<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 29, 1999
COMMISSION FILE NUMBER 0-20574
------------------------
THE CHEESECAKE FACTORY INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 51-0340466
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
26950 AGOURA ROAD 91301
CALABASAS HILLS, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (818) 871-3000
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of August 6, 1999, 20,144,026 shares of the registrant's Common Stock,
$.01 par value, were outstanding.
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- --------------------------------------------------------------------------------
<PAGE>
THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
---------
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets--June 29, 1999 and December 29, 1998............... 1
Consolidated Statements of Operations--Thirteen and twenty-six weeks ended June
29, 1999 and June 30, 1998................................................... 2
Consolidated Statements of Cash Flows--Twenty-six weeks ended June 29, 1999 and
June 30, 1998................................................................ 3
Notes to Consolidated Financial Statements--June 29, 1999...................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 6
Item 3. Quantitative and Qualitative Disclosure about Market Risk...................... 14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Stockholders................................ 15
Item 6. Exhibits and Reports on Form 8-K............................................... 15
Signatures................................................................................. 16
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 29, DECEMBER 29,
1999 1998
------------- -------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 29,298 $ 17,467
Investments and marketable securities............................................ 15,728 21,596
Accounts receivable.............................................................. 3,142 3,473
Other receivables................................................................ 5,061 5,478
Inventories...................................................................... 6,565 5,854
Prepaid expenses................................................................. 1,110 826
------------- -------------
Total current assets........................................................... 60,904 54,694
------------- -------------
Property and equipment, net........................................................ 123,445 107,660
------------- -------------
Other assets:
Marketable securities............................................................ 9,014 13,609
Other receivables................................................................ 4,559 5,286
Trademarks....................................................................... 1,668 1,614
Other............................................................................ 2,889 2,557
------------- -------------
Total other assets............................................................. 18,130 23,066
------------- -------------
Total assets................................................................. $ 202,479 $ 185,420
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 13,287 $ 11,303
Income taxes payable............................................................. 2,030 1,421
Other accrued expenses........................................................... 13,611 11,290
Deferred income taxes............................................................ 400 416
------------- -------------
Total current liabilities...................................................... 29,328 24,430
------------- -------------
Deferred income taxes............................................................ 227 699
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued and
outstanding.................................................................... -- --
Junior participating cumulative preferred stock, $.01 par value, 150,000 shares
authorized; none issued and outstanding........................................ -- --
Common Stock, $.01 par value, 30,000,000 shares authorized; 20,351,076 and
20,108,102 issued for 1999 and 1998, respectively.............................. 204 201
Additional paid-in capital....................................................... 121,480 117,713
Retained earnings................................................................ 54,771 45,880
Marketable securities valuation account.......................................... (63) (35)
Treasury stock, 211,000 shares at cost........................................... (3,468) (3,468)
------------- -------------
Total stockholders' equity..................................................... 172,924 160,291
------------- -------------
Total liabilities and stockholders' equity................................. $ 202,479 $ 185,420
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT NET INCOME PER SHARE)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS THIRTEEN WEEKS TWENTY-SIX WEEKS TWENTY-SIX WEEKS
ENDED JUNE 29, ENDED JUNE 30, ENDED JUNE 29, ENDED JUNE 30,
1999 1998 1999 1998
--------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales......................... $ 79,363 $ 59,843 $ 149,173 $ 114,810
Third-party bakery sales................. 6,404 4,430 11,418 8,964
------- ------- -------- --------
Total revenues....................... 85,767 64,273 160,591 123,774
------- ------- -------- --------
Costs and expenses:
Restaurant cost of sales................. 20,568 15,856 38,683 30,755
Third-party bakery cost of sales......... 3,166 2,081 5,664 4,201
Labor expenses........................... 25,951 19,813 49,108 38,593
Other operating costs and expenses....... 18,869 14,443 35,821 27,548
General and administrative expenses...... 5,381 4,224 10,336 7,967
Depreciation and amortization expenses... 2,695 2,048 5,107 4,062
Preopening costs......................... 1,721 1,308 3,423 1,489
------- ------- -------- --------
Total costs and expenses............. 78,351 59,773 148,142 114,615
------- ------- -------- --------
Income from operations....................... 7,416 4,500 12,449 9,159
Interest income, net......................... 755 761 1,359 1,495
Other income, net............................ 132 106 194 203
------- ------- -------- --------
Income before income taxes and cumulative
effect of change in accounting principle... 8,303 5,367 14,002 10,857
Income tax provision......................... 3,031 1,852 5,111 3,738
------- ------- -------- --------
Income before cumulative effect of change in
accounting principle....................... 5,272 3,515 8,891 7,119
Cumulative effect of change in accounting
principle, net of income tax benefit of
$3,343..................................... -- -- -- 6,347
------- ------- -------- --------
Net income................................... $ 5,272 $ 3,515 $ 8,891 $ 772
------- ------- -------- --------
------- ------- -------- --------
Net income per share:
Basic:
Income before cumulative effect of change
in accounting principle................ $ 0.26 $ 0.18 $ 0.44 $ 0.36
Cumulative effect of change in accounting
principle.............................. -- -- -- (0.32)
------- ------- -------- --------
Net income............................... $ 0.26 $ 0.18 $ 0.44 $ 0.04
------- ------- -------- --------
------- ------- -------- --------
Diluted:
Income before cumulative effect of change
in accounting principle................ $ 0.25 $ 0.17 $ 0.42 $ 0.35
Cumulative effect of change in accounting
principle.............................. -- -- -- (0.31)
------- ------- -------- --------
Net income............................... $ 0.25 $ 0.17 $ 0.42 $ 0.04
------- ------- -------- --------
------- ------- -------- --------
Weighted average shares outstanding:
Basic.................................... 20,083 20,065 19,998 19,998
Diluted.................................. 21,209 20,740 20,989 20,627
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS TWENTY-SIX WEEKS
ENDED JUNE 29, ENDED JUNE 30,
1999 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................... $ 8,891 $ 772
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization............................................ 5,108 4,062
Cumulative effect of change in accounting principle...................... -- 6,347
Deferred income taxes.................................................... (472) --
Changes in assets and liabilities:
Accounts receivable...................................................... 331 815
Other receivables........................................................ 1,144 5,181
Inventories.............................................................. (711) (351)
Prepaid expenses......................................................... (284) (431)
Trademarks............................................................... (86) (291)
Other.................................................................... (371) (309)
Accounts payable......................................................... 1,984 (1,803)
Income taxes payable..................................................... 609 2,503
Other accrued expenses................................................... 2,321 1,067
-------- --------
Cash provided by operating activities.................................. 18,464 17,562
-------- --------
Cash flows from investing activities:
Additions to property and equipment...................................... (20,822) (14,808)
Investments in available-for-sale securities............................. (18,531) (21,395)
Sales of available-for-sale securities................................... 28,950 8,555
-------- --------
Cash used by investing activities...................................... (10,403) (27,648)
-------- --------
Cash flows from financing activities:
Common stock issued...................................................... 3 2
Proceeds from exercise of employee stock options......................... 3,767 2,243
-------- --------
Cash provided by financing activities.................................. 3,770 2,245
-------- --------
Net change in cash and cash equivalents.................................... 11,831 (7,841)
Cash and cash equivalents at beginning of period........................... 17,467 43,543
-------- --------
Cash and cash equivalents at end of period................................. $ 29,298 $ 35,702
-------- --------
-------- --------
Supplemental disclosures:
Interest paid............................................................ $ 79 $ 24
-------- --------
-------- --------
Income taxes paid........................................................ $ 4,973 $ 1,234
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 29, 1999
(UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
The Cheesecake Factory Incorporated and its wholly owned subsidiaries (The
Cheesecake Factory Restaurants, Inc.; The Cheesecake Factory Bakery
Incorporated; The Houston Cheesecake Factory Corporation; and Grand Lux Cafe
LLC) (the "Company") for the thirteen weeks and twenty-six weeks ended June 29,
1999, and have been prepared in accordance with generally accepted accounting
principles and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. The financial statements presented herein have not been audited by
independent public accountants, but include all material adjustments (consisting
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial condition, results of
operations and cash flows for such periods. However, these results are not
necessarily indicative of results for any other interim period or for the full
year. The consolidated balance sheet data presented herein for December 29, 1998
was derived from the Company's audited consolidated financial statements for the
fiscal year then ended, but does not include all disclosures required by
generally accepted accounting principles. The preparation of financial
statements in accordance with generally accepted accounting principles requires
the Company's management to make certain estimates and assumptions for the
reporting periods covered by the financial statements. These estimates and
assumptions affect the reported amounts of assets, liabilities, revenues and
expenses. Actual amounts could differ from these estimates.
