<PAGE>
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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 MARCH 30, 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
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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 April 30, 1999, 20,069,476 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--March 30, 1999 and December 29, 1998................ 1
Consolidated Statements of Operations--Thirteen weeks ended March 30, 1999 and
March 31, 1998................................................................. 2
Consolidated Statements of Cash Flows--Thirteen weeks ended March 30, 1999 and
March 31, 1998................................................................. 3
Notes to Consolidated Financial Statements--March 30, 1999....................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 6
Item 3. Quantitative and Qualitative Disclosures about Market Risk....................... 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................. 13
Signatures.................................................................................. 14
</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>
MARCH 30, DECEMBER 29,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................................ $ 25,845 $ 17,467
Investments and marketable securities................................................................ 16,607 21,596
Accounts receivable.................................................................................. 2,174 3,473
Other receivables.................................................................................... 4,485 5,478
Inventories.......................................................................................... 6,598 5,854
Prepaid expenses..................................................................................... 1,192 826
----------- ------------
Total current assets............................................................................... 56,901 54,694
----------- ------------
Property and equipment, net............................................................................ 116,981 107,660
----------- ------------
Other assets:
Marketable securities................................................................................ 11,760 13,609
Other receivables.................................................................................... 7,271 5,286
Trademarks........................................................................................... 1,624 1,614
Other................................................................................................ 2,737 2,557
----------- ------------
Total other assets................................................................................. 23,392 23,066
----------- ------------
Total assets..................................................................................... $197,274 $185,420
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................................................... $ 15,927 $ 11,303
Income taxes payable................................................................................. 3,036 1,421
Other accrued expenses............................................................................... 12,158 11,290
Deferred income taxes................................................................................ 432 416
----------- ------------
Total current liabilities.......................................................................... 31,553 24,430
----------- ------------
Deferred income taxes................................................................................ 699 699
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; 20,178,202 and 20,108,102 issued for 1999
and 1998, respectively............................................................................. 202 201
Additional paid-in capital........................................................................... 118,797 117,713
Retained earnings.................................................................................... 49,499 45,880
Marketable securities valuation account.............................................................. (8) (35)
Treasury stock, 211,000 shares at cost............................................................... (3,468) (3,468)
----------- ------------
Total stockholders' equity......................................................................... 165,022 160,291
----------- ------------
----------- ------------
Total liabilities and stockholders' equity....................................................... $197,274 $185,420
----------- ------------
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</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
ENDED MARCH 30, ENDED MARCH 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Revenues:
Restaurant sales............................................................. $ 69,810 $ 54,967
Third-party bakery sales..................................................... 5,014 4,534
------- -------
Total revenues............................................................. 74,824 59,501
------- -------
Costs and expenses:
Restaurant cost of sales..................................................... 18,115 14,899
Third-party bakery cost of sales............................................. 2,498 2,120
Labor expenses............................................................... 23,157 18,780
Other operating costs and expenses........................................... 16,952 13,105
General and administrative expenses.......................................... 4,955 3,742
Depreciation and amortization expenses....................................... 2,412 2,015
Preopening costs............................................................. 1,702 181
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Total costs and expenses................................................... 69,791 54,842
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Income from operations......................................................... 5,033 4,659
Interest income, net........................................................... 604 734
Other income, net.............................................................. 62 96
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Income before income taxes and cumulative effect of change in accounting
