<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 SEPTEMBER 28, 1999
COMMISSION FILE NUMBER 0-20574
------------------------
THE CHEESECAKE FACTORY INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
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)
</TABLE>
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 November 5, 1999, 20,094,363 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--September 28, 1999 and
December 29, 1998......................................... 1
Consolidated Statements of Operations--Thirteen and
thirty-nine weeks ended September 28, 1999 and
September 29, 1998........................................ 2
Consolidated Statements of Cash Flows--Thirty-nine weeks
ended September 28, 1999 and September 29, 1998........... 3
Notes to Consolidated Financial Statements--September 28,
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...................................................... 14
PART II. OTHER INFORMATION
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>
SEPTEMBER 28, DECEMBER 29,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 25,349 $ 17,467
Investments and marketable securities..................... 18,097 21,596
Accounts receivable....................................... 3,338 3,473
Other receivables......................................... 7,353 5,478
Inventories............................................... 8,873 5,854
Prepaid expenses.......................................... 989 826
-------- --------
Total current assets.................................... 63,999 54,694
-------- --------
Property and equipment, net................................. 128,945 107,660
-------- --------
Other assets:
Marketable securities..................................... 9,982 13,609
Other receivables......................................... 4,066 5,286
Trademarks................................................ 1,705 1,614
Other..................................................... 2,455 2,557
-------- --------
Total other assets...................................... 18,208 23,066
-------- --------
Total assets.......................................... $211,152 $185,420
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 13,187 $ 11,303
Income taxes payable...................................... 4,642 1,421
Other accrued expenses.................................... 14,593 11,290
Deferred income taxes..................................... 404 416
-------- --------
Total current liabilities............................... 32,826 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; 20,381,563 and 20,108,102 issued for 1999
and 1998, respectively.................................. 204 201
Additional paid-in capital................................ 121,877 117,713
Retained earnings......................................... 60,594 45,880
Marketable securities valuation account................... (55) (35)
Treasury stock, 248,000 shares at cost.................... (4,521) (3,468)
-------- --------
Total stockholders' equity.............................. 178,099 160,291
-------- --------
Total liabilities and stockholders' equity............ $211,152 $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 THIRTEEN THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales........................ $85,823 $64,259 $234,996 $179,069
Third-party bakery sales................ 6,031 4,317 17,449 13,282
------- ------- -------- --------
Total revenues...................... 91,854 68,576 252,445 192,351
Costs and expenses:
Restaurant cost of sales................ 22,225 17,106 60,908 47,861
Third-party bakery cost of sales........ 2,775 2,049 8,439 6,250
Labor expenses.......................... 27,853 21,045 76,961 59,638
Other operating costs and expenses...... 20,396 15,843 56,217 43,391
General and administrative expenses..... 5,440 4,420 15,776 12,387
Depreciation and amortization
expenses................................ 2,832 2,168 7,939 6,230
Preopening costs........................ 2,001 1,197 5,424 2,686
------- ------- -------- --------
Total costs and expenses............ 83,522 63,828 231,664 178,443
------- ------- -------- --------
Income from operations.................... 8,332 4,748 20,781 13,908
Interest income, net...................... 716 836 2,075 2,330
Other income, net......................... 122 59 316 262
------- ------- -------- --------
Income before income taxes and cumulative
effect of change in accounting
principle............................... 9,170 5,643 23,172 16,500
Income tax provision...................... 3,347 1,747 8,458 5,484
------- ------- -------- --------
Income before cumulative effect of change
in accounting principle................. 5,823 3,896 14,714 11,016
Cumulative effect of change in accounting
principle, net of income tax benefit
of $3,343............................... -- -- -- 6,347
------- ------- -------- --------
Net income................................ $ 5,823 $ 3,896 $ 14,714 $ 4,669