Certain information and footnote disclosures normally included in financial
statements in accordance with generally accepted accounting principles have been
omitted pursuant to requirements of the Securities and Exchange Commission.
Management believes the disclosures included in the accompanying interim
financial statements and footnotes are adequate to make the information not
misleading, but should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Form 10-K for the fiscal
year ended December 29, 1998.
NOTE B--INVESTMENTS AND MARKETABLE SECURITIES
Investments and marketable securities, all classified as available for sale,
consisted of the following as of June 29, 1999 (in thousands):
<TABLE>
<CAPTION>
UNREALIZED BALANCE SHEET
CLASSIFICATION COST FAIR VALUE GAIN (LOSS) AMOUNT MATURITY
- ----------------------------------------------- --------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Available-for-sale securities:
July 1999 to
Corporate debt securities.................... $ 15,747 $ 15,728 $ (19) $ 15,728 June 2000
--------- ----------- --- -------------
--------- ----------- --- -------------
OTHER ASSETS:
Available-for-sale securities:
July 2000 to
Corporate debt securities.................... $ 9,090 $ 9,014 $ (76) $ 9,014 April 2001
--------- ----------- --- -------------
--------- ----------- --- -------------
</TABLE>
4
<PAGE>
THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 29, 1999
(UNAUDITED)
NOTE C--NET INCOME PER SHARE
During fiscal 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 128, "Accounting for Earnings Per
Share." SFAS No. 128 requires companies to present basic earnings per share
(EPS) and diluted EPS, instead of the primary and fully diluted EPS
presentations that were formerly required by Accounting Principles Board Opinion
No. 15, "Earnings Per Share." Basic EPS is computed by dividing net income
available to common stockholders by the weighted average number of common shares
outstanding during the period. For the Company, diluted EPS includes the
dilutive effect of potential stock option exercises, calculated using the
treasury stock method. EPS amounts for all periods presented reflect the
provisions of SFAS No. 128.
NOTE D--STOCK TRANSACTIONS
Earnings per share amounts for all periods presented herein reflect a
three-for-two stock split which was effective April 1, 1998.
The Company is authorized to repurchase up to 450,000 shares of its common
stock for reissuance upon the exercise of stock options under the Company's
current stock option plans. As of July 30, 1999, the Company has repurchased
211,000 shares at a total cost of approximately $3.5 million. All share
repurchases occurred during fiscal 1998.
NOTE E--PREOPENING COSTS
During fiscal 1998, the Company elected the early adoption of AICPA
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities." This new accounting standard requires most entities to expense all
start-up and preopening costs as they are incurred. Preopening costs for all
periods presented herein reflect costs that were expensed as incurred. In
addition, the Consolidated Statement of Operations for the twenty-six weeks
ended June 30, 1998 has been restated to reflect, as a one-time charge, the
cumulative effect of this change in accounting principle, net of income tax
benefit.
NOTE F--RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year's presentation and to improve comparability with other restaurant entities.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THIS FORM 10-Q WHICH ARE NOT HISTORICAL FACTS MAY
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS INVOLVE
KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE
ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY
DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR
IMPLIED BY FORWARD-LOOKING STATEMENTS. SUCH RISKS, UNCERTAINTIES, AND OTHER
FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING: CHANGES IN GENERAL
ECONOMIC CONDITIONS WHICH AFFECT CONSUMER SPENDING PATTERNS FOR RESTAURANT
DINING OCCASIONS; INCREASING COMPETITION IN THE UPSCALE CASUAL DINING SEGMENT OF
THE RESTAURANT INDUSTRY; ADVERSE WEATHER CONDITIONS WHICH IMPACT CUSTOMER
TRAFFIC AT THE COMPANY'S RESTAURANTS IN GENERAL AND WHICH CAUSE THE TEMPORARY
UNDERUTILIZATION OF OUTDOOR PATIO SEATING AVAILABLE AT SEVERAL OF THE COMPANY'S
RESTAURANTS; EVENTS WHICH INCREASE THE COST TO DEVELOP AND/OR DELAY THE
DEVELOPMENT AND OPENING OF THE COMPANY'S NEW, HIGHLY CUSTOMIZED RESTAURANTS;
CHANGES IN THE AVAILABILITY AND/OR COST OF RAW MATERIALS, MANAGEMENT AND HOURLY
LABOR, AND OTHER RESOURCES NECESSARY TO OPERATE THE COMPANY'S RESTAURANTS AND
BAKERY PRODUCTION FACILITY; THE COMPANY'S ABILITY TO RAISE PRICES SUFFICIENTLY
TO OFFSET COST INCREASES; THE SUCCESS OF STRATEGIC AND OPERATING INITIATIVES,
INCLUDING BRAND EXTENSIONS AND NEW CONCEPTS; DEPTH OF MANAGEMENT; ADVERSE
PUBLICITY ABOUT THE COMPANY, ITS RESTAURANTS OR BAKERY PRODUCTS; THE COMPANY'S
DEPENDENCE ON A SINGLE BAKERY PRODUCTION FACILITY; THE COMPANY'S ABILITY TO
OBTAIN AND RETAIN LARGE-ACCOUNT CUSTOMERS FOR ITS BAKERY OPERATIONS; CHANGES IN
TIMING AND/OR SCOPE OF THE PURCHASING PLANS OF LARGE-ACCOUNT BAKERY CUSTOMERS
WHICH CAUSE FLUCTUATIONS IN BAKERY SALES AND OPERATING RESULTS; THE RATE OF
GROWTH OF GENERAL AND ADMINISTRATIVE EXPENSES ASSOCIATED WITH BUILDING A
STRENGTHENED CORPORATE INFRASTRUCTURE TO SUPPORT THE COMPANY'S GROWING
OPERATIONS; RELATIONS BETWEEN THE COMPANY AND ITS EMPLOYEES; THE AVAILABILITY,
AMOUNT, TYPE, AND COST OF CAPITAL FOR THE COMPANY AND THE DEPLOYMENT OF SUCH
CAPITAL; CHANGES IN, OR ANY FAILURE TO COMPLY WITH, GOVERNMENTAL REGULATIONS;
THE REVALUATION OF ANY OF THE COMPANY'S ASSETS; THE AMOUNT OF, AND ANY CHANGES
TO, TAX RATES; RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE; AND OTHER FACTORS
REFERENCED IN THIS FORM 10-Q AND THE COMPANY'S FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION FOR THE FISCAL YEAR ENDED DECEMBER 29, 1998.
