Table of Contents

 

 

 

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

** **
| **x** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT  OF 1934** |
|-------|------------------------------------------------------------------------------------------------------|

 

**For thefiscal year ended December 29, 2009**

 

**or**

 
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

 

**Commission File Number 0-20574**

 

**THECHEESECAKE FACTORY INCORPORATED**

(Exact name of registrant as specified inits charter)

 

| **Delaware**                             | ** ** | **51-0340466**      |
|------------------------------------------|------------|---------------------|
| (State or other jurisdiction             |       | (I.R.S. Employer    |
| of incorporation or organization)        |       | Identification No.) |
| ** **                               | ** ** | ** **          |
| **26901 Malibu Hills Road**              | ** ** | ** **          |
| **Calabasas Hills, California**          | ** ** | **91301**           |
| (Address of principal executive offices) |       | (Zip Code)          |

 

Registrant’s telephone number, including area code: **(818) 871-3000**

 

Securities registered pursuant to Section 12(b) of the Act: 

 
| **Title of each class**                    | ** ** | **Name of each exchange on which registered**                  |
|--------------------------------------------|------------|----------------------------------------------------------------|
| **Common Stock, par value $.01 per share** | ** ** | **The NASDAQ Stock Market LLC (NASDAQ Global  Select Market)** |
| **Preferred Stock Purchase Rights**        | ** ** | **(Currently attached to and trading with the  Common Stock)** |

 

Securities registered pursuant to Section 12(g) of theAct: **None**

 

Indicateby check mark whether the registrant is a well-known seasoned issuer, asdefined in Rule 405 of the Securities Act. Yes x  No o

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. Yes o  No x

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).* Yes o  No o

 

*The registrant has not yet been phased into the interactive data requirements.

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 
| Large accelerated filer x                     |   | Accelerated filer o         |
|-----------------------------------------------|--------|-----------------------------|
|                                          |   |                        |
| Non-accelerated filer o                       |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                        |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act). Yes o  No x

 

Theaggregate market value of the voting stock held by non-affiliates of theregistrant as of the last business day of the second fiscal quarter, June 30,2009, was $971,631,456 (based on the last reported sales on The NASDAQ StockMarket on that date).

 

Asof February 17, 2010, 60,382,767 shares of the registrant’s Common Stock,$.01 par value per share, were outstanding.

 

###### **DOCUMENTS INCORPORATED BY REFERENCE**

###### ** **

Part IIIof this Form 10-K incorporates by reference information from theregistrant’s Proxy Statement for the Annual Meeting of Stockholders to be heldon June 2, 2010.

 

 

 

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**TABLE OF CONTENTS**

 
| ** **        | ** **                                                                                                              | **Page** |
|-------------------|-------------------------------------------------------------------------------------------------------------------------|----------|
|              |                                                                                                                    |     |
| **PART I**   |                                                                                                                    |     |
| Item  1.          | Business                                                                                                                | 1        |
| Item 1A.          | Risk Factors                                                                                                            | 14       |
| Item 1B.          | Unresolved  Staff Comments                                                                                              | 21       |
| Item  2.          | Properties                                                                                                              | 21       |
| Item 3.           | Legal Proceedings                                                                                                       | 22       |
| Item 4.           | Submission  of Matters to a Vote of Security Holders                                                                    | 22       |
|              |                                                                                                                    |     |
| **PART II**  |                                                                                                                    |     |
| Item 5.           | Market for  the Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities | 23       |
| Item 6.           | Selected Financial  Data                                                                                                | 25       |
| Item 7.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             | 26       |
| Item 7A.          | Quantitative  and Qualitative Disclosures about Market Risk                                                             | 38       |
| Item 8.           | Financial  Statements and Supplementary Data                                                                            | 39       |
| Item 9.           | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                                   | 39       |
| Item 9A.          | Controls and Procedures                                                                                                 | 39       |
| Item 9B.          | Other Information                                                                                                       | 40       |
|              |                                                                                                                    |     |
| **PART III** |                                                                                                                    |     |
| Item 10.          | Directors,  Executive Officers and Corporate Governance                                                                 | 41       |
| Item 11.          | Executive  Compensation                                                                                                 | 41       |
| Item 12.          | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                        | 41       |
| Item 13.          | Certain  Relationships and Related Transactions, and Director Independence                                              | 41       |
| Item 14.          | Principal  Accountant Fees and Services                                                                                 | 41       |
|              |                                                                                                                    |     |
| **PART IV**  |                                                                                                                    |     |
| Item 15.          | Exhibits and  Financial Statement Schedules                                                                             | 42       |

 

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**PART I**

 

**Forward-Looking Statements**

 

Certaininformation included in this Form 10-K and other materials filed or to befiled by us with the Securities and Exchange Commission (“SEC”), as well asinformation included in oral or written statements made by us or on our behalf,may contain forward-looking statements about our current and expectedperformance trends, growth plans, business goals and other matters.  Thesestatements may be contained in our filings with the SEC, in our press releases,in other written communications, and in oral statements made by or with theapproval of one of our authorized officers. Words or phrases such as “believe,”“plan,” “will likely result,” “expect,” “intend,” “will continue,” “isanticipated,” “estimate,” “project,” “may,” “could,” “would,” “should,” andsimilar expressions are intended to identify forward-looking statements. These statements, and any other statements that are not historical facts, areforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995, as codified in Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended (the “Acts”).

 

Inconnection with the “safe harbor” provisions of the Acts, we have identifiedand are disclosing important factors, risks and uncertainties that could causeour actual results to differ materially from those projected in forward-lookingstatements made by us, or on our behalf (See Item 1A, “Risk Factors”). These cautionary statements are to be used as a reference in connection withany forward-looking statements.  The factors, risks and uncertaintiesidentified in these cautionary statements are in addition to those contained inany other cautionary statements, written or oral, which may be made orotherwise addressed in connection with a forward-looking statement or containedin any of our subsequent filings with the SEC.  Because of these factors,risks and uncertainties, we caution against placing undue reliance onforward-looking statements.  Although we believe that the assumptionsunderlying forward-looking statements are reasonable, any of the assumptionscould be incorrect, and there can be no assurance that forward-lookingstatements will prove to be accurate. Forward-looking statements speak only asof the date on which they are made.  Except as may be required by law, wedo not undertake any obligation to modify or revise any forward-lookingstatement to take into account or otherwise reflect subsequent events orcircumstances arising after the date that the forward-looking statement wasmade.

 

**ITEM 1.           BUSINESS**

 

**General**

 

Asof February 26, 2010, The Cheesecake Factory Incorporated (referred toherein as the “Company” or as “we,” “us” and “our”) operated 161 upscale,casual, full-service dining restaurants: 147 under The Cheesecake Factory®mark; 13 under the Grand Lux Cafe® mark; and one under the RockSugar Pan AsianKitchen® mark.  We also operated two bakery production facilities andlicensed two limited menu bakery cafes under The Cheesecake Factory BakeryCafe® mark to another foodservice operator. Throughout this report, we use the term “restaurants” to include TheCheesecake Factory, Grand Lux Cafe and RockSugar Pan Asian Kitchen, unlessotherwise noted, and exclude the two bakery production facilities and twolicensed bakery cafes, unless otherwise noted.

 

Ourbusiness operations originated in 1972 when Oscar and Evelyn Overton founded asmall bakery in the Los Angeles area.  Their son, David Overton, ourChairman of the Board and Chief Executive Officer, led the creation and openingof the first The Cheesecake Factory restaurant in Beverly Hills, California in1978.  In February 1992, our Companywas incorporated in Delaware to consolidate the restaurant and bakerybusinesses of its predecessors operating under The Cheesecake Factory®mark.  Our executive offices are located at 26901 Malibu Hills Road,Calabasas Hills, California 91301, and our telephone number is (818) 871-3000.

 

Restaurantsales represented 96% of our revenues in fiscal 2009, 2008 and 2007.  Our restaurants currently range in size from5,400 to 21,000 interior square feet, provide full alcoholic beverage serviceand are generally open seven days a week for lunch and dinner, as well asSunday brunch.  Hours of operation aregenerally from 11:00 a.m. to 11:00 p.m., except on weekends when mostof our restaurants stay open past midnight, and on Sunday when our restaurantsopen at 10:00 a.m. for brunch.

 

Ourbakery operations are in the business of creating and marketing branded bakeryproducts under The Cheesecake Factory®, The Cheesecake Factory Bakery® and TheDream Factory® marks as well as private-label bakery products to otherfoodservice operators, retailers and distributors (“bakery sales”) in order toleverage our brand identity with consumers and take advantage of excess bakeryproduction capacity.  Bakery sales represented approximately 4% of ourrevenues for fiscal 2009, 2008 and 2007.  For segment information, seeNote 16 of Notes to Consolidated Financial Statements in Part IV, Item 15of this report.

 

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Wemaintain a website at  *www.thecheesecakefactory.com*. On our website, we make available at no charge our annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, allamendments to those reports, and our proxy statements as soon as reasonablypracticable after we electronically file this material with or furnish it tothe SEC.  Our filings are also availableon the SEC’s website at *www.sec.gov*.  The contents of our website are notincorporated by reference into this Form 10-K.

 

**The Cheesecake Factory Restaurant Concept**

 

TheCheesecake Factory restaurants strive to provide a distinctive, high qualitydining experience at moderate prices by offering an extensive, innovative andevolving menu in an upscale, casual, high energy setting with attentive,efficient and friendly service.  As a result, The Cheesecake Factoryrestaurants appeal to a diverse guest base across a broad demographicrange.  Our extensive menu enables us to compete for substantially alldining preferences and occasions from the key lunch and dinner day parts to themid-afternoon and late-night day parts, which are traditionally weaker timesfor most casual dining restaurant operations.  The Cheesecake Factoryrestaurants are not open for breakfast, but do offer Sunday brunch.  Allof our restaurants are open seven days a week.  All items on the menu,including approximately 40 varieties of cheesecake and other quality bakeddesserts, may be purchased for off-premise consumption, which representsapproximately 8% of total Cheesecake Factory restaurant sales in fiscal 2009,2008 and 2007.  Most of our restaurants offer curbside “to go” programs,approximately 40% of our restaurants offer home and business delivery serviceutilizing third-party delivery partners and all of our restaurants offer acatering menu.

 

Ourmenu features approximately 200 items, supplemented by additional itemspresented on separate menu cards, including appetizers, pizza, seafood, steaks,chicken, burgers, specialty items, pastas, salads, sandwiches, omelets anddesserts.  Examples of menu offerings include Chicken Madeira, CajunJambalaya Pasta, Thai Lettuce Wraps and Crispy Chicken Costoletta.  Menuitems, except those desserts manufactured at our bakery production facilities,are prepared from scratch daily on the restaurant premises with high quality,fresh ingredients using innovative and proprietary recipes.  We considerthe extensive selection of items on our menu to be an important factor in thedifferentiation of our restaurants from our competitors.

 

Ourmenu features all-natural chicken with no added hormones, premium beef that isCertified Angus, U.S.D.A. American Style Kobe Wagyu; Prime or Choice, freshfish that is either longline or hook & line caught whenever possible,cooking oils that contain no trans fat according to United States Food and DrugAdministration Food Labeling Guidelines, and produce that is mainly sourceddirectly from premium growers.  In addition, we offer certified organic,fair trade, shade-grown coffee, and certified organic black and herbal teas.

 

Oneof our competitive strengths is the ability to anticipate consumer dining andtaste preferences and adapt our menu to the latest trends in food consumptionto keep it relevant to consumers.  We create new menu items to keep pacewith changing consumer tastes and preferences, and regularly update ouringredients and cooking methods to improve the quality and consistency of ourfood.  Generally, we review our entire menu every six months, in thewinter and in the summer, for guest appeal and pricing.  All new menuitems are tested and selected based on uniqueness, anticipated salespopularity, preparation technique and profitability.

 

Ourability to create, promote and attractively display our unique line of dessertsis also important to the competitive positioning and financial success of ourrestaurants.  Our brand identity and reputation for offering high qualitydesserts results in a higher percentage of dessert sales relative to that ofmost chain restaurant operators.  Dessert sales represented approximately15% for fiscal 2009, and 14% for fiscal 2008 and 2007, of The CheesecakeFactory restaurant sales.

 

Eachof our restaurants offers a full-service bar where our entire menu isserved.  The sale of alcoholic beveragesrepresents approximately 13% of The Cheesecake Factory restaurant sales forfiscal 2009, 2008 and 2007.  Most of our alcoholic beverage sales occurwith meal purchases.

 

Weplace significant emphasis on the unique interior design and decor of ourrestaurants, which results in a higher investment per square foot of restaurantspace than is typical for the casual dining industry.  However, each ofour restaurants has historically generated annual sales per square foot thatare also typically higher than our competitors.  Our stylish restaurantdesign and decor contributes to the distinctive dining experience enjoyed byour guests.  Each restaurant features large, open dining areas and a contemporarykitchen design, which, in some cases, features exhibition cooking. More than85% of our restaurants offer outdoor patio seating as weather permits. Approximately 20% of our total estimated productive seating capacity is locatedon outdoor patios, which can be subject to underutilization from time to timedue to adverse or unseasonable weather conditions.  The table and seatinglayouts of our restaurants are flexible, permitting tables and seats to beeasily rearranged to accommodate large groups or parties, thus permitting moreeffective utilization of seating capacity.

 

**Grand Lux Cafe Restaurant Concept**

 

GrandLux Cafe is an upscale casual dining concept that offers unique American andinternational menu items in an elegant but relaxed atmosphere.  The menuat Grand Lux Cafe offers approximately 200 items including appetizers, pasta,seafood, steaks, 

 

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chicken,burgers, salads, specialty items and desserts.  Examples of menu offeringsinclude Chop House Burger, Buffalo Chicken Rolls, Crispy Caramel Chicken andSanta Barbara Grilled Chicken Sandwich.  A full-service bar, as well as anonsite bakery which produces made-to-order deserts, are also elements of thisconcept.  All of our Grand Lux Cafes are open seven days a week.  Our location in the VenetianResort-Hotel-Casino in Las Vegas, Nevada is open 24 hours a day and its sisterlocation in the Palazzo Resort-Hotel-Casino is open 20 to 21 hours a day; bothlocations also serve a breakfast menu.  Approximately 70% of our Grand LuxCafe locations offered home and business delivery service utilizing third-partydelivery partners.

 

Wecontinue to refine Grand Lux Cafe’s menu and operations in order to positionthe concept appropriately for potential future growth.  Although we didnot open any new Grand Lux Cafes in fiscal 2008 or fiscal 2009 and do not planto open any new locations in fiscal 2010, we continue to search for premiersites that would be suitable for this concept. There are inherent risks in expanding any new restaurant conceptincluding, but not limited to, consumer acceptance, recruiting and training qualifiedstaff members and managers, and achieving an acceptable return oninvestment.  We incurred an impairmentcharge of $26.5 million in fiscal 2009 related to four Grand Lux Cafelocations.  All of these restaurantsremain open.  See Note 1 of Notes to Consolidated FinancialStatements in Part IV, Item 15 of this Annual Report on Form 10-K foradditional information concerning our accounting policies for impairment oflong-lived assets.

 

**RockSugar Pan Asian Kitchen Concept**

 

RockSugarPan Asian Kitchen is a unique concept featuring a Southeast Asian menu in anupscale casual dining setting.  Its menushowcases the cuisines of Thailand, Vietnam, Malaysia, Singapore, Indonesia andIndia with dishes served Asian family-style to create an atmosphere that encouragessharing and conversation.  Examples of menu offerings include ShakingBeef, Crispy Chicken Samosas, Lacquered BBQ Ribs and Banana Leaf Chilean SeaBass.  We currently have one RockSugar Pan Asian Kitchen restaurant inoperation located in the Century City Shopping Center in Los Angeles, California.  The unique décor of the restaurant featuresdesign elements true to the restaurant’s Southeast Asian branding.  Therestaurant also features a full-service bar with an extensive wine list andexotic cocktails, as well as an onsite bakery where we create freshly-madedesserts that infuse traditional French flair into nearly a dozenAsian-influenced items.

 

**Competition**

 

Therestaurant industry is highly competitive.  There are a substantial numberof restaurant operators that compete directly and indirectly with us, many ofwhich have significantly greater financial and operational resources, higherrevenues and greater economies of scale than we do.  The restaurantbusiness is affected by many factors, including changes in consumer tastes anddiscretionary spending patterns; macroeconomic conditions; demographic trends;weather conditions; the cost and availability of raw materials, labor andenergy; government regulations; and local competitive factors.  Any changein these or other related factors could adversely affect our restaurantoperations.  Inaddition, with improving product offerings at fast casual restaurants,quick-service restaurants and grocery stores, consumers may choose to tradedown to these alternatives, which could also negatively affect our financialresults.  The macroeconomic downturnin 2008 and 2009 decreased the frequency of our guests’ visits and, if theeconomy worsens in 2010, we could be negatively impacted further.  As aresult of these competitive factors, we must constantly evolve and refine thecritical elements of our restaurant concepts over time to protect theirlonger-term competitiveness.  (See “Restaurant CompetitivePositioning” below.)

 

Withregard to our bakery operations, national competition within the premium bakeddessert category has shifted over the past several years to a lesser number ofmanufacturers, and the market remains highly competitive.

 

Webelieve that our restaurant and bakery operations compete favorably forconsumers on the critical attributes of quality, variety, taste, service,consistency and overall value.

 

**RestaurantCompetitive Positioning**

 

Therestaurant industry is comprised of multiple segments, including fine dining,casual dining and quick-service.  Casual dining can be further sub-dividedinto core casual and upscale casual dining.  Our restaurants operate inthe upscale casual dining segment, which we believe is differentiated byfreshly prepared and innovative food, flavorful recipes with creativepresentations, unique restaurant layouts, eye-catching design elements and morepersonalized service.  Upscale casual dining is positioned higher thancore casual dining with standards that are closer to fine dining.  Webelieve that we are a leader in upscale casual dining given our high averagesales per restaurant and strong competitive positioning, the key elements ofwhich include the following:

 

*High Quality, High Profile Restaurant Locations andFlexible Site Layouts.*  We generally locate our restaurants inhigh quality, high profile locations within densely populated areas with abalanced mix of residences and businesses, including shopping and entertainmentoutlets.  Our restaurants rely principally on the visit frequency andloyalty of consumers who work, reside or shop 

 

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neareach of our restaurants.  We have the flexibility to design ourrestaurants to accommodate a wide variety of urban and suburban site layouts,including multi-level locations.  Inaddition, we have a variety of restaurant sizes, generally from 7,000 to 16,000square feet, from which we are able to select appropriately for each market andspecific site.

 

*Extensive and Innovative Menu with Award-Winning Barand Bakery Programs.*  Our restaurants offer one of the broadestmenus in casual dining featuring a wide array of flavors with portions designedfor sharing.  Substantially all of ourmenu items (except the desserts manufactured at our bakery productionfacilities) are prepared fresh daily on the restaurant premises using highquality ingredients based on innovative and proprietary recipes.  Ourmenus are generally updated twice each year to respond to evolving consumerdining preferences and needs, as well as food trends and nutritionalawareness.  These menu updates keep ourconcepts relevant with consumers.  Our bakery production facilitiesproduce over 70 varieties of quality cheesecake and other baked desserts usinghigh quality dairy and other raw ingredients available.

 

*Affordability.*  We believe ourrestaurants are recognized by consumers for offering value with menu itemsacross a broad array of price points and generous food portions at moderateprices.  This year, we introduced new menu items and categories at ourrestaurants, further enhancing the variety and price point offerings to ourguests. The estimated average check per The Cheesecake Factory restaurantguest, including beverages and desserts, was approximately $19.00, $18.50 and$18.00 for fiscal 2009, 2008 and 2007, respectively.  The estimatedaverage check per restaurant guest at Grand Lux Cafe was approximately $19.00for fiscal 2009, 2008 and 2007.

 

*Distinctive Restaurant Design and Decor.*  Our restaurants’distinctive contemporary design and decor create a high energy, non-chain imageand upscale ambiance in a casual setting.  Whenever possible, outdoorpatio seating is incorporated in the design of our restaurants, allowing foradditional restaurant capacity, as weather permits, at a comparatively lowoccupancy cost per seat.  Outdoor patioseating is available at more than 85% of our restaurants.

 

*Commitment to Excellent Service and Hospitalitythrough the Selection, Training and Retention of High Quality Employees.*   Ourmission is “to create an environment where absolute guest satisfaction is ourhighest priority.” We strive to consistently exceed the expectations of guestsin all aspects of their experience in our restaurants.  One of the most importantaspects of delivering dependable, quality service is experienced staff memberswho can execute our concepts according to our high standards.  We believe our recruitment, selection,training, and rewards and recognition programs are among the most comprehensivein the restaurant industry and allow us to attract and retain qualified staffmembers who are motivated to consistently provide excellence in guesthospitality.  By providing extensive training and innovative compensationprograms, we seek to have our staff members develop a sense of personalcommitment to our core values and culture of excellence in restauranteuring andguest hospitality.  These programs have resulted in generally higherretention rates relative to the restaurant industry.  (See “Restaurant Operations and Management”below.)

 

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**Existing Restaurant Locations**

 

Asof February 26, 2010, we operated 161 upscale, casual, full-servicedining restaurants: 147 under The Cheesecake Factory® mark in 34 states and theDistrict of Columbia; 13 under the Grand Lux Cafe® mark in nine states; and oneRockSugar Pan Asian Kitchen® in California.  Additionally, we licensed twobakery cafes under The Cheesecake Factory Bakery Cafe® mark to anotherfoodservice operator.  The following table sets forth information withrespect to our Company-operated, full-service restaurant locations:

 

**ExistingCompany-Operated Full-Service Restaurant Locations by State**

 
| **State**            | ** ** | **The  Cheesecake  Factory** | ** ** | **Grand Lux  Cafe** | ** ** | **RockSugar Pan  Asian Kitchen** | ** ** | **Total** | ** ** |
|----------------------|------------|----------------------------------------|------------|-------------------------------|------------|---------------------------------------|------------|-----------|------------|
| Alabama              |       | 1                                      |       |                          |       |                                  |       | 1         |       |
| Arizona              |       | 6                                      |       | 1                             |       |                                  |       | 7         |       |
| California           |       | 32                                     |       | 1                             |       | 1                                     |       | 34        |       |
| Colorado             |       | 3                                      |       | 1                             |       |                                  |       | 4         |       |
| Connecticut          |       | 1                                      |       |                          |       |                                  |       | 1         |       |
| District of Columbia |       | 1                                      |       |                          |       |                                  |       | 1         |       |
| Florida              |       | 14                                     |       | 3                             |       |                                  |       | 17        |       |
| Georgia              |       | 4                                      |       |                          |       |                                  |       | 4         |       |
| Hawaii               |       | 1                                      |       |                          |       |                                  |       | 1         |       |
| Idaho                |       | 1                                      |       |                          |       |                                  |       | 1         |       |
| Illinois             |       | 5                                      |       | 1                             |       |                                  |       | 6         |       |
| Indiana              |       | 2                                      |       |                          |       |                                  |       | 2         |       |
| Iowa                 |       | 1                                      |       |                          |       |                                  |       | 1         |       |
| Kansas               |       | 1                                      |       |                          |       |                                  |       | 1         |       |
| Kentucky             |       | 1                                      |       |                          |       |                                  |       | 1         |       |
| Maryland             |       | 5                                      |       |                          |       |                                  |       | 5         |       |
| Massachusetts        |       | 7                                      |       |                          |       |                                  |       | 7         |       |
| Minnesota            |       | 1                                      |       |                          |       |                                  |       | 1         |       |
| Missouri             |       | 3                                      |       |                          |       |                                  |       | 3         |       |
| Nebraska             |       | 1                                      |       |                          |       |                                  |       | 1         |       |
| Nevada               |       | 3                                      |       | 2                             |       |                                  |       | 5         |       |
| New Jersey           |       | 5                                      |       | 1                             |       |                                  |       | 6         |       |
| New York             |       | 8                                      |       | 1                             |       |                                  |       | 9         |       |
| North Carolina       |       | 3                                      |       |                          |       |                                  |       | 3         |       |
| Oklahoma             |       | 2                                      |       |                          |       |                                  |       | 2         |       |
| Ohio                 |       | 6                                      |       |                          |       |                                  |       | 6         |       |
| Oregon               |       | 1                                      |       |                          |       |                                  |       | 1         |       |
| Pennsylvania         |       | 4                                      |       |                          |       |                                  |       | 4         |       |
| Rhode Island         |       | 1                                      |       |                          |       |                                  |       | 1         |       |
| Tennessee            |       | 1                                      |       |                          |       |                                  |       | 1         |       |
| Texas                |       | 10                                     |       | 2                             |       |                                  |       | 12        |       |
| Utah                 |       | 1                                      |       |                          |       |                                  |       | 1         |       |
| Virginia             |       | 6                                      |       |                          |       |                                  |       | 6         |       |
| Washington           |       | 3                                      |       |                          |       |                                  |       | 3         |       |
| Wisconsin            |       | 2                                      |       |                          |       |                                  |       | 2         |       |
| Total                |       | 147                                    |       | 13                            |       | 1                                     |       | 161       |       |

 

**Restaurant Expansion**

 

Webelieve the viability of The Cheesecake Factory concept has been successfullydemonstrated in a variety of layouts (single or multi-level, generally from7,000 to 16,000 square feet), site locations (i.e., urban or suburban shoppingmalls, lifestyle centers, retail strip centers, office complexes andentertainment centers — either freestanding or in-line) and trade areas acrossthe United States.  Accordingly, we intend to continue developing TheCheesecake Factory restaurants in high quality, high profile 

 

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locationsthat meet our site standards and demographic requirements within denselypopulated areas in both existing and new markets.  In addition toexpanding The Cheesecake Factory concept, we plan to selectively pursue otheropportunities to leverage the competitive strengths of our restaurantoperations, including Grand Lux Cafe and RockSugar Pan Asian Kitchen, as wellas the potential development or acquisition of new restaurant concepts.

 

Duringfiscal 2008 and 2009, many landlords delayed or cancelled new developmentprojects, as well as extensions and renovations of existing projects due to theinstability in the credit market and a decline in consumer spending brought onby the economic downturn.  This reducedthe number of premier sites available that we would consider for ourrestaurants.  As a result, we openedseven new restaurants in fiscal 2008 and only one new restaurant in fiscal2009.  As of the date of this report, wehave opened one The Cheesecake Factory restaurant and expect to open as many astwo additional The Cheesecake Factory restaurants during the remainder offiscal 2010.  We do not plan to open any Grand Lux Cafe or RockSugar PanAsian Kitchen restaurants during fiscal 2010.  It is difficult for us topredict precisely the timing of our new restaurant openings due to many factorsthat are outside of our control (see “New Restaurant Site Selection andDevelopment” below).  We are currently looking for additional sites thatmeet our standards and are negotiating leases for potential futurelocations.  From time to time, we will evaluate opportunities to acquireand convert other restaurant locations into our concepts.  However, wecurrently have no binding commitments or agreements to acquire or convert anyother restaurant locations to our concepts.

 

Ourupscale, highly customized, casual dining restaurants draw guests from a muchlarger geographical area compared to most casual dining chainrestaurants.  The size of our restaurant trade areas varies by location,depending on a number of factors such as population density, retail trafficgenerators and geography.  As a result, the opening of a new restaurantcould impact the sales of one or more of our nearby restaurants. Generally, this impact lessens over time, although we can provide no assurancesthat the sales levels of previously opened restaurants in the same market willreturn to their prior levels.  It is not our intention to open newrestaurants that materially cannibalize the sales of our existingrestaurants.  However, as with most growing retail and restaurant chainoperations, we can provide no assurance that sales cannibalization will notoccur or become more significant in the future as we gradually increase ourpresence in existing markets to maximize our competitive position and financialperformance in each market.

 

**New Restaurant Site Selection and Development**

 

Webelieve the locations of our restaurants are critical to our long-term successand, accordingly, we devote significant time and resources to analyzing eachprospective site.  Since our restaurant concepts can be successfullyexecuted within a variety of site locations and layouts, we can be highlyselective and flexible in choosing suitable locations. In general, we focus onhigh quality, high profile sites within larger metropolitan areas with densepopulations and above-average household incomes. While our restaurantstypically share common interior decor elements, the design of each restaurantis customized to accommodate the specifics of each site, including the buildingtype, square footage and layout of available space.  In addition tocarefully analyzing demographic information and both historical and anticipatedpopulation growth for each prospective site, we consider many other factors toassess the suitability of a location.  Our restaurants principally rely onthe visit frequency and loyalty of consumers who work, reside or shop in eachof our trade areas.