principle.................................................................... 5,699 5,489
Income tax provision........................................................... 2,080 1,885
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Income before cumulative effect of change in accounting principle.............. 3,619 3,604
Cumulative effect of change in accounting principle, net of income tax benefit
of $3,343.................................................................... -- 6,347
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Net income (loss).............................................................. $ 3,619 $ (2,743)
------- -------
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Net income (loss) per share:
Basic:
Income before cumulative effect of change in accounting principle............ $ 0.18 $ 0.18
Cumulative effect of change in accounting principle.......................... -- (0.32)
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Net income (loss)............................................................ $ 0.18 $ (0.14)
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------- -------
Diluted:
Income before cumulative effect of change in accounting principle............ $ 0.18 $ 0.18
Cumulative effect of change in accounting principle.......................... -- (0.31)
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Net income (loss)............................................................ $ 0.18 $ (0.13)
------- -------
------- -------
Weighted average shares outstanding:
Basic........................................................................ 19,913 19,930
Diluted...................................................................... 20,562 20,501
</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>
THIRTEEN WEEKS THIRTEEN WEEKS
ENDED MARCH 30, ENDED MARCH 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................ $ 3,619 $ (2,743)
Adjustments to reconcile net income (loss) to cash provided by operating
activities:
Depreciation and amortization................................................ 2,412 2,015
Cumulative effect of change in accounting principle.......................... -- 6,347
Changes in assets and liabilities:
Accounts receivable.......................................................... 1,299 815
Other receivables............................................................ (992) 2,120
Inventories.................................................................. (744) 14
Prepaid expenses............................................................. (366) (470)
Trademarks................................................................... (26) (279)
Other........................................................................ (199) (78)
Accounts payable............................................................. 4,624 (5,483)
Income taxes payable......................................................... 1,615 1,748
Other accrued expenses....................................................... 868 3,082
--------------- ---------------
Cash provided by operating activities...................................... 12,110 7,088
--------------- ---------------
Cash flows from investing activities:
Additions to property and equipment.......................................... (11,698) (6,400)
Investments in available-for-sale securities................................. (11,319) (14,135)
Sales of available-for-sale securities....................................... 18,200 4,512
--------------- ---------------
Cash used by investing activities.......................................... (4,817) (16,023)
--------------- ---------------
Cash flows from financing activities:
Common stock issued.......................................................... 1 1
Proceeds from exercise of employee stock options............................. 1,084 1,376
--------------- ---------------
Cash provided by financing activities...................................... 1,085 1,377
--------------- ---------------
Net change in cash and cash equivalents........................................ 8,378 (7,558)
Cash and cash equivalents at beginning of period............................... 17,467 43,543
--------------- ---------------
Cash and cash equivalents at end of period..................................... $ 25,845 $ 35,985
--------------- ---------------
--------------- ---------------
Supplemental disclosures:
Interest paid................................................................ $ -- $ 24
--------------- ---------------
Income taxes paid............................................................ $ 436 $ 138
--------------- ---------------
--------------- ---------------
</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
MARCH 30, 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 ended March 30, 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 March 30, 1999 (in thousands):
<TABLE>
<CAPTION>
BALANCE
UNREALIZED SHEET
CLASSIFICATION COST FAIR VALUE GAIN (LOSS) AMOUNT MATURITY
- ------------------------------------------------ --------- ----------- ------------- --------- ------------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Available-for-sale securities:
January 1999 to
Corporate debt securities..................... $ 16,594 $ 16,607 $ 13 $ 16,607 February 2000
--------- ----------- --- ---------
--------- ----------- --- ---------
OTHER ASSETS:
Available-for-sale securities:
April 2000 to
Corporate debt securities..................... $ 11,786 $ 11,760 $ (26) $ 11,760 August 2001
--------- ----------- --- ---------
--------- ----------- --- ---------
</TABLE>
4
<PAGE>
THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 30, 1999
(UNAUDITED)
NOTE C--NET INCOME (LOSS) PER SHARE
During fiscal 1997, the Company adopted the provisions of 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 April 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 thirteen weeks ended
March 31, 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 April 30, 1999, the Company operated 29 upscale, high volume, casual
dining restaurants, a self-service "express" foodservice operation at
DisneyQuest-TM--Orlando 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 ended March 30, 1999
are not necessarily indicative of the results to be expected for the full fiscal
year.