GENERAL
As of August 6, 1999, the Company operated 30 upscale, high volume, casual
dining restaurants under The Cheesecake Factory-Registered Trademark- name. The
Company also operated Grand Lux Cafe-TM-, an upscale casual dining restaurant
located in the Venetian Resort-Hotel-Casino in Las Vegas, Nevada; two
self-service, limited menu foodservice operations under The Cheesecake Factory
Express-Registered Trademark- name inside DisneyQuest-TM- family entertainment
concepts in Orlando, Florida and Chicago, Illinois; and a bakery production
facility. The Company's revenues consist of sales from its restaurant operations
and sales from its bakery operations to third-party foodservice operators and
distributors. Sales and costs of sales are separately reported for restaurant
and third-party bakery activity. All other operating cost and expense categories
are reported on a combined basis for both restaurant and bakery activities.
Comparable restaurant sales include the sales of restaurants open for the full
period of each period being compared. New restaurants enter the comparable sales
base in their thirteenth month of operations.
At the end of calendar 1992, the Company adopted a 52/53-week fiscal year
ending on the Sunday closest to December 31 for financial reporting purposes.
Commencing with the start of fiscal 1998, the Company changed its fiscal week
and year-end from Sunday to Tuesday to facilitate certain operational
efficiencies. Fiscal 1999 will consist of 52 weeks and will end on Tuesday,
December 28, 1999.
6
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Consolidated
Statements of Operations of the Company expressed as percentages of total
revenues. The results of operations for the thirteen weeks and twenty-six weeks
ended June 29, 1999 are not necessarily indicative of the results to be expected
for the full fiscal year.
<TABLE>
<CAPTION>
THIRTEEN THIRTEEN TWENTY-SIX TWENTY-SIX
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JUNE 29, 1999 JUNE 30, 1998 JUNE 29, 1999 JUNE 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
% % % %
Revenues:
Restaurant sales.................................... 92.5 93.1 92.9 92.8
Third-party bakery sales............................ 7.5 6.9 7.1 7.2
------ ------ ------ ------
Total revenues.................................... 100.0 100.0 100.0 100.0
------ ------ ------ ------
Costs and expenses:
Restaurant cost of sales............................ 24.0 24.7 24.1 24.8
Third-party bakery cost of sales.................... 3.7 3.2 3.5 3.4
Labor expenses...................................... 30.3 30.8 30.6 31.2
Other operating costs and expenses.................. 22.0 22.5 22.3 22.3
General and administrative expenses................. 6.3 6.6 6.4 6.4
Depreciation and amortization expenses.............. 3.1 3.2 3.2 3.3
Preopening costs.................................... 2.0 2.0 2.1 1.2
------ ------ ------ ------
Total costs and expenses.......................... 91.4 93.0 92.2 92.6
------ ------ ------ ------
Income from operations................................ 8.6 7.0 7.8 7.4
Interest income, net.................................. 0.9 1.2 0.8 1.2
Other income, net..................................... 0.2 0.2 0.1 0.2
------ ------ ------ ------
Income before income taxes and cumulative effect of
change in accounting principle....................... 9.7 8.4 8.7 8.8
Income tax provision.................................. 3.5 2.9 3.2 3.0
------ ------ ------ ------
Income before cumulative effect of change in
accounting principle................................. 6.2 5.5 5.5 5.8
Cumulative effect of change in accounting principle,
net of income tax benefit............................ -- -- -- 5.1
------ ------ ------ ------
Net income............................................ 6.2 5.5 5.5 0.7
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
THIRTEEN WEEKS ENDED JUNE 29, 1999 COMPARED TO THIRTEEN WEEKS ENDED JUNE 30,
1998
REVENUES
For the thirteen weeks ended June 29, 1999, the Company's total revenues
increased 33% to $85.8 million versus $64.3 million for the thirteen weeks ended
June 30, 1998. Restaurant sales increased $19.6 million or 33% to $79.4 million
versus $59.8 million for the same period of the prior year. The $19.6 million
increase in restaurant sales consisted of a $2.3 million or 4.0% increase in
comparable restaurant sales for the period and a $17.3 million increase from the
openings of new restaurants. Sales in comparable restaurants benefited, in part,
from the impact of an effective menu price increase of approximately 2% which
was taken in February 1999.
Third-party bakery sales increased 45% to $6.4 million for the thirteen
weeks ended June 29, 1999 versus $4.4 million for the same period of the prior
year. This increase of $2.0 million was attributable to higher sales volumes to
warehouse club and restaurant operators. Sales to warehouse club operators
7
<PAGE>
comprised approximately 48% of total third-party bakery sales for both the
thirteen weeks ended June 29, 1999 and for the same period of the prior year.
RESTAURANT COST OF SALES
During the thirteen weeks ended June 29, 1999, restaurant cost of sales were
$20.6 million versus $15.9 million for the comparable period last year. The
related increase of $4.7 million was primarily attributable to new restaurant
openings. As a percentage of restaurant sales, these costs decreased slightly to
25.9% versus 26.5% for the same period of the prior year, principally as a
result of the benefit of menu price increases, lower produce and poultry costs
and more effective purchasing contracts.
The menu at the Company's restaurants is one of the most diversified in the
industry and, accordingly, is not overly dependent on a single commodity. With
respect to newly opened restaurants, costs in this category will typically be
higher than normal during the first 90-120 days of operations until each
restaurant staff becomes more accustomed to optimally predicting, managing and
servicing the high sales volumes typically experienced by the Company's
restaurants.
THIRD-PARTY BAKERY COST OF SALES
Cost of sales for third-party bakery sales, which include ingredient,
packaging and production supply costs, were $3.2 million for the thirteen weeks
ended June 29, 1999 versus $2.1 million for the same period of the prior year.