 

Ourrestaurant development model closely resembles a retail business model thatoccupies leased space in shopping malls, office complexes, retail stripcenters, entertainment centers and other real estate developments.  Wealso develop freestanding restaurant locations using both ground leases andbuilt-to-suit leases, which are commonly used to finance freestanding locationsin the restaurant industry.  However, wedo not rely on third party financing to obtain or construct sites.  We generallylease our restaurant locations for primary periods of 15 to 20 years, with anoption to renew.  Our rent structuresvary from lease to lease, but generally provide for the payment of both minimumbase rent and contingent (percentage) rent based on restaurant sales.  Weare also generally responsible for our proportionate share of common areamaintenance (“CAM”), insurance, property tax and other occupancy-relatedexpenses under our leases.  Many of our leases provide for maximumallowable annual percentage or fixed dollar increases in CAM, insurance, andproperty tax expenses to enable us to better predict and control futurevariable lease costs.  Our sales volumes generally have been in excess ofthe threshold for percentage rent payments at a large percentage of ourrestaurant locations that are subject to leases with percentage rent paymentprovisions.

 

Weexpend cash for leasehold improvements and furnishings, fixtures and equipment(“FF&E”) to build out our leased premises.  We may also expend cashfor structural additions that we make to leased premises. Generally, a portionof the leasehold improvement and building costs are reimbursed to us by ourlandlords as construction contributions pursuant to agreed-upon terms in ourleases.  If obtained, landlord construction contributions usually take theform of up-front cash, full or partial credits against minimum or percentagerents otherwise payable by us, or a combination thereof.  However, we canprovide no assurance that contributions will be available for every potentiallocation that we seek to develop into a new restaurant and recoupment of all ora portion of such contributions may depend upon the financial viability of ourlandlords and our ability to achieve sales levels sufficient to permitdeductions against percentage rent.  We own substantially all of theFF&E in our restaurants and currently plan to do so in the future.

 

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Therelatively high sales productivity of our restaurants provides opportunities toobtain suitable and competitive leasing terms from landlords.  Due to theflexible and customized nature of our restaurant operations and the complexdesign, construction and preopening processes for each new location, our leasenegotiation and restaurant development timeframes vary.  The developmentand opening process generally ranges from six to eighteen months, dependinglargely on the availability of the leased space we intend to occupy, and can besubject to delays either due to factors outside of our control or to ourselective timing of restaurant openings.  The number and timing of newrestaurants actually opened during any given period, and their associatedcontribution to operating week growth for the period, will depend on a numberof factors including, but not limited to the identification and availability of high qualitylocations and acceptable lease terms; the availability of suitable financingfor our landlords; the financial viability of our landlords; the timing of thedelivery of the leased premises to us from our landlords in order to commencebuild-out construction activities; the ability of our landlords and us toobtain all necessary governmental licenses and permits on a timely basis toconstruct and operate our restaurants; our ability to successfully manage thedesign, construction and preopening processes for each restaurants, and theavailability and/or cost of raw materials; any unforeseen engineering orenvironmental problems with the leased premises; adverse weather during theconstruction period; the availability of qualified operating personnel in the localmarket; and general economic conditions.

 

Whilewe attempt to manage those factors within our control, we have experiencedunforeseen and planned delays in restaurant openings from time to time in thepast, are currently experiencing delays on certain sites, and could experiencedelays in the future.

 

**Unit Economics**

 

Webelieve that our ability to select suitable locations and operate successful,high quality restaurants has resulted in the continuing popularity of ourrestaurant concepts with consumers.  This popularity is reflected in ouraverage food and beverage sales per restaurant, which are among the highest ofany publicly-held restaurant company.  The following discussion of salesand square foot averages include only The Cheesecake Factory and Grand Lux Caferestaurant concepts.  Average sales per restaurant open for the full yearwere approximately $9.6 million, $9.9 million and $10.5 million for fiscal2009, 2008 and 2007, respectively.  Since each of our restaurants has acustomized layout and differs in size, an effective method to measure the uniteconomics of our concepts is by square foot.  Average sales per productivesquare foot (defined as interior plus seasonally-adjusted patio square feet)for restaurants open for the full year were approximately $830 for fiscal 2009,$860 for fiscal 2008 and $920 for fiscal 2007.  Our average sales metricsfor a given fiscal year can be impacted by a number of factors, includingconsumer preferences, macroeconomic conditions, severe weather conditions andthe average size of new restaurants we open during that year.  Theinterior square footage for the Cheesecake Factory restaurant opened duringfiscal 2009 was 11,000.  The averageinterior square footage for restaurants opened during fiscal 2008 and 2007 was9,800 and 11,000, respectively.

 

Wecurrently lease space for each of our restaurants and are required to expendcash for leasehold improvements and FF&E to build out the leased premises,which is targeted, on average, from $600 to $700 per square foot for TheCheesecake Factory restaurants, excluding preopening costs.  Theconstruction costs to build out our leased premises vary geographically. Additionally, our investment cost per square foot will also vary fromrestaurant to restaurant, depending on the complexity of our build-out of theleased space, site conditions and labor conditions in the local market. We typically seek to obtain construction contributions from our landlords forstructural additions and other leasehold improvements that we make to theleased premises.  These contributions vary from lease to lease, dependingon the scope of construction activities and other factors and are not alwaysachievable at every site.

 

Inselecting sites for our restaurants, an important objective is to earn anappropriate return on investment.  However, this return cannot bemeaningfully measured until our restaurants reach their mature run-rate levelsof sales and profitability.  The initial return on investment performancetargets for newer concepts will typically be lower than the average for anestablished, highly productive concept such as The Cheesecake Factory, sincethe first few locations of a new concept are typically in a refinement stage asthey build brand recognition for a period of time.  Our cash return onfully capitalized investment target does not consider field supervision andcorporate support expenses; excludes non-cash items such as depreciationexpense; excludes income taxes; and does not represent a targeted return on investmentin our common stock.  If we select a potential restaurant location foracquisition and development, the actual performance of the location may differfrom its originally targeted performance.  We can provide no assurancethat any new restaurant opened will have similar operating results to those ofestablished restaurants or that we will achieve our targeted results.

 

Ournew restaurants historically open with initial sales volumes well in excess oftheir sustainable run-rate levels.  This initial “honeymoon” effectusually results from grand opening publicity, promotions and other consumerawareness activities that generate abnormally high customer traffic for ourconcepts, particularly in new markets.  During the three to six monthsfollowing the opening of new restaurants, customer traffic generally settlesinto its normal pattern, resulting in sales volumes that gradually adjustdownward to their sustainable run-rate level. .  Additionally, ournew restaurants usually require a 90 to 120 day period after opening 

 

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toreach their targeted restaurant-level margin due to cost of sales and laborinefficiencies commonly associated with new, highly complex casual diningrestaurants such as ours.  As a result, asignificant number of restaurant openings in any single fiscal quarter, alongwith their associated preopening costs, could have a significant impact on ourconsolidated results of operations for that period.  Therefore, ourresults of operations for any single fiscal quarter are not necessarilyindicative of the results for any other fiscal quarter or for a full fiscalyear.

 

**Preopening Costs for New Restaurants**

 

Asa result of the highly customized and operationally complex nature of ourupscale, high volume concepts, as well as the investment we make in properlytraining our staff to operate our restaurants, the preopening process for ourrestaurants is more extensive, time consuming and costly relative to that ofmost chain restaurant operations.  Preopening costs vary by locationdepending on a number of factors, including the proximity of our existingrestaurants; the size and physical layout of each location; the number ofmanagement and hourly employees required to operate each restaurant; therelative difficulty of the restaurant staffing process; the cost of travel andlodging for different metropolitan areas; the timing of the restaurant openingand the extent of unexpected delays, if any, in obtaining final licenses andpermits to open the restaurants, which may also depend on our landlordsobtaining their licenses and permits, as well as completing their constructionactivities, for the properties where our leased premises are located.

 

Preopeningcosts for a typical single-story The Cheesecake Factory restaurant in anestablished market average approximately $1.2 million to $1.4 million andinclude all costs to relocate and compensate restaurant management employeesduring the preopening period; costs to recruit and train hourly restaurantemployees; wages, travel and lodging costs for our opening training team andother support employees; and straight-line minimum base rent during thebuild-out and in-restaurant training periods.  Also included inpreopening costs are expenses for maintaining a roster of trained managers forpending openings; the associated temporary housing and other costs necessary torelocate managers in alignment with future restaurant opening and operatingneeds; and corporate travel and support activities.  Preopening costs are usually higher forlarger restaurants, initial entry into a new market or newer concepts.  Weusually incur the most significant portion of preopening costs within the twomonths immediately preceding and the month of a restaurant’s opening. Preopening costs can fluctuate significantly from period to period, based onthe number and timing of restaurant openings and the specific preopening costsincurred for each restaurant.

 

**Restaurant Operations and Management**

 

Ourability to consistently and properly execute a made-from-scratch, complex menuin an upscale, casual, high volume dining environment is critical to ouroverall success.  We employ detailed operating procedures, standards,controls, food line management systems, and cooking methods and processes toaccommodate our extensive menu and to drive sales productivity.  However,the successful day-to-day operation of our restaurants remains critically dependenton the quality, ability, dedication and engagement of our general managers,executive kitchen managers and all other management and hourly staff membersworking at our restaurants.  Theavailability and retention of high level restaurant management has been andwill likely continue to be a significant industry-wide challenge.

 

Webelieve that the high average sales volumes and popularity of our restaurantsallow us to attract and retain high quality, experienced restaurant-levelmanagement and other operational personnel. Also we tend to experience a lower level of management and staff memberturnover than the restaurant industry in general.  Each full-servicerestaurant is typically staffed with one general manager, one executive kitchenmanager and approximately six to ten additional kitchen and front-of-the-housemanagers, depending on the size and sales volume of each restaurant.  Ourgeneral managers possess an average of eight years of experience with theCompany.  All newly recruited restaurant management personnel complete anextensive training program during which they receive both classroom andon-the-job instruction in food quality, safety and preparation, guest service,alcoholic beverage service, liquor liability avoidance, financial managementand cost controls, risk management, staff relations, and our core values andculture of guest hospitality.  Managers continue their development byparticipating in and completing a variety of training and developmentactivities to assess their skills and knowledge necessary for continued upwardprogression through our management levels.

 

Restaurantgeneral managers report to an area director of operations who typicallysupervises the operations of six to eight restaurants, depending on geographicand management experience factors.  In turn, each area director ofoperations reports to one of four regional vice presidents of restaurantoperations.  Our executive kitchen managers report to their generalmanagers, but are also supervised by an area kitchen operations managerresponsible for between six and ten restaurants.  Our restaurant fieldsupervision organization also includes a chief operating officer, a senior vicepresident of kitchen operations, and a performance development team who arecollectively responsible for managing new restaurant openings and training forall operational managers and staff.

 

Toenable us to more effectively compete for and retain the highest qualityrestaurant management personnel, we offer an innovative and comprehensive compensationprogram for our restaurant general managers and executive kitchenmanagers.  Each 

 

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participantin the program receives a competitive base salary and has the opportunity toearn an annual cash bonus (calculated and paid quarterly) based on quantitativerestaurant performance metrics.  Participating restaurant general managersare also eligible to use a Company-leased vehicle, for which all non-businessuse is calculated and added to the participants’ taxable income in accordancewith income tax regulations.  A longer-term, wealth-building program,currently based on stock options and restricted stock, is also available toparticipating restaurant general managers and executive kitchen managers.  Participation in our equity compensationprogram depends on the participants’ extended service with us in theirrespective positions and their achievement of certain established performanceobjectives during that period.

 

Ourrestaurant general managers are responsible for selecting and training hourlystaff members for their respective restaurants.  Each restaurant isstaffed, on average, with approximately 180 hourly staff members.  Theactual number of staff members working in the restaurant on any given day willdepend on guest traffic levels and can be scaled accordingly throughout the dayas appropriate.   We require each hourly staff member to participate in aformal training program for his or her respective position in the restaurant,under the supervision of other experienced staff members and restaurantmanagement.  We strive to foster enthusiasm and dedication in our staffmembers through daily staff meetings and dedicated time for training.  Weregularly solicit their suggestions concerning restaurant operations and otheraspects of our business.

 

Inorder to equip our restaurant general managers, executive kitchen managers andfield supervision management with the necessary tools to effectively operateour restaurants, we prepare a detailed monthly operating budget for eachrestaurant.  The information we provideincludes comparisons of actual results to budgeted results, as well as toactual results for the prior year period. We also measure the productivity and efficiency of our restaurantoperations using a variety of statistical indicators such as daily table turns,guests served per labor hour worked, operating costs incurred per guest servedand other metrics, and provide this statistical package to the management ofeach restaurant to assist them in better managing financial, labor, operationaland other metrics.

 

**Bakery Operations**

 

Currently,we have two bakery production facilities: one in Calabasas Hills, California,and a second in Rocky Mount, North Carolina. Our facility in Calabasas Hills contains approximately 60,000 squarefeet, of which approximately 40,000 square feet is devoted to productionoperations and the remainder is utilized for corporate support purposes. Our facility in Rocky Mount, North Carolina contains approximately 100,000square feet, of which approximately 70% is devoted to production operations and20% is being used as a distribution center for our restaurants and customerslocated in the eastern United States.  We intend to build out theremaining space in stages as additional capacity is needed to producecheesecakes and other bakery products for our restaurants and other foodservicewholesalers, retailers and distributors. We have an option to acquire additional land adjacent to our currentfacility in North Carolina, should additional capacity be needed in the future.

 

Weproduce approximately 70 varieties of cheesecake in our two productionfacilities based on proprietary recipes.  Some of our most popularcheesecakes include the Original Cheesecake, Stefanie’s Ultimate Red VelvetCake Cheesecake, Godiva® Chocolate, 30th Anniversary Chocolate Cake Cheesecake,Fresh Banana Cream, Adam’s Peanut Butter Cup Fudge Ripple and FreshStrawberry.  Other popular baked desserts include Chocolate Tower TruffleCakeTM, Carrot Cake,Black-Out Cake and Lemoncello Cream Torte.  In the aggregate, our bakeryproduction facilities currently produce approximately 300 product SKUs (stockkeeping units).

 

Highquality baked desserts and other products made with the best availableingredients are essential to the successful execution of our restaurant andbakery operations.  Our bakery facilities operate under an ongoing,comprehensive food safety and quality assurance program.  This programincludes, among other things, supplier qualification and plant inspections,inbound raw material testing, microbiological testing of the productionenvironment, safety and sanitation monitoring, and finished goodstesting.  Our in-house food safety and quality assurance staff constantlyaudits and monitors our manufacturing practices during operation and closelymonitors our compliance with the industry standard Hazard Analysis CriticalControl Points (“HACCP”) program.  We use both internal and externalquality control laboratory resources to test raw ingredients and finishedproducts for safety.

 

Thecommissary role of our bakery operations is to produce innovative, high qualitycheesecakes and other baked desserts for sale at our restaurants.  Dessertsales represented approximately 15% of our restaurant sales in fiscal 2009 and14% in fiscal 2008 and 2007, and are important to restaurant-levelprofitability.  We also market cheesecakes and other baked products on awholesale basis to other foodservice operators, retailers anddistributors.  Approximately 60% of the bakery’s production activities arecurrently devoted to our outside customers, with the remaining dedicated tosupplying our restaurants.  Cheesecakes and other items produced foroutside accounts are marketed under The Cheesecake Factory® trademark, TheDream Factory® trademark, The Cheesecake Factory Bakery® mark and other privatelabels.  Current large-account customers include the leading nationalwarehouse club operators, a national retail bookstore cafe, institutionalfoodservice distributors, supermarkets and other restaurant and foodserviceoperators. Sales to warehouse clubs, which represent approximately two-thirdsof our total outside bakery sales, are concentrated with three large warehouseclub operators in the United States.  Bakery products are shipped to ourrestaurants and other customers 

 

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throughoutthe United States by common carrier.  We also fulfill orders received bytelephone and through our website.  Bakery products are also shipped tointernational customers.  Our bakery sells our baked goods internationallyunder both The Cheesecake Factory® and The Dream Factory® trademarks in overten countries.  We have a limited exclusive distribution arrangement withone operator in Saudi Arabia to sell our baked goods in their cafe outlets under“The Cheesecake Factory of California” name and are selling our desserts atanother Middle East-based coffee cafe under The Dream Factory® trademark.

 

Westrive to develop and maintain long-term, growing relationships with our bakerycustomers, based largely on our 37-year reputation for producing high quality,creative baked desserts.  However, bakery sales volumes always will beless predictable than our restaurant sales.  It is difficult to predictthe timing of bakery product shipments and contribution margins on a quarterlybasis.  Additionally, the purchasing plans of our large-account customersmay fluctuate from quarter to quarter.  Due to the highly competitivenature of the bakery business, we are unable to enter into long-term contractswith our large-account bakery customers who may discontinue purchasing ourproducts without advance notice at any time for any reason.

 

Wecurrently maintain a full-time staff of sales and marketing and productdevelopment employees dedicated to bakery operations.  Additionally, weutilize the services of professional foodservice brokers for certain bakeryproducts and distribution channels.

 

**Purchasing and Distribution**

 

Westrive to obtain quality menu ingredients, raw materials and other supplies andservices for our operations from reliable sources at competitive prices. We continually research and evaluate various ingredients and products in aneffort to maintain high quality levels and to be responsive to changingconsumer tastes.  Except for cheesecakes and other baked products, ourrestaurants do not utilize a central food commissary.  Substantially allmenu items are prepared on each restaurant’s premises daily from scratch usingfresh ingredients.  In order to maximize purchasing efficiencies and toprovide the freshest ingredients for our menu items while obtaining the lowestpossible prices for the required quality and consistency, each restaurant’smanagement determines the quantities of food and supplies required and ordersthe items from local, regional and national suppliers on terms negotiated byour central purchasing staff.  Restaurant-level inventories are maintainedat a minimum dollar-value level in relation to sales due to the highconcentration and relatively rapid turnover of the perishable produce, poultry,meat, fish and dairy commodities that we use in our operations, coupled withlimited storage space at our restaurants.

 

Weattempt to negotiate short-term and long-term agreements for our principalcommodity, supply and equipment requirements, depending on market conditionsand expected demand.  However, we are currently unable to contract forlong periods of time for certain of our commodities such as fish and most dairyitems (except for cream cheese used in our bakery operations) and, consequently,these commodities can be subject to unforeseen supply and costfluctuations.  Commodity costs also can fluctuate due to governmentregulation, severe weather conditions, and disruptions in the supply chain dueto food safety concerns.  However, our essential food and beverageproducts generally are available from multiple qualified suppliers in virtuallyall cities in which our operations are located.  Independent foodservicedistributors, including the largest foodservice distributor in North America,deliver most food and supply items daily to our restaurants.

 

**Information Technology**

 

Wefacilitate financial and accounting controls in our restaurants through the useof a sophisticated point-of-sale (POS) cash register system and computernetwork in each restaurant that interfaces with the computer network in ourcorporate offices using a high-speed, secure communication system.  ThePOS system is also used to authorize and transmit credit card salestransactions.  The POS system and computer network provide our restaurantmanagement with daily and weekly information regarding sales, cash receipts,inventory, food and beverage costs, labor costs and other controllableoperating expenses.  Field supervision staff members also use computersystems that interface with the restaurant and corporate computer networks andhandheld wireless devices to insure prompt communication.

 

Infiscal 2008, we fully deployed our Kitchen Management System (“KMS”).  KMS is an automated routing and cooklinebalancing system installed in all of our restaurants which improves cooklineproductivity, synchronizes order completion, provides valuable ticket time andcook time data, and allows for more efficient levels of labor withoutsacrificing quality.   In January 2010,we completed the implementation of our new front desk management system, whichwill further streamline our operations.  We continue to innovate andmodernize our technology infrastructure to provide improved efficiency,capability, stability and scalability.

 

**Marketing and Advertising**

 

Webelieve our commitment to providing a differentiated total guest experiencethrough fresh and innovative menu items, unique restaurant design and decor,and friendly, attentive service where guest satisfaction is our highest priorityhas created strong 

 

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brandrecognition for our namesake concept. Our operational excellence continues to be a highly effective approachto attracting and retaining customers.  Accordingly, we have historicallyrelied on our reputation as well as our high profile locations, media interestand positive “word of mouth” to retain and grow market share rather than usingtraditional paid advertising.

 

Forrestaurants opening in new markets, we strive to obtain local television andradio station coverage of the opening in order to benefit from the freepublicity.  We also attempt to buildawareness and relationships with retailers located in the same developments,mall concierges, local hotel concierges, neighborhood groups and others in thecommunity.

 

Duringfiscal 2009, we implemented a strategic marketing plan with the primaryobjectives of further building our brand awareness and driving guest engagementin a cost effective way that is consistent with the high quality of ourbrands.  Our fiscal 2009 expenditures formarketing and advertising were approximately 1% of restaurant sales.

 

**Seasonality and Quarterly Results**

 

Ourbusiness is subject to seasonal fluctuations. Historically, our highest levelsof revenues and net income for our established restaurants have occurred in thesecond and third quarters of the fiscal year.  Approximately 90% of ourrestaurants are located in retail centers and malls that typically experienceseasonal fluctuations in sales.  Patio seating represents approximately20% of the total available productive seating in our restaurants and can besubject to disruption from inclement weather.  Holidays and severeweather, such as hurricanes, thunderstorms and similar conditions, may impactrestaurant sales volumes seasonally in some of the markets where weoperate.  Quarterly results have been and will continue to be significantlyimpacted by the number and timing of new restaurant openings and theirassociated preopening costs and operating inefficiencies.

 

Ourbakery operations are seasonal to the extent that the fourth quarter’s salesare typically higher due to holiday business.  Additionally, bakery salescomparisons may fluctuate significantly from quarter to quarter due to thetiming and size of orders from our larger bakery customers.

 

Asa result of these specific seasonal factors, among others, our financialresults for any given quarter may not be indicative of the results that may beachieved for a full fiscal year.

 

**Food Quality and Safety**

 

Ourrevenues can be substantially affected by adverse publicity.  This could result from food quality, illness,or health concerns stemming from incidents occurring in the general food supplychain, at our competitors’ restaurants, at one or more of our restaurants or,with respect to our bakery operations, a single production run of bakeryproducts.  In particular, since we depend heavily on The CheesecakeFactory® mark for a majority of our revenues, unfavorable publicity withrespect to our bakery operations could have a material adverse effect on ourrestaurant operations.

 

Tominimize the risk of food borne illness, we have implemented a HACCP system formanaging food safety and quality, training staff in food safety and handlingand maintaining quality assurance oversight at our bakery and have extendedsimilar systems with respect to food safety at our restaurants.  In addition, our corporate food safety andquality assurance staff supplement our internal operational staff and externalfood quality monitoring programs, including a monthly review by a third-partyprovider to audit our food safety and sanitation.  Nevertheless, the riskof contamination or food borne illness cannot be completely eliminated.  Outbreaks at other restaurant chains, or withrespect to similar food products on our menu, may affect our restaurants evenif our restaurants are not implicated in the food safety concern publicized. We attempt to manage risks of this nature, but the occurrence of any one ofthese factors in the foodservice industry, or in any one of our restaurants orour bakery production facilities, could cause our Company to be adverselyaffected.

 

**Government Regulation**

 

Weare subject to numerous federal, state and local laws affecting ourbusiness.  Each of our restaurants is subject to licensing and regulationby a number of government authorities, which may include alcoholic beveragecontrol, nutritional information disclosure, health, sanitation, environmental,zoning and public safety agencies in the state or municipality in which therestaurant is located.  Difficulties in obtaining or failures to obtainthe required licenses or approvals could delay or prevent the development andopenings of new restaurants, or could disrupt the operations of existingrestaurants.

 

Duringfiscal 2009, approximately 13% of our restaurant sales were attributable toalcoholic beverages.  Alcoholic beverage control regulations require eachof our restaurants to apply to a state authority and, in certain locations,county and municipal authorities, for licenses and permits to sell alcoholicbeverages on the premises.  Typically, licenses must be renewed annually andmay be subject to penalties, temporary suspension or revocation for cause atany time. The failure of a restaurant to obtain or retain its 

 

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licenseswould adversely affect that restaurant’s operations and profitability. Alcoholic beverage control regulations impact many aspects of the dailyoperations of our restaurants, including the minimum ages of patrons and staffmembers consuming or serving these beverages, respectively; staff memberalcoholic beverage training and certification requirements; hours of operation;advertising; wholesale purchasing and inventory control of these beverages; theseating of minors and the servicing of food within our bar areas; special menusand events, such as happy hours, and the storage and dispensing of alcoholicbeverages.  State and local authorities in many jurisdictions routinelymonitor compliance with alcoholic beverage laws.  The failure to receiveor retain, or a delay in obtaining, a liquor license for a particularrestaurant could adversely affect our restaurant sales or the ability to obtainliquor licenses elsewhere.

 

Weare subject to dram shop statutes in most of the states in which we operate,which generally provide a person injured by an intoxicated person the right torecover damages from an establishment that wrongfully served alcoholicbeverages to the intoxicated person.  We carry liquor liability coverageas part of our existing comprehensive general liability insurance; however, asettlement or judgment against us under a dram shop statute in excess of ourliability coverage could have a material adverse effect on our results ofoperations.

 

Variousfederal and state labor laws govern our operations and our relationships withour staff members, including such matters as minimum wages, breaks, overtime,fringe benefits, safety, working conditions and citizenship or workauthorization requirements.  We are also subject to the regulations of theU.S. Citizenship and Immigration Services and U.S. Customs and ImmigrationEnforcement.  In addition, some states in which we operate have adoptedimmigration employment laws which impose additional conditions on employers. Even if we operate our restaurants in strict compliance with the laws, rules andregulations of these federal and state agencies, some of our staff members maynot meet federal citizenship or residency requirements or lack appropriate workauthorizations, which could lead to a disruption in our work force. Significant government-imposed increases in minimum wages, paid or unpaidleaves of absence, sick leave, and mandated health benefits, or increased taxreporting, assessment or payment requirements related to our staff members whoreceive gratuities, could be detrimental to the profitability of ourrestaurants and bakery operations.  Various proposals that would requireemployers to provide health insurance for all of their employees are consideredfrom time to time in Congress and various states andmunicipalities.   The imposition of any requirement that we providehealth insurance benefits to staff members that are more extensive than thehealth insurance benefits we currently provide, or the imposition of additionalemployer paid employment taxes on income earned by our employees, could have anadverse effect on our results of operations and financial position.  Oursuppliers also may be affected by higher minimum wage and benefit standards,which could result in higher costs for goods and services supplied to us. In addition, while we carry employment practices insurance covering a varietyof labor-related liability claims, a settlement or judgment against us that isuninsured or in excess of our coverage limitations could have a materialadverse effect on our results of operations, liquidity, financial position orbusiness.

 

Asa manufacturer and distributor of food products, we are subject to a number offood safety regulations, including the Federal Food, Drug and Cosmetic Act andregulations adopted by the U.S. Food and Drug Administration.  Thiscomprehensive regulatory framework governs the manufacture (includingcomposition and ingredients), labeling, packaging and safety of food in the UnitedStates.  In addition, several states and local jurisdictions have adoptedor are considering various food and menu nutritional labeling requirements,many of which are inconsistent or are interpreted differently from onejurisdiction to another.  The costs associated with such compliance mayincrease over time, and while our ability to adapt to consumer preferences is astrength of our concepts, the effect of such labeling requirements on consumerchoices, if any, is unclear at this time.

 

Weare subject to federal and state environmental regulations, but these laws havenot had a material effect on our operations.  Various laws concerning thehandling, storage and disposal of hazardous materials, such as cleaningsolvents, and the operation of restaurants in environmentally sensitivelocations may impact aspects of our operations.  During fiscal 2009, therewere no material capital expenditures for environmental control facilities, andno such expenditures are anticipated.

 

Ourfacilities must comply with the applicable requirements of the Americans withDisabilities Act of 1990 (“ADA”) and related federal and state statutes. The ADA prohibits discrimination on the basis of disability with respect topublic accommodations and employment.  Under the ADA and related statelaws, we must make access to our new or significantly remodeled restaurantsreadily accessible to disabled persons. We must also make reasonableaccommodations for the employment of disabled persons.