======= ======= ======== ========
Net income per share:
Basic:
Income before cumulative effect of
change in accounting principle........ $ 0.29 $ 0.19 $ 0.73 $ 0.55
Cumulative effect of change in
accounting principle.................. -- -- -- (0.32)
------- ------- -------- --------
Net income.............................. $ 0.29 $ 0.19 $ 0.73 $ 0.23
======= ======= ======== ========
Diluted:
Income before cumulative effect of
change in accounting principle........ $ 0.27 $ 0.19 $ 0.70 $ 0.54
Cumulative effect of change in
accounting principle.................. -- -- -- (0.31)
------- ------- -------- --------
Net income.............................. $ 0.27 $ 0.19 $ 0.70 $ 0.23
======= ======= ======== ========
Weighted average shares outstanding:
Basic................................... 20,153 20,059 20,050 20,018
Diluted................................. 21,395 20,510 21,141 20,591
</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>
THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED
SEPTEMBER 28, SEPTEMBER 29,
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $14,714 $ 4,669
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization............................. 7,939 6,230
Cumulative effect of change in accounting principle....... -- 6,347
Deferred income taxes..................................... (473) --
Changes in assets and liabilities:
Accounts receivable....................................... 135 392
Other receivables......................................... (655) 3,370
Inventories............................................... (3,019) (1,384)
Prepaid expenses.......................................... (163) (584)
Trademarks................................................ (140) (319)
Other..................................................... 41 (654)
Accounts payable.......................................... 1,884 948
Income taxes payable...................................... 3,221 1,818
Other accrued expenses.................................... 3,303 873
------- -------
Cash provided by operating activities................. 26,787 21,706
------- -------
Cash flows from investing activities:
Additions to property and equipment....................... (29,114) (21,333)
Investments in available-for-sale securities.............. (28,087) (31,780)
Sales of available-for-sale securities.................... 35,182 14,908
------- -------
Cash used by investing activities..................... (22,019) (38,205)
------- -------
Cash flows from financing activities:
Common stock issued....................................... 3 1
Purchase of treasury stock................................ (1,053) (3,008)
Proceeds from exercise of employee stock options.......... 4,164 2,305
------- -------
Cash provided (used) by financing activities.......... 3,114 (702)
------- -------
Net change in cash and cash equivalents..................... 7,882 (17,201)
Cash and cash equivalents at beginning of period............ 17,467 43,543
------- -------
Cash and cash equivalents at end of period.................. $25,349 $26,342
======= =======
Supplemental disclosures:
Interest paid............................................. $ 97 $ 24
======= =======
Income taxes paid......................................... $ 5,237 $ 3,675
======= =======
</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
SEPTEMBER 28, 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,
collectively referred to as "the Company"), for the thirteen week and
thirty-nine week periods ended September 28, 1999 and September 29, 1998. The
consolidated financial statements 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 September 28, 1999 (in thousands):
<TABLE>
<CAPTION>
UNREALIZED BALANCE
GAIN SHEET
CLASSIFICATION COST FAIR VALUE (LOSS) AMOUNT MATURITY
- -------------- -------- ---------- ---------- -------- ---------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Available-for-sale securities:
October 1999 to
Corporate debt securities........... $18,129 $18,097 $ (32) $18,097 September 2000
======= ======= ===== =======
OTHER ASSETS:
Available-for-sale securities:
October 2000 to
Corporate debt securities........... $10,039 $ 9,982 $ (57) $ 9,982 June 2001
======= ======= ===== =======
</TABLE>
4
<PAGE>
THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 28, 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 November 5, 1999, the Company has repurchased
295,500 shares at a total cost of approximately $5.7 million. Share repurchases
occurred during both fiscal years 1998 and 1999.
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 thirty-nine weeks
ended September 29, 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 November 5, 1999, the Company operated 32 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 thirty-nine weeks
ended September 28, 1999 are not necessarily indicative of the results to be
expected for the full fiscal year.