As a percentage of bakery sales, bakery costs for the thirteen weeks ended June
29, 1999 increased to 49.4% versus 47.0% for the comparable period last year.
This percentage increase was primarily due to a shift in the mix of sales to
lower-margin products. The Company's costs for certain of its dairy-related
commodities increased as much as 50% to 75% during certain weeks of fiscal 1998
when the overall level of such costs rose across the country as a result of
unfavorable supply and demand conditions. Since December 1998, the Company's
costs for its dairy-related commodities have gradually decreased, but remain
potentially volatile. While the Company has taken steps to increase its
inventory positions of certain dairy-related commodities during periods when the
costs of those commodities are seasonally low, there can be no assurance that
future costs for these commodities, or any commodities used in the Company's
bakery or restaurant operations, will not begin to rise again due to market
conditions beyond the Company's control.
LABOR EXPENSES
Labor expenses, which include restaurant-level labor costs and bakery direct
production labor costs (including associated fringe benefits), were $26.0
million for the thirteen weeks ended June 29, 1999 versus $19.8 million for the
same period of the prior year. This increase was principally due to the impact
of new restaurant openings. As a percentage of total revenues, labor expenses
decreased to 30.3% versus 30.8% for the comparable period last year. The
decrease in labor as a percentage of total revenues for the thirteen weeks ended
June 29, 1999 versus the same period of the prior year was principally due to
increased labor productivity at the restaurants and the leveraging of the fixed
component of labor expenses with higher sales volumes.
For new restaurants, labor expenses will typically be higher than normal
during the first 90-120 days of operations until each restaurant's staff becomes
more accustomed to optimally predicting, managing and servicing the high sales
volumes typically experienced by the Company's restaurants.
OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses consist of restaurant-level occupancy and
other operating expenses (excluding food costs and labor expenses reported
separately), bakery production overhead, and selling and distribution expenses.
Other operating costs and expenses increased 31% to $18.9 million for the
thirteen weeks ended June 29, 1999 versus $14.4 million for the same period of
the prior year. This
8
<PAGE>
increase was principally attributable to new restaurant openings. As a
percentage of total revenues, other operating costs and expenses decreased to
22.0% for the thirteen weeks ended June 29, 1999 versus 22.5% for the same
period of fiscal 1998. This percentage decrease was primarily attributable to
the leveraging of the fixed component of other operating costs and expenses with
higher sales volumes and the impact of certain cost reduction initiatives.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist of restaurant support expenses
(field supervision, manager recruitment and training, relocation and other
related expenses), bakery administrative expenses, and corporate support and
governance expenses. General and administrative expenses increased to $5.4
million for the thirteen weeks ended June 29, 1999 versus $4.2 million for the
same period of fiscal 1998, an increase of $1.2 million or 27%. As a percentage
of total revenues, general and administrative expenses decreased slightly to
6.3% for the thirteen weeks ended June 29, 1999 versus 6.6% for the same period
of fiscal 1998.
The Company intends to continue strengthening its operational support
infrastructure during the remainder of fiscal 1999 and fiscal 2000, which will
likely generate a higher absolute amount of general and administrative expenses
during those periods. Additionally, the Company plans to continue aggressively
pursuing new large-account customers for its bakery operations which will
require continued investments in product development and marketing programs. One
of the Company's principal objectives is to more effectively leverage its
operational and corporate support infrastructure with higher sales volumes.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses were $2.7 million for the thirteen
weeks ended June 29, 1999 versus $2.0 million for the thirteen weeks ended June
30, 1998. As a percentage of total revenues, depreciation and amortization
expenses were 3.1% for the thirteen weeks ended June 29, 1999 versus 3.2% for
the same period of the prior year. The increase of $0.7 million primarily
consisted of higher restaurant depreciation expense, which was principally due
to the openings of new restaurants.
PREOPENING COSTS
Incurred preopening costs were $1.7 million for the thirteen weeks ended
June 29, 1999 compared to $1.3 million for the same period of the prior year.
The Company opened two restaurants during the quarter ended June 29, 1999 (Grand
Lux Cafe-TM- and DisneyQuest-TM--Chicago) and was well underway with preopening
activities at Columbus, Ohio (which opened on July 21, 1999) versus two openings
during the same quarter of the prior year. Preopening costs for Grand Lux
Cafe-TM- were approximately twice the cost of a typical Cheesecake Factory
restaurant due to its relatively large size (approximately 18,300 square feet)
and associated staffing requirement (approximately 325 employees), its status as
a new concept and its increased operational complexity due, in part, to its 24
hours-a-day operation.
Preopening costs include incremental, out-of-pocket costs that are not
otherwise capitalizable which are directly incurred to open new restaurants.
Most preopening costs are related to the recruiting and training of the hourly
staff for each new restaurant, the cost of restaurant management staff assigned
to the new location prior to opening, and the costs of corporate support travel,
practice cooking and service activities. As a result of the highly customized
and operationally complex nature of the Company's restaurants, the restaurant
preopening process is significantly more extensive and costly for the Company
relative to that of other chain restaurant operations. Preopening costs will
vary from location to location depending on a number of factors including, but
not limited to, the proximity of other established Company restaurants, the size
and physical layout of each location and the relative difficulty of the
restaurant staffing and training process. Preopening costs will fluctuate from
period to period based on the number and timing of restaurant openings and the
specific preopening costs incurred for each restaurant.
9
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These fluctuations could be significant. Based on the Company's current growth
objectives for the remainder of fiscal 1999 and fiscal 2000, preopening costs
for each of those years will likely exceed the respective amount of preopening
costs for the applicable prior year.
During the past two fiscal years, the Company reevaluated its preopening
process with the objective of reducing its timeframe, intensiveness and overall
cost while, at the same time, not adversely impacting its ability to effectively
execute its restaurant openings. The Company intends to pursue further
refinements to this process during the remainder of fiscal 1999. However, there
can be no assurance that preopening costs will be reduced for future restaurants
or that preopening costs will not continue to have a significant impact on the
Company's results of operations.
TWENTY-SIX WEEKS ENDED JUNE 29, 1999 COMPARED TO TWENTY-SIX WEEKS ENDED JUNE 30,
1998
REVENUES
For the twenty-six weeks ended June 29, 1999, the Company's total revenues
increased 30% to $160.6 million versus $123.8 million for the twenty-six weeks
ended June 30, 1998. Restaurant sales increased $34.4 million or 30% to $149.2
million versus $114.8 million for the same period of the prior year. The $34.4
million increase in restaurant sales consisted of a $4.7 million or 4.1%
increase in comparable restaurant sales for the period and a $29.7 million
increase from the openings of new restaurants. Third-party bakery sales
increased 27% to $11.4 million for the twenty-six weeks ended June 29, 1999
versus $9.0 million for the same period of the prior year, primarily due to
increased sales to warehouse club operators.
RESTAURANT COST OF SALES
During the twenty-six weeks ended June 29, 1999, restaurant cost of sales
were $38.7 million versus $30.8 million for the comparable period last year. The
related increase of $7.9 million was primarily attributable to new restaurant
openings. As a percentage of restaurant sales, these costs decreased to 25.9%
versus 26.8% for the same period of the prior year, principally as a result of
menu price increases.