 

Wehave a significant number of hourly restaurant staff members who receive incomefrom gratuities.  We have elected to voluntarily participate in a TipReporting Alternative Commitment (“TRAC”) agreement with the Internal RevenueService.  By complying with the educational and other requirements of theTRAC agreement, we reduce the likelihood of potential employer-only FICA taxassessments for unreported or underreported tips.  However, we rely on our staff members toaccurately disclose the full amount of their tip income and based our reportingon the disclosures provided to us by such tipped employees.

 

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**Trademarks and Other Intellectual Property**

 

Wehave registered, among other marks, “The Cheesecake Factory,” “Grand Lux Cafe,”“RockSugar Pan Asian Kitchen,” “The Cheesecake Factory Bakery,” “The CheesecakeFactory Express,” “The Dream Factory,” and “The Cheesecake Factory Bakery Cafe”as trademarks with the United States Patent and Trademark Office in bothrestaurant and bakery goods categories, among others.  Additionaltrademark applications are pending.  We have also registered our ownershipof the Internet domain names “www.thecheesecakefactory.com,” “www.grandluxcafe.com,”“www.rocksugarpanasiankitchen.com” and other Internet domain names andperiodically apply for copyright protection of our restaurant menus.  Weregard our trademarks and other intellectual property as having substantialvalue and as important factors in the marketing of our restaurants and bakeryproducts.  We have registered, or have pending applications to register,one or more of our trademarks in more than 70 foreign countries, although wehave not been able to register our mark in every country or in every categoryfor which registration has been sought and can provide no assurance that ourname and marks will be renewed in the future.  The duration of trademarkregistrations varies from country to country.  However, trademarks aregenerally valid and may be renewed indefinitely as long as they are in useand/or their registrations are properly maintained, and they have not beenfound to become generic.

 

**Charitable Giving**

 

In2001, the Company sponsored the formation of The Cheesecake Factory Oscar andEvelyn Overton Charitable Foundation (“Foundation”), a 501(c)(3) qualified,non-profit charitable organization. Three of our Named Executive Officers, David Overton, W. Douglas Bennand Debby Zurzolo, hold positions on the Foundation’s Board of Directors.  Our Foundation allows us to give back to thecommunities of which we are a part and provides a means for staff memberparticipation in qualified local community service and charitable programs. In fiscal 2009, the Foundation hosted its annual Invitational Charity GolfTournament, raising over $200,000 in net proceeds to benefit the City of Hope,a National Cancer Institute-designated Comprehensive Cancer Center.  Sincethe inception of the event in 2003, the Foundation has raised $1.5 million forthe City of Hope.  In addition, the Foundation held its annualThanksgiving Day Feast at 13 Salvation Army shelters across the country,serving approximately 6,000 low-income individuals and families.  The Foundation also supports the SalvationArmy’s South Los Angeles Youth and Community Center, enabling it to provide asafe haven to at risk children and families on Saturdays.  The Foundation also helps sponsor TheCheesecake Factory “Secret Ingredients” teams of our staff members who work directlywith qualified charities in their communities to support a variety of local andnational causes.

 

Inaddition to the efforts of the Foundation, the Company donated $0.5 million infiscal 2009 to Feeding America®, the nation’s leading domestic hunger-reliefcharity, through sales of our 30th Anniversary Chocolate Cake Cheesecake andStefanie’s Ultimate Red Velvet Cake Cheesecakeä.  Our staff members and guests also donatedover 320,000 cans of soup to local food banks across the country during our month-longDrive Out Hunger Tourä in September.  In addition, we continued to participate inthe Harvest Program, a food donation program whereby we give excess, unusedfood from The Cheesecake Factory and Grand Lux Cafe restaurants to qualifiedlocal and regional agencies, including food banks, soup kitchens and homelessshelters.

 

**Employees**

 

Asof December 29, 2009, we employed approximately 30,000 staff members, ofwhich approximately 29,000 worked in our restaurants, approximately 700 workedin our bakery operations and approximately 300 worked in our corporate centerand restaurant field supervision organization.  None of our staff membersare currently covered by collective bargaining agreements, and we have neverexperienced an organized work stoppage, strike or labor dispute.  Ourworking conditions and compensation packages are generally comparable withthose offered by our competitors, and we consider overall relations with ourstaff members to be favorable.

 

**Executive Officers**

 

DavidOverton, age 63, serves as our Chairman of the Board and Chief ExecutiveOfficer.  Mr. Overton co-founded our predecessor company in 1972 withhis parents, Oscar and Evelyn Overton.

 

Michael E. Jannini, age57, was appointed President of the Company in February 2010.  Priorto joining the Company, Mr. Jannini spent over 20 years in variousmanagement roles with Marriott International, Inc.  He most recentlyserved as Executive Vice President and General Manager of Global Brand Strategyand Innovation at Marriott.

 

W.Douglas Benn, age 55, was appointed Executive Vice President and ChiefFinancial Officer in January 2009. Mr. Benn is a veteran of therestaurant industry having spent more than 20 years in management roles withrestaurant companies. Prior to joining the Company, he served as Executive VicePresident and Chief Financial Officer of RARE Hospitality International, ownerof the LongHorn Steakhouse and The Capital Grille concepts, prior to thatcompany’s sale to another multi-concept, public restaurant company in October 2007.

 

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MaxS. Byfuglin, age 64, serves as President of The Cheesecake Factory BakeryIncorporated, our bakery subsidiary.  Mr. Byfuglin joined our bakeryoperations in 1982 and worked closely with our founders, serving in nearlyevery capacity in our bakery over the past 28 years.

 

DebbyR. Zurzolo, age 53, serves as our Executive Vice President, Secretary andGeneral Counsel.  Ms. Zurzolo joined our Company as Senior VicePresident and General Counsel in April 1999 and was appointed to hercurrent positions in December 2003.  From 1982 until joining theCompany, she practiced law at Greenberg Glusker Fields Claman &Machtinger LLP in Los Angeles, California.  As a partner with that firm, Ms. Zurzolorepresented us on various real estate and other business matters.

 

**ITEM 1A.               RISK FACTORS**

 

The risk factorspresented below may have a material adverse effect on our business, operatingresults, financial position and/or cash flows.  In addition to the riskfactors presented below, changes in general economic conditions, includingnational, regional and local economic conditions; consumer tastes anddiscretionary spending patterns; demographic trends; employment levels; andother factors that may affect consumer behavior and spending for restaurantdining occasions in general, may have a material impact on us.  Our actualresults could vary significantly from any results expressed or implied byforward-looking statements depending on a variety of factors, including therisks and uncertainties described below.

 

Other sections of thisreport may identify additional factors that could materially and adverselyimpact our business, operating results, financial position and/or cashflows.  We operate in a competitive and dynamic environment and new riskfactors may emerge at any time.  It isnot possible for us to predict the impact these factors could have on us or theextent to which any one factor, or combination of factors, may adversely affectour results.

 

**The global economic crisis adverselyimpacted our business and financial results in fiscal 2008 and 2009.  Continuing effects from the recession couldmaterially affect us in fiscal 2010 and beyond.**

 

The restaurant industrydepends upon consumer discretionary spending.  The global economic crisisreduced consumer confidence to historic lows in 2009 and impacted consumers’ability and/or willingness to spend discretionary dollars.  National unemployment rates exceeding 10%(and higher in certain localities) along with a growing number of homeforeclosures, significantly reduced home values, investment losses in thefinancial markets, personal bankruptcies and reduced access to credit furthereroded consumer discretionary spending resulting in lower levels of guesttraffic in our restaurants.  Leading economic indicators, such asunemployment and consumer confidence, remain volatile and may not showmeaningful improvement in fiscal 2010. If the weak economy continues for a prolonged period of time or worsens,our business, operating results, financial position and cash flows could bematerially affected.  During fiscal2008 and 2009, many landlords delayed or cancelled new development projects, aswell as extensions and renovations of existing projects due to the instabilityin the credit market and the decline in consumer spending, reducing the numberof premier sites available that we would consider for our restaurants.

 

In addition, the economicenvironment may result in continued negative comparable restaurant sales drivenby a further deterioration in guest traffic and/or a reduction in the averageamount guests spend in our restaurants.  If comparable restaurant sales remainnegative, it will result in sales de-leverage (i.e., spreading fixed costsacross a lower level of sales) which will, in turn, cause downward pressure onour profitability.  Further reductions instaff levels, additional asset impairment charges and potential restaurantclosures could result from prolonged negative comparable restaurant sales.

 

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**The lack of available credit, alongwith the macroeconomic factors previously discussed, has had an adverse impacton certain of our landlords and other tenants in retail centers in which we arelocated.  If these issues continue orworsen, it could further materially impact these parties, which in turn couldnegatively affect our financial results.**

 

If creditaccessibility fails to improve in fiscal 2010 and beyond, our landlords may beunable to obtain financing or remain in good standing under their existingfinancing arrangements, resulting in their inability to provide constructioncontributions or failure to satisfy other lease covenants to us.  Severalof our landlords have filed for protection under Chapter 11 of the UnitedStates Bankruptcy Code, and we have received notices of intended foreclosuresfrom lenders to our landlords on other projects.  Approximately eleven percent of ourrestaurants are in locations that are owned, managed or controlled by landlordsthat have filed for bankruptcy protection. As of the date of filing of this report, no leases have been rejected inthe bankruptcy proceedings and we have not received any indications that ouroccupancy rights will be disturbed by any of these proceedings.   However, if these landlords (and others whohave not filed for bankruptcy protection to date) are unable to obtainsufficient credit to continue to properly manage their retail sites, we mayexperience a drop in the level of quality of such retail centers.  While we currently do not anticipate thatthese matters concerning our landlords will have a material adverse effect onour operations or results, we can provide no assurance that this will be thecase in the future.

 

In addition, severalother tenants at retail centers in which we are located or have executed leaseshave ceased operations or, in some cases, have failed to open after committingto do so.  If these failures continue, they can result in a reduction ofguest traffic at retail centers in which we are located, that in turn, maycontribute to a lower number of guest visits at our restaurants. Additionally,if our landlords fail to satisfy required co-tenancies in our leases, such failuresmay result in us delaying openings or terminating leases in theselocations.  All of these factors could have a material adverse impact onour operations.

 

**Future growth in our revenues,profitability and earnings per share depends heavily on improving comparablerestaurant sales and selecting high quality sites for new restaurant openings.**

 

Future growth in revenuesand profits will depend on our ability to grow comparable restaurant sales andleverage the comparable sales gains by efficiently operating ourrestaurants.  Comparable restaurant saleschanges are composed of guest traffic increases or decreases, menu pricing andmenu mix shifts.

 

Changes in guest trafficlevels can be impacted by a variety of factors including macroeconomicconditions, competition from other restaurants (both in the upscale casualdining segment and in other segments of the restaurant industry), consumerperception of our concepts’ offerings in terms of quality, price, value andservice, and how guest experiences affect their desire to return to ourrestaurants.  If we are unable toincrease the guest traffic levels in our restaurants, it will likely hinder ourability to grow our comparable restaurant sales.

 

We utilize menu priceincreases to help offset inflation of key operating costs.  If the amountof the menu price increases that we implement are not accepted by guests,resulting in reduced guest traffic, or are insufficient to absorb or offsetincreased costs, it could reduce our growth in comparable restaurant sales.

 

Menumix was negatively impacted in fiscal 2008 and 2009 as a result of guestsmanaging their checks and choosing not to order items such as desserts andbeverages (both alcoholic and non-alcoholic). If menu mix continues to be negative, it could serve to offset some ofthe impact of our menu price increases thereby lowering our potential forcomparable restaurant sales growth.

 

Future revenue andprofitability growth also will depend on the availability of high quality sitesthat meet our criteria for new restaurant development and our ability to selectsites that will continue to drive high levels of sales per square feet.  Our new restaurant development can be subjectto unforeseen delays due to market conditions, the highly customized nature ofour restaurant concepts, and the complex design, construction, and preopeningprocesses for each new location.  The lease negotiation and restaurantdevelopment timeframes also vary by location.  Due to continuedinstability in the credit market and a decline in consumer spending, manylandlords have delayed or cancelled new projects or extension and/orrenovations of existing projects.  Suchactions may limit our choices to consider for growth opportunities.

 

The number and timing ofnew restaurants actually opened during any given period, and their associatedcontribution to operating week growth for the period, will depend on a numberof factors including, but not limited to:

 

·                  the identification and availability of high qualitylocations and acceptable lease terms;

·                  the availability of suitable financing for ourlandlords;

·                  the financial viability of our landlords;

·                  the timing of the delivery of the leased premises tous from our landlords in order to commence build-out construction activities;

 

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·                  the ability of our landlords and us to obtain allnecessary governmental licenses and permits on a timely basis to construct andoperate our restaurants;

·                  our ability to successfully manage the design,construction and preopening processes for each restaurants, and theavailability and/or cost of raw materials;

·                  any unforeseen engineering or environmental problemswith the leased premises;

·                  adverse weather during the construction period; and

·                  the availability of qualified operating personnel inthe local market.

 

If we are unable todevelop new restaurants, our ability to increase our revenues and profitabilitymay be harmed.

 

**Increases in the costs to operate ourbusiness may have a material adverse impact on our business and results ofoperations.**

 

Our profitability andoperating margins depend on, among other things, our ability to anticipate andreact to changes in the costs of key, operating resources, including food andother raw materials, labor, energy and water, insurance (including health,liability and workers’ compensation), and other supplies and services. Although we are able to contract for the majority of the food commodities usedin our restaurants for periods of up to one year, some of the commodities usedin our operations cannot be locked in for periods of longer than 30 days or atall.  As a result, these commodities can be subject to unforeseen supplyand cost fluctuations due to factors such as a change in demand patterns, anincrease in the cost of key inputs, fuel costs, weather and other marketconditions outside of our control.

 

Our suppliers also may beaffected by higher costs to produce and transport commodities used in ourrestaurants and bakery manufacturing facilities, higher minimum wage andbenefit costs, and other expenses that they pass through to their customers,which could result in higher costs for goods and services supplied to us. In addition, weather patterns in recent years have resulted in lower thannormal levels of rainfall in certain areas that could produce droughts in keystates such as California, impacting the price of water and the correspondingprices of commodities grown in states facing drought conditions. There is noassurance that we will be able to maintain our utility and commodity costs atlevels that do not have a material adverse effect on our operations.

 

Many of our staff membersare subject to various minimum wage requirements.  The federal minimumwage increased from $6.55 in July 2008 to $7.25 in July 2009. Many of our employees work in restaurants located in states, includingCalifornia, where the minimum wage is higher than the federal minimum and receivecompensation equal to the state’s minimum wage.  There may be minimum wageincreases in excess of federal minimum wage implemented in jurisdictions inwhich we operate or seek to operate.  Minimum wage increases may have amaterial adverse effect on our labor costs.

 

We retain the financialresponsibility for a significant portion of our risks and associatedliabilities with respect to workers’ compensation, general liability,employment practices, employee health benefits and other insurable risks throughour self insurance programs.  Unfavorable fluctuations in marketconditions, availability of such insurance or changes in state and/or federalregulations could significantly increase our self insurance costs and insurancepremiums.  In addition, employment-relatedlitigation continues to increase at both the state and federal levels,particularly with respect to claims styled as class action lawsuits which aremore costly to defend.  Also, someemployment related claims in the area of wage and hour disputes are notinsurable risks.

 

Despite our efforts tocontrol costs while still providing competitive health care benefits to ourstaff members, significant increases in health care costs continue to occur,and we can provide no assurance that our cost containment efforts in this areawill be effective.  Further, we areunable to predict the impact of pending federal health care legislation on ourhealth care benefit costs, and significant increases in such costs couldadversely impact our operating results. In addition, several localities, including San Francisco, have adoptedor are considering adoption of health care related legislation affectingemployers. There is no assurance that we will be able to absorb and/or passthrough the costs of such legislation in a manner that will not adverselyimpact our operating results.

 

**Competition in the restaurantindustry in general, and specifically within the upscale, casual segment of therestaurant industry, may adversely affect guest traffic at our restaurants.**

 

The restaurant industryis highly competitive with respect to price, value and promotions, service,location, and food quality.  There are a substantial number of restaurantoperations that compete with us for customer traffic, some of which have significantlygreater resources to aggressively market to consumers, which could result inour concepts losing market share.  Consumers are highly focused on valueand if other restaurants are able to promote and deliver a higher degree ofvalue through heavy discounting or other methods, our guest traffic levels maysuffer which would adversely impact our revenues and profitability.  Inaddition, with improving product offerings at fast casual restaurants,quick-service restaurants and grocery stores, consumers may choose to tradedown to these alternatives, which could also negatively affect our financialresults.  Even as the economy recovers,such patterns of downgrading selection may continue among consumers, which couldreduce guest traffic at our restaurants.

 

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**Negative publicity about us, ourrestaurants or bakery products, and about others across the food industry supplychain, whether or not accurate, could harm our business.**

 

Adverse publicity or newsreports, whether or not accurate, regarding food quality issues, illness,injury, health concerns, government or industry findings concerning foodproducts served by us, or operating issues stemming from a single restaurant, alimited number of our restaurants, a single production run of our bakeryproducts, restaurants operated by other foodservice providers or generally inthe food supply chain, could be damaging to the restaurant industry overall andspecifically harm our brand and reputation.  A decrease in guest trafficas a result of these types of health concerns or negative publicity couldmaterially harm our results of operations.

 

**Our success depends substantially onthe value of our brands and our reputation for offering guests a unique totalexperience.**

 

We believe we have builta strong reputation for the quality and breadth of our menu items and bakeryproducts, as part of the total experience that guests enjoy in ourrestaurants.  We believe we must protect and grow the value of our brandsto continue to be successful in the future.  Any incident that erodesconsumer trust in or affinity for our brands could significantly reduce theirvalue.  If consumers perceive or experience a reduction in food quality,service or ambiance, or in any way believe we failed to deliver a consistentlypositive experience, our brand value could suffer.

 

**Our failure to successfully operateour bakery business would have a material adverse impact on our third partybakery sales and profits.**

 

Our bakery operationsdepend on a number of factors including, but not limited to:

 

·                  our ability to obtain and retain large-accountcustomers;

·                  our ability to pass on increases in the key costs ofoperations to our customers, in whole or in part;

·                  macroeconomic conditions affecting consumers’ desireand ability to purchase our bakery product offerings; and

·                  our current reliance on three major warehousecustomers for a substantial percentage of our third party bakery sales

 

A decrease in salesand/or profitability from our bakery operations would have an adverse impact onour financial results.

 

**Newrestaurant openings may negatively impact sales at our existing restaurants.**

 

We target high quality,high profile locations for our upscale and highly customized restaurants, andbelieve that we draw guests from a much larger geographical area compared tomost casual dining chain restaurants.  The sizes of our restaurant tradeareas vary by location, depending on a number of factors such as populationdensity; demographics; retail, business, entertainment and other trafficgenerators; and geography.  As a result, the opening of a new restaurantcould impact the sales of one or more of our existing restaurants nearby. It is not our intention to open new restaurants that materially cannibalize thesales of our existing restaurants.  However, as with most growing retailand restaurant chain operations, there can be no assurance that salescannibalization will not occur or become more significant in the future as wegradually increase our presence in existing markets over time to maximize ourcompetitive position and financial performance in each market.

 

**We areinvesting in marketing, but our marketing programs may not be successful.**

 

A significant increase inour marketing efforts began in the fourth quarter of fiscal 2008 and hascontinued through fiscal 2009 using a variety of media, including social mediavenues.  We expect to continue to conductbrand awareness programs and guest initiatives to attract and retainguests.  These initiatives may not be successful, resulting in expensesincurred without the benefit of higher revenues.  In addition, we maydetermine in the future that developing and maintaining national and/orregional advertising campaigns may be necessary, which would also increase ouroperating expenses with no guarantee of the corresponding increase in revenuenecessary to offset those higher costs.

 

**Our business and future developmentcould be harmed if we are unable to retain key personnel or have difficultiesin recruiting qualified personnel.**

 

The success of ourbusiness continues to depend in critical respects on the contributions of DavidOverton, our co-founder and Chairman of the Board and Chief Executive Officer (“CEO”),and certain other senior executives of the Company.  The loss of theservices of our CEO or other senior executives could have a material adverseeffect on our business and plans for future development.  It is unlikelythat we would be able to find a qualified replacement for our CEO quickly, andsuch replacement would not have the in-depth knowledge of our concepts and thecriteria needed for their success that our current CEO possesses.  Whilewe adopted a 

 

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succession planning policy in fiscal 2008 thatincludes both emergency short-term and long-term planning elements, there is arisk that we may not be able to implement such a succession planning policysuccessfully or in a timely manner.

 

In addition to our seniorexecutives, we must also continue to attract, retain and motivate a sufficientnumber of qualified management and operating personnel, including regionalmanagement, general managers and executive kitchen managers.  Qualifiedindividuals have historically been in short supply and an inability to attractthem to our restaurant operations would limit our ability to effectively expandin existing markets and penetrate new markets.  Additionally, the abilityof these key personnel to maintain consistency in the service, hospitality,quality and atmosphere of our restaurants is a critical factor in oursuccess.  Any failure to do so may harm the reputation of our concepts andadversely affect our operating results.

 

Competition for qualifiedindividuals could also increase our labor costs related to cash and othercompensation, including equity awards.  Ifwe continue to make equity grants at similar levels as in the past, our 2001Equity Incentive Plan only contains authorized shares sufficient to permit grantingequity through the first quarter of fiscal 2011.  Our ability to offer equity awards in thefuture may be limited or nonexistent if our shareholders do not approve a newequity incentive plan at our 2010 Annual Meeting of Stockholders.  Our ability to attract and retain qualifiedmanagement and operating personnel may be harmed if we are unable to offercompetitive cash and other compensation, including equity awards.

 

**We maybe unable to appropriately scale our infrastructure in a timely manner.**

 

During fiscal 2008 and2009, we reduced our infrastructure to adapt to the reduction in comparablerestaurant sales and for the reduced number of new restaurant openings plannedfor those years.  We continue to evaluate the appropriate level of our infrastructureto support our fiscal 2010 operational and development plans.  If marketconditions improve and we are able to identify enough high quality sites tosignificantly increase the planned number of new restaurant openings in thefuture, we may be unable to scale or manage the growth of our corporate andfield supervision infrastructure in the short term to appropriately support ouroperations.  Likewise, if sales decline, we may be unable to reduce ourinfrastructure quickly enough to prevent further sales deleveraging which wouldadversely affect our results of operations.

 

**Changes in, or any failure to complywith, applicable laws or regulations at the federal, state or local level couldadversely affect our business, financial position and results.**

 

Various federal and statelabor laws and regulations govern our operations and relationships with ourstaff members, including minimum wages, breaks, overtime, fringe benefits,safety, working conditions and citizenship requirements.  Changes in, orany failure to comply with, these laws and regulations could subject us tofines or legal actions.  Settlements or judgments that are not insured orin excess of our coverage limitations could have a material adverse affect onour business.  Although we operate our facilities in compliance withfederal and state requirements, some of our staff members may not meet federalcitizenship or residency requirements.  This could result in a disruptionin our work force, sanctions against us and adverse publicity.  Significantgovernment-imposed increases in minimum wages, paid or unpaid leaves of absenceand mandated health and/or COBRA benefits, or increased tax reporting,assessment or payment requirements related to our employees who receivegratuities, or changes in interpretations of existing law concerning meal andrest period breaks currently under consideration by the Supreme Court in theState of California, could be detrimental to the profitability of ourrestaurants and bakery operations.

 

Our business is subject toextensive state and local government regulation in the various jurisdictions inwhich our restaurants and bakeries are located, including regulations relatingto alcoholic beverage control, public health and safety, environmental hazardsand food safety.  The failure to obtain and/or retain licenses, permits orother regulatory approvals could delay or prevent the opening and/or continuedoperation of a restaurant in a particular area.  Alcoholic beveragecontrol regulations require each of our restaurants to obtain licenses andpermits to sell alcoholic beverages on the premises.  The failure of arestaurant to obtain or retain its licenses would adversely affect thatrestaurant’s operations and profitability, and could adversely affect ourability to obtain these licenses elsewhere. We may also be subject to dram shopstatutes in certain states, which generally provide a person injured by anintoxicated person the right to recover damages from an establishment thatwrongfully served alcoholic beverages to the intoxicated person.  Eventhough we are covered by general liability insurance, a settlement or judgmentagainst us under a dram shop statute in excess of liability coverage could havea material adverse effect on our operations.

 

In addition, as a manufacturerand distributor of food products, we are subject to a number of food safety andlabeling laws and regulations, including the Federal Food, Drug and CosmeticAct.  Failure to comply with these and other applicable laws andregulations could adversely affect our business, financial position and resultsof operations.

 

**Information technology systemfailures or breaches of our network security could interrupt our operations andsubject us to increased operating costs as well as litigation and other liabilities.**

 

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We rely heavily on ourcomputer systems and network infrastructure across our operations including,but not limited to, point-of-sale processing at our restaurants, and thesystems we use could be vulnerable to unforeseen risks.  Our operationsdepend upon our ability to protect our computer equipment and systems againstdamage from physical theft, fire, power loss, telecommunications failure orother catastrophic events, as well as from internal and external securitybreaches, denial of service attacks, viruses, worms and other disruptiveproblems caused by hackers.  In addition, our corporate support center islocated in California, in an area prone to natural disasters such asearthquakes and wildfires.  Any damage orfailure of our computer systems or network infrastructure that causes aninterruption in our operations could have a material adverse effect on ourfinancial condition and results of operations.

 

We employ both internalresources and external consultants to conduct extensive auditing and testingfor weaknesses in our systems, controls, firewalls and encryption to reduce thelikelihood of any security failures or breaches.  Although we, withthe help of third-party service providers and consultants, intend to maintainand upgrade our security technology and establish operational procedures toprevent such damage, breaches, or attacks, there can be no assurance that thesesecurity measures will be successful.  In addition, advances in computercapabilities, new discoveries in the field of cryptography or otherdevelopments could result in a compromise or breach of the algorithms we andour third-party service providers use to encrypt and protect customertransaction data.  A failure of such security measures could harm ourreputation and financial results, as well as subject us to litigation oractions by regulatory authorities.

 

**Ourinability or failure to execute on a comprehensive business continuity planfollowing a major natural or manmade disaster, including terrorism, at ourcorporate facility could materially adversely impact our business**

 

Most of our****corporate****systems and processes and corporatesupport for our restaurant operations are centralized at one Californialocation with the exception of our construction and design department. ** **Althoughwe have disaster recovery procedures in place to address most events of acrisis nature, including back up and off site location for recovery ofelectronic and other forms of data and information, we are currently developinga comprehensive business continuity plan specifically addressing a variety ofpotential disasters, and attendant recovery procedures on both a corporate-wideand departmental basis. If we are unable to fully develop or implement suchplan, we may experience delays in recovery of data, inability to perform vitalcorporate functions, tardiness in required reporting and compliance, failuresto adequately support field operations, and other breakdowns in normaloperating procedures that could have a material adverse effect on our financialcondition, results of operation, and exposure to administrative and other legalclaims.

 

**Litigationcould have a material adverse impact on our business.**

 

We are subject tolawsuits, administrative proceedings and claims that arise in the regularcourse of business.  The matters typically involve claims by guests, staffmembers and others regarding issues such as food borne illness, food safety,premises liability, compliance with wage and hour requirements, work-relatedinjuries, discrimination, harassment, disability and other operational issuescommon to the foodservice industry.  We could be adversely affected bynegative publicity and litigation costs resulting from these claims, regardlessof their validity.  Significant legal fees and costs in complex classaction litigation or an adverse judgment or settlement that is not insured or isin excess of insurance coverage could have a material adverse effect on ourfinancial position and results of operations.  We are self-insured, orcarry insurance programs with high retention levels, for a significant portionof our risks and associated liabilities with respect to workers’ compensation,general liability, employer’s liability, health benefits and other insurablerisks.  We accrue liabilities for these programs based on our estimate ofthe ultimate costs to settle known claims as well as claims that are incurredbut not reported.  Significant judgment is required to estimate claimsthat have been incurred but not reported.  If actual claims trends,including the severity or frequency of claims, differ from our estimates, ourfinancial results could be negatively impacted.