<TABLE>
<CAPTION>
THIRTEEN THIRTEEN THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
% % % %
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales........................ 93.4 93.7 93.1 93.1
Third-party bakery sales................ 6.6 6.3 6.9 6.9
----- ----- ----- -----
Total revenues........................ 100.0 100.0 100.0 100.0
----- ----- ----- -----
Costs and expenses:
Restaurant cost of sales................ 24.2 24.9 24.1 24.9
Third-party bakery cost of sales........ 3.0 3.0 3.4 3.3
Labor expenses.......................... 30.3 30.7 30.5 31.0
Other operating costs and expenses...... 22.2 23.1 22.3 22.6
General and administrative expenses..... 5.9 6.4 6.3 6.4
Depreciation and amortization
expenses.............................. 3.1 3.2 3.1 3.2
Preopening costs........................ 2.2 1.8 2.1 1.4
----- ----- ----- -----
Total costs and expenses.............. 90.9 93.1 91.8 92.8
----- ----- ----- -----
Income from operations.................... 9.1 6.9 8.2 7.2
Interest income, net...................... 0.8 1.2 0.9 1.2
Other income, net......................... 0.1 0.1 0.1 0.1
----- ----- ----- -----
Income before income taxes and cumulative
effect of change in accounting
principle............................... 10.0 8.2 9.2 8.5
Income tax provision...................... 3.7 2.5 3.4 2.8
----- ----- ----- -----
Income before cumulative effect of change
in accounting principle................. 6.3 5.7 5.8 5.7
Cumulative effect of change in accounting
principle, net of income tax benefit.... -- -- -- 3.3
----- ----- ----- -----
Net income................................ 6.3 5.7 5.8 2.4
===== ===== ===== =====
</TABLE>
THIRTEEN WEEKS ENDED SEPTEMBER 28, 1999 COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 29, 1998
REVENUES
For the thirteen weeks ended September 28, 1999, the Company's total
revenues increased 34% to $91.9 million versus $68.6 million for the thirteen
weeks ended September 29, 1998. Restaurant sales increased $21.5 million or 34%
to $85.8 million versus $64.3 million for the same period of the prior year. The
$21.5 million increase in restaurant sales consisted of a $2.2 million or 3.4%
increase in comparable restaurant sales for the period and a $19.3 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 40% to $6.0 million for the thirteen
weeks ended September 28, 1999 versus $4.3 million for the same period of the
prior year. This increase of $1.7 million was attributable
7
<PAGE>
to higher sales volumes to warehouse club and restaurant operators. Sales to
warehouse club operators comprised approximately 56% of total third-party bakery
sales for the thirteen weeks ended September 28, 1999 compared to 63% for the
same period of the prior year.
RESTAURANT COST OF SALES
During the thirteen weeks ended September 28, 1999, restaurant cost of sales
were $22.2 million versus $17.1 million for the comparable period last year. The
related increase of $5.1 million was primarily attributable to new restaurant
openings. As a percentage of restaurant sales, these costs decreased slightly to
25.9% versus 26.6% for the same period of the prior year, principally as a
result of the benefit of menu price increases, lower dairy and poultry costs and
more effective purchasing agreements.
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 $2.8 million for the thirteen weeks
ended September 28, 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
September 28, 1999 decreased slightly to 46.1% versus 47.4% for the comparable
period last year. During certain weeks of fiscal 1998, the Company's costs for
certain of its dairy related commodities increased as much as 50% to 75% 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
$27.9 million for the thirteen weeks ended September 28, 1999 versus
$21.1 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 30.3% versus 30.7% for the
comparable period last year. This decrease was principally due to 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 bakery selling and distribution
expenses. Other operating costs and expenses increased 29% to $20.4 million for
the thirteen weeks ended September 28, 1999 versus $15.8 million for the same
period of the prior year. This increase was principally attributable to new
restaurant openings. As a percentage of total
8
<PAGE>
revenues, other operating costs and expenses decreased to 22.2% for the thirteen
weeks ended September 28, 1999 versus 23.1% 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 September 28, 1999 versus $4.4 million
for the same period of fiscal 1998, an increase of $1.0 million or 23%. This
increase was principally due to the planned growth in the number of corporate
and operational support employees, and increased bonus expenses. As a percentage
of total revenues, general and administrative expenses decreased slightly to
5.9% for the thirteen weeks ended September 28, 1999 versus 6.4% 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 $2.8 million for the thirteen
weeks ended September 28, 1999 versus $2.1 million for the thirteen weeks ended
September 29, 1998. As a percentage of total revenues, depreciation and
amortization expenses were 3.1% for the thirteen weeks ended September 28, 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 $2.0 million for the thirteen weeks ended
September 28, 1999 compared to $1.2 million for the same period of the prior
year. The Company opened two restaurants during the quarter ended September 28,
1999 (Columbus, Ohio and Boulder, Colorado) as well as an additional opening on
the first day of the fourth quarter of fiscal 1999 (Providence, Rhode Island)
compared to two restaurant openings during the same period of the prior year.