<TABLE>
<CAPTION>
THIRTEEN WEEKS THIRTEEN WEEKS
ENDED ENDED
MARCH 30, 1999 MARCH 31, 1998
----------------- -----------------
% %
<S> <C> <C>
Revenues:
Restaurant sales............................................................... 93.3 92.4
Third-party bakery sales....................................................... 6.7 7.6
----- -----
Total revenues............................................................... 100.0 100.0
----- -----
Costs and expenses:
Restaurant cost of sales....................................................... 24.2 25.0
Third-party bakery cost of sales............................................... 3.3 3.6
Labor expenses................................................................. 31.0 31.6
Other operating costs and expenses............................................. 22.7 22.0
General and administrative expenses............................................ 6.6 6.3
Depreciation and amortization expenses......................................... 3.2 3.4
Preopening costs............................................................... 2.3 0.3
----- -----
Total costs and expenses..................................................... 93.3 92.2
----- -----
Income from operations........................................................... 6.7 7.8
Interest income, net............................................................. 0.8 1.2
Other income, net................................................................ 0.1 0.2
----- -----
Income before income taxes and cumulative effect of change in accounting
principle...................................................................... 7.6 9.2
Income tax provision............................................................. 2.8 3.2
----- -----
Income before cumulative effect of change in accounting principle................ 4.8 6.0
Cumulative effect of change in accounting principle, net of income tax benefit... -- (10.6)
----- -----
Net income (loss)................................................................ 4.8 (4.6)
----- -----
----- -----
</TABLE>
THIRTEEN WEEKS ENDED MARCH 30, 1999 COMPARED TO THIRTEEN WEEKS ENDED MARCH 31,
1998
REVENUES
For the thirteen weeks ended March 30, 1999, the Company's total revenues
increased 26% to $74.8 million versus $59.5 million for the thirteen weeks ended
March 31, 1998. Restaurant sales increased $14.8 million or 27% to $69.8 million
versus $55.0 million for the same period of the prior year. The $14.8 million
increase in restaurant sales consisted of a $2.3 million or 4.2% increase in
comparable restaurant sales for the period and a $12.5 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 11% to $5.0 million for the thirteen
weeks ended March 30, 1999 versus $4.5 million for the same period of the prior
year. The increase was principally attributable to higher sales volumes to
warehouse club operators. For the thirteen weeks ended March 30, 1999, sales to
warehouse club operators comprised approximately 60% of total third-party bakery
sales, compared to approximately 56% for the same period of the prior year.
7
<PAGE>
RESTAURANT COST OF SALES
During the thirteen weeks ended March 30, 1999, restaurant cost of sales
were $18.1 million versus $14.9 million for the comparable period last year. The
related increase of $3.2 million was primarily attributable to new restaurant
openings. As a percentage of restaurant sales, these costs decreased slightly to
24.2% versus 25.0% for the same period of the prior year, principally as a
result of the benefit of menu price increases and lower produce, grocery and
seafood costs that were offset, in part, by higher dairy-related commodity
costs.
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 $2.5 million for the thirteen weeks
ended March 30, 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 March
30, 1999 increased to 49.8% versus 46.8% for the comparable period last year.
This percentage increase was primarily due to higher costs for dairy-related
commodities (principally cream cheese, whipped cream and butter) coupled with a
slight 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. 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 $23.2
million for the thirteen weeks ended March 30, 1999 versus $18.8 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 slightly to 31.0% versus 31.6% for the comparable period last year.
The slight decrease in labor as a percentage of total revenues for the thirteen
weeks ended March 30, 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) and bakery production overhead, selling and distribution expenses.
Other operating costs and expenses increased 29% to $17.0 million for the
thirteen weeks ended March 30, 1999 versus $13.1 million for the same period of
the prior year. This increase was principally attributable to new restaurant
openings. As a percentage of total revenues, occupancy and other expenses
increased slightly to 22.7% for the thirteen weeks ended March 30, 1999 versus
22.0% for the same period of fiscal 1998. This slight percentage increase was
primarily attributable
8
<PAGE>
to increased expenditures as a percentage of revenues related to bakery
marketing and distribution expenses.
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 $5.0
million for the thirteen weeks ended March 30, 1999 versus $3.8 million for the
same period of fiscal 1998, an increase of $1.2 million or 32%. As a percentage
of total revenues, general and administrative expenses increased to 6.6% for the
thirteen weeks ended March 30, 1999 versus 6.3% for the same period of fiscal
1998. These increases were principally attributable to staff additions to the
Company's field supervision, restaurant openings and corporate support
infrastructure in order to support planned future growth. The Company intends to
continue strengthening its operational support infrastructure during fiscal
1999, which will likely generate a higher absolute amount of general and
administrative expenses for the fiscal year.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses were $2.4 million for the thirteen
weeks ended March 30, 1999 versus $2.0 million for the thirteen weeks ended
March 31, 1998. As a percentage of total revenues, depreciation and amortization
expenses were 3.2% for the thirteen weeks ended March 30, 1999 versus 3.4% for
the same period of the prior year. The increase of $0.4 million for the thirteen
weeks ended March 30, 1999 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
March 30, 1999 compared to $181,000 for the same period of the prior year. The
Company opened two Cheesecake Factory-Registered Trademark- restaurants and was
well underway with preopening activities associated with the new Grand Lux
Cafe-TM- concept during the thirteen weeks ended March 30, 1999. There were no
restaurant openings during the thirteen weeks ended March 31, 1998.