 

**New information or attitudesregarding diet and health could result in changes in regulations and consumereating habits that could adversely affect our revenues.**

 

Regulations and consumereating habits may change as a result of new information, increases indisclosure requirements or attitudes regarding diet and health.  Thesechanges may include regulations that impact the ingredients and nutritionalcontent of our menu items and bakery products.  In addition, a number ofstates, counties and cities have enacted menu labeling laws requiringmulti-unit restaurant operators to make certain nutritional informationavailable to guests or have enacted legislation prohibiting the sales ofcertain types of ingredients in restaurants.  Efforts have been made tointroduce similar legislation at the federal level.  The success of our restaurant operationsdepends, in part, upon our ability to effectively respond to changes inconsumer health and disclosure regulations and to adapt our menu offerings totrends in eating habits.  If consumer health regulations or consumereating habits change significantly, we may be required to modify or discontinuecertain menu items.  To the extent we are unable to respond withappropriate changes to our menu offerings, it could materially affect guestdemand for our concepts and have an adverse impact on our revenues.

 

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**Seasonality of our business and thetiming of new restaurant openings could result in fluctuations in our financialperformance from quarter-to-quarter within a fiscal year.**

 

Our business is subjectto seasonal fluctuations.  Our restaurant sales are typically higherduring the second and third quarters of the fiscal year.  Our bakeryoperation is seasonal to the extent that the fourth quarter’s sales aretypically higher due to holiday business and may also significantly vary fromquarter-to-quarter due to the timing and/or size of orders from large accountbakery customers.  As a result of these factors, results of operations forany single quarter are not necessarily indicative of the results that may beachieved for a full fiscal year.  Quarterly results have been, and in thefuture could continue to be, significantly impacted by the timing of newrestaurant openings, including associated preopening costs and operatinginefficiencies, as well as macroeconomic factors.

 

**Adverseweather conditions could unfavorably affect our restaurant sales.**

 

Adverse weatherconditions can impact guest traffic at our restaurants, cause the temporaryunderutilization of outdoor patio seating, and, in more severe cases, causetemporary restaurant closures, sometimes for prolonged periods. Outdoor patioseating is available at most of our restaurants and accounts for approximately20% of our seating capacity.  Ourinability to fully utilize our restaurants’ seating capacity as planned maynegatively impact our revenues and results of operations.

 

**Our failure to establish, maintainand apply adequate internal control over our financial reporting could affectour reported results of operations.  In addition, changes in financialaccounting standards or interpretations of existing standards could affect ourreported results of operations**.

 

We are subject to theongoing internal control provisions of Section 404 of the Sarbanes-OxleyAct of 2002.  These provisions provide for the identification of materialweaknesses in internal control over financial reporting—a process to providereasonable assurance regarding the reliability of financial reporting forexternal purposes in accordance with accounting principles generally accepted (“GAAP”)in the United States of America.  While we have not experienced a materialweakness in internal controls, there can be no assurance that we will be ableto remediate any future material weaknesses in internal controls in a timelymanner or maintain all of the controls necessary to remain in compliance. Any failure to maintain an effective system of internal controls over financialreporting could limit our ability to report our financial results accuratelyand timely or to detect and prevent fraud.  Additionally, changes inaccounting standards or new accounting pronouncements and interpretations mayoccur that could adversely affect our previously reported or future financialposition or results of operations.

 

**Our federal, state and local tax returns may, fromtime to time, be selected for audit by taxing authorities, which may result intax assessments or penalties that could have a material adverse impact on ourresults of operations and financial position.**

 

We are subject tofederal, state and local taxes. Significant judgment is required in determining the provision for incometaxes. Although we believe our tax estimates are reasonable, if the IRS orother taxing authority disagrees with the positions we have taken on our taxreturns, we could face additional tax liability, including interest andpenalties. If material, payment of such additional amounts upon finaladjudication of any disputes could have a material impact on our results ofoperations and financial position.

 

The Internal RevenueService issued a Notice of Proposed Adjustment concerning our tax returns filed for fiscal years 2003 through 2006 withrespect to the deductibility under the provisions of Internal Revenue Code Section 162(m) ofcertain compensation in excess of $1 million per year paid to “coveredemployees” (as defined in such section) resulting from their exercise of stockoptions later determined to be misdated disallowing the deduction ofapproximately $5.1 million of compensation expense. It is our position thatsuch compensation qualifies as performance-based compensation that is notsubject to the limitations on deductibility under Internal Revenue Code Section 162(m).  We received a Statutory Notice of Deficiencyfrom the IRS for fiscal 2005 only and have petitioned for redetermination ofthis notice with the United States Tax Court. With respect to all other tax years in question, we intend to continuediscussions with the IRS in an effort to reach a favorable resolution and, ifsuch resolution is not reached, to pursue all available administrative and legalremedies.  We have reserved $2.4 millionfor estimated taxes and interest due through December 29, 2009.  This reserve does not include penalties.

 

**Failure to satisfy financialcovenants and/or repayment requirements under our credit facility could have amaterial adverse effect on our financial condition.**

 

We have a five-yearrevolving credit facility (“Facility”) with a maximum available borrowingcommitment of $300 million, which expires in April 2012.  The Facility requires us to maintain certainfinancial covenants.  While we have not experienced a failure to maintainthese covenants in the past, any future failure to maintain these covenants orhave sufficient liquidity to either repay or refinance the outstanding balanceat expiration of the Facility would have a material adverse effect on ourfinancial condition.  See 

 

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Note 7 of Notes to Consolidated Financial Statementsin Part IV, Item 15 of this Annual Report on Form 10-K for additionalinformation concerning our Facility.

 

**Failure to meet market expectationsfor our financial performance will likely have a negative impact on the marketprice of our common stock.**

 

If we fail to meet themarket’s expectations for our financial performance, particularly with respectto comparable restaurant sales, revenues, operating margins and dilutedearnings per share, a decline in the market price of The Cheesecake FactoryIncorporated common stock will likely occur.

 

The market price of ourcommon stock may also be affected by general stock market conditions, includingthe performance of broad-based stock market indices and exchanges.  These conditions may result in stock marketvolatility, which in turn would likely impact the price of our common stock, aswell as a sell-off in our common stock, both of which could be unrelated ordisproportionate to changes in our operating performance.

 

**There may be future sales or otherdilution of our equity which may adversely affect the market price of ourcommon stock.**

 

We are not restrictedfrom issuing additional common stock or preferred stock, including anysecurities that are convertible into or exchangeable for, or that represent theright to receive, common stock or preferred stock or any substantially similarsecurities.  Our Board of Directors is authorized to issue additionalshares of common stock and additional classes or series of preferred stockwithout any action on the part of the stockholders.  The Board ofDirectors also has the discretion, without stockholder approval, to set theterms of any such classes or series of preferred stock that may be issued,including voting rights, dividend rights and preferences over the common stockwith respect to dividends or upon the liquidation, or winding up of ourbusiness and other terms.  If we issue preferred shares in the future thathave a preference over our common stock with respect to the payment ofdividends or upon liquidation, dissolution or winding up, or if we issuepreferred shares with voting rights that dilute the voting power of our commonstock, the rights of our common stockholders or the market price of our commonstock could be adversely affected.

 

**We have a shareholder rights plan, orpoison pill, which could affect the price of our common stock and make it moredifficult for a potential acquirer to purchase a large portion of oursecurities, to initiate a tender offer or a proxy contest, or to acquire us.**

 

In August 2008, ourBoard of Directors extended a shareholder rights plan, commonly known as a “poisonpill,” for a period to end in August 2018. The poison pill may discourage,delay, or prevent a third party from acquiring a large portion of our securities,initiating a tender offer or proxy contest, or acquiring us through anacquisition, merger, or similar transaction. Such an acquirer could beprevented from consummating one of these transactions even if our shareholdersmight receive a premium for their shares over then-current market prices.

 

**ITEM 1B.       UNRESOLVEDSTAFF COMMENTS**

 

Notapplicable.

 

**ITEM 2.       PROPERTIES**

 

Allof our 161 existing Company-operated, full-service restaurants are located onleased properties, and we have no current plans to own the real estateunderlying our restaurants.  See Part I, Item 1 “Business — ExistingRestaurant Locations” for information regarding the location of ourrestaurants.  We own substantially all of the FF&E in ourrestaurants.  Existing restaurant leases have expiration dates rangingfrom December 25, 2010 to January 31, 2031 (excluding unexercisedrenewal options).  There can be no assurance that we will be able to renewexpiring leases after the expiration of all remaining renewal options. Most of our restaurant leases provide for contingent rent based on a percentageof restaurant sales (to the extent this amount exceeds a minimum base rental)and payment of certain lease-related expenses.  See Note 10 of Notes toConsolidated Financial Statements in Part IV, Item 15 of this report forinformation regarding the aggregate straight-line minimum and contingent rentexpense for the last three fiscal years and information regarding ourobligation to pay minimum base rentals in future years.  A majority of our leases also provide fortermination rights by us in the event our sales are below a stated level for aperiod of time, generally conditioned upon a repayment of the unamortizedallowances contributed by landlords to the build out of the leasedpremises.  Additionally, most of ourleases also provide for a reduced level of overall rent obligation shouldspecified co-tenancies not be satisfied.

 

Ourcorporate support center and one bakery production facility are located inCalabasas Hills, California.  The corporate support center is an 88,000square-foot facility on an approximate 5-acre parcel of land.  The bakeryproduction facility is a 60,000 square-foot facility on a 3.3-acre parcel ofland.  We completed a second bakery production facility in Rocky Mount,North Carolina 

 

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inMarch 2006.  The second bakery facility is a 100,000 square-footfacility on a 15.82-acre parcel of land.  We currently own all threeproperties in fee simple and have an option to purchase additional landadjacent to our North Carolina facility, which is subject to our satisfactionof certain staffing levels at our North Carolina facility and improvements tothis real estate.

 

**ITEM 3.       LEGALPROCEEDINGS**

 

SeeNote 10 of Notes to Consolidated Financial Statements in Part IV, Item 15of this report for a summary of legal proceedings.

 

**ITEM 4.       SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Nomatter was submitted to a vote of our stockholders during the fourth quarter ofthe fiscal year ended December 29, 2009.

 

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**PART II**

 

**ITEM 5.****                 ****MARKET FORTHE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES**

 

Ourcommon stock is listed on the Global Select MarketSM tier of The NASDAQ Stock Market® under thesymbol CAKE.  The following table sets forth, for the periods indicated,the high and low sales prices as reported on The NASDAQ Stock Market:

 
| ** **      | ** ** | **High**   | ** ** | **Low**    | ** ** |
|-----------------|------------|------------|------------|------------|------------|
| **Fiscal 2009** | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter   |       | $          | 12.82      |       | $          | 6.84 |   |
| Second Quarter  |       | 18.53      |       | 11.14      |       |
| Third Quarter   |       | 21.01      |       | 15.69      |       |
| Fourth Quarter  |       | 22.63      |       | 17.55      |       |
|            |       |       |       |       |       |
| **Fiscal 2008** | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter   |       | $          | 23.25      |       | $          | 17.24 |   |
| Second Quarter  |       | 23.16      |       | 15.43      |       |
| Third Quarter   |       | 18.37      |       | 13.69      |       |
| Fourth Quarter  |       | 14.83      |       | 4.96       |       |

 

Sinceour initial public offering in September 1992, we have not declared orpaid any cash dividends on our common stock and have no current plans to paydividends in the near future.  Inaddition, our amended credit facility limits cash distributions with respect toour equity interests, such as cash dividends and share repurchases, based on aliquidity threshold.  See Note 7 of Notesto Consolidated Financial Statements in Part IV, Item 15 of this reportfor further discussion of our credit facility.

 

Therewere approximately 1,200 holders of record of our common stock at February 17,2010 and we estimate there were approximately 27,100 beneficial stockholders onthat date.

 

Duringthe quarterly period ended December 29, 2009, we made no purchases ofequity securities that are registered by us pursuant to Section 12 of theExchange Act.

 

Our Board of Directors increased the authorizationto repurchase shares of our common shares by 10 million shares during fiscal2008 and by 15 million shares in fiscal 2007, for a total authorization of 31million shares.  No increases wereauthorized during fiscal 2009.  Underthis authorization, we cumulatively repurchased a total of 23.1 million sharesfor a total cost of $506.2 million through December 29, 2009.  The authorization does not have an expirationdate, does not require us to purchase a specific number of shares and may bemodified, suspended or terminated at any time.

 

In August 2008, we entered into a prearrangedstock repurchase plan intended to qualify for the safe harbor under Rule 10b5-1under the Securities Exchange Act of 1934, as amended (“10b5-1 Plan”).  In October 2008, we suspended our sharerepurchase program in order to maintain maximum flexibility in our capitaldecisions in light of the unprecedented crisis in the global financial marketsand the indeterminate future impact it could have on the overall economy and onour business.  Concurrently with theeffective date of such suspension, we terminated our 10b5-1 Plan.  On February 25, 2010, our Board of Directorsreinstated our stock repurchase program and approved the adoption of a new10b5-1 Plan, which will become effective on March 27, 2010.  In addition, we may also make purchases inthe open market in compliance with Rule 10b-18 under the Securities ExchangeAct of 1934.

 

The timing and number of shares repurchased pursuantto the share repurchase authorization are subject to a number of factors,including current market conditions, legal constraints, financial covenantsunder our credit facility, and available cash or other sources of funding.  Shares may be repurchased in the open marketor through privately negotiated transactions at times and prices consideredappropriate by us.  We make thedetermination to repurchase shares based on several factors, including anevaluation of current and future capital needs associated with new restaurantdevelopment, current and forecasted cash flows, a review of our capitalstructure and cost of capital, and our share price.

 

*Price Performance Graph*

 

Set forth below is a graphcomparing the total return on an indexed basis of a $100 investment in theCompany’s common stock, the S&P 400 Midcap Index, the NASDAQ Composite®(US) Index and the *Nation’s Restaurant News*Stock Index. The measurement points utilized in the graph consist of the lasttrading day in each calendar year, which closely approximates the last day ofthe respective fiscal year of the Company. The historical stock performancepresented below is not intended to and may not be indicative of future stockperformance.

 

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# **Comparison of Five-YearCumulative Total Return on $100 Investment**

**Among The Cheesecake FactoryIncorporated, S&P 400 Midcap Index,**

**NASDAQ Composite® (US) Index****and the Nation’s Restaurant News Stock Index**

 

 
| ** **                                         | ** ** | **12/31/04** | ** ** | **12/30/05** | ** ** | **12/29/06** | ** ** | **12/31/07** | ** ** | **12/31/08** | ** ** | **12/31/09** | ** ** |
|----------------------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|
| The Cheesecake Factory Incorporated                |       | $            | 100        |         | $          | 115          |       | $            | 76         |         | $          | 73           |       | $ | 31 |   | $ | 66 |   |
| S&P 400 Midcap Index                           |       | $            | 100        |         | $          | 111          |       | $            | 121        |         | $          | 129          |       | $ | 81 |   | $ | 110 |   |
| NASDAQ Composite® (US) Index                  |       | $            | 100        |         | $          | 102          |       | $            | 112        |         | $          | 122          |       | $ | 59 |   | $ | 84 |   |
| Nation’s Restaurant News Stock Index (1) |       | $            | 100        |         | $          | 110          |       | $            | 125        |         | $          | 134          |       | $ | 105 |   | $ | 133 |   |

 

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(1)          The Nation’s Restaurant News Stock Index (“Index”) ispublished on Fridays.  The publicationdate for this Index that most closely approximates the last trading day for2007 and 2008 are 12/28/07 and 12/26/08, respectively.  For 2005, 2006 and 2009, the Index waspublished on the dates shown in the table above.

 

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**ITEM 6.****                            ****SELECTED FINANCIAL DATA**

 

Thefollowing table sets forth, for the periods indicated, selected consolidatedfinancial data that has been derived from our consolidated financialstatements.  The following selectedconsolidated financial data should be read in conjunction with our consolidatedfinancial statements and related notes thereto, and with Part II, Item 7,Management’s Discussion and Analysis of Financial Condition and Results ofOperations.

 
| ** **                                                                               | ** ** | **Fiscal Year (1) (2)**                             | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                               | ** ** | **2009**                                                           | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                               | ** ** | **(In thousands, except per share data)** | ** ** |
| **Statement of Operations Data:**                                                        | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                                 |       | $                                                                  | 1,602,020  |   | $ | 1,606,406 |   | $ | 1,511,577 |   | $ | 1,315,325 |   | $ | 1,182,053 |   |
|                                                                                     |       |                                                               |       |   |   |   |   |   |   |   |   |
| Costs and expenses:                                                                      |       |                                                               |       |   |   |   |   |   |   |   |   |
| Cost of sales                                                                            |       | 394,409                                                            |       | 416,801 |   | 380,996 |   | 333,528 |   | 302,889 |   |
| Labor expenses                                                                           |       | 528,578                                                            |       | 533,080 |   | 491,614 |   | 420,957 |   | 364,173 |   |
| Other operating costs and expenses                                                       |       | 402,877                                                            |       | 397,498 |   | 353,547 |   | 303,240 |   | 268,253 |   |
| General and administrative expenses                                                      |       | 97,432                                                             |       | 83,731 |   | 83,949 |   | 72,751 |   | 53,527 |   |
| Depreciation and amortization expenses                                                   |       | 75,184                                                             |       | 73,290 |   | 64,202 |   | 53,064 |   | 45,177 |   |
| Impairment of assets                                                                     |       | 26,541                                                             |       | 2,952 |   | 3⁄4 |   | 3⁄4 |   | 3⁄4 |   |
| Preopening costs                                                                         |       | 3,282                                                              |       | 11,883 |   | 26,466 |   | 24,944 |   | 18,293 |   |
| Total costs and expenses                                                                 |       | 1,528,303                                                          |       | 1,519,235 |   | 1,400,774 |   | 1,208,484 |   | 1,052,312 |   |
|                                                                                     |       |                                                               |       |   |   |   |   |   |   |   |   |
| Income from operations                                                                   |       | 73,717                                                             |       | 87,171 |   | 110,803 |   | 106,841 |   | 129,741 |   |
| Interest expense                                                                         |       | (23,433                                                            | )          | (14,788 | ) | (10,852 | ) | (1,878 | ) | (942 | ) |
| Interest income                                                                          |       | 372                                                                |       | 1,849 |   | 4,703 |   | 6,123 |   | 4,860 |   |
| Other income/(expense), net                                                              |       | 651                                                                |       | (977 | ) | 1,009 |   | 2,048 |   | 557 |   |
| Income before income taxes                                                               |       | 51,307                                                             |       | 73,255 |   | 105,663 |   | 113,134 |   | 134,216 |   |
| Income tax provision                                                                     |       | 8,474                                                              |       | 20,962 |   | 31,699 |   | 31,852 |   | 46,268 |   |
| Net income                                                                               |       | $                                                                  | 42,833     |   | $ | 52,293 |   | $ | 73,964 |   | $ | 81,282 |   | $ | 87,948 |   |
|                                                                                     |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net income per share:                                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                                                    |       | $                                                                  | 0.72       |   | $ | 0.82 |   | $ | 1.02 |   | $ | 1.04 |   | $ | 1.12 |   |
|                                                                                     |       |                                                               |       |   |   |   |   |   |   |   |   |
| Diluted                                                                                  |       | $                                                                  | 0.71       |   | $ | 0.82 |   | $ | 1.01 |   | $ | 1.02 |   | $ | 1.10 |   |
|                                                                                     |       |                                                               |       |   |   |   |   |   |   |   |   |
| Weighted average shares outstanding:                                                     |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                                                    |       | 59,362                                                             |       | 63,822 |   | 72,475 |   | 78,181 |   | 78,354 |   |
| Diluted                                                                                  |       | 60,082                                                             |       | 64,009 |   | 73,504 |   | 79,460 |   | 80,176 |   |
|                                                                                     |       |                                                               |       |   |   |   |   |   |   |   |   |
| **Balance Sheet Data (at end of  period):**                                              | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total cash and cash equivalents                                                          |       | $                                                                  | 73,715     |   | $ | 80,365 |   | $ | 36,867 |   | $ | 44,790 |   | $ | 31,052 |   |
| Investments and marketable securities                                                    |       | 3⁄4                                                             |       | 996 |   | 12,362 |   | 89,524 |   | 146,922 |   |
| Total assets                                                                             |       | 1,046,751                                                          |       | 1,142,630 |   | 1,145,753 |   | 1,039,731 |   | 926,250 |   |
| Total long-term debt and deemed landlord financing  liability, including current portion |       | 153,331                                                            |       | 331,273 |   | 226,495 |   | 40,419 |   | 26,896 |   |
| Total stockholders’ equity                                                          |       | 516,113                                                            |       | 452,566 |   | 562,926 |   | 711,542 |   | 646,699 |   |

 

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(1)           Fiscal 2005 consisted of 53weeks. All other fiscal years presented consisted of 52 weeks.

 

(2)                                  Fiscal 2009, 2008, 2007,2006 and 2005 included $14.6 million, $13.1 million, $18.2 million, $18.2million and $0.8 million, respectively, of stock-based compensation expense.  The increase from fiscal 2005 to fiscal 2006relates to the adoption of revised Financial Accounting Standards Boardguidance regarding accounting for stock-based compensation.

 

**Non-GAAP Measures**

 

Adjusted net income andadjusted diluted net income per share are supplemental measures of ourperformance that are not required by or presented in accordance with GAAP.  These non-GAAP measures may not be comparableto similarly titled measures

 

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used by other companies and should not be consideredin isolation or as a substitute for measures of performance prepared inaccordance with GAAP.

 

We calculate these non-GAAPmeasures by eliminating from net income and diluted net income per share theimpact of a number of items we do not consider indicative of our ongoingoperations.  We believe these adjustedmeasures provide additional information to facilitate the comparison of ourpast and present financial results.  Weutilize results that both include and exclude the identified items inevaluating business performance. However, our inclusion of these adjusted measures should not beconstrued as an indication that our future results will be unaffected byunusual or infrequent items.  In thefuture, we may incur expenses or generate income similar to the adjusted items.

 

Following is areconciliation from net income and diluted net income per share to thecorresponding adjusted measures:

 
| ** **                                                         | ** ** | **Fiscal Year** | ** ** |
|--------------------------------------------------------------------|------------|-----------------|------------|
| ** **                                                         | ** ** | **2009**        | ** ** | **2008** | ** ** |
| Net income                                                         |       | $               | 42,833     |   | $ | 52,293 |   |
| After-tax impact from:                                             |       |            |       |   |   |
| Impairment of assets (1)                                           |       | 15,925          |       | 1,771 |   |
| Unwinding of interest rate  collars (2)                            |       | 4,452           |       | — |   |
| Chairman and CEO employment  agreement (3)                         |       | 1,530           |       | — |   |
| Realization of investment in  variable life insurance contract (4) |       | (668            | )          | — |   |
| Adjusted net income                                                |       | $               | 64,072     |   | $ | 54,064 |   |
|                                                               |       |            |       |   |   |
| Diluted net income per share                                       |       | $               | 0.71       |   | $ | 0.82 |   |
| After-tax impact from:                                             |       |            |       |   |   |
| Impairment of assets                                               |       | 0.27            |       | 0.02 |   |
| Unwinding of interest rate  collars                                |       | 0.07            |       | — |   |
| Chairman and CEO employment  agreement                             |       | 0.03            |       | — |   |
| Realization of investment in  variable life insurance contract     |       | (0.01           | )          | — |   |
| Adjusted diluted net income  per share                             |       | $               | 1.07       |   | $ | 0.84 |   |

 

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(1)          Represents the impairment of the carryingvalue of four Grand Lux Cafe restaurants in fiscal 2009 and three TheCheesecake Factory restaurants in fiscal 2008. The pre-tax amounts associated with this item were $26,541 and $2,952 infiscal 2009 and fiscal 2008, respectively, and were recorded in impairment ofassets.

(2)          Represents costs to unwindderivative instruments in conjunction with reducing the outstanding balance onour revolving credit facility.  Thepre-tax amount associated with this item is $7,421 and was recorded in interestexpense.

(3)          Represents a charge resulting froma change in the amount and structure of the retirement benefit contained in theemployment agreement with our Chief Executive Officer.  The pre-tax amount associated with this item is$2,550 and was recorded in general and administrative expenses.

(4)          Represents the realization ofproceeds from one of our variable life insurance contracts used to support ourExecutive Savings Plan, a non-qualified deferred compensation plan.  This item is non-taxable and was recorded inother income/(expense).

 

SeeManagement’s Discussion and Analysis of Financial Condition and Results ofOperations in Part 1, Item 7 of this report for more information regardingeach of the identified items.

 

**ITEM 7.          MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS**

 

**General**

 

Thisdiscussion and analysis should be read in conjunction with our consolidatedfinancial statements and related notes in Part IV, Item 15 of this report,the “Risk Factors’ included in Part I, Item 1A of this report, and thecautionary statements included throughout this report. The inclusion ofsupplementary analytical and related information herein may require us to makeestimates and assumptions in connection with our analysis of trends andexpectations with respect to our results of operations and financial positiontaken as a whole.

 

Asof February 26, 2010, we operated 161 upscale, casual, full-service diningrestaurants: 147 under The Cheesecake Factory® mark; 13 under the Grand Lux Cafe®mark; and one under the RockSugar Pan Asian Kitchen® mark.  We alsooperated 

 

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twobakery production facilities and licensed two limited menu bakery cafes underThe Cheesecake Factory Bakery Cafe® mark to another foodservice operator.

 

TheCheesecake Factory is an upscale casual dining concept that offersapproximately 200 menu items including appetizers, pizza, seafood, steaks,chicken, burgers, pasta, specialty items, salads, sandwiches, omelets anddesserts, including approximately 40 varieties of cheesecake and other bakeddesserts.  Grand Lux Cafe and RockSugar Pan Asian Kitchen are also upscalecasual dining concepts offering approximately 200 and 80 menu items,respectively.  In contrast to many chain restaurant operations,substantially all of our menu items (except certain desserts manufactured atour bakery production facilities) are prepared on the restaurant premises usinghigh quality, fresh ingredients based on innovative and proprietaryrecipes.  We believe our restaurants are recognized by consumers foroffering value with generous food portions at moderate prices.  Ourrestaurants’ distinctive, contemporary design and decor create a high-energyambiance in a casual setting.  Our restaurants currently range in sizefrom 5,400 to 21,000 interior square feet, provide full liquor service and aregenerally open seven days a week for lunch and dinner, as well as Sundaybrunch.  Total restaurant sales represented approximately 96% of ourrevenues for fiscal 2009, 2008 and 2007 with bakery sales accounting for theremainder.

 

**Overview**

 

Inaddition to being highly competitive, the restaurant industry is affected bychanges in consumer tastes and discretionary spending patterns; changes ingeneral economic conditions; public safety conditions; demographic trends;weather conditions; the cost and availability of food products, labor andenergy; purchasing power; and government regulations.  Accordingly, aspart of our strategy we must constantly evolve and refine the critical elementsof our restaurant concepts to protect our competitiveness and to maintain andenhance the strength of our brand.

 

Our strategy is driven by our commitment to guestsatisfaction and is focused primarily on menu innovation and operationalexecution to continue to differentiate ourselves from other restaurantconcepts, as well as drive competitively strong performance that is sustainable.  Financially, we are focused on prudentlymanaging expenses at our restaurants, bakery facilities and corporate supportcenter.  We are also committed toallocating capital in a manner that will maximize profitability andreturns.  Investing in our restaurants isour top capital allocation priority with a focus on continuing to develop ourconcepts in premier locations within both existing and new markets.  Near-term, we plan to deploy our excesscapital on hand to either reduce the outstanding balance on our credit facility,repurchase some of our outstanding shares, or a combination of both.

 

In evaluating and assessing the performance of ourbusiness, we believe the following are key performance indicators that shouldbe taken into consideration:

 

·                   *Comparable Restaurant Sales andOverall Revenue Growth.*  Changes in comparablerestaurant sales come from variations in guest traffic, as well as changes incheck average (as a result of menu price increases and/or changes in menumix).  Our strategy is to grow guesttraffic by continuing to offer innovative, high-quality menu items that offerguests a wide range of options in terms of flavor, price and value.  In addition, we plan to continue focusing onservice and hospitality with the goal of delivering an exceptional guestexperience.  Our philosophy with regardto menu pricing is to use price increases to help offset key operating costs ina manner that balances protecting both our margins and guest traffic levels.  Prior to the economic downturn, menu mix hadgenerally been neutral to our average check, allowing us to retain the impactof our menu price increases.  As theeconomy strengthens, we would expect this pattern to resume as guests focusless on check management.

 

Comparable restaurant sales growth, in addition torevenue from new restaurant openings and increases in third-party bakery sales,drive our overall revenue growth.