THIRD-PARTY BAKERY COST OF SALES
Third-party bakery cost of sales were $5.7 million for the twenty-six weeks
ended June 29, 1999 versus $4.2 million for the same period of the prior year.
As a percentage of bakery sales, bakery costs for the twenty-six weeks ended
June 29, 1999 increased to 49.6% versus 46.9% for the comparable period last
year. This percentage increase was primarily due to a shift in the mix of sales
to lower-margin products and slightly unfavorable cost comparisons for
dairy-related commodities.
LABOR EXPENSES
Labor expenses were $49.1 million for the twenty-six weeks ended June 29,
1999 versus $38.6 million for the same period of the prior year. This increase
was principally due to the impact of new restaurant openings. As a percentage of
total revenues, labor expenses decreased to 30.6% versus 31.2% for the
comparable period last year.
OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses increased 30% to $35.8 million for the
twenty-six weeks ended June 29, 1999 versus $27.6 million for the same period of
the prior year. This increase was principally attributable to new restaurant
openings. As a percentage of total revenues, other operating costs and expenses
remained consistent at 22.3% for both the twenty-six weeks ended June 29, 1999
and for the same period of fiscal 1998.
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GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased to $10.3 million for the
twenty-six weeks ended June 29, 1999 versus $8.0 million for the same period of
fiscal 1998, an increase of $2.3 million or 30%. As a percentage of total
revenues, general and administrative expenses remained consistent at 6.4% for
both periods.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses were $5.1 million for the twenty-six
weeks ended June 29, 1999 versus $4.1 million for the twenty-six weeks ended
June 30, 1998. As a percentage of total revenues, depreciation and amortization
expenses were 3.2% for the twenty-six weeks ended June 29, 1999 versus 3.3% for
the same period of the prior year. The increase of $1.0 million primarily
consisted of higher restaurant depreciation expense, which was principally due
to the openings of new restaurants.
PREOPENING COSTS
Incurred preopening costs were $3.4 million for the twenty-six weeks ended
June 29, 1999 compared to $1.5 million for the same period of the prior year. As
a percentage of total revenues, preopening costs were 2.1% for the twenty-six
weeks ended June 29, 1999 versus 1.2% for the same period of the prior year. The
increase of $1.9 million in preopening costs during the twenty-six weeks ended
June 29, 1999 was principally due to the opening of four restaurants (including
Grand Lux Cafe-TM-, a new concept) during the twenty-six weeks ended June 29,
1999, versus two restaurants opened during the same period of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth a summary of the Company's key liquidity
measurements for the twenty-six week periods ended June 29, 1999 and June 30,
1998.
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
------------------------------
JUNE 29, JUNE 30,
1999 1998
-------------- --------------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C>
Cash and marketable securities on hand, end of period.................. $54.0 $58.5
Net working capital, end of period..................................... $31.6 $30.3
Current ratio, end of period........................................... 2.1:1 2.2:1
Long-term debt, end of period.......................................... -- --
Cash provided by operations............................................ $18.5 $17.6
Capital expenditures................................................... $20.8 $14.8
</TABLE>
As of June 29, 1999, the Company's key liquidity measurements were not
significantly different compared to June 30, 1998. As of August 6, 1999, there
were no borrowings outstanding under the Company's $25 million revolving credit
and term loan facility (the "Credit Facility"). The terms of the Credit Facility
were amended in April 1998 to provide for, among other things, borrowings under
the Credit Facility to bear interest at variable rates based, at the Company's
option, on either the prime rate of interest, the lending institution's cost of
funds rate plus 0.75%, or the applicable LIBOR rate plus 0.75%. The Credit
Facility expires on May 31, 2000. On that date, a maximum of $25 million of any
borrowings outstanding under the Credit Facility automatically convert into a
four-year term loan, payable in equal quarterly installments at interest rates
of 0.5% higher than the applicable revolving credit rates. The Credit Facility
is not collateralized and requires the Company to maintain certain financial
ratios and to observe certain restrictive covenants with respect to the conduct
of its operations, with which the Company is currently in compliance.
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During fiscal 1998, the Company's total capital expenditures were $28.0
million, most of which were related to its restaurant operations. For fiscal
1999, the Company currently estimates its total capital expenditure requirement
to range between $35-$40 million, excluding approximately $5-$7 million of
expected noncapitalizable restaurant preopening costs and net of agreed-upon
landlord construction contributions. This estimate contemplates as many as nine
new restaurants to be opened during fiscal 1999 (including Grand Lux Cafe-TM- at
The Venetian Resort-Hotel-Casino and DisneyQuest-TM--Chicago) and also provides
for an anticipated increase in construction-in-progress disbursements for
anticipated fiscal 2000 openings. The Company has historically leased the land
and building shells for its restaurant locations and has expended cash for
leasehold improvements and furnishings, fixtures and equipment for the
locations.
The Company's primary expansion objective is to increase its total
restaurant productive square feet and operating weeks at least 25% during fiscal
1999 and 2000. As of August 6, 1999, there were four restaurants under
construction for potential 1999 openings. These restaurants are located in
Boulder, Colorado; Providence, Rhode Island; San Francisco, California; and
Mission Viejo, California (for which the Company signed a lease in July 1999).
The actual timing of these restaurant openings will depend, among other things,
upon the progress of construction and preopening activities. Two leases have
been signed for potential 2000 openings in Atlanta, Georgia (Perimeter Mall) and
West Palm Beach, Florida, and three letters of intent have been executed for
other potential locations.
Based on its current expansion objectives and opportunities, the Company
believes that its cash and short-term investments on hand, coupled with expected
cash provided by operations, available borrowings under its Credit Facility and
expected landlord construction contributions should be sufficient to finance its
planned capital expenditures and other operating activities through fiscal 2000.
The Company anticipates that it may seek additional funds to finance its future
growth. However, there can be no assurance that such funds will be available
when needed or be available on terms acceptable to the Company.
The Company effected a three-for-two stock split on April 1, 1998. The
Company is also authorized to repurchase up to 450,000 shares of its common
stock for reissuance upon the exercise of stock options under the Company's
current stock option plans. A source of funding for share repurchases will be
the proceeds to the Company from the exercise of employee stock options. Shares
may be repurchased in the open market or through privately negotiated
transactions at times and prices considered appropriate by the Company. As of
August 6, 1999, the Company had repurchased 211,000 shares at a total cost of
approximately $3.5 million. All share repurchases occurred during fiscal 1998.
YEAR 2000 COMPLIANCE
The Year 2000 issue results from the fact that many computers, embedded
computer microprocessors, computer software applications and databases only use
two digits (rather than four) to define the applicable year. As a result, such
computer systems and applications may recognize a date of "00" as the year 1900
instead of the intended year 2000, which could result in data miscalculations
and computer system failures. Computer systems and applications are considered
to be Year 2000 compliant when they are fully capable of correctly processing
transactions in the year 2000. The Year 2000 issue is real and presents a number
of serious risks and uncertainties that could have a broad impact across all
industries and which could materially impact the Company's results of
operations, liquidity and financial position.