Preopening costs include incremental, out-of-pocket costs directly incurred
to open new restaurants that are not otherwise capitalizable. 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. These fluctuations can
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.
9
<PAGE>
THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1999 COMPARED TO THIRTY-NINE WEEKS ENDED
SEPTEMBER 29, 1998
REVENUES
For the thirty-nine weeks ended September 28, 1999, the Company's total
revenues increased 31% to $252.4 million versus $192.4 million for the
thirty-nine weeks ended September 29, 1998. Restaurant sales increased $55.9
million or 31% to $235.0 million versus $179.1 million for the same period of
the prior year. The $55.9 million increase in restaurant sales consisted of a
$6.9 million or 3.9% increase in comparable restaurant sales for the period and
a $49.0 million increase from the openings of new restaurants. Third-party
bakery sales increased 31% to $17.5 million for the thirty-nine weeks ended
September 28, 1999 versus $13.3 million for the same period of the prior year,
primarily due to increased sales to other restaurant operators.
RESTAURANT COST OF SALES
During the thirty-nine weeks ended September 28, 1999, restaurant cost of
sales were $60.9 million versus $47.8 million for the comparable period last
year. The related increase of $13.1 million was primarily attributable to new
restaurant openings. As a percentage of restaurant sales, these costs decreased
to 25.9% versus 26.7% 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 $8.4 million for the thirty-nine weeks
ended September 28, 1999 versus $6.2 million for the same period of the prior
year. As a percentage of bakery sales, bakery costs for the thirty-nine weeks
ended September 28, 1999 increased slightly to 48.4% versus 47.1% for the
comparable period last year. This percentage increase was primarily due to a
shift in the mix of sales to lower-margin products.
LABOR EXPENSES
Labor expenses were $77.0 million for the thirty-nine weeks ended September
28, 1999 versus $59.6 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 slightly to 30.5% versus
31.0% for the comparable period last year.
OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses increased 30% to $56.2 million for the
thirty-nine weeks ended September 28, 1999 versus $43.4 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 decreased slightly to 22.3% versus 22.6% for the comparable period
last year.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased to $15.8 million for the
thirty-nine weeks ended September 28, 1999 versus $12.4 million for the same
period of fiscal 1998, an increase of $3.4 million or 27%. As a percentage of
total revenues, general and administrative expenses decreased slightly to 6.3%
versus 6.4% for the comparable period last year.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses were $7.9 million for the thirty-nine
weeks ended September 28, 1999 versus $6.2 million for the thirty-nine weeks
ended September 29, 1998. As a percentage of total revenues, depreciation and
amortization expenses were 3.1% for the thirty-nine weeks ended
10
<PAGE>
September 28, 1999 versus 3.2% for the same period of the prior year. The
increase of $1.7 million primarily consisted of higher restaurant depreciation
expense, which was principally due to the openings of new restaurants.
PREOPENING COSTS
Incurred preopening costs were $5.4 million for the thirty-nine weeks ended
September 28, 1999 compared to $2.7 million for the same period of the prior
year. As a percentage of total revenues, preopening costs were 2.1% for the
thirty-nine weeks ended September 28, 1999 versus 1.4% for the same period of
the prior year. The increase of $2.7 million in preopening costs during the
thirty-nine weeks ended September 28, 1999 was principally due to the opening of
five restaurants (including Grand Lux Cafe, a new concept) during the
thirty-nine weeks ended September 28, 1999, versus three 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 thirty-nine weeks ended September 28, 1999 and
September 29, 1998.