 

·                  *Income from Operations Expressedas a Percentage of Revenues (“Operating Margins”).*  Operating margins are subject tofluctuations in commodity costs, labor, restaurant-level occupancy expenses,general and administrative expenses, and preopening expenses.  Ourobjective is to gradually increase our operating margins by capturing fixedcost leverage from comparable restaurant sales increases; maximizing ourpurchasing power as our business grows; and operating our restaurants asproductively as possible by retaining the efficiencies we gained through costmanagement initiatives that have been implemented.

 

In addition, by efficiently scaling our restaurant andbakery support infrastructure and improving our internal processes, we striveto grow general and administrative expenses at a slower rate than revenuegrowth over the long-term, which should also contribute to operating marginexpansion.

 

·                  *Return on Investment.* Return on investment measures our ability to make the best decisionsregarding our allocation of capital. Returns are affected by the cost to build restaurants, the level of revenuesthat each restaurant can deliver and 

 

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our ability to maximizethe profitability of restaurants through operational execution and strict costmanagement.  Our objective is to deploycapital in a manner that will maximize our return on investment.

 

**Results of Operations**

 

Thefollowing table sets forth, for the periods indicated, our consolidatedstatements of operations expressed as percentages of revenues:

 
| ** **                             | ** ** | **Fiscal Year** | ** ** |
|----------------------------------------|------------|----------------------|------------|
| ** **                             | ** ** | **2009**             | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues                               |       | 100.0                | %          | 100.0 | % | 100.0 | % |
|                                   |       |                 |       |   |   |   |   |
| Costs and expenses:                    |       |                 |       |   |   |   |   |
| Cost of sales                          |       | 24.6                 |       | 26.0 |   | 25.2 |   |
| Labor expenses                         |       | 33.0                 |       | 33.2 |   | 32.5 |   |
| Other operating costs and expenses     |       | 25.1                 |       | 24.7 |   | 23.4 |   |
| General and administrative expenses    |       | 6.1                  |       | 5.2 |   | 5.6 |   |
| Depreciation and amortization expenses |       | 4.7                  |       | 4.6 |   | 4.2 |   |
| Impairment of assets                   |       | 1.7                  |       | 0.2 |   | 3⁄4 |   |
| Preopening costs                       |       | 0.2                  |       | 0.7 |   | 1.8 |   |
|                                   |       |                 |       |   |   |   |   |
| Total costs and expenses               |       | 95.4                 |       | 94.6 |   | 92.7 |   |
|                                   |       |                 |       |   |   |   |   |
| Income from operations                 |       | 4.6                  |       | 5.4 |   | 7.3 |   |
| Interest expense                       |       | (1.5                 | )          | (0.9 | ) | (0.7 | ) |
| Interest income                        |       | 0.0                  |       | 0.1 |   | 0.3 |   |
| Other income/(expense), net            |       | 0.1                  |       | 0.0 |   | 0.1 |   |
|                                   |       |                 |       |   |   |   |   |
| Income before income taxes             |       | 3.2                  |       | 4.6 |   | 7.0 |   |
| Income tax provision                   |       | 0.5                  |       | 1.3 |   | 2.1 |   |
|                                   |       |                 |       |   |   |   |   |
| Net income                             |       | 2.7                  | %          | 3.3 | % | 4.9 | % |

 

**Fiscal 2009 Compared to Fiscal 2008**

 

*Revenues*

 

Revenuesdecreased slightly to $1,602.0 million for fiscal 2009 compared to $1,606.4million for fiscal 2008.

 

Restaurantsales decreased slightly to $1,534.3 million for fiscal 2009 compared to$1,536.5 million for the prior fiscal year.  The resulting sales decreaseof $2.2 million consisted of a $36.5 million decrease in comparable restaurantsales and a $34.3 million increase from newer restaurants not yet in thecomparable sales base.  Comparable salesdecreased by 2.6% from fiscal 2008 to fiscal 2009.  At December 29, 2009, there were sixrestaurants not included in the comparable sales base.  New restaurants become eligible to enter ourcomparable sales calculations in their 19th month of operation.

 

Comparablesales at The Cheesecake Factory restaurants decreased 2.3% from fiscal2008.  We realized effective menu priceincreases of approximately 1.2% and 0.8% in the first and third quartersof 2009, respectively.  The decreasein comparable sales for fiscal 2009 was due to reduced traffic at ourrestaurants, which we believe was primarily driven by the macroeconomic factorsaffecting the restaurant industry in general. This decrease in guest traffic was partially offset by a slightly higheraverage check.

 

Comparablesales at our Grand Lux Cafe restaurants decreased 5.1% from fiscal year2008.  We realized effective menu priceincreases of approximately 0.3% and 0.6% in the second and fourth quartersof 2009, respectively.  The decreasein Grand Lux Cafe comparable sales is also attributable to a decline in guesttraffic, which we believe was primarily caused by the macroeconomic factorsimpacting the restaurant industry in general.

 

Wegenerally update and reprint the menus in our restaurants twice a year. As part of these menu updates, we evaluate the need for price increases basedon those operating cost and expense increases that we are aware of or canreasonably expect.  While menu priceincreases can facilitate increased comparable restaurant sales in addition tooffsetting margin pressure, we carefully consider all potential price increasesin light of the extent to which we believe they will be accepted by ourrestaurant guests.  

 

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Additionally,other factors outside of our control, such as general economic conditions,inclement weather, timing of holidays, and competitive and other factors,including those referenced in Part I, Item 1A of this report can impactcomparable sales.

 

Inclusiveof our summer 2009 and winter 2010 menu change we will have implemented atargeted effective menu price increase of approximately 1.4% for the first halfof fiscal 2010.  We plan to review our operating cost and expense trendsin the spring of 2010 and consider the need for additional menu pricing inconnection with our 2010 summer menu change.

 

Totalrestaurant operating weeks increased 3% to 8,313 in fiscal 2009 from the prioryear primarily from the opening of three new restaurants during the trailing15-month period.  Average sales per restaurant operating week decreasedapproximately 3% in fiscal 2009 to $184,600 compared to the prior fiscal year.  This decrease in average weekly sales was dueprincipally to the decline in guest traffic.

 

Bakerysales to other foodservice operators, retailers and distributors (“bakery sales”)decreased approximately 3% to $67.7 million in fiscal 2009 compared to $69.9million in the prior fiscal year.  Thisdecrease is due primarily to lower sales to our warehouse clubs and nationalaccounts.

 

Westrive to develop and maintain long-term, growing relationships with our bakerycustomers, based largely on our 37-year reputation for producing high qualityand creative baked desserts.  However, it is difficult to predict thetiming of bakery product shipments and contribution margins on a quarterlybasis, as the purchasing plans of our large-account customers mayfluctuate.  Due to the highly competitive nature of the bakery business,we are unable to enter into long-term contracts with our large-account bakerycustomers, who may discontinue purchasing our products without advance noticeat any time for any reason**.**

 

*Cost of Sales*

 

Costof sales consists of food, beverage, retail and bakery production supply costsincurred in conjunction with our restaurant and bakery revenues, and excludesdepreciation, which is captured separately in depreciation and amortizationexpenses.

 

As a percentage of revenues, cost of sales decreased to 24.6% in fiscal2009 compared to 26.0% in fiscal 2008. Approximately one-half of this decrease was attributable to savingsassociated with our cost of sales initiatives, including the development of newmenu items with lower food costs, negotiation of more favorable pricing forcommodities and improvements in our supply chain.  The majority of the remaining cost of salesfavorability stemmed primarily from commodity price spikes that occurred in2008 when prices were significantly higher for certain grocery, produce anddairy items as compared to the same periods in fiscal 2009.  Additionally, our bakery benefited from afavorable year-over-year contracted price for cream cheese.

 

Ourrestaurant menus are among the most diversified in the foodservice industryand, accordingly, are not overly dependent on a few select commodities. Changes in costs for one commodity are often, but not always, counterbalancedby cost changes in other commodity categories.  The principal commodity categoriesfor our restaurants include produce, poultry, meat, fish and seafood, cheese,other fresh dairy products, bread and general grocery items.

 

Currentlywe are able to contract for the majority of the food commodities used in ouroperations for periods of up to one year.  However, with the exception ofcream cheese used in our bakery operations, we are currently not able tocontract for some of our commodities, such as fish, dairy and certain produceproducts for periods longer than 30 days in most cases.  As a result,these commodities can be subject to unforeseen supply and cost fluctuations dueprincipally to weather, fuel costs and agricultural conditions.  Creamcheese is the most significant commodity used in our bakery products.  Wehave contracted for a majority of our fiscal 2010 cream cheese requirements andwill also purchase cream cheese on the spot market as necessary to supplementour contracted amounts.

 

Ashas been our past practice, we will carefully consider opportunities tointroduce new menu items and implement selected menu price increases to helpoffset expected cost increases for key commodities and other goods and servicesutilized by our operations.  While we have been successful in the past inreacting to inflation and other changes in the costs of key operating resourcesby gradually increasing prices for our menu items, coupled with more efficientpurchasing practices, varying menu mix, productivity improvements and greatereconomies of scale, there can be no assurance that we will be able to continueto do so in the future.

 

Whilewe have taken steps to qualify multiple suppliers and enter into agreements forsome of the key commodities used in our restaurant and bakery operations, therecan be no assurance that future supplies and costs for these commodities willnot fluctuate due to weather and other market conditions outside of our control. Fornew restaurants, cost of sales will typically be higher during the first 90 to120 days of operations until our management team at each new restaurant becomesmore accustomed to optimally predicting, managing and servicing the sales volumesat the new restaurant.

 

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*Labor Expenses*

 

As a percentage of revenues, laborexpenses decreased to 33.0% in fiscal 2009 compared to 33.2% in fiscal2008.  This decrease was primarily due todirect labor savings as a result of our operational initiatives, partiallyoffset by higher health insurance costs and de-leveraging from lower saleslevels in fiscal 2009 as compared to the prior year.  Stock-based compensation included in laborwas $5.9 million in fiscal 2009 compared to $4.7 million in fiscal 2008.  The expense in the prior year period is netof a $1.5 million reduction related to an adjustment to our estimated stockoption forfeiture rate.

 

*Other Operating Costs and Expenses*

 

Other operating costs and expensesconsist of restaurant-level occupancy expenses (rent, common area expenses,insurance, licenses, taxes and utilities), other operating expenses (excludingfood costs and labor expenses, which are reported separately) and bakery productionoverhead, selling and distribution expenses.  As a percentage of revenues,other operating costs and expenses increased to 25.1% for fiscal 2009 versus24.7% for fiscal 2008.  This increase wasprimarily due to higher self-insurance reserves, increased marketing expensesand de-leveraging of fixed costs due to lower sales levels in fiscal 2009.  These items were partially offset by benefitsfrom operational cost saving initiatives and lower utility costs during fiscal2009.

 

*General and Administrative Expenses*

 

General and administrative (“G&A”)expenses consist of the restaurant management recruiting and training program,as well as the restaurant field supervision, bakery administrative andcorporate support organizations.  As apercentage of revenues, G&A expenses increased to 6.1% for fiscal 2009versus 5.2% for fiscal 2008.  The majority of this variance was due to anincrease in the accrual for corporate performance bonuses in fiscal 2009 ascompared to the comparable prior year period, as well as a $2.9 million chargein fiscal 2009 resulting from a change in the amount and structure of theretirement benefit contained in the employment agreement with our ChiefExecutive Officer.

 

G&A expenses included $8.4million and $8.2 million of stock-based compensation expense in fiscal 2009 andfiscal 2008, respectively.  The expensein the prior year period is net of a $0.7 million reduction related to anadjustment to our stock option forfeiture rate.

 

*Depreciation and Amortization Expenses*

 

Asa percentage of revenues, depreciation and amortization expenses increased to4.7% for fiscal 2009 compared to 4.6% for fiscal 2008.  The increase is primarily attributable tode-leveraging from the lower average weekly sales at our restaurants.

 

*Impairment of Assets*

 

Weassess potential impairment of our long-lived assets whenever events or changesin circumstances indicate that the carrying value of the assets may not berecoverable.  Factors considered include,but are not limited to, significant underperformance relative to expectedhistorical or projected future operating results; significant changes in themanner of use of the acquired assets or the strategy for the overall business;and significant negative industry or economic trends.  We regularly review restaurants that fallbelow a defined threshold of projected cash flows to carrying value in order todetermine if impairment testing is warranted.

 

Basedon the results of this analysis, we recorded a $26.5 million impairment chargeagainst the carrying value of four Grand Lux Cafe restaurants in fiscal2009.  This charge will reducedepreciation and amortization expense for fiscal 2010 by $2.0 million.  During fiscal 2008, we recorded a $3.0million impairment charge against the carrying value of three The CheesecakeFactory locations.

 

*Preopening Costs*

 

Preopeningcosts decreased to $3.3 million for fiscal 2009 compared to $11.9 million forthe prior fiscal year.  We incurred preopening costs to open one TheCheesecake Factory restaurant in fiscal 2009 compared to opening six TheCheesecake Factory restaurants and our first RockSugar Pan Asian Kitchenlocation during fiscal 2008.  In addition, preopening costs were incurredin both years for restaurant openings in progress; maintaining a roster of trainedmanagers for pending openings; and the associated temporary housing and othercosts necessary to relocate managers in alignment with future restaurantopening and operating needs.

 

Preopeningcosts include all costs to relocate and compensate restaurant managementemployees during the preopening period; costs to recruit and train hourlyrestaurant employees; wages, travel and lodging costs for our opening trainingteam and other support employees; and straight-line minimum base rent duringthe build-out and in-restaurant training periods.  Also included in 

 

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preopeningcosts are expenses for maintaining a roster of trained managers for pendingopenings; the associated temporary housing and other costs necessary torelocate managers in alignment with future restaurant opening and operatingneeds; and corporate travel and support activities.  Preopening costs can fluctuate significantlyfrom period to period, based on the number and timing of restaurant openingsand the specific preopening costs incurred for each restaurant.

 

*Interest Expense, Interest Income and Other Income*

 

Interest expense increased to $23.4million for fiscal 2009 compared to $14.8 million for fiscal 2008 due primarilyto costs totaling $7.4 million to unwind two of our interest rate collars inconjunction with reducing our revolving credit facility balance.  In addition, we paid a higher interest rateon the outstanding balance of our debt during fiscal 2009 relative to the prioryear as a result of an amendment to our revolving credit facility in January 2009.  (See Note 7 of Notes to ConsolidatedFinancial Statements in Part IV, Item 15 of this report for furtherdiscussion of our long-term debt.)  Theseincreases to interest expense were partially offset by a lower averageoutstanding debt balance during fiscal 2009 as compared to the prior year.  Interest expense also included $3.7 millionand $3.5 million in fiscal 2009 and fiscal 2008, respectively, associated withlandlord construction allowances deemed to be financing in accordance withaccounting guidance.

 

Interest income decreased to $0.4million for fiscal 2009 compared to $1.8 million for the prior year dueprimarily to lower interest rates earned on invested balances during fiscal2009.

 

We recorded net other income of$0.7 million for fiscal 2009 compared to net other expense of $1.0 million forfiscal 2008.  This variance primarily relatesto changes in the value of our investments in variable life insurance contractsused to support our Executive Savings Plan (“ESP”), a non-qualified deferredcompensation plan, as well as the realization in fiscal 2009 of $0.7 million inproceeds from one of these contracts.

 

*Income Tax Provision*

 

Oureffective income tax rate was 16.5% for fiscal 2009 compared to 28.6% forfiscal 2008.  This decline was primarily attributable to non-taxable gainsin fiscal 2009 compared to non-deductible losses in fiscal 2008 on ourinvestments in variable life insurance contracts used to support our ESP,greater leverage from tax credits and incentives on lower book income in fiscal2009 and a reserve recorded in fiscal 2008 for the potential disallowance ofcertain executive compensation under the provisions of Internal Revenue Code Section 162(m).  The favorable rate impact of these items waspartially offset by a rate benefit in fiscal 2008 for the Internal RevenueService’s approval of our change in method of accounting for constructionallowances.

 

**Fiscal 2008 Compared to Fiscal 2007**

 

*Revenues*

 

Revenuesincreased approximately 6% to $1,606.4 million for fiscal 2008 compared to$1,511.6 million for fiscal 2007.

 

Restaurantsales increased approximately 6% to $1,536.5 million for fiscal 2008 comparedto $1,448.3 million for the prior fiscal year.  The resulting salesincrease of $88.2 million consisted of $58.1 million, or a 4.6% decrease incomparable restaurant sales and a $146.3 million increase from locations thatwere not in the comparable sales base. At December 30, 2008, there were 27 restaurants not included in thecomparable sales base.

 

Comparablesales at The Cheesecake Factory restaurants decreased approximately 4.5% fromfiscal 2007.  We implemented an approximate1.5% effective menu price increase during our winter menu update in the firstquarter of 2008, and an additional approximate 1.0% effective menu priceincrease during our summer menu update in the third quarter of 2008.  The decrease in comparable sales for fiscal2008 was due to reduced traffic at our restaurants, which we believe wasprimarily driven by the macroeconomic factors affecting the restaurant industryin general.

 

Comparablesales at our Grand Lux Cafe restaurants decreased approximately 5.0% fromfiscal year 2007.  We implemented aneffective menu price increase of approximate 1.5% in April 2008.  We believe this decrease in comparable salesis also attributable to a decline in guest traffic, which we believe wasprimarily driven by the macroeconomic factors affecting the restaurant industryin general.

 

Totalrestaurant operating weeks increased 13% to 8,089 compared to 7,166 in fiscal2007.  Average sales per restaurant operating week decreased 6% in fiscal2008 to $190,100 compared to the prior fiscal year. This decrease in averageweekly sales is due principally to the decline in guest traffic.

 

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Bakerysales increased 10% to $69.9 million in fiscal 2008 compared to $63.3 millionin the prior fiscal year.  This increaseis primarily due to higher sales to the warehouse clubs.

 

*Cost of Sales*

 

Asa percentage of revenues, cost of sales increased to 26.0% during fiscal 2008compared to 25.2% for the prior fiscal year. This increase was primarily attributable to unfavorable year-over-yearpricing for cheese and general grocery items.

 

*Labor Expenses*

 

Asa percentage of revenues, labor expenses increased to 33.2% in fiscal 2008compared to 32.5% in fiscal 2007.  Whilewe manage our labor judiciously to adapt to revenue fluctuations, we expect toexperience de-leveraging of labor costs at lower sales levels as we arecommitted to delivering the level of service our guests have come to expect,while still achieving reasonable labor costs. In addition, during fiscal 2008, we experienced minimum wage increasesin several states in which we operate and increased health insurance costs.These increases were partially offset by a decrease in stock-based compensationto $4.7 million, or 0.3% of revenues, in fiscal 2008 from $6.9 million, or 0.5%of revenues, in fiscal 2007.

 

*Other Operating Costs and Expenses*

 

Asa percentage of revenues, other operating costs and expenses increased to 24.7%for fiscal 2008 versus 23.4% for fiscal 2007. This increase was primarily due to de-leveraging of fixed costs due tolower average weekly sales at our restaurants as well as higher utility rates.

 

*General and Administrative Expenses*

 

Asa percentage of revenues, G&A expenses decreased to 5.2% for fiscal 2008versus 5.6% for fiscal 2007.  Tighter management of our supportinfrastructure and lower stock-based compensation expense were partially offsetby our investment in marketing efforts and higher gift card related costs.  In fiscal 2008, G&A expenses includedstock-based compensation expense of $8.2 million, or 0.5% of revenues, comparedto $10.9 million, or 0.7% of revenues, in fiscal 2007.

 

*Depreciation and Amortization Expenses*

 

Asa percentage of revenues, depreciation and amortization expenses increased to4.6% for fiscal 2008 compared to 4.2% for fiscal 2007.  The increase is primarily due tode-leveraging from lower average weekly sales at our restaurants.

 

*Impairment of Assets*

 

Duringfiscal 2008, we recorded a $3.0 million impairment charge against the carryingvalue of three The Cheesecake Factory locations.  We did not incur impairment charges duringfiscal 2007.

 

*Preopening Costs*

 

Preopeningcosts decreased to $11.9 million for fiscal 2008 compared to $26.5 million forthe prior fiscal year.  We incurred preopening costs for six CheesecakeFactory restaurants and our first RockSugar Pan Asian Kitchen restaurant duringfiscal 2008 compared to 16 Cheesecake Factory and five Grand Lux Cafe openingsin fiscal 2007.  In addition, preopening costs were incurred in both yearsfor restaurant openings in progress.

 

*Interest Expense, Interest Income and Other Income*

 

Interestexpense increased to $14.8 million for fiscal 2008 compared to $10.9 millionfor fiscal 2007 due primarily to higher borrowings on our revolving creditfacility.  Interest expense also included$3.5 million and $3.2 million in fiscal 2008 and fiscal 2007, respectively,associated with landlord construction allowances deemed to be financing inaccordance with accounting guidance.

 

Interestincome decreased to $1.8 million for fiscal 2008 compared to $4.7 million forfiscal 2007 due primarily to lower investment balances driven by significantshare repurchases in both years, partially offset by reduced capital spendingfor restaurant openings.

 

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Werecorded net other expense of $1.0 million for fiscal 2008 compared to netother income of $1.0 million for the prior year.  This $2.0 millionvariance primarily relates to declines in value of our investments in variablelife insurance contracts used to support our obligations under our ESP, anon-qualified deferred compensation plan.

 

*Income Tax Provision*

 

Oureffective income tax rate was 28.6% for fiscal 2008 compared to 30.0% forfiscal 2007.  The decrease from the prior year was primarily attributableto higher tax credits and other employment incentives and a reduction in ourreserve for uncertain tax positions related to the approval by the InternalRevenue Service of our change in method of accounting for constructionallowances.  The favorable rate impact ofthese items was partially offset by our reserve for the potential disallowanceof certain executive compensation under the provisions of Internal Revenue CodeSection 162(m) and by non-deductible losses in our investments invariable life insurance contracts used to support our ESP.

 

**Fiscal 2010 Outlook**

 

Thisdiscussion contains forward-looking statements and should be read inconjunction with our consolidated financial statements and related notes in Part IV,Item 15 of this report, the “Risk Factors’ included in Part I, Item 1A ofthis report, and the cautionary statements included throughout this report. Theinclusion of supplementary analytical and related information herein mayrequire us to make estimates and assumptions in connection with our analysis oftrends and expectations with respect to our results of operations and financialposition taken as a whole.

 

Infiscal 2010, we plan to open as many as three new locations, consisting solelyof The Cheesecake Factory restaurant concept. We estimate diluted earnings per share for fiscal 2010 will be between$1.16 and $1.24 based on an assumption that comparable restaurant sales will bein a range of between (1%) and 0%.  Weexpect cash capital expenditures in fiscal 2010 to range between $50 millionand $55 million, of which approximately $20 million to $23 million will be usedto fund new restaurant openings.  Weexpect to generate free cash flow, defined as cash flow provided by operatingactivities less capital expenditures, of approximately $100 million to $110million and plan to utilize our free cash flow as well as a portion of ourexisting cash on hand to either reduce the outstanding balance on our creditfacility, repurchase some of our outstanding shares, or a combination of both.

 

**Liquidity and Capital Resources**

 

Oneof our corporate financial objectives is to maintain a sufficiently strong andconservative balance sheet to support our operating initiatives and unit growthwith financial flexibility; to provide the financial resources necessary toprotect and enhance the competitiveness of our restaurant and bakery brands;and to provide a prudent level of financial capacity to manage the risks anduncertainties of conducting our business operations in the current economicenvironment and through future economic and industry cycles.  Our ongoingcapital requirements are principally related to our restaurant expansion planand ongoing maintenance of our restaurants and bakery facilities, as well asinvestment in our corporate and information technology infrastructures.

 

Similarto many restaurant and retail chain store operations, we utilize operatinglease arrangements for all of our restaurant locations.  We believe thatour operating lease arrangements continue to provide appropriate leverage for ourcapital structure in a financially efficient manner.  However, we are notlimited to the use of lease arrangements as our only method of opening newrestaurants.  While most of our operating lease obligations are notrequired to be reflected as indebtedness on our consolidated balance sheet, theminimum base rents and related fixed obligations under our lease agreementsmust be satisfied by cash flows from our ongoing operations.  Accordingly,our lease arrangements reduce, to some extent, our capacity to utilize fundedindebtedness in our capital structure.

 

Historically,we have obtained capital from our ongoing operations, public stock offerings,debt financing, employee stock option exercises and construction contributionsfrom our landlords.  Our requirement for working capital is notsignificant, since our restaurant guests pay for their food and beveragepurchases in cash or cash equivalents at the time of sale, and we are able tosell many of our food inventory items before payment is due to the suppliers ofsuch items**.**

 

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Thefollowing table presents, for the periods indicated, a summary of our keyliquidity measurements (dollar amounts in millions):

 
| ** **                                                                             | ** ** | **December 29,  2009** | ** ** | **December  30,  2008** | ** ** | **January 1,  2008** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|---------------------------|------------|
| ** **                                                                             | ** ** | ** **                  | ** ** | ** **                   | ** ** | ** **                | ** ** |
| Cash and marketable securities on hand                                                 |       | $                           | 73.7       |                         | $          | 81.4                      |       | $ | 49.2 |   |
| Net working capital                                                                    |       | $                           | (28.2      | )                            | $          | 4.4                       |       | $ | (35.9 | ) |
| Current ratio                                                                          |       | 0.9:1                       |       | 1.0:1                        |       | 0.8:1                     |       |
| Long-term debt and deemed landlord financing  liability, including current portion (1) |       | $                           | 153.3      |                         | $          | 331.3                     |       | $ | 226.5 |   |

 
| ** **                               | ** ** | **Fiscal Year** | ** ** |
|------------------------------------------|------------|----------------------|------------|
| ** **                               | ** ** | **2009**             | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                     |       |                 |       |   |   |   |   |
| Cash provided by operating activities    |       | $                    | 197.1      |   | $ | 169.2 |   | $ | 160.1 |   |
| Capital expenditures                     |       | $                    | 37.2       |   | $ | 84.9 |   | $ | 211.0 |   |
| (Repayment)/borrowing on credit facility |       | $                    | (175.0     | ) | $ | 100.0 |   | $ | 175.0 |   |
| Purchase of treasury stock               |       | $                    | 3⁄4     |   | $ | (172.5 | ) | $ | (249.0 | ) |

 

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(1)            Landlord constructionallowances related to restaurant locations for which we are deemed, foraccounting purposes only, to have an ownership interest are reflected in ourbalance sheets as deemed landlord financing.  This liability is amortizedover the lease term based on the rent payments designated in the leaseagreement.

 

Duringfiscal 2009, our cash and marketable securities on hand decreased by $7.7million to $73.7 million at December 29, 2009.  This decrease wasprimarily attributable to repayments on our credit facility and purchases ofproperty and equipment, partially offset by cash provided by operatingactivities.  At December 29, 2009,we had $25.2 million of cash invested in a tax-exempt money market fund.  The fund purchases only first-tiersecurities, and we have not experienced any losses in these accounts.  Therefore, we believe we are not exposed tosignificant risk on these investments. See Note 1 of Notes to Consolidated Financial Statements in Part IV,Item 15 of this report for further discussion of cash and cash equivalents.

 

Ourrestaurant development model more closely resembles that of a retail businessthat occupies leased space in shopping malls, lifestyle centers, officecomplexes, strip centers, entertainment centers and other real estatedevelopments.  We typically seek to lease our restaurant locations for primaryperiods of 15 to 20 years under operating lease arrangements.  Our rentstructures vary by lease, but generally provide for the payment of both minimumand contingent (percentage) rent based on net sales, as well as other expensesrelated to the leases (for example, our pro rata share of common areamaintenance, property tax and insurance expenses). We disburse cash forleasehold improvements and FF&E to build out our leased premises.  Wemay also disburse cash for structural additions that we make to leased premisesthat generally are reimbursed to us by our landlords as constructioncontributions pursuant to agreed-upon terms in the respective leases.  Ifobtained, landlord construction contributions usually take the form of up-frontcash, full or partial credits against minimum or percentage rents otherwisepayable by us, or a combination thereof.  We do not have any current plansto encumber our existing leasehold interests with lessee securedfinancing.  We own substantially all of the FF&E in our restaurantsand currently plan to do so in the future.

 

Capitalexpenditures were relatively lower in fiscal 2009 compared to fiscal 2008 and2007 due to the number of restaurants opened in each year (one, seven and 21,respectively.)  Capital expenditures fornew restaurants, including locations under development as of each fiscal yearend were $8 million, $56 million and $163 million for fiscal 2009, 2008 and2007, respectively.  In fiscal 2009, no capital expenditures were fundedthrough deemed landlord financing. Of the remaining fiscal 2009 capitalexpenditures, $25 million represented maintenance and capacity addition outlaysfor our existing restaurants, and approximately $4 million was for bakery andcorporate infrastructure investments.