THE COMPANY'S STATE OF READINESS FOR THE YEAR 2000 ISSUE
During fiscal 1998, the Company began to formulate a plan to address the
Year 2000 issue. The Company's Year 2000 plan currently consists of five phases:
awareness, assessment, remediation, testing and implementation. The phases of
the Year 2000 plan overlap substantially. The Company has established an
internal Year 2000 task force, consisting of cross-functional members of its
management team, to execute the plan. As of August 6, 1999, the Company has made
substantial progress in the awareness,
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<PAGE>
assessment and the remediation phases of the plan and is moving forward with the
testing and implementation phases. Remediation, testing and implementation work
for all mission-critical internal systems and processes is currently expected to
be completed before the end of fiscal 1999.
AWARENESS AND ASSESSMENT
The Company believes the nature of its business is such that the principal
business risks associated with the Year 2000 issue can be addressed by assessing
the readiness of key suppliers of goods and services to its restaurant and
bakery operations to ensure they are aware of the Year 2000 issue and are taking
timely and appropriate actions to reduce or eliminate the risks. The Company has
also completed its assessment of all internal computer systems and software
applications.
SUPPLIERS OF MISSION-CRITICAL GOODS AND SERVICES
The Company has sent a letter and questionnaire to all key suppliers of its
goods and services to bring the Year 2000 issue to their attention and to assess
their readiness. The task force has identified and prioritized those suppliers
which provide mission-critical goods and services to the Company, is currently
summarizing their responses to the Company's Year 2000 questionnaire, and
expects to continue discussions with them in an attempt to ensure an
uninterrupted supply of goods and services and to develop any necessary
contingency plans. The Company has received written responses from its suppliers
of computerized point-of-sale systems, credit card processing services and
outside payroll processing services that represent their respective systems to
be Year 2000 compliant. However, there are many other key suppliers who have not
yet responded to the Company's letter and questionnaire. All of the Company's
efforts in this regard will not necessarily guarantee that events and
circumstances outside of the Company's direct influence and control will not
adversely impact its operations.
EXPECTED COSTS TO ADDRESS THE YEAR 2000 ISSUE
As of August 6, 1999, the Company does not believe that the costs related to
the execution of its Year 2000 plan will be material to its results of
operations, liquidity and financial position. The Company estimates that it has
incurred a total cost of less than $100,000 to date with respect to executing
its Year 2000 plan. Additional assessment, remediation, testing and
implementation costs are currently expected to be less than $200,000 in the
aggregate and are expected to be funded by cash flows from operations. This
expected cost is based on the Company's best estimates, which were derived using
numerous assumptions of future events including the continued availability of
certain necessary resources, third-party modification plans and other factors.
Any unanticipated failures by critical suppliers, as well as any failure on the
part of the Company to successfully execute its own remediation efforts, could
materially increase the expected cost of the plan and could lengthen its
completion date. As a result, there can be no assurance that these
forward-looking statements will be achieved.
RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE
If any mission-critical computer systems have been inadvertently overlooked
by the Company in the assessment, remediation, testing or implementation phases
of its Year 2000 plan, or if any of the Company's internal computer systems are
not successfully remediated, there could be a material adverse effect on the
Company's results of operations, liquidity and financial condition of a
magnitude which the Company has not yet been able to fully analyze.
Additionally, the Company has not yet been assured that the computer systems of
all of its key suppliers will be Year 2000 compliant in a timely manner or that
the computer systems of third parties with which the Company's computer systems
exchange data will also be compliant. If the Company's suppliers of
mission-critical goods and services, including providers of necessary energy,
telecommunications and transportation requirements, fail to provide the Company
with the raw materials and services necessary to predictably execute its
operations, such failures could have a material adverse impact on the Company's
results of operations, liquidity and financial position.
13
<PAGE>
CONTINGENCY PLANS
The Company is in the initial stages of developing an operational
contingency plan to address any unavoidable Year 2000 issues. Although the
Company expects to have the plan substantially completed by the start of the
fourth quarter of fiscal 1999, modifications to the plan will likely continue
through the remainder of fiscal 1999 and into fiscal 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on
funded debt. This exposure relates to its $25 million revolving credit and term
loan facility (the "Credit Facility"). There were no borrowings outstanding
under the Credit Facility during the twenty-six weeks ended June 29, 1999.
Borrowings under the Credit Facility bear interest at variable rates based on
either the prime rate of interest, the lending institution's cost of funds plus
0.75% or LIBOR plus 0.75%. A hypothetical 1% interest rate change would not have
a material impact on the Company's results of operations.
A change in market prices also exposes the Company to market risk related to
its investments in marketable securities. As of June 29, 1999, the Company held
$24.7 million in marketable securities. A hypothetical 10% decline in the market
value of those securities would result in a $2.4 million unrealized loss. This
hypothetical decline would not affect cash flow from operations and would not
have an impact on net income until the securities were disposed of.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
On May 18, 1999, the Company held its Annual Meeting of Stockholders (the
"Meeting"). At the Meeting, the stockholders re-elected David Overton to the
Board of Directors to serve until the 2002 Annual Meeting of Stockholders and
until his successor has been duly elected and qualified. As to the re-election
of David Overton as a director, there were 16,858,259 votes "for" and 25,587
votes "withheld."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.10 Debby R. Zurzolo Employment Agreement
(b) Reports on Form 8-K. None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
THE CHEESECAKE FACTORY INCORPORATED
Date: August 13, 1999
By: /s/ DAVID M. OVERTON
------------------------------------------
David M. Overton
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
By: /s/ GERALD W. DEITCHLE
------------------------------------------
Gerald W. Deitchle
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>
16
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EXHIBIT 10.10
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is entered into this 12th
day of April, 1999, between THE CHEESECAKE FACTORY INCORPORATED (the
"Company") and DEBBY R. ZURZOLO (the "Employee").
WHEREAS, the Board of Directors of the Company (the "Board") has
approved and authorized the entry into this Agreement with the Employee; and
WHEREAS, the parties desire to enter into this Agreement setting forth
the terms and conditions for the employment relationship to the Employee with
the Company.
NOW, THEREFORE, in consideration of the promises and mutual covenants
and agreements herein contained and intending to be legally bound hereby, the
Company and the Employee hereby agree as follows:
1. EMPLOYMENT. The Employee is employed as Senior Vice President and
General Counsel of the Company from the date of this Agreement until
termination in accordance with Section 8. The Employee shall have such duties
and responsibilities as may be designated to her by the Board from time to
time. Employee shall report directly to the Chief Executive Officer of the
Company. Employee shall devote substantially all her time, attention and
energies to the business and affairs of the Company and its subsidiaries.