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, including the cost of 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. Additionally, new concepts such as Grand Lux Cafe, which is
planned to open in May 1999, are expected to incur initial preopening costs that
will be significantly higher than preopening costs for typical Company
restaurants. 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, and the fluctuations could be significant. Based
on the Company's current growth objectives for fiscal 1999 and 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 fiscal 1999. However, there can be no
assurance that preopening costs will be
9
<PAGE>
reduced for future restaurants or that preopening costs will not continue to
have a significant impact on the Company's results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth a summary of the Company's key liquidity
measurements for the thirteen-week periods ended March 30, 1999, and December
29, 1998.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
--------------------------
MARCH 30, DECEMBER 29,
1999 1998
----------- -------------
(DOLLAR AMOUNTS IN
MILLIONS)
<S> <C> <C>
Cash and marketable securities on hand, end of period............... $ 54.2 $ 52.7
Net working capital, end of period.................................. $ 25.4 $ 30.3
Current ratio, end of period........................................ 1.8:1 2.2:1
Long-term debt, end of period....................................... -- --
Cash provided by operations......................................... $ 12.1 $ 5.3
Capital expenditures................................................ $ 11.7 $ 6.6
</TABLE>
As of March 30, 1999, the Company's balance of cash and marketable
securities on hand was not significantly different compared to the respective
amount as of December 29, 1998. Net working capital of $25.4 million as of March
30, 1999 was $4.9 million less than the respective amount for December 29, 1998,
due principally to increased current liabilities for accounts payable and income
taxes payable in the ordinary course of business. Cash provided by operations
increased $6.8 million to $12.1 million for the thirteen weeks ended March 30,
1999 versus $5.3 million for the comparable period ended December 29, 1998, due
principally to working capital items.
As of April 30, 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.
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 eight
new restaurants to be opened during fiscal 1999 (including Grand Lux Cafe 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.
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
10
<PAGE>
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
April 30, 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 April 30, 1999, the Company has made
substantial progress in the awareness and assessment phases of the plan and is
moving forward with the remediation, 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
tracking 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
11
<PAGE>
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 April 30, 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.
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 first quarter of 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 March 30, 1999, the Company held
$28.4 million in marketable securities. A hypothetical 10% decline in the market
value of those securities would result in a $2.8 million unrealized loss and a
corresponding decline in their fair value of a like amount. This hypothetical
decline would not affect cash flow from operations and would not have an impact
on net income (loss) until the securities were disposed of.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. None.
(b) Reports on Form 8-K. None.
13
<PAGE>
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.
THE CHEESECAKE FACTORY INCORPORATED
Date: May 13, 1999
By:
-------------------------------------------------------------------------------
David M. Overton
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
By:
-------------------------------------------------------------------------------
Gerald W. Deitchle
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1999
<PERIOD-START> DEC-30-1998
<PERIOD-END> MAR-30-1999
<CASH> 25,845
<SECURITIES> 16,607
<RECEIVABLES> 2,174
<ALLOWANCES> 0
<INVENTORY> 6,598
<CURRENT-ASSETS> 56,901
<PP&E> 149,771
<DEPRECIATION> 32,790
<TOTAL-ASSETS> 197,274
<CURRENT-LIABILITIES> 31,553
<BONDS> 0
0
0
<COMMON> 202
<OTHER-SE> 164,820
<TOTAL-LIABILITY-AND-EQUITY> 197,274
<SALES> 74,824
<TOTAL-REVENUES> 74,824
<CGS> 20,613
<TOTAL-COSTS> 20,613
<OTHER-EXPENSES> 49,178
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,699
<INCOME-TAX> 2,080
<INCOME-CONTINUING> 3,619
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,619
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