 

Forfiscal 2010, we currently estimate our cash outlays for capital expenditures torange between $50 million and $55 million, net of agreed-upon up-front cashlandlord construction contributions and excluding $5 million of expectednoncapitalizable preopening costs for new restaurants.  The amountreflected as additions to property and equipment in the consolidated statementsof cash flows may vary from this estimate based on the accounting treatment ofeach operating lease (See Note 1 of Notes to Consolidated Financial Statementsin Part IV, Item 15 of this report).  Our estimate for capitalexpenditures for fiscal 2010 contemplates a net outlay of $20 million to $23million for as many as three The Cheesecake Factory restaurants to be openedduring fiscal 2010 and estimated construction-in-progress disbursements foranticipated fiscal 2011 openings.  Theseamounts are net of estimated collections of up-front cash landlord constructioncontributions.  Expected capitalexpenditures for fiscal 2010 also include 

 

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approximately$21 million to $22 million for maintenance and capacity addition expendituresto our existing restaurants and $9 million to $10 million for bakery andcorporate infrastructure investments.

 

AtDecember 29, 2009, we had $100 million of borrowings outstanding under our$300 million revolving credit facility (“Facility”), having repaid $175 millionduring fiscal 2009.  Availability underthe Facility is reduced by outstanding standby letters of credit, which areused to support our self-insurance programs. As of December 29, 2009, we had net availability for borrowings of$184 million, based on outstanding debt of $100 million and $16 million instandby letters of credit.  See Note 7 ofNotes to Consolidated Financial Statements in Part IV, Item 15 of thisreport for further discussion of our long-term debt.

 

During fiscal 2008 and2007, we entered into zero-cost interest rate collars that hedged interest ratevariability on $250 million of outstanding borrowings on our Facility.  During fiscal 2009, we unwound $150 millionof these derivatives at a cost of $7.4 million. See Note 8 of Notes to Consolidated Financial Statements in Part IV,Item 15 of this report for further discussion of our derivative financialinstruments.

 

Our Board of Directors increased the authorizationto repurchase shares of our common shares by 10 million shares during fiscal2008 and by 15 million shares in fiscal 2007, for a total authorization of 31million shares.  No increases wereauthorized during fiscal 2009.  Underthis authorization, we cumulatively repurchased a total of 23.1 million sharesfor a total cost of $506.2 million through December 29, 2009.  The authorization does not have an expirationdate, does not require us to purchase a specific number of shares and may bemodified, suspended or terminated at any time.

 

In August 2008, we entered into a prearrangedstock repurchase plan intended to qualify for the safe harbor under Rule 10b5-1under the Securities Exchange Act of 1934, as amended (“10b5-1 Plan”).  In October 2008, we suspended our sharerepurchase program in order to maintain maximum flexibility in our capitaldecisions in light of the unprecedented crisis in the global financial marketsand the indeterminate future impact it could have on the overall economy and onour business.  Concurrently with theeffective date of such suspension, we terminated our 10b5-1 Plan.  On February 25, 2010, our Board of Directorsreinstated our stock repurchase program and approved the adoption of a new10b5-1 Plan, which will become effective on March 27, 2010.  In addition, we may also make purchases inthe open market in compliance with Rule 10b-18 under the Securities ExchangeAct of 1934.

 

The timing and number of shares repurchased pursuantto the share repurchase authorization are subject to a number of factors,including current market conditions, legal constraints, financial covenantsunder our credit facility, and available cash or other sources of funding.  Shares may be repurchased in the open marketor through privately negotiated transactions at times and prices consideredappropriate by us.  We make thedetermination to repurchase shares based on several factors, including anevaluation of current and future capital needs associated with new restaurantdevelopment, current and forecasted cash flows, a review of our capitalstructure and cost of capital, and our share price.

 

Basedon our current expansion objectives, we believe that our cash and cashequivalents, combined with expected cash flows provided by operations,available borrowings under our credit facility and expected landlordconstruction contributions should be sufficient in the aggregate to finance ourplanned capital expenditures and other operating activities in fiscal 2010.

 

Asof December 29, 2009, we had no financing transactions, arrangements orother relationships with any unconsolidated entities or related parties. Additionally, we had no financing arrangements involving synthetic leases ortrading activities involving commodity contracts.

 

**Contractual Obligations and Commercial Commitments**

 

Thefollowing schedules summarize our contractual obligations and commercialcommitments as of December 29, 2009 (amounts in millions):

 
| ** **                       | ** ** | **Payment Due by Period** | ** ** |
|----------------------------------|------------|------------------------------------------|------------|
| ** **                       | ** ** | **Total**                                | ** ** | **Less than 1  Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **More than 5  Years** | ** ** |
| **Contractual obligations**      | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Leases (1)                       |       | $                                        | 968.6      |   | $ | 59.3 |   | $ | 123.8 |   | $ | 127.5 |   | $ | 658.0 |   |
| Long-term debt                   |       | 100.0                                    |       | — |   | 100.0 |   | — |   | — |   |
| Purchase obligations (2)         |       | 104.9                                    |       | 91.9 |   | 13.0 |   | — |   | — |   |
| Uncertain tax positions          |       | 7.3                                      |       | 5.5 |   | 1.8 |   | — |   | — |   |
| Total                            |       | $                                        | 1,180.8    |   | $ | 156.7 |   | $ | 238.6 |   | $ | 127.5 |   | $ | 658.0 |   |
|                             |       |                                     |       |   |   |   |   |   |   |   |   |
| **Other commercial commitments** | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Standby letters of credit        |       | $                                        | 15.5       |   | $ | — |   | $ | 15.5 |   | $ | — |   | $ | — |   |

 

----

(1)          Representsaggregate minimum lease payments for our restaurant operations, automobiles andcertain equipment, including amounts characterized as deemed landlord financingpayments in accordance with accounting guidance.  See Note 1 in Notes to Consolidated FinancialStatements.  Most of our leases also require contingent rent in additionto the minimum base rent based on a percentage of sales ranging from 3% to 10%and require expenses incidental to the use of the property.

 

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(2)            Purchasingobligations represent commitments for the purchase of goods and estimatedconstruction commitments, net of agreed-upon up-front landlord constructioncontributions.  Amounts excludeagreements that are cancelable without significant penalty.

(3)            Represents liability for uncertain taxpositions.  See Note 14 of Notes to ConsolidatedFinancial Statements in Part IV, Item 15 of this report for furtherdiscussion of income taxes.

 

Weexpect to fund our contractual obligations primarily with operating cash flowsgenerated in the normal course of business.

 

**Critical Accounting Policies**

 

Criticalaccounting policies are those we believe are most important to portraying ourfinancial condition and results of operations and also require the greatestamount of subjective or complex judgments by management.  Judgments anduncertainties regarding the application of these policies may result inmaterially different amounts being reported under various conditions or usingdifferent assumptions.  We consider the following policies to be the mostcritical in understanding the judgment that is involved in preparing ourconsolidated financial statements.

 

*Property and Equipment*

 

Werecord all property and equipment at cost less accumulated depreciation. Improvements are capitalized while repairs and maintenance costs are expensedas incurred.  Depreciation and amortization are calculated using thestraight-line method over the estimated useful life of each asset or theinitial term of the respective lease plus any exercised renewal periods,whichever is shorter.  The useful life of property and equipment and thedetermination as to what constitutes a capitalized cost versus a repair andmaintenance expense involves judgment by management, which may producematerially different amounts of depreciation expense than if differentassumptions were used.

 

*Impairment of Long-Lived Assets*

 

Weassess potential impairment of our long-lived assets whenever events or changesin circumstances indicate that the carrying value of the assets or asset groupmay not be recoverable.  Factorsconsidered include, but are not limited to, significant underperformancerelative to expected historical or projected future operating results;significant changes in the manner of use of the acquired assets or the strategyfor the overall business; and significant negative industry or economictrends.  We regularly review restaurantsthat fall below a defined threshold of projected cash flows to carrying valuein order to determine if impairment testing is warranted.

 

Wehave determined that our asset group for impairment testing is comprised of theassets and liabilities of each of our individual restaurants, as this is thelowest level of identifiable cash flows. We have identified leasehold improvements as the primary asset becauseit is the most significant component of our restaurant assets, is the principalasset from which our restaurants derive their cash flow generating capacity andhas the longest remaining useful life. The recoverability is assessed in most cases by comparing the carryingvalue of the assets to the undiscounted cash flows expected to be generated bythese assets.

 

Impairmentlosses are measured as the amount by which the carrying values of the assetsexceed their fair values.  Thisassessment process requires the use of estimates and assumptions regardingfuture cash flows and estimated useful lives, which are subject to asignificant degree of judgment based on our experience and knowledge.  These estimates can be significantly impactedby changes in the economic environment, real estate market conditions andcapital spending decisions.

 

Duringfiscal 2009, we recorded a $26.5 million impairment charge against the carryingvalue of four Grand Lux Cafe locations. During fiscal 2008, we recorded a $3.0 million impairment charge againstthe carrying value of three The Cheesecake Factory locations.  We did not incur impairment charges duringfiscal 2007.  If the current economicsituation deepens in magnitude and/or we are unable to implement initiatives toappropriately scale our infrastructure in a timely manner, we may be requiredto record additional impairment charges in future periods.

 

*Leases*

 

Wecurrently lease all of our restaurant locations.  We evaluate each leaseto determine its appropriate classification as an operating or capital leasefor financial reporting purposes.  All of our restaurant leases areclassified as operating leases.

 

Minimumbase rent for our operating leases, which generally have escalating rentalsover the term of the lease, is recorded on a straight-line basis over the initiallease term the initial term of the respective lease plus any exercised renewalperiods.  The initial rent term includes the build-out, or rent holidayperiod, for our leases, where no rent payments are typically due under theterms of the 

 

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lease. Contingent rent expense, which is based on a percentage of revenue, is alsorecorded to the extent it exceeds minimum base rent per the lease agreement.

 

Wedisburse cash for leasehold improvements and FF&E to build out and equipour leased premises.  We may also expend cash for structural additionsthat we make to leased premises that generally are reimbursed to us by ourlandlords as construction contributions pursuant to agreed-upon terms in ourleases.  Landlord construction contributions usually take the form ofup-front cash, full or partial credits against minimum or percentage rentsotherwise payable by us, or a combination thereof. Depending on the specificsof the leased space and the lease agreement, amounts paid for structuralcomponents are recorded during the construction period as either prepaid rentor construction-in-progress and the landlord construction contributions arerecorded as either an offset to prepaid rent or as a deemed landlord financingliability.

 

Uponcompletion of construction, we perform an analysis on the leases for which thestructural cost was initially recorded to construction-in-progress to determineif they qualify for sale-leaseback treatment.  For those qualifyingleases, the deemed landlord financing liability and the associatedconstruction-in-progress are removed and the difference is reclassified toeither prepaid or deferred rent and amortized over the lease term as anincrease or decrease to rent expense.  If the lease does not qualify forsale-leaseback treatment, the deemed landlord financing liability is amortizedover the lease term based on the rent payments designated in the leaseagreement.

 

*Self-Insurance Liability*

 

Weretain the financial responsibility for a significant portion of our risks andassociated liabilities with respect to workers’ compensation, generalliability, employment practices, employee health benefits and other insurablerisks.  The accrued liabilities associated with these programs are basedon our estimate of the ultimate costs to settle known claims as well as claimsincurred but not yet reported to us (“IBNR”) as of the balance sheet date. Our estimatedliabilities are not discounted and are based on information provided by ourinsurance brokers and insurers, combined with our judgment regarding a numberof assumptions and factors, including the frequency and severity of claims,claims development history, case jurisdiction, applicable legislation and ourclaims settlement practices.  We maintain stop-loss coverage with thirdparty insurers to limit our individual claim exposure for many of our programsand for aggregate exposure on our employee health benefits program.  Theestimated amounts receivable from our third-party insurers under this coverageare recorded in other receivables.  Significant judgment is required toestimate IBNR amounts as parties have yet to assert such claims.  Ifactual claims trends, including the severity or frequency of claims, differfrom our estimates, our financial results could be impacted.

 

*Stock-Based Compensation*

 

Weapply the Black-Scholes valuation model in determining the fair value of stockoption grants, which requires the use of subjective assumptions, including thevolatility of our common stock price and the length of time employees willretain their vested stock options prior to exercise.  Additionally, we estimate the expectedforfeiture rate related to both stock options and restricted stock indetermining the amount of stock-based compensation expense for eachperiod.  Changes in these assumptions canmaterially affect our results of operations.  See Note 12 of Notes to Consolidated Financial Statements in Part IV,Item 15 of this report for further discussion of stock-based compensation.

 

*Income Taxes*

 

Weprovide for income taxes based on our estimate of federal and state taxliabilities.  Our estimates include, but are not limited to, effectivestate and local income tax rates, allowable tax credits for items such as FICAtaxes paid on reported tip income, and estimates related to depreciationexpense allowable for tax purposes.  Our estimates are made based on thebest available information at the time we prepare our income taxprovision.  In making our estimates, we also consider the impact oflegislative and judicial developments.  As these developments evolve, weupdate our estimates, which, in turn, may result in adjustments to our effectivetax rate.  We generally file our income tax returns within nine to tenmonths after our fiscal year-end.  All tax returns are subject to audit byfederal and state governments, usually years after the returns are filed, andcould be subject to differing interpretations of the tax laws.

 

We account for uncertain tax positions under Financial AccountingStandards Board guidance, which prescribes a minimum probability threshold thata tax position must meet before a financial statement benefit isrecognized.  The minimum threshold isdefined as a tax position that is more likely than not to be sustained uponexamination by the applicable taxing authority, including resolution of anyrelated appeals or litigation processes, based on the technical merits of theposition.  The tax benefit to berecognized is measured as the largest amount of benefit that is greater than50% likely of being realized upon ultimate settlement.  Assessment of uncertain tax positionsrequires significant judgments relating to the amounts, timing and likelihoodof ultimate resolution.  Our actualresults could differ materially from these estimates.

 

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**RecentAccounting Pronouncements**

 

See Note 1 of Notes to Consolidated Financial Statements in Part IV,Item 15 of this report for a summary of new accounting standards.

 

**Impact of Inflation and Changes in the Costs of Key OperatingResources**

 

Ourprofitability is dependent, among other things, on our ability to anticipateand react to changes in the costs of key operating resources, including foodand other raw materials, labor, energy and other supplies and services. Substantial increases in costs and expenses could impact our operating resultsto the extent that such increases cannot be passed along to our restaurant andbakery customers.  While we have taken steps to qualify multiple suppliersand enter into agreements for some of the commodities used in our restaurantand bakery operations, there can be no assurance that future supplies and costsfor such commodities will not fluctuate due to weather and other marketconditions outside of our control.  We are currently unable to contractfor some of our commodities such as fish and dairy items (except for creamcheese used in our bakery operations) for periods longer than 30 days. Consequently, such commodities can be subject to unforeseen supply and costfluctuations.  Dairy costs can also fluctuate due to governmentregulation.  The impact of inflation on food, labor, energy and occupancycosts can significantly affect the profitability of our restaurant and bakeryoperations.

 

Manyof our restaurant and bakery staff members are paid hourly rates related to thefederal minimum wage.  In fiscal 2007, Congress enacted an increase in thefederal minimum wage implemented in two phases, beginning in fiscal 2007 and concludingin fiscal 2008.  In addition, numerousstate and local governments increased the minimum wage within theirjurisdictions, with further state minimum wage increases going into effect infiscal 2009. Certain operating costs, such as taxes, insurance and otheroutside services continue to increase with the general level of inflation orhigher and may also be subject to other cost and supply fluctuations outside ofour control.

 

Whilewe have been able to partially offset inflation and other changes in the costsof key operating resources by gradually increasing prices for our menu itemsand bakery products, coupled with more efficient purchasing practices,productivity improvements and greater economies of scale, there can be noassurance that we will be able to continue to do so in the future.  Fromtime to time, competitive conditions could limit our menu pricingflexibility.  In addition, macroeconomic conditions could make additionalmenu price increases imprudent.  Therecan be no assurance that all future cost increases can be offset by increasedmenu prices or that increased menu prices will be fully absorbed by ourrestaurant guests without any resulting changes in their visit frequencies orpurchasing patterns.  Substantially all of the leases for our restaurantsprovide for contingent rent obligations based on a percentage of sales. As a result, rent expense will absorb a proportionate share of any menu priceincreases in our restaurants.  There can be no assurance that we will continueto generate increases in comparable restaurant and bakery sales in amountssufficient to offset inflationary or other cost pressures.

 

**Seasonality and Quarterly Results**

 

Ourbusiness is subject to seasonal fluctuations. Historically, our highest levelsof revenues and net income for our established restaurants have occurred in thesecond and third quarters of the fiscal year.  Approximately two-thirds ofour restaurants are located in or near shopping centers and malls thattypically experience seasonal fluctuations in sales.  Patio seatingrepresents approximately 20% of the total available productive seating for allrestaurants open as of December 29, 2009 and can be subject to disruptionfrom inclement weather.  Holidays, severe weather, hurricanes, thunderstormsand similar conditions may impact restaurant sales volumes seasonally in someof the markets where we operate.  Our bakery operations are seasonal tothe extent that the fourth quarter’s sales are typically higher due to holidaybusiness.  Additionally, bakery sales comparisons may fluctuatesignificantly from quarter to quarter due to the timing and size of orders fromour larger bakery customers.  Quarterly results have been and willcontinue to be significantly impacted by the timing of new restaurant openingsand their associated preopening costs.  As a result of these and otherfactors, our financial results for any given quarter may not be indicative ofthe results that may be achieved for a full fiscal year.

 

**ITEM 7A.****      ****QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Thefollowing discussion of market risks contains forward-looking statements. Actual results may differ materially from the following discussion based ongeneral conditions in the financial and commodity markets.

 

Weare exposed to market risk from interest rate changes on funded debt.  This exposure relates to the component of theinterest rate on our $300 million revolving credit facility (“Facility”)that is indexed to three-month LIBOR.  Asof December 29, 2009, we had $100 million in debt outstanding under theFacility.  Since all of this debt washedged, a hypothetical 1% interest rate increase would have no impact on incomefrom operations.  At December 30,2008, we had $275 million in debt outstanding under the 

 

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Facility.  Since the majority of this amount was hedged,a hypothetical 1% interest rate increase would have only decreased income fromoperations by $0.9 million.  See Notes 7and 8 of Notes to Consolidated Financial Statements in Part IV, Item 15 ofthis report for further discussion of our long-term debt and derivativefinancial instruments, respectively.

 

Weare also subject to market risk related to our investments in variable lifeinsurance contracts used to support our ESP, to the extent these investmentsare not equivalent to the related liability. In addition, because changes in these investments are not taxable, thefull impact of gains or losses affects net income.  A hypothetical 10% decline in the marketvalue of our deferred compensation assets and related liabilities held at December 29,2009 would not impact income from operations. However, net income would decline by $0.7 million.  Based on balances at December 30, 2008,a hypothetical 10% decline in the market value of our deferred compensationassets and related liabilities would have decreased income from operations by$0.4 million and net income by $0.9 million.

 

Wepurchase food and other commodities for use in our operations, based on marketprices established with our suppliers.  Many of the commodities purchasedby us can be subject to volatility due to market supply and demand factorsoutside of our control.  To manage this risk in part, we periodicallyenter into fixed price purchase commitments, with terms typically up to oneyear, for many of our commodity requirements.  However, we are currentlyunable to contract for some of our commodities such as fish, produce and dairyitems (except for cream cheese used in our bakery operations) for periodslonger than 30 days.  Dairy costs can also fluctuate due to governmentregulation.  Substantially all of our food and supplies are available fromseveral sources, which helps to diversify our overall commodity costrisk.  In addition, we may have the ability to increase menu prices, orvary menu items, in response to food commodity price increases.  Some ofour commodity purchase arrangements may contain contractual features that limitthe price paid by establishing certain price floors or caps.  We do notuse financial instruments to hedge commodity prices, since our purchasearrangements with suppliers, to the extent that we can enter into such arrangements,help control the ultimate cost that we pay.

 
| **ITEM 8.** | **FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA** |
|-------------|-------------------------------------------------|

 

Theconsolidated financial statements required to be filed hereunder are set forthin Part IV, Item 15 of this report.

 
| **ITEM 9.** | **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND FINANCIAL DISCLOSURE** |
|-------------|-------------------------------------------------------------------------------------------|

 

None.

 
| **ITEM 9A.** | **CONTROLS AND PROCEDURES** |
|--------------|-----------------------------|

 

**Evaluation of Disclosure Controls and Procedures**

 

Wehave established and maintain disclosure controls and procedures that aredesigned to ensure that material information relating to the Company and oursubsidiaries required to be disclosed by us in the reports that we file orsubmit under the Securities Exchange Act of 1934 is recorded, processed,summarized, and reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate to allow timely decisions regarding required disclosure.  Indesigning and evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only a reasonable assurance of achieving the desiredcontrol objectives, and management was necessarily required to apply itsjudgment in evaluating the cost-benefit relationship of possible controls andprocedures.  We carried out an evaluation, under the supervision and withthe participation of our management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures as of the end of the period covered bythis report.  Based on that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective at the reasonable assurance level as of December 29, 2009.

 

**Management’s Report on Internal Control over FinancialReporting**

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting. As defined in Exchange Act Rule 13a-15(f),internal control over financial reporting is a process designed by, or underthe supervision of, our principal executive and principal financial officer andeffected by our Board of Directors, management and other personnel, to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles and includes those policies andprocedures that (i) pertain to the maintenance of records that inreasonable detail accurately and fairly reflect the transactions anddispositions of the assets of the Company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in 

 

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accordancewith generally accepted accounting principles, and that receipts andexpenditures of the Company are being made only in accordance withauthorizations of management and directors of the Company; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the Company’s assets that could have amaterial effect on the financial statements.  Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.

 

Underthe supervision and with the participation of our management, including ourChief Executive Officer and Chief Financial Officer, we carried out anevaluation of the effectiveness of our internal control over financialreporting as of December 29, 2009 based on the criteria in “InternalControl - Integrated Framework” issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO”).  Based on thisevaluation, our management concluded that our internal control over financialreporting was effective as of December 29, 2009.

 

The effectiveness of our internal control overfinancial reporting as of December 29, 2009 has been audited byPricewaterhouseCoopers LLP, an independent registered public accounting firm,as stated in their report which appears in Part IV, Item 15 of thisreport.

 

**Changes in Internal Control over Financial Reporting**

 

Therehave been no changes in our internal control over financial reporting (asdefined in Rules 13a-15(f) and 15d-15(f) under the SecuritiesExchange Act of 1934) during our most recent fiscal quarter ended December 29,2009 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**ITEM 9B.****          ****OTHER INFORMATION**

 

None.

 

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**PART III**

 

**ITEM 10.****          ****DIRECTORS, EXECUTIVEOFFICERS AND CORPORATE GOVERNANCE**

 

We have adopted a code of ethics which applies to our Chief Executive Officer, Chief FinancialOfficer and Chief Accounting Officer, who are the Company’s principalexecutive, financial and accounting officers, respectively, and the Company’sother executive officers and members of the Board of Directors, entitled “Codeof Ethics for Executive Officers, Senior Financial Officers and Directors.  The Code of Ethics is available on ourcorporate website at *www.thecheesecakefactory.com*in the “Corporate Governance” section of our “Investors” page.   We intend to satisfy disclosure requirements underItem 5.05 of Form 8-K regarding an amendment to, or waiver from, aprovision of the Code of Ethics by posting such information on our website, atthe address and location specified above, or as otherwise required by theNASDAQ Global Market.

 

Information with respect to our executive officers is included in Part I,Item 1 of this report.  Other information required by this item is herebyincorporated by reference from the sections entitled “Election of Directors,” “Boardof Directors and Corporate Governance,” “Audit Committee Financial Expert,” “Committees of the Board of Directors andComposition of Committees”,  and “Section 16(a) BeneficialOwnership Reporting Compliance” in our definitive Proxy Statement for theAnnual Meeting of Stockholders to be held on June 2, 2010 (the “ProxyStatement”).

 

**ITEM 11.****          ****EXECUTIVE COMPENSATION**

 

Theinformation required by this item is hereby incorporated by reference to thesections entitled “Board of Directors Compensation” and “Executive Compensation”in the Proxy Statement.

 

**ITEM 12.****          ****SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED  STOCKHOLDERMATTERS**

 

Theinformation required by this item is hereby incorporated by reference to thesections entitled “Equity Compensation Plan Information” and “BeneficialOwnership of Principal Stockholders and Management” in the Proxy Statement.

 

**ITEM 13.****          ****CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

Theinformation required by this item is hereby incorporated by reference to thesections entitled “Policies Regarding Review, Approval or Ratification ofTransactions with Related Parties” and “Board of Directors and CorporateGovernance” in the Proxy Statement.

 

**ITEM 14.****          ****PRINCIPALACCOUNTANT FEES AND SERVICES**

 

Theinformation required by this item is hereby incorporated by reference to thesection entitled “Independent Registered Public Accounting Firm Fees andServices” (in the proposal entitled “Ratification of Selection of IndependentRegistered Public Accounting Firm”) in the Proxy Statement.