2. SALARY. The Company shall pay the Employee a salary at an annual
rate of $230,000, with such salary to be increased at such times, if any, and
in such amounts as determined by the Board ("Base Salary"). Such salary shall
be payable by the Company to the Employee in substantially equal
installments not less frequently than bi-weekly. Participation in deferred
compensation, discretionary bonus, retirement, stock option and other
employee benefit plans and in fringe benefits shall not reduce the salary
payable to the Employee under this Section 2.
3. PARTICIPATION IN BONUS, RETIREMENT AND EMPLOYEE BENEFIT PLANS.
3.1 The Employee shall be entitled to participate equitably with
other officers to the extent of her position, tenure and salary in any plan
of the Company relating to options, bonuses, stock purchases, pension,
thrift, profit sharing, life insurance, disability insurance, medical
coverage, education, severance or so called "golden parachute" payments, or
other retirement or employee benefits that the Company has adopted or may
adopt for the benefit of its officers.
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<PAGE>
3.2 Employee shall receive on the date hereof options under the
Company's 1992 Employee Performance Stock Option Plan ("1992 Plan") to
purchase 100,000 shares of the Company's Common Stock ("Initial Options")
which options shall vest 20% per year on the first anniversary of the date of
grant and each anniversary thereafter, provided the Company's earnings
performance for the year ended immediately prior to the year in which the
vesting date occurs, meets or exceeds the average earnings performance of all
full-menu table service restaurants reported in the Wertheim Index or an
equivalent index selected by the Board's Compensation Committee. The exercise
price shall be equal to $19.906 which is the "Fair Market Value" as defined
in the 1992 Plan as of the date Employee accepted employment with the Company.
3.3 Employee and her dependents shall be entitled to participate
in either the Company-paid indemnity/IPO health insurance program through
N.L. Care, or the Company-paid HMO health insurance program through Care
America. Participation shall be effective 30 days from the date hereof. The
Company shall provide COBRA reimbursement to Employee for the 30 days prior
to Employee's and his dependent's participation in a Company-paid health
insurance program. In addition, Employee shall have the right to participate
in any other plan or benefit offered by the Company for similar situated
employees.
3.4 The Employee shall be eligible for participation in the
Company's Performance Incentive Plan (the "Incentive Plan"). Participation in
the Incentive Plan for the 1999 fiscal year shall be prorated to 75% of any
award earned.
4. AUTOMOBILE. The Company shall provide the Employee, at her
option, a non-accountable car allowance of $900 per month, or participation
in the Company's car leasing plan.
5. VACATION. The Employee shall be entitled to three (3) weeks
annual paid vacation in accordance with the Company's general administrative
policy, in addition to holidays and other paid time off provided generally
to officers of the Company.
6. BUSINESS EXPENSES. During such time as the Employee is
rendering services hereunder, the Employee shall be entitled to incur and
be reimbursed for all reasonable business expenses, including but not
limited to mobile telephone charges. The Company agrees that it will
reimburse the Employee for all such expenses upon the presentation by the
Employee, from time to time, of an itemized account of such expenditures
setting forth the date, the purposes for which incurred, and the amounts
thereof, together with such receipts showing payments in conformity with the
Company's established policies. Reimbursement shall be made within a
reasonable period not to exceed thirty days after the Employee's submission
of an itemized account.
7. INDEMNITY. The Company shall indemnify and hold the Employee
harmless from any cost, expense or liability arising out of or relating to
any acts or decisions made by the
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<PAGE>
Employee on behalf of or in the course of performing services for the
Company to the same extent the Company indemnifies and holds harmless other
officers and directors of the Company and in accordance with the Company's
established policies. The Company agrees to maintain Directors and
Officers Liability Insurance if such insurance shall be available at rates
and on terms reasonably acceptable to the Board.
8. TERMINATION.
(a) DEATH. This Agreement shall terminate upon the Employee's
death. Employee's estate shall be entitled to any unpaid pro rata salary
earned prior to such death, and payment of the pro rata portion of Employee's
Incentive Plan award for the fiscal year, if any, when paid to all other
participants, to the extent not already vested in at least 40% of the Initial
Options, the immediate vesting of 40% of the Initial Options and all benefits
and rights provided under any applicable stock option plan.
(b) DISABILITY. If, as a result of the Employee's incapacity due
to physical or mental illness, he shall have been absent from the full-time
performance of substantially all of her material duties with the Company for
90 consecutive days or 180 days within any 12-month period, her employment
may be terminated by the Company for "Disability." Termination shall occur
30 days after a notice of a written termination is delivered to Employee by
the Company. Employee shall be entitled to any unpaid pro rata salary earned
prior to such "Disability" and a lump sum payment of the pro rata portion of
Employee's Incentive Plan award for the fiscal year, if any, when paid to all
other participants, to the extent not already vested in at least 40% of the
Initial Options, the immediate vesting of 40% of the Initial Options and all
benefits and rights provided under any applicable stock option plan and
disability plan.
(c) CAUSE. Subject to the notice provisions set forth below, the
Company may terminate the Employee's employment for "Cause" at any time.
"Cause" shall mean termination upon: (1) the willful failure by the Employee
to substantially perform her duties with the Company for a reasonable period
of time after notice (other than any such failure resulting from her
incapacity due to physical or mental illness), or (2) the Employee's
commission of such acts of dishonesty, fraud, misrepresentation or other acts
of moral turpitude as would prevent the effective performance of her duties.
For purposes of this subsection (c), no act, or failure to act, on the
Employee's part shall be deemed "willful" unless done, or omitted to be done,
by her not in good faith without the reasonable belief that her action or
omission was in the best interest of the Company. Employee shall be entitled
to any unpaid pro rata salary earned prior to the date of termination under
this paragraph (c).
(d) WITHOUT CAUSE. This Agreement and the Employee may be
terminated for any reason without cause by the Company at any time. In such
case, the Employee shall be entitled to (i) any unpaid pro rata salary earned
prior to the date of termination, (ii) a lump-sum payment in an amount equal
to two year's Base Salary then in effect, (iii) a lump-sum payment of the pro
rata portion of Employee's Incentive Plan award for the fiscal year, if any,
when
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<PAGE>
awards are paid to all other plan participants, (iv) any amounts accrued and
unpaid under any plan or benefit of which Employee is a participant, and (v)
to the extent not already vested, the immediate vesting of forty percent
(40%) of the Options granted to Employee pursuant to Section 3.2.
(e) BY EMPLOYEE. Employee may terminate this Agreement upon 90
days written notice after a Change in Control (as defined below). In such
case, the Employee shall be entitled to (i) any unpaid pro rata salary earned
prior to the date of termination, (ii) a lump-sum payment in an amount equal
to two year's Base Salary then in effect, (iii) a lump-sum payment of the pro
rata portion of Employee's Incentive Plan award for the fiscal year, if any,
when awards are paid to all other plan participants, (iv) any amounts accrued
and unpaid under any plan or benefit of which Employee is a participant, and
(v) to the extent not already vested in at least 40% of the Initial Options,
the immediate vesting of forty percent (40%) of the Options granted to
Employee pursuant to Section 3.2. "Change of Control" shall mean (i) any
reorganization, merger or consolidation of the Company with one or more
corporations where the Company is the surviving corporation and the
stockholders of the Company immediately prior to such transaction do not own
at least 80% of the Company's Common Stock immediately after such
transaction, (ii) any reorganization, merger or consolidation of the Company
with one or more corporations where the Company is not the surviving
corporation, (iii) a sale of substantially all of the Company's assets, or
(iv) a sale of 80% or more of the then outstanding shares of Common Stock of
the Company.