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-----------------------------
SEPTEMBER 28, SEPTEMBER 29,
1999 1998
------------- -------------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C>
Cash and marketable securities on hand, end of
period........................................... $53.4 $53.1
Net working capital, end of period................. $31.2 $30.3
Current ratio, end of period....................... 2.0:1 2.2:1
Long-term debt, end of period...................... -- --
Cash provided by operations........................ $26.8 $21.7
Capital expenditures............................... $29.1 $21.3
</TABLE>
As of September 28, 1999, the Company's key liquidity measurements were not
significantly different compared to September 29, 1998. As of November 5, 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.
The Company currently estimates its total capital expenditure requirement
during fiscal 1999 to range between $33-$35 million, excluding approximately
$6-$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-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.
11
<PAGE>
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 November 5, 1999, there was one restaurant (Mission Viejo,
California) under construction for a potential December 1999 opening. Three
leases have been signed for potential 2000 openings in San Francisco, California
(Macy's at Union Square); Atlanta, Georgia (Perimeter Mall) and West Palm Beach,
Florida. Four letters of intent have been executed for other potential
locations. Several other potential locations are currently under evaluation.
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 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
November 5, 1999, the Company had repurchased 295,500 shares at a total cost of
approximately $5.7 million. All share repurchases occurred during fiscal years
1998 and 1999.
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 and 1999, the Company formulated 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 November 5, 1999, the Company has
made substantial progress in all phases of the plan and is currently focusing on
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.
12
<PAGE>
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, financial reporting systems, credit card
processing services and outside payroll processing services that represent their
respective systems to be Year 2000 compliant. However, there are several
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 November 5, 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
all of 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 final stages of developing an operational contingency
plan to address any perceived unavoidable Year 2000 issues in both the
restaurants and bakery production facility. These contingency plans involve,
among other things, arranging for alternative suppliers where available and
practical in the circumstances; establishing back-up manual systems to process
certain critical business transactions in the event of the failure of automated
systems; ensuring that reasonable levels of critical food and supply inventories
are on hand; and adjusting work schedules for certain critical personnel to
ensure their availability during the final week of fiscal 1999 and the first
week of fiscal 2000. Although the Company expects to have the plan substantially
completed by the end of November 1999, modifications to the plan will likely
continue through the remainder of fiscal 1999 and into fiscal 2000.
13
<PAGE>
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 thirty-nine weeks ended September 28, 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 September 28, 1999, the Company
held $28.1 million in marketable securities. A hypothetical 10% decline in the
market value of those securities would result in a $2.8 million unrealized
pretax 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K. None.
15
<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.
<TABLE>
<S> <C> <C>
THE CHEESECAKE FACTORY INCORPORATED
By: /s/ DAVID M. OVERTON
------------------------------------------------
David M. Overton
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
Date: November 11, 1999
By: /s/ GERALD W. DEITCHLE
------------------------------------------------
Gerald W. Deitchle
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1999
<PERIOD-START> DEC-30-1998
<PERIOD-END> SEP-28-1999
<CASH> 25,349
<SECURITIES> 18,097
<RECEIVABLES> 3,338
<ALLOWANCES> 0
<INVENTORY> 8,873
<CURRENT-ASSETS> 63,999
<PP&E> 167,203
<DEPRECIATION> 38,258
<TOTAL-ASSETS> 211,152
<CURRENT-LIABILITIES> 32,826
<BONDS> 0
0
0
<COMMON> 204
<OTHER-SE> 177,895
<TOTAL-LIABILITY-AND-EQUITY> 178,099
<SALES> 252,445
<TOTAL-REVENUES> 252,445
<CGS> 69,347
<TOTAL-COSTS> 69,347
<OTHER-EXPENSES> 162,317
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97
<INCOME-PRETAX> 23,172
<INCOME-TAX> 8,458
<INCOME-CONTINUING> 14,714
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,714
<EPS-BASIC> 0.73
<EPS-DILUTED> 0.70
</TABLE>