 

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**PART IV**

 

**ITEM 15.****          ****EXHIBITS AND FINANCIALSTATEMENT SCHEDULES**

 
| The  following documents are filed as a part of this Report: |
|--------------------------------------------------------------|

 
| (a)    | 1.     | Financial  statements:                                                                                                                                               |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                 |
|   |   | The  consolidated financial statements required to be filed hereunder are listed  in the Index to Consolidated Financial Statements on page 43 of this  report. |
|   |   |                                                                                                                                                                 |
|   | 2.     | Financial  statement schedules:                                                                                                                                      |
|   |   |                                                                                                                                                                 |
|   |   | None.                                                                                                                                                                |
|   |   |                                                                                                                                                                 |
|   | 3.     | Exhibits:                                                                                                                                                            |
|   |   |                                                                                                                                                                 |
|   |   | The  Exhibits required to be filed hereunder are listed in the exhibit index  included herein at page 66.                                                       |

 

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**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                                               | **Page No.** |
|----------------------------------------------------------|-------------------|
| ** **                                               | ** **        |
| Report of Independent Registered Public Accounting  Firm | 44                |
|                                                     |              |
| Consolidated Balance Sheets                              | 45                |
|                                                     |              |
| Consolidated Statements of Operations                    | 46                |
|                                                     |              |
| Consolidated Statements of Stockholders’ Equity     | 47                |
|                                                     |              |
| Consolidated Statements of Cash Flows                    | 48                |
|                                                     |              |
| Notes to Consolidated Financial Statements               | 49                |

 

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### **Report of IndependentRegistered Public Accounting Firm**

### ** **

Tothe Board of Directors and Stockholders of The Cheesecake Factory Incorporated:

 

Inour opinion, the accompanying consolidated balance sheets and the relatedconsolidated statements of operations, stockholders’ equity and cash flowspresent fairly, in all material respects, the financial position of TheCheesecake Factory Incorporated and its subsidiaries at December 29, 2009and December 30, 2008, and the results of their operations and their cashflows for each of the three years in the period ended December 29, 2009 inconformity with accounting principles generally accepted in the United Statesof America.  Also in our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of December 29, 2009, based on criteria establishedin Internal Control - Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).  The Company’s management is responsible forthese financial statements, for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internal controlover financial reporting, included in the accompanying Management’s Report onInternal Control over Financial Reporting. Our responsibility is to express opinions on these financial statementsand on the Company’s internal control over financial reporting based on ourintegrated audits.  We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audits to obtain reasonableassurance about whether the financial statements are free of materialmisstatement and whether effective internal control over financial reportingwas maintained in all material respects. Our audits of the financial statements included examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  Our audit of internalcontrol over financial reporting included obtaining an understanding ofinternal control over financial reporting, assessing the risk that a materialweakness exists, and testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk.  Our audits also included performing suchother procedures as we considered necessary in the circumstances. We believethat our audits provide a reasonable basis for our opinions.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (i) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

 

PricewaterhouseCoopersLLP

LosAngeles, California

February 26,2010

 

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**THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(In thousands, except share data)**

 
| ** **                                                                                                                                                                | ** ** | **December 29, 2009** | ** ** | **December 30, 2008** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                                                | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| Current assets:                                                                                                                                                           |       |                            |       |                            |       |
| Cash and cash equivalents                                                                                                                                                 |       | $                               | 73,715     |                            | $          | 80,365 |   |
| Investments and marketable securities                                                                                                                                     |       | —                          |       | 996                             |       |
| Accounts receivable                                                                                                                                                       |       | 11,352                          |       | 12,537                          |       |
| Income tax receivable                                                                                                                                                     |       | 1,875                           |       | 12,713                          |       |
| Other receivables                                                                                                                                                         |       | 27,475                          |       | 32,821                          |       |
| Inventories                                                                                                                                                               |       | 22,202                          |       | 23,132                          |       |
| Prepaid expenses                                                                                                                                                          |       | 27,871                          |       | 24,654                          |       |
| Deferred income taxes                                                                                                                                                     |       | 7,737                           |       | 3,001                           |       |
|                                                                                                                                                                      |       |                            |       |                            |       |
| Total current assets                                                                                                                                                      |       | 172,227                         |       | 190,219                         |       |
|                                                                                                                                                                      |       |                            |       |                            |       |
| Property and equipment, net                                                                                                                                               |       | 788,402                         |       | 860,489                         |       |
|                                                                                                                                                                      |       |                            |       |                            |       |
| Other assets:                                                                                                                                                             |       |                            |       |                            |       |
| Trademarks                                                                                                                                                                |       | 4,338                           |       | 4,177                           |       |
| Prepaid rent                                                                                                                                                              |       | 54,243                          |       | 58,323                          |       |
| Other                                                                                                                                                                     |       | 27,541                          |       | 29,422                          |       |
|                                                                                                                                                                      |       |                            |       |                            |       |
| Total other assets                                                                                                                                                        |       | 86,122                          |       | 91,922                          |       |
|                                                                                                                                                                      |       |                            |       |                            |       |
| Total assets                                                                                                                                                              |       | $                               | 1,046,751  |                            | $          | 1,142,630 |   |
|                                                                                                                                                                      |       |                            |       |                            |       |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                            | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| Current liabilities:                                                                                                                                                      |       |                            |       |                            |       |
| Accounts payable                                                                                                                                                          |       | $                               | 33,948     |                            | $          | 37,875 |   |
| Other accrued expenses                                                                                                                                                    |       | 166,513                         |       | 147,958                         |       |
|                                                                                                                                                                      |       |                            |       |                            |       |
| Total current liabilities                                                                                                                                                 |       | 200,461                         |       | 185,833                         |       |
|                                                                                                                                                                      |       |                            |       |                            |       |
| Deferred income taxes                                                                                                                                                     |       | 87,048                          |       | 87,045                          |       |
| Deferred rent                                                                                                                                                             |       | 64,209                          |       | 57,286                          |       |
| Deemed landlord financing liability                                                                                                                                       |       | 51,802                          |       | 54,887                          |       |
| Long-term debt                                                                                                                                                            |       | 100,000                         |       | 275,000                         |       |
| Other noncurrent liabilities                                                                                                                                              |       | 27,118                          |       | 30,013                          |       |
| Commitments and contingencies                                                                                                                                             |       |                            |       |                            |       |
| Stockholders’ equity:                                                                                                                                                |       |                            |       |                            |       |
| Preferred stock, $.01 par value, 5,000,000 shares  authorized; none issued                                                                                                |       | —                          |       | —                          |       |
| Junior participating cumulative preferred stock,  $.01 par value, 150,000 shares authorized; none issued                                                                  |       | —                          |       | —                          |       |
| Common stock, $.01 par value, 250,000,000 shares  authorized; 83,377,092 and 82,846,857 shares issued at December 29, 2009  and December 30, 2008, respectively |       | 834                             |       | 828                             |       |
| Additional paid-in capital                                                                                                                                                |       | 386,562                         |       | 370,919                         |       |
| Retained earnings                                                                                                                                                         |       | 639,544                         |       | 596,711                         |       |
| Accumulated other comprehensive loss                                                                                                                                      |       | (4,619                          | )          | (9,684                          | )          |
| Treasury stock 23,100,079 shares at cost at  December 29, 2009 and December 30, 2008                                                                            |       | (506,208                        | )          | (506,208                        | )          |
|                                                                                                                                                                      |       |                            |       |                            |       |
| Total stockholders’ equity                                                                                                                                           |       | 516,113                         |       | 452,566                         |       |
|                                                                                                                                                                      |       |                            |       |                            |       |
| Total liabilities and stockholders’ equity                                                                                                                           |       | $                               | 1,046,751  |                            | $          | 1,142,630 |   |

 

See the accompanying notes to the consolidated financial statements.

 

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**THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(In thousands, except per share data)**

 
| ** **                             | ** ** | **Fiscal Year** | ** ** |
|----------------------------------------|------------|----------------------|------------|
| ** **                             | ** ** | **2009**             | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues                               |       | $                    | 1,602,020  |   | $ | 1,606,406 |   | $ | 1,511,577 |   |
| Costs and expenses:                    |       |                 |       |   |   |   |   |
| Cost of sales                          |       | 394,409              |       | 416,801 |   | 380,996 |   |
| Labor expenses                         |       | 528,578              |       | 533,080 |   | 491,614 |   |
| Other operating costs and expenses     |       | 402,877              |       | 397,498 |   | 353,547 |   |
| General and administrative expenses    |       | 97,432               |       | 83,731 |   | 83,949 |   |
| Depreciation and amortization expenses |       | 75,184               |       | 73,290 |   | 64,202 |   |
| Impairment of assets                   |       | 26,541               |       | 2,952 |   | — |   |
| Preopening costs                       |       | 3,282                |       | 11,883 |   | 26,466 |   |
| Total costs and expenses               |       | 1,528,303            |       | 1,519,235 |   | 1,400,774 |   |
| Income from operations                 |       | 73,717               |       | 87,171 |   | 110,803 |   |
| Interest expense                       |       | (23,433              | )          | (14,788 | ) | (10,852 | ) |
| Interest income                        |       | 372                  |       | 1,849 |   | 4,703 |   |
| Other income/(expense), net            |       | 651                  |       | (977 | ) | 1,009 |   |
| Income before income taxes             |       | 51,307               |       | 73,255 |   | 105,663 |   |
| Income tax provision                   |       | 8,474                |       | 20,962 |   | 31,699 |   |
| Net income                             |       | $                    | 42,833     |   | $ | 52,293 |   | $ | 73,964 |   |
|                                   |       |                 |       |   |   |   |   |
| Net income per share:                  |       |                 |       |   |   |   |   |
| Basic                                  |       | $                    | 0.72       |   | $ | 0.82 |   | $ | 1.02 |   |
| Diluted                                |       | $                    | 0.71       |   | $ | 0.82 |   | $ | 1.01 |   |
|                                   |       |                 |       |   |   |   |   |
| Weighted average shares outstanding:   |       |                 |       |   |   |   |   |
| Basic                                  |       | 59,362               |       | 63,822 |   | 72,475 |   |
| Diluted                                |       | 60,082               |       | 64,009 |   | 73,504 |   |

 

See the accompanying notes to the consolidated financial statements.

 

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**THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

**(In thousands)**

 
| ** **                                                                              | ** ** | **Shares of  Common  Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income/(Loss)** | ** ** | **Treasury  Stock** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|------------------------------------------------------|------------|---------------------|------------|-----------|------------|
| Balance,  January 2, 2007                                                          |       | 81,886                            |       | $                 | 819        |                             | $          | 319,943                |       | $                                                    | 471,798    |                | $          | (553      | )          | $ | (80,465 | ) | $ | 711,542 |   |
| Cumulative  effect of adopting the pronouncement related to uncertain tax positions     |       | —                            |       | —            |       | —                           |       | (1,344                 | )          | —                                               |       | —              |       | (1,344    | )          |
| Balance,  January 2, 2007, as adjusted                                             |       | 81,886                            |       | 819               |       | 319,943                          |       | 470,454                |       | (553                                                 | )          | (80,465             | )          | 710,198   |       |
| Comprehensive  income:                                                                  |       |                              |       |              |       |                             |       |                   |       |                                                 |       |                |       |      |       |
| Net  income                                                                             |       | —                            |       | —            |       | —                           |       | 73,964                 |       | —                                               |       | —              |       | 73,964    |       |
| Net  unrealized gain on available-for-sale securities                                   |       | —                            |       | —            |       | —                           |       | —                 |       | 504                                                  |       | —              |       | 504       |       |
| Net  unrealized loss on derivative financial instruments                                |       | —                            |       | —            |       | —                           |       | —                 |       | (2,849                                               | )          | —              |       | (2,849    | )          |
| Total  comprehensive income                                                             |       |                              |       |              |       |                             |       |                   |       |                                                 |       |                |       | 71,619    |       |
| Issuance  of common stock from stock options exercised                                  |       | 587                               |       | 6                 |       | 8,245                            |       | —                 |       | —                                               |       | —              |       | 8,251     |       |
| Tax  impact of stock options exercised, net of cancellations                            |       | —                            |       | —            |       | 2,031                            |       | —                 |       | —                                               |       | —              |       | 2,031     |       |
| Stock-based  compensation                                                               |       | —                            |       | —            |       | 19,853                           |       | —                 |       | —                                               |       | —              |       | 19,853    |       |
| Issuance  of restricted stock, net of forfeitures                                       |       | 187                               |       | 2                 |       | —                           |       | —                 |       | —                                               |       | —              |       | 2         |       |
| Purchase  of treasury stock                                                             |       | —                            |       | —            |       | 4,256                            |       | —                 |       | —                                               |       | (253,284            | )          | (249,028  | )          |
| Balance,  January 1, 2008                                                          |       | 82,660                            |       | 827               |       | 354,328                          |       | 544,418                |       | (2,898                                               | )          | (333,749            | )          | 562,926   |       |
| Comprehensive  income:                                                                  |       |                              |       |              |       |                             |       |                   |       |                                                 |       |                |       |      |       |
| Net  income                                                                             |       | —                            |       | —            |       | —                           |       | 52,293                 |       | —                                               |       | —              |       | 52,293    |       |
| Net  unrealized gain on available-for-sale securities                                   |       | —                            |       | —            |       | —                           |       | —                 |       | 46                                                   |       | —              |       | 46        |       |
| Net  unrealized loss on derivative financial instruments                                |       | —                            |       | —            |       | —                           |       | —                 |       | (6,832                                               | )          | —              |       | (6,832    | )          |
| Total  comprehensive income                                                             |       |                              |       |              |       |                             |       |                   |       |                                                 |       |                |       | 45,507    |       |
| Issuance  of common stock from stock options exercised                                  |       | 267                               |       | 2                 |       | 2,667                            |       | —                 |       | —                                               |       | —              |       | 2,669     |       |
| Tax  impact of stock options exercised, net of cancellations                            |       | —                            |       | —            |       | (822                             | )          | —                 |       | —                                               |       | —              |       | (822      | )          |
| Stock-based  compensation                                                               |       | —                            |       | —            |       | 14,426                           |       | —                 |       | —                                               |       | —              |       | 14,426    |       |
| Issuance  of restricted stock, net of forfeitures                                       |       | (80                               | )          | (1                | )          | —                           |       | —                 |       | —                                               |       | —              |       | (1        | )          |
| Capital  contributions, net of taxes                                                    |       | —                            |       | —            |       | 320                              |       | —                 |       | —                                               |       | —              |       | 320       |       |
| Purchase  of treasury stock                                                             |       | —                            |       | —            |       | —                           |       | —                 |       | —                                               |       | (172,459            | )          | (172,459  | )          |
| Balance,  December 30, 2008                                                        |       | 82,847                            |       | 828               |       | 370,919                          |       | 596,711                |       | (9,684                                               | )          | (506,208            | )          | 452,566   |       |
| Comprehensive  income:                                                                  |       |                              |       |              |       |                             |       |                   |       |                                                 |       |                |       |      |       |
| Net  income                                                                             |       | —                            |       | —            |       | —                           |       | 42,833                 |       | —                                               |       | —              |       | 42,833    |       |
| Net  unrealized gain on available-for-sale securities                                   |       | —                            |       | —            |       | —                           |       | —                 |       | 1                                                    |       | —              |       | 1         |       |
| Net  unrealized loss on derivative financial instruments                                |       | —                            |       | —            |       | —                           |       | —                 |       | 346                                                  |       | —              |       | 346       |       |
| Loss  reclassified into income due to cancellation of derivative financial  instruments |       | —                            |       | —            |       | —                           |       | —                 |       | 4,718                                                |       | —              |       | 4,718     |       |
| Total  comprehensive income                                                             |       |                              |       |              |       |                             |       |                   |       |                                                 |       |                |       | 47,898    |       |
| Issuance  of common stock from stock options exercised                                  |       | 182                               |       | 2                 |       | 1,681                            |       | —                 |       | —                                               |       | —              |       | 1,683     |       |
| Tax  impact of stock options exercised, net of cancellations                            |       | —                            |       | —            |       | (1,117                           | )          | —                 |       | —                                               |       | —              |       | (1,117    | )          |
| Stock-based  compensation                                                               |       | —                            |       | —            |       | 15,079                           |       | —                 |       | —                                               |       | —              |       | 15,079    |       |
| Issuance  of restricted stock, net of forfeitures                                       |       | 348                               |       | 4                 |       | —                           |       | —                 |       | —                                               |       | —              |       | 4         |       |
| Balance,  December 29, 2009                                                        |       | 83,377                            |       | $                 | 834        |                             | $          | 386,562                |       | $                                                    | 639,544    |                | $          | (4,619    | )          | $ | (506,208 | ) | $ | 516,113 |   |

 

See the accompanying notes to the consolidated financial statements.

 

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**THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In thousands)**

 
| ** **                                                                     | ** ** | **Fiscal Year** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                     | ** ** | **2009**             | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                           |       |                 |       |   |   |   |   |
| Cash flows from operating activities:                                          |       |                 |       |   |   |   |   |
| Net income                                                                     |       | $                    | 42,833     |   | $ | 52,293 |   | $ | 73,964 |   |
| Adjustments to reconcile net income to cash  provided by operating activities: |       |                 |       |   |   |   |   |
| Depreciation and amortization                                                  |       | 75,184               |       | 73,290 |   | 64,202 |   |
| Impairment of assets                                                           |       | 26,541               |       | 2,952 |   | — |   |
| Realized loss on derivative financial instruments                              |       | 7,421                |       | — |   | — |   |
| Deferred income taxes                                                          |       | (4,798               | )          | 22,179 |   | (189 | ) |
| Stock-based compensation                                                       |       | 14,610               |       | 13,132 |   | 18,172 |   |
| Tax impact of stock options exercised, net of  cancellations                   |       | (1,117               | )          | (822 | ) | 2,031 |   |
| Excess tax benefit related to stock options  exercised                         |       | (857                 | )          | (410 | ) | (1,577 | ) |
| Other                                                                          |       | 1,957                |       | (145 | ) | (15 | ) |
| Changes in assets and liabilities:                                             |       |                 |       |   |   |   |   |
| Accounts receivable                                                            |       | 1,185                |       | (1,190 | ) | 292 |   |
| Other receivables                                                              |       | 5,346                |       | 28,224 |   | (18,244 | ) |
| Inventories                                                                    |       | 930                  |       | 926 |   | (3,283 | ) |
| Prepaid expenses                                                               |       | (3,217               | )          | 3,225 |   | (6,618 | ) |
| Other assets                                                                   |       | 5,013                |       | 2,654 |   | (22,936 | ) |
| Accounts payable                                                               |       | (3,927               | )          | (20,047 | ) | 12,354 |   |
| Income taxes payable                                                           |       | 7,865                |       | (9,281 | ) | 1,152 |   |
| Termination of derivative financial instruments                                |       | (7,421               | )          | — |   | — |   |
| Other accrued expenses                                                         |       | 29,587               |       | 2,205 |   | 40,796 |   |
| Cash provided by operating activities                                          |       | 197,135              |       | 169,185 |   | 160,101 |   |
|                                                                           |       |                 |       |   |   |   |   |
| Cash flows from investing activities:                                          |       |                 |       |   |   |   |   |
| Additions to property and equipment                                            |       | (37,243              | )          | (84,907 | ) | (211,025 | ) |
| Investments in available-for-sale securities                                   |       | —               |       | — |   | (47,865 | ) |
| Sales of available-for-sale securities                                         |       | 1,000                |       | 11,469 |   | 125,784 |   |
| Cash used in investing activities                                              |       | (36,243              | )          | (73,438 | ) | (133,106 | ) |
|                                                                           |       |                 |       |   |   |   |   |
| Cash flows from financing activities:                                          |       |                 |       |   |   |   |   |
| Deemed landlord financing proceeds                                             |       | 6,354                |       | 17,862 |   | 30,323 |   |
| Deemed landlord financing payments                                             |       | (1,436               | )          | (1,247 | ) | (1,041 | ) |
| Proceeds from exercise of employee stock options                               |       | 1,683                |       | 2,669 |   | 8,251 |   |
| Excess tax benefit related to stock options  exercised                         |       | 857                  |       | 410 |   | 1,577 |   |
| (Repayment) /borrowings on credit facility                                     |       | (175,000             | )          | 100,000 |   | 175,000 |   |
| Purchase of treasury stock                                                     |       | —               |       | (172,459 | ) | (249,028 | ) |
| Capital contribution                                                           |       | —               |       | 516 |   | — |   |
| Cash used in financing activities                                              |       | (167,542             | )          | (52,249 | ) | (34,918 | ) |
|                                                                           |       |                 |       |   |   |   |   |
| Net change in cash and cash equivalents                                        |       | (6,650               | )          | 43,498 |   | (7,923 | ) |
| Cash and cash equivalents at beginning of period                               |       | 80,365               |       | 36,867 |   | 44,790 |   |
| Cash and cash equivalents at end of period                                     |       | $                    | 73,715     |   | $ | 80,365 |   | $ | 36,867 |   |
|                                                                           |       |                 |       |   |   |   |   |
| Supplemental disclosures:                                                      |       |                 |       |   |   |   |   |
| Interest paid                                                                  |       | $                    | 24,486     |   | $ | 14,864 |   | $ | 8,438 |   |
| Income taxes paid                                                              |       | $                    | 18,576     |   | $ | 8,612 |   | $ | 28,649 |   |

 

See the accompanying notes to the consolidated financial statements.

 

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**THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**1.     Summary of Significant AccountingPolicies:**

 

*Description of Business*

 

TheCheesecake Factory Incorporated (referred to herein as the “Company” or in thefirst person notations “we,” “us” and “our”) operates 161 upscale, casual,full-service dining restaurants under The Cheesecake Factory®, Grand Lux Cafe®and RockSugar PanAsian Kitchen® marks.   Additionally, we operate twobakery production facilities that produce baked desserts and other products forour restaurants and for other foodservice operators, retailers anddistributors.  We also license two bakery cafes under The CheesecakeFactory Bakery Cafe® mark to another foodservice operator.  We closed ourself-service, limited menu “express” foodservice operation under The CheesecakeFactory Express® mark upon expiration of our license agreement during fiscal 2008.  All of our Company-operated and licensedrestaurants and our bakery production facilities are located within the UnitedStates of America.

 

*Basis of Presentation*

 

Theaccompanying consolidated financial statements include the accounts of TheCheesecake Factory Incorporated and its wholly owned subsidiaries.  Allintercompany accounts and transactions for the periods presented have beeneliminated in consolidation.

 

Weutilize a 52/53-week fiscal year ending on the Tuesday closest to December 31st for financialreporting purposes.  Fiscal years 2009, 2008 and 2007 each consisted of 52weeks.

 

*Use of Estimates*

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires us to makeestimates and assumptions for the reporting period and as of the financialstatement date.  These estimates and assumptions affect the reportedamounts of assets and liabilities, the disclosure of contingent liabilities andthe reported amounts of revenues and expenses.  Actual results coulddiffer from those estimates.

 

*Cash and Cash Equivalents*

 

AtDecember 29, 2009, we had $25.2 million of cash invested in a tax-exemptmoney market fund.  This asset qualifiesas a cash equivalent since we have a call option that allows us to redeem dailyfor cash.  Amounts receivable from creditcard processors, totaling $7.8 million and $7.3 million at December 29,2009 and December 30, 2008, respectively, are considered cash equivalentsbecause they are both short-term and highly liquid in nature and are typicallyconverted to cash within three days of the sales transaction.  Checksissued, but not yet presented for payment to our bank are reflected as areduction of cash and cash equivalents.

 

*Investments and Marketable Securities*

 

Ourinvestment policy restricts the investment of our excess cash balances toinstruments with minimal volatility, such as U.S. Treasury and Federal agencyobligations, investment grade corporate debt securities, and money marketmutual funds.  We generally classify all of our investments and marketablesecurities as available-for-sale securities, even though our current liquidityposition and requirements provide us with the ability to hold a substantialamount of such securities to maturity.  Debt securities classified asavailable-for-sale securities are reported at their fair value, with unrealizedgains and losses excluded from net income and reported as a separate componentof stockholders’ equity (net of the related tax effect) until realized. Fair value is determined by the most recently traded price of each security atthe balance sheet date, plus any accrued interest.  Realized gains orlosses are determined on the specific identification cost method.  At December 30,2008, all of our investments and marketable securities were classified in theavailable-for-sale category.  We had noinvestments and marketable securities as of December 29, 2009.

 

*Accounts and Other Receivables*

 

Ouraccounts receivable principally result from credit sales to bakerycustomers.  Other receivables consist of various amounts due fromlandlords, insurance providers, our gift card reseller and others in theordinary course of business.

 

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*Concentration of Credit Risk*

 

Financial instruments that potentially subject us toa concentration of credit risk are cash and cash equivalents, investments andmarketable securities, and receivables.  We currently maintain a majorityof our day-to-day operating cash balances with one major financial institution;cash balances may be in excess of FDIC insurance limits.  At December 29,2009, we had $25.2 million of cash invested in a tax-exempt money marketfund.  The fund purchases only first-tiersecurities, and we have not experienced any losses in these accounts.  Therefore, we believe we are not exposed tosignificant risk on these investments. We place our temporary excess cash with a major financial institutionthat, in turn, invests in instruments with minimal volatility, such as U.S.Treasury and Federal agency obligations, investment grade corporate debtsecurities, and money market mutual funds.  Our investment policy limitsthe amount of exposure to any one institution or investment.

 

Weconsider the concentration of credit risk for accounts receivable to be minimaldue to the payment histories and general financial condition of our largeroutside bakery customers.  Concentrationof credit risk related to other receivables is limited as this balance iscomprised primarily of amounts due from our landlords for the reimbursement oftenant improvements, as well as from our third-party insurers and gift cardreseller.

 

*Fair Value of Financial Instruments*

 

Forcash and cash equivalents, the carrying amount approximates fair value becauseof the short maturity of these instruments. The fair value of our investment and marketable securities equals thequoted market price.  The fair value ofour long-term debt and deemed landlord financing liabilities are determinedusing current applicable rates for similar instruments as of the balance sheetdate.  We amended our credit agreement inJanuary 2009, bringing our interest rate to current applicable marketrates at that time.  In December 2009,we performed a review of market conditions and the borrowing rates currentlyavailable to us for facilities with similar terms and maturities.  Based on this analysis, we believe thecarrying value of our long-term debt approximates fair value.  The fair value of our deemed landlordfinancing liabilities is $52.4 million versus a carrying value of $53.3million.

 

*Inventories*

 

Inventoriesare stated at the lower of cost or market on a first-in, first-out basis andconsist of restaurant food and other supplies, bakery raw materials, and bakeryfinished goods.

 

*Property and Equipment*

 

Werecord all property and equipment at cost less accumulated depreciation. Improvements are capitalized while repairs and maintenance costs are expensedas incurred.  Depreciation and amortization are calculated using thestraight-line method over the estimated useful life of the assets or theinitial term of the respective lease plus any exercised renewal periods,whichever is shorter.  Leasehold improvements include the cost of ourinternal development and construction department.  Depreciation and amortization periods are asfollows:

 
| Buildings  and land improvements   |   | 25  to 30 years |
|------------------------------------|--------|-----------------|
| Leasehold  improvements            |   | 15  to 20 years |
| Restaurant  fixtures and equipment |   | 10  years       |
| Bakery  equipment                  |   | 15  years       |
| Computer  software and equipment   |   | 3  to 5 years   |

 

*Impairment of Long-Lived Assets*

 

Weassess potential impairment of our long-lived assets whenever events or changesin circumstances indicate that the carrying value of the assets or asset groupmay not be recoverable.  Factorsconsidered include, but are not limited to, significant underperformancerelative to expected historical or projected future operating results;significant changes in the manner of use of the acquired assets or the strategyfor the overall business; and significant negative industry or economictrends.  We regularly review restaurantsthat fall below a defined threshold of projected cash flows to carrying valuein order to determine if impairment testing is warranted.

 

Wehave determined that our asset group for impairment testing is comprised of theassets and liabilities of each of our individual restaurants, as this is thelowest level of identifiable cash flows. We have identified leasehold improvements as the primary asset becauseit is the most significant component of our restaurant assets, it is theprincipal asset from which our restaurants derive their cash flow generatingcapacity and has the longest remaining useful life.  The recoverability is assessed in most casesby comparing the carrying value of the assets to the undiscounted cash flowsexpected to be generated by these assets. Impairment losses are measured as the amount by which the carryingvalues of the assets exceed their fair values.

 

Duringfiscal 2009, we recorded a $26.5 million impairment charge against the carryingvalue of four Grand Lux Cafe locations. During fiscal 2008, we recorded a $3.0million impairment charge against the carrying value of three The CheesecakeFactory locations. We did not incur impairment charges during fiscal 2007.

 

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*Self-Insurance Liability*

 

Weretain the financial responsibility for a significant portion of our risks andassociated liabilities with respect to workers’ compensation, generalliability, employment practices, employee health benefits and other insurablerisks.  The accrued liabilities associated with these programs are basedon our estimate of the ultimate costs to settle known claims as well as claimsincurred but not yet reported to us (“IBNR”) as of the balance sheetdate.  Our estimated liabilities are not discounted and are based oninformation provided by our insurance brokers and insurers, combined with ourjudgment regarding a number of assumptions and factors, including the frequencyand severity of claims, claims development history, case jurisdiction,applicable legislation and our claims settlement practices.  We maintainstop-loss coverage with third party insurers to limit our individual claimexposure for many of our programs and for aggregate exposure on our employeehealth benefits program.  The estimated amounts receivable from ourthird-party insurers under this coverage are recorded in otherreceivables.  Significant judgment is required to estimate IBNR amounts asparties have yet to assert such claims.  If actual claims trends, includingthe severity or frequency of claims, differ from our estimates, our financialresults could be impacted.

 

*Derivative Financial Instruments*

 

Our derivative financialinstruments consist of zero-cost interest rate collars to hedge interest ratevariability on our revolving credit facility. We formally document the relationship between the hedging instrumentsand the hedged items, as well as our risk management objective and strategy forundertaking hedge transactions.  Theseinterest rate collars qualify for hedge accounting as cash flow hedges.  Accordingly, we recognize these derivativesat fair value as either assets or liabilities on the consolidated balancesheets.  All changes in fair value arerecorded in accumulated other comprehensive income and subsequentlyreclassified into earnings when the related interest expense on the underlyingborrowing is recognized.  We have not,and do not plan to, enter into any derivative financial instruments for tradingor speculative purposes.

 

*Revenue Recognition*

 

Ourrevenues consist of sales from our restaurant operations and sales from ourbakery operations to other foodservice operators, retailers and distributors (“bakerysales”).  Revenues from restaurant sales are recognized when payment istendered at the point of sale.  Revenues from bakery sales are recognizedupon transfer of title to customers.  Revenues are presented net of salestaxes.  The obligation is included inother accrued expenses until the taxes are remitted to the appropriate taxingauthorities.

 

Werecognize a liability upon the sale of our gift cards and recognize revenuewhen these gift cards are redeemed in our restaurants or on our website.  Revenues from unredeemed gift cards arerecognized proportionally over three years based on historical and expectedredemption trends and are classified as revenues in our consolidated statementof operations.  Incremental direct costsrelated to gift card sales, including commissions and credit card fees, aredeferred and recognized in earnings in the same pattern as the related giftcard revenue.

 

Certainof our promotional programs are multiple element arrangements that include bothdelivered and undelivered components.  Weallocate revenue to each undelivered element based on vendor-specific objectiveevidence of fair value, which is the price charged when that element is soldseparately.  These revenues are deferredand subsequently recognized when these elements are delivered.  Any residual revenue is allocated to thedelivered component and recognized at the time of the original transaction.