(f) NOTICE AND DATE OF TERMINATION. Any termination of the
Employee's employment by the Company or by the Employee shall be communicated
by written Notice of Termination to the other party hereto in accordance with
Section 11. "Notice of Termination" shall mean a notice that indicates the
specific termination provision in this Agreement relied upon and sets forth
in reasonable detail the facts and circumstances claimed to provide a basis
for the termination of the Employee's employment under the provision so
indicated. Unless otherwise specifically provided herein, Employee's
employment shall be terminated upon the later of the date notice is given
pursuant to Paragraph 11 or the date set forth in the Notice of Termination.
For purposes of this Agreement, the term of this Agreement shall end on the
effective date of Employee's termination as provided in the foregoing notice
or, if no effective date is provided, the date such notice is received by
Employee.
9. ASSIGNMENT.
(a) This Agreement is personal to each of the parties hereto. No
party may assign or delegate any rights or obligations hereunder without
first obtaining the written consent of the other party hereto, except that
this Agreement shall be binding upon and inure to the benefit of any
successor corporation to the Company.
(b) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or
-4-
<PAGE>
assets of the Company to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that the Company would be required
to perform as if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which assumes this
Agreement by operation of law, or otherwise.
(c) This Agreement shall inure to the benefit of and be
enforceable by the Employee and her personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If the Employee should die while any amount would still be payable
to her hereunder had she continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to his devisee, legatee or other designee or, if there is no such
designee, to her estate.
10. CONFIDENTIAL INFORMATION.
(a) During the term of this Agreement and thereafter, the Employee
shall not, except as may be required to perform her duties hereunder or as
required by applicable law, disclose to others for use, whether directly or
indirectly, any Confidential Information regarding the Company. "Confidential
Information" shall mean information about the Company, its subsidiaries and
affiliates, and their respective clients and customers that is not available
to the general public and that was learned by the Employee in the course of
her employment by the Company, including (without limitation) any data,
formulae, information, proprietary knowledge, trade secrets and client and
customer lists and all papers, resumes, records and the documents containing
such Confidential Information. The Employee acknowledges that such
Confidential Information is specialized, unique in nature and of great value
to the Company, and that such information gives the Company a competitive
advantage. Upon the termination of her employment, the Employee will promptly
deliver to the Company all documents (and all copies thereof) containing any
Confidential Information.
(b) NONCOMPETITION. Except as otherwise provided herein, the
Employee agrees that during the term of this Agreement she will not, directly
or indirectly, without the prior written consent of the Company, provide
consulting service with or without pay, own, manage, operate, join, control,
participate in, or be connected as a stockholder, partner, or otherwise with
any business, individual, partner, firm, corporation, or other entity which
is then in competition with the Company or any present affiliate of the
Company; provided, however, that the "beneficial ownership" by the Employee,
either individually or as a member of a "group," as such terms are used in
Rule 13d of the General Rules and Regulations under the Securities Exchange
Act of 1934 ("Exchange Act"), of not more than 1% of the voting stock of any
corporation shall not be a violation of this Agreement. It is further
expressly agreed that the Company will or would suffer irreparable injury if
the Employee were to compete with the Company or any subsidiary or affiliate
of the Company in violation of this Agreement and that the Company would by
reason of such competition be entitled to injunctive relief in a court of
appropriate jurisdiction, and the Employee further consents and stipulates to
the entry of such
-5-
<PAGE>
injunctive relief in such a court prohibiting the Employee from competing
with the Company or any subsidiary or affiliate of the Company in violation
of this Agreement.
(c) RIGHT TO COMPANY MATERIALS. The Employee agrees that all
styles, designs, recipes, lists, materials, books, files, reports,
correspondence, records, and other documents ("Company Material") used,
prepared, or made available to the Employee, shall be and shall remain the
property of the Company. Upon the termination of her employment or the
expiration of this Agreement, all Company Materials shall be returned
immediately to the Company, and Employee shall not make or retain any copies
thereof.
(d) ANTISOLICITATION. The Employee promises and agrees that during
the term of this Agreement, and for a period of two years thereafter, she
will not influence or attempt to influence employees, customers, franchisees,
landlords, or suppliers of the Company or any of its present or future
subsidiaries or affiliates, either directly or indirectly, to divert their
employment or business to or with any individual, partnership, firm,
corporation or other entity then in competition with the business of the
Company, or any subsidiary or affiliate of the Company.
11. NOTICE. For the purpose of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall
be deemed to have been duly given when delivered or mailed by United States
certified or registered mail, return receipt requested, postage prepaid,
addressed to the respective addresses set forth below, or to such other
addresses as either party may have furnished to the other in writing in
accordance herewith, except that notice of a change of address shall be
effective only upon actual receipt:
Company: The Cheesecake Factory Incorporated
26950 Agoura Road
Calabasas Hills, California 91301
with a copy to: the Secretary of the Company;
Employee: Debby R. Zurzolo
c/o The Cheesecake Factory Incorporated
26950 Agoura Road
Calabasas Hills, CA 91301
12. AMENDMENTS OR ADDITIONS. No amendment or additions to this
Agreement shall be binding unless in writing and signed by both parties
hereto.
13. SECTION HEADINGS. The section headings used in this Agreement
are included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
-6-
<PAGE>
14. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
15. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed to be an original, but both of which together will
constitute one and the same instrument.
16. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three arbitrators in Los Angeles, California, in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction; provided, however, that the Employee shall be entitled to seek
specific performance of her right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under or in
connection with this Agreement.
17. ATTORNEYS FEES. In the event of any action or proceeding to
interpret or enforce this Agreement, the prevailing party in such action or
proceeding shall be entitled to receive reimbursement of its reasonable
attorneys= fees and costs incurred from the other party.
18. MISCELLANEOUS. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed
to in writing and signed by the Employee and such officer as may be
specifically designated by the Board. No waiver by either party hereto at any
time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not expressly
set forth in this Agreement. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California without regard to its conflicts of law principles. All references
to sections of the Exchange Act shall be deemed also to refer to any
successor provisions to such sections.
-7-
<PAGE>
Any payments provided for hereunder shall be paid after deduction of
any applicable withholding required under federal, state or local law.
Sections 10 and 16 shall survive the expiration or earlier termination of
this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement on the date first indicated above.
THE CHEESECAKE FACTORY INCORPORATED
By:
---------------------------------
DAVID OVERTON
Chief Executive Officer
EMPLOYEE:
--------------------------------------
DEBBY R. ZURZOLO
-8-
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