 

*Leases*

 

Wecurrently lease all of our restaurant locations.  We evaluate each leaseto determine its appropriate classification as an operating or capital leasefor financial reporting purposes.  All of our restaurant leases areclassified as operating leases.

 

Minimumbase rent for our operating leases, which generally have escalating rentalsover the term of the lease, is recorded on a straight-line basis over theinitial term of the respective lease plus any exercised renewal periods.  The initial rent term includes the build-out,or rent holiday period, for our leases, where no rent payments are typicallydue under the terms of the lease. Contingent rent expense, which is based on apercentage of revenue, is also recorded to the extent it exceeds minimum baserent per the lease agreement.

 

Wedisburse cash for leasehold improvements and FF&E to build out and equipour leased premises.  We may also expend cash for structural additionsthat we make to leased premises that generally are reimbursed to us by ourlandlords as construction contributions pursuant to agreed-upon terms in ourleases.  Landlord construction contributions usually take the form ofup-front cash, full or partial credits against minimum or percentage rentsotherwise payable by us, or a combination thereof.  Depending on the specifics of the leasedspace and the lease agreement, amounts paid for structural components arerecorded during the construction 

 

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periodas either prepaid rent or construction-in-progress and the landlordconstruction contributions are recorded as either an offset to prepaid rent oras a deemed landlord financing liability.

 

Uponcompletion of construction, we perform an analysis on the leases for which thestructural cost was initially recorded to construction-in-progress to determineif they qualify for sale-leaseback treatment.  For those qualifyingleases, the deemed landlord financing liability and the associatedconstruction-in-progress are removed and the difference is reclassified toeither prepaid or deferred rent and amortized over the lease term as an increaseor decrease to rent expense.  If the lease does not qualify forsale-leaseback treatment, the deemed landlord financing liability is amortizedover the lease term based on the rent payments designated in the leaseagreement.

 

*Stock-Based Compensation*

 

We maintain performanceincentive plans under which incentive stock options, non-qualified stockoptions, stock appreciation rights, restricted shares, deferred shares,performance shares and performance units may be granted to employees andconsultants.  To date, we have onlygranted non-qualified stock options and restricted shares of common stock underthese plans.  Stock options generally vest at 20% per year or, in the caseof restaurant management, cliff vest in five years and expire eight to tenyears from the date of grant.  Certainstock options require that either the grantee or the Company satisfy specifiedperformance criteria prior to exercisability of vested stock options.  Restricted shares vest 100% not prior tothree years from the date of grant, and require that the staff member remainsemployed in good standing with the Company as of the vesting date.  Certain executive officer stock options andrestricted stock may vest earlier in the event of a change of control, asdefined in the plan.

 

Non-employee directorshave received only non-qualified stock options under a non-employee directorequity plan, which expired in May 2007. Currently, we do not have a plan under which non-employee directors maybe granted stock options or other equity interests in the Company.

 

Weapply the Black-Scholes valuation model in determining the fair value of stockoption grants, which is then amortized on a straight-line basis over therequisite service period.  See Note 12for discussion of the assumptions utilized in our stock option valuationmodel.   We reclassify the excess taxbenefit resulting from the exercise of stock options out of cash flows fromoperating activities and into cash flows from financing activities on the consolidatedstatements of cash flows.

 

*Advertising Costs*

 

Weexpense advertising production costs at the time the advertising first takesplace; all other advertising costs are expensed as incurred.  The majorityof our advertising costs are included in other operating costs and expenses andwere $7.7 million, $1.4 million and $0.9 million in fiscal 2009, 2008 and 2007,respectively.

 

*Preopening Costs*

 

Preopeningcosts include all costs to relocate and compensate restaurant managementemployees during the preopening period; costs to recruit and train hourlyrestaurant employees; wages, travel and lodging costs for our opening trainingteam and other support employees; and straight-line minimum base rent duringthe build-out and in-restaurant training periods.  Also included inpreopening costs are expenses for maintaining a roster of trained managers forpending openings; the associated temporary housing and other costs necessary torelocate managers in alignment with future restaurant opening and operatingneeds; and corporate travel and support activities.  We expense preopening costs as incurred.

 

*Income Taxes*

 

Deferredincome tax assets and liabilities are recognized for the tax consequences oftemporary differences based on the difference between the financial statementand tax basis of existing assets and liabilities using the statutory ratesexpected in the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in incomein the period that includes the enactment date.

 

Weaccount for uncertain tax positions under Financial Accounting Standards Boardguidance, which prescribes a minimum probability threshold that a tax positionmust meet before a financial statement benefit is recognized.  The minimum threshold is defined as a taxposition that is more likely than not to be sustained upon examination by theapplicable taxing authority, including resolution of any related appeals orlitigation processes, based on the technical merits of the position.  The tax benefit to be recognized is measuredas the largest amount of benefit that is greater than 50% likely of beingrealized upon ultimate settlement.  SeeNote 14 for information regarding changes in our unrecognized tax benefitsduring fiscal 2009.

 

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*Net Income per Share*

 

Basicnet income per share is computed by dividing net income available to commonstockholders by the weighted average number of common shares outstanding duringthe period.  At December 29, 2009, December 30,2008 and January 1, 2008, 0.6 million, 0.4 million and 0.5 million shares,respectively, of restricted stock issued to employees were unvested, andtherefore excluded from the calculation of basic earnings per share for each ofthe fiscal years ended on those dates. Diluted net income per share includes the dilutive effect of bothoutstanding stock options and restricted shares, calculated using the treasurystock method.  Assumed proceeds from the in-the-money options include thewindfall tax benefits, net of shortfalls, calculated under the “as-if” methodas prescribed by FASB Accounting Standards Codification 718, “Compensation —Stock Option Compensation.”

 
| ** **                                              | ** ** | **Fiscal Year**                                               | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2009**                                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                              | ** ** | **(In thousands, except per share data)** | ** ** |
| ** **                                              | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                              |       | $                                                                  | 42,833     |   | $ | 52,293 |   | $ | 73,964 |   |
|                                                    |       |                                                               |       |   |   |   |   |
| Basic weighted average shares outstanding               |       | 59,362                                                             |       | 63,822 |   | 72,475 |   |
| Dilutive effect of stock options and restricted  shares |       | 720                                                                |       | 187 |   | 1,029 |   |
|                                                    |       |                                                               |       |   |   |   |   |
| Diluted weighted average shares outstanding             |       | 60,082                                                             |       | 64,009 |   | 73,504 |   |
|                                                    |       |                                                               |       |   |   |   |   |
| Basic net income per share                              |       | $                                                                  | 0.72       |   | $ | 0.82 |   | $ | 1.02 |   |
|                                                    |       |                                                               |       |   |   |   |   |
| Diluted net income per share                            |       | $                                                                  | 0.71       |   | $ | 0.82 |   | $ | 1.01 |   |

 

Sharesof common stock equivalents of 9.3 million, 9.2 million and 5.9 million forfiscal 2009, 2008 and 2007, respectively, were excluded from the dilutedcalculation due to their anti-dilutive effect.

 

*Comprehensive Income*

 

Comprehensiveincome includes all changes in equity during a period except those resultingfrom investment by and distribution to owners. Comprehensive income reported on our consolidated statements ofstockholders’ equity consists of net income, the unrealized portion of changesin the fair value of our cash flow hedges and unrealized gains or losses onavailable-for-sale securities.

 

*Recent Accounting Pronouncements*

 

In February 2008, theFinancial Accounting Standards Board (“FASB”) issued authoritative guidancethat delayed the effective date of guidance related to the fair valuemeasurement of nonfinancial assets and liabilities that are recognized ordisclosed at fair value in the financial statements on a nonrecurringbasis.  The adoption of the deferred provisions in the first quarter offiscal 2009 did not impact our consolidated financial statements.  See Note 9 of this report for furtherdiscussion of fair value measurement.

 

In the first quarter of fiscal 2009, we adopted new accounting guidance ondisclosures about derivative and hedging activities.  The new guidance impacts disclosures only andrequires additional qualitative and quantitative information on the use ofderivatives and their impact on an entity’s financial position, results ofoperations and cash flows.  See Note 8 ofthis report for additional information regarding our derivative financialinstruments.

 

In April 2008, the FASB issuedauthoritative guidance amending the factors that should be considered indeveloping renewal or extension assumptions used to determine the useful lifeof a recognized intangible asset.  Thisguidance also requires enhanced related disclosures.  Implementation of this guidance in the firstquarter of fiscal 2009 did not have a material impact on our consolidatedfinancial statements.

 

Inthe second quarter of fiscal 2009, we adopted new accounting guidance requiringdisclosures about the fair value of financial instruments for interim reportingperiods in addition to annual reporting periods.  Implementation of this guidance did notimpact our consolidated financial statements.

 

InMay 2009, the FASB issued authoritative guidance establishing generalstandards of accounting for and disclosure of events that occur after thebalance sheet date, but before the financial statements are issued or availableto be issued.  This guidance requiresdisclosure of the date through which a company has evaluated subsequent eventsand the basis for that date, which for public entities is the date thefinancial statements are issued.  Thisguidance does not apply to subsequent events that are within the scope of 

 

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otherGAAP and does not result in significant changes in the subsequent eventsreported by us.  We performed a reviewfor subsequent events through February 26, 2010.  No recognized or non-recognized subsequentevents were noted.

 

In October 2009, theFASB issued guidance on revenue arrangements with multiple deliverables effectivefor us in fiscal 2011, although early adoption is permitted.  The guidance revises the criteria formeasuring and allocating consideration to each component of a multiple elementarrangement.  The guidance requirescompanies to allocate revenue using the relative selling price of eachdeliverable, which must be estimated if the company does not have either ahistory of selling the deliverable on a stand alone basis or third-partyevidence of selling price.  For ourcompany, this guidance will only impact the pattern of revenue recognition forour marketing programs that include multiple elements.  As the timing and content of futurepromotions is not determinable at this time, we are unable to estimate theimpact of this guidance on our financial statements.

 

**2.     Investments and MarketableSecurities:**

 

Wegenerally invest our excess cash balances in U.S. Treasury and Agencysecurities, investment grade corporate debt securities rated “A” or better andmoney market mutual funds.

 

Investments and marketablesecurities consisted solely of available-for-sale securities (in thousands):

 
| **Corporate Debt Securities** | ** ** | **Cost**   | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Maturity** | ** ** |
|-----------------------------------------|------------|------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|--------------|------------|
| ** **                              | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **      | ** ** | ** **   | ** ** |
| December 29, 2009                  |       | $          | —     |                         | $          | —                        |       | $               | —     |         | $          | — |   | — |   |
|                                    |       |       |       |                         |       |                          |       |            |       |         |       |
| December 30, 2008                  |       | $          | 999        |                         | $          | —                        |       | $               | (3         | )            | $          | 996 |   | February 2009 |   |

 

The following tables present thelength of time available-for-sale securities were in continuous unrealized losspositions, but were not deemed to be other-than-temporarily impaired (inthousands):

 
| ** **                    | ** ** | **Less Than 12 Months** | ** ** | **Greater Than or Equal to  12 Months** | ** ** |
|-------------------------------|------------|----------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                    | ** ** | **Gross  Unrealized  Holding  Losses** | ** ** | **Fair Value**                                              | ** ** | **Gross  Unrealized  Holding  Losses** | ** ** | **Fair Value** | ** ** |
| **At December 30 2008:** | ** ** | ** **                             | ** ** | ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Corporate  debt securities    |       | $                                      | (3         | )                                                                | $          | 996 |   | $ | — |   | $ | — |   |
|                               |            |                                        |            |                                                                  |            |  |  |  |  |  |  |  |  |

 

Grossunrealized holding losses of $3,000 for less than 12 months as of December 30,2008 pertain to one income security. There were no significant realized losses recorded for other thantemporary impairments during either fiscal 2009 or 2008.

 

**3.     Other Receivables:**

 

Otherreceivables consisted of (in thousands):

 
| ** **                          | ** ** | **December 29, 2009** | ** ** | **December 30, 2008** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
|                                |       |                            |       |                            |       |
| Receivable  from gift card reseller |       | $                               | 13,252     |                            | $          | 12,018 |   |
| Landlord  construction allowances   |       | 3,281                           |       | 7,934                           |       |
| Receivable  from insurers           |       | 4,304                           |       | 6,062                           |       |
| Other                               |       | 6,638                           |       | 6,807                           |       |
| Total                               |       | $                               | 27,475     |                            | $          | 32,821 |   |

 

**4.     Inventories:**

 

Inventoriesconsisted of (in thousands):

 
| ** **                         | ** ** | **December 29,********2009** | ** ** | **December 30, 2008** | ** ** |
|------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
|                               |       |                              |       |                            |       |
| Restaurant  food and supplies      |       | $                                 | 12,619     |                            | $          | 12,091 |   |
| Bakery  finished goods             |       | 5,530                             |       | 7,423                           |       |
| Bakery  raw materials and supplies |       | 4,053                             |       | 3,618                           |       |
| Total                              |       | $                                 | 22,202     |                            | $          | 23,132 |   |

 

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**5.     Property and Equipment:**

 

Propertyand equipment consisted of (in thousands):

 
| ** **                                       | ** ** | **December 29, 2009** | ** ** | **December 30, 2008** | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
|                                             |       |                            |       |                            |       |
| Land  and related improvements                   |       | $                               | 13,410     |                            | $          | 13,410 |   |
| Buildings                                        |       | 17,692                          |       | 17,692                          |       |
| Leasehold  improvements                          |       | 811,125                         |       | 819,115                         |       |
| Fixtures  and equipment                          |       | 281,672                         |       | 281,355                         |       |
| Computer  software and equipment                 |       | 44,004                          |       | 45,814                          |       |
| Restaurant  smallware                            |       | 23,447                          |       | 23,156                          |       |
| Construction  in progress                        |       | 18,612                          |       | 22,370                          |       |
|                                             |       |                            |       |                            |       |
| Property  and equipment, total                   |       | 1,209,962                       |       | 1,222,912                       |       |
| Less:  accumulated depreciation and amortization |       | (421,560                        | )          | (362,423                        | )          |
| Property  and equipment, net                     |       | $                               | 788,402    |                            | $          | 860,489 |   |

 

Repairand maintenance expenses for fiscal 2009, 2008 and 2007 were $31.9 million,$30.1 million and $23.7 million, respectively.

 

**6.     Other Accrued Expenses:**

 

Otheraccrued expenses consisted of (in thousands):

 
| ** **                | ** ** | **December 29, 2009** | ** ** | **December 30, 2008** | ** ** |
|---------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Gift cards                |       | $                               | 62,601     |                            | $          | 58,501 |   |
| Insurance                 |       | 30,916                          |       | 26,840                          |       |
| Salaries and wages        |       | 25,500                          |       | 17,452                          |       |
| Employee benefits         |       | 11,669                          |       | 11,047                          |       |
| Payroll and sales taxes   |       | 10,919                          |       | 10,120                          |       |
| Rent and related expenses |       | 6,764                           |       | 7,036                           |       |
| Other                     |       | 18,144                          |       | 16,962                          |       |
| Total                     |       | $                               | 166,513    |                            | $          | 147,958 |   |

 

**7.     Long-Term Debt:**

 

Long-term debt consistedof (in thousands):

 
| ** **      | ** ** | **December 29, 2009** | ** ** | **December 30,  2008** | ** ** |
|-----------------|------------|----------------------------|------------|-----------------------------|------------|
| ** **      | ** ** | ** **                 | ** ** | ** **                  | ** ** |
| Credit facility |       | $                          | 100,000    |                        | $          | 275,000 |   |
|                 |            |                            |            |                             |            |  |  |

 

InApril 2007, we entered into a five-year revolving credit facility (“Facility”)with a maximum available borrowing commitment of $200 million.  In March 2008, we amended the Facilityto increase the maximum available borrowing commitment to $300 million.  In January 2009, we entered into asecond amendment, which reset our financial covenants and pricing, and alsolimited cash distributions with respect to our equity interests, such as cashdividends and share repurchases, based on a liquidity threshold.  Borrowings under the amended Facility bearinterest at a floating rate based on the London Interbank Offering Rate (LIBOR)plus a spread ranging from 2.50% to 2.75%, depending on our ratio of debt totrailing 12-month earnings before interest, taxes, depreciation, amortizationand noncash stock option expense (“EBITDA”), as defined in the agreement.  In addition, we pay a commitment fee rangingfrom 0.40% to 0.45%, also depending on our ratio of debt to EBITDA, calculatedon the average unused portion of the Facility. The amended Facility restricts unsecured borrowings to $15 million andincludes a pledge of our outstanding equity interests in The Cheesecake FactoryBakery Incorporated and The Cheesecake Factory Assets Co. LLC, which hadcarrying values of $93.1 million and $65.3 million, respectively, at December 29,2009.

 

Weare obligated to maintain certain financial covenants, which include a maximumdebt to EBITDA ratio of 1.75 as of the fiscal quarter ending March 31,2009 or 1.50 as of the end of any fiscal quarter thereafter, as well as aminimum EBITDAR (EBITDA plus rental expense), as defined in the Facility, tointerest and rental expense ratio of 1.90 as of any of the fiscal quartersending 

 

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March 31,2009 through September 28, 2010 or 2.00 as of the end of any fiscalquarter thereafter.  At December 29,2009, our EBITDA and EBITDAR ratios were 0.52 and 2.29, respectively.  Therefore, we were in compliance with thefinancial covenants in effect under the Facility at that date.

 

Availability under the Facility is reduced by outstanding standbyletters of credit, which are used to support our self-insurance programs.  As of December 29, 2009, we had netavailability for borrowings of $184 million, based on outstanding debt of $100million and $16 million in standby letters of credit.  During fiscal 2009, we repaid $175 million ofthe outstanding balance on the Facility, bringing our current outstandingbalance to $100 million.  Since we havethe contractual ability to maintain the outstanding balance on our Facility,the debt is classified as long-term on our consolidated balance sheets.

 

**8.****             ****DerivativeFinancial Instruments**

 

At December 30, 2008, we heldthree zero-cost interest rate collars that hedged interest rate variability on$250 million of the outstanding balance on our Facility.  During fiscal 2009, we paid down $175 millionof the outstanding balance on our Facility and correspondingly unwound two ofour derivatives, representing $150 million of hedged interest rate variability,at a cost of $7.4 million.  Our remaininginstrument consists of a combination of a purchased cap option with athree-month LIBOR cap rate of 5.35% and a sold floor option with a three-monthLIBOR floor rate of 4.69%, and has a maturity date of April 3, 2012.  See Note 7 for further discussion of ourcredit facility.

 

These derivatives qualify for hedgeaccounting as cash flow hedges and, accordingly, are recognized at fair valueas either assets or liabilities on the consolidated balance sheets.  Changes in fair value are recorded inaccumulated other comprehensive income (“AOCI”) and subsequently reclassifiedinto earnings when the related interest expense on the underlying borrowing isrecognized.  We do not hold anyderivative financial instruments for trading or speculative purposes.

 

Changesin the fair value of our interest rate collars are expected to be perfectlyeffective in offsetting the variability in interest payments attributable tofluctuations in three-month LIBOR rates above the cap rates and below the floorrates specified in the respective agreements. If, at any time, an interest rate collar is determined to beineffective, in whole or in part, due to modifications in the interest ratecollar or the underlying credit facility, prospective changes in fair value ofthe portion of the derivative determined to be ineffective will be recognizedas a gain or loss in the consolidated statements of operations.

 

Thefair values and balance sheet locations of our derivatives are as follows (inthousands):

 
| ** **              | ** ** | **Liability  Derivatives**    | ** ** |
|-------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **December 29,  2009**   | ** ** | **December 30,  2008** | ** ** |
| ** **              | ** ** | **Balance  Sheet Location**   | ** ** | **Fair  Value** | ** ** | **Balance  Sheet Location** | ** ** | **Fair Value** | ** ** |
| Interest rate contracts |       | Other  accrued expenses       |       | $ | 4,299 |   | Other  accrued expenses |   | $ | 3,702 |   |
| Interest rate contracts |       | Other  noncurrent liabilities |       | 3,945 |   | Other  noncurrent liabilities |   | 11,686 |   |
| Total                   |       |                          |       | $ | 8,244 |   |   |   | $ | 15,388 |   |

 

Wehad no derivative financial instruments in asset positions as of December 29,2009 or December 30, 2008.  See Note9 for discussion of the methods used to determine fair value of our derivativefinancial instruments.

 

Theeffect of derivative instruments on our consolidated statements of operationsis as follows (in thousands):

 
| ** **              | ** ** | **Gain/(Loss)  Recognized in AOCI on  Derivatives** | ** ** | **Location  of Gain/(Loss)** | ** ** | **Loss  Reclassified  from AOCI into Income (1)** | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|------------------------------|------------|---------------------------------------------------|------------|
| ** **              | ** ** | **Fiscal  Year**                                    | ** ** | **Reclassified  from AOCI**  | ** ** | **Fiscal  Year**                                  | ** ** |
| ** **              | ** ** | **2009**                                            | ** ** | **2008**                     | ** ** | **into  Income**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| Interest rate contracts |       | $                                                   | 346        |                         | $          | (6,832                                            | )          | Interest  expense |   | $ | (12,494 | ) | $ | (1,266 | ) |
|                         |            |                                                     |            |                              |            |                                                   |            |  |  |  |  |  |  |  |  |

 

----

(1)          Lossreclassified from AOCI into income during fiscal 2009 included $7.4 million ofexpense to unwind $150 million of our interest rate collars.

 

We expect to reclassify approximately$4.3 million of the AOCI balance at December 29, 2009 against earningsduring the next 12 months as the related hedged interest expense is recognized.

 

**9.     Fair Value Measurement**

 

We utilize the following fair value hierarchy thatprioritizes the inputs used to measure fair value:

 

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| Level 1: | Quoted prices are available in active markets for identical assets or  liabilities as of the reporting date.  Active markets are those in  which transactions for the asset or liability occur in sufficient frequency  and volume to provide pricing information on an ongoing basis.  Level  1 primarily consists of financial instruments such as exchange-traded  derivatives, listed equities and U.S. government treasury securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| Level 2: | Pricing inputs are other than quoted prices in active markets  included in Level 1, which are either directly or indirectly observable as of  the reporting date.  Level 2 includes those financial instruments  that are valued using models or other valuation  methodologies.  These models are primarily industry-standard models  that consider various assumptions, including quoted forward prices for  commodities, time value, volatility factors, and current market and  contractual prices for the underlying instruments, as well as other relevant  economic measures.  Substantially all of these assumptions are  observable in the marketplace throughout the full term of the instrument, can  be derived from observable data or are supported by observable levels at  which transactions are executed in the marketplace.  Instruments in  this category include non-exchange-traded derivatives such as over the  counter forwards, options and repurchase agreements. |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| Level 3: | Pricing inputs include significant inputs that are generally less  observable from objective sources.  These inputs may be used with  internally developed methodologies that result in management’s best estimate  of fair value.   At each balance sheet date, we perform an analysis  of all instruments subject to fair value measurement and include in Level 3  all of those whose fair value is based on significant unobservable inputs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

The following table presents our financial assetsand liabilities that were accounted for at fair value as of December 29,2009 (in thousands):

 
| ** **                         | ** ** | **Fair Value Measurements Using** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **Quoted  Prices in  Active  Markets**           | ** ** | **Significant  Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** |
|                               |       |                                             |       |   |   |   |   |
| Assets:                            |       |                                             |       |   |   |   |   |
| Cash invested in money market fund |       | $                                                | 25,197     |   | $ | — |   | $ | — |   |
|                               |       |                                             |       |   |   |   |   |
| Liabilities:                       |       |                                             |       |   |   |   |   |
| Derivative financial instruments   |       | $                                                | —     |   | $ | 8,244 |   | $ | — |   |

 

For assets that are measured using quoted prices inactive markets, fair value is the published market price per unit multiplied bythe number of units held without consideration of transaction costs.  At December 29, 2009, we had $25.2million of cash invested in a tax-exempt money market fund.  The fund purchases only first-tiersecurities, and we have not experienced any losses in these accounts.  Therefore, we believe we are not exposed tosignificant risk on these investments.

 

The fair value of our derivative financialinstruments is estimated using the net present value of a series of cash flowson both the cap and floor components of the interest rate collars.  These cash flows are based on yield curveswhich take into account the contractual terms of the derivatives, including theperiod to maturity and market-based parameters such as interest rates andvolatility.  We incorporatednonperformance risk by adjusting the present value of each liability positionutilizing an estimation of our credit risk.

 

**10.     Commitments and Contingencies**

 

Welease all of our restaurant locations under operating leases, with remainingterms ranging from 1 year to 20 years.  The restaurant leases typicallyinclude land and building shells, require contingent rent above the minimumbase rent payments based on a percentage of sales ranging from 3% to 10%, andrequire various expenses incidental to the use of the property.  Amajority of our leases provide for ongoing co-tenancy requirements which wouldfurther lower rental rates, and/or permit lease terminations should requiredco-tenants cease to operate for specified periods of time.  Most leases have renewal options, which wehave always exercised in the past.  Many of our leases provide earlytermination rights permitting us to terminate the lease prior to expiration ifwe do not achieve specified sales levels in certain years commencing after thefifth lease year.  We also leaseautomobiles and certain equipment under operating lease agreements.

 

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Asof December 29, 2009, the aggregate minimum annual lease payments underoperating leases, including amounts characterized as deemed landlord financingpayments are as follows (in thousands):

 
| 2010       |   |   |   | $       | 59,308  |   |   |   |
|------------|--------|--------|--------|---------|---------|--------|--------|--------|
| 2011       |   |   |   | 61,022  |    |   |   |
| 2012       |   |   |   | 62,807  |    |   |   |
| 2013       |   |   |   | 63,527  |    |   |   |
| 2014       |   |   |   | 63,940  |    |   |   |
| Thereafter |   |   |   | 658,030 |    |   |   |
| Total      |   |   |   | $       | 968,634 |   |   |   |

 

Rent expense on all operating leases was as follows(in thousands):

 
| ** **                       | ** ** | **Fiscal Year** | ** ** |
|----------------------------------|------------|----------------------|------------|
| ** **                       | ** ** | **2009**             | ** ** | **2008** | ** ** | **2007** | ** ** |
| Straight-lined minimum base rent |       | $                    | 62,979     |   | $ | 61,587 |   | $ | 50,274 |   |
| Contingent rent                  |       | 17,567               |       | 18,935 |   | 21,294 |   |
| Other charges                    |       | 25,780               |       | 24,337 |   | 20,473 |   |
| Total                            |       | $                    | 106,326    |   | $ | 104,859 |   | $ | 92,041 |   |

 

Ascredit guarantees to insurers, we have $16 million in standby letters of creditrelated to our self-insurance liabilities. All standby letters of credit are renewable annually.

 

Weretain the financial responsibility for a significant portion of our risks andassociated liabilities with respect to workers’ compensation, generalliability, employee health benefits and other insurable risks.  Theaccrued liabilities associated with these programs are based on our estimate ofthe ultimate costs to settle known claims as well as claims incurred but notyet reported to us (“IBNR claims”) as of the balance sheet date.  Ourestimated liabilities are not discounted and are based on information providedby our insurance brokers and insurers, combined with our judgment regarding anumber of assumptions and factors, including the frequency and severity ofclaims, claims development history, case jurisdiction, applicable legislationand our claims settlement practices.  We maintain stop-loss coverage withthird party insurers to limit our individual claim exposure for many of ourprograms and for aggregate exposure on our employee health benefitsprogram.  The estimated amounts receivable from our third-party insurersunder this coverage are recorded in other receivables.  Significantjudgment is required to estimate IBNR amounts as parties have yet to assertsuch claims.  If actual claims trends, including the severity or frequencyof claims, differ from our estimates, our financial results could be impacted.

 

Afterfailing in efforts to reach a conciliated settlement, on June 30, 2008,the EEOC for the Phoenix District Office filed a complaint with the UnitedStates District Court for the District of Arizona stylized as Equal EmploymentOpportunity Commission vs. The Cheesecake Factory, Inc.  The complaint(No. CV08-1207-PHX-NVW) alleges that since November 2004, we engagedin unlawful employment practices by permitting a class of male employees,including three named former employees, to be sexually harassed by maleco-workers creating a hostile work environment in violation of Title VII. The complaint also alleges, among other claims, that we knew or should of knownof the alleged sexual harassment and failed to act reasonably to prevent orcorrect such alleged sexual harassment.  The complaint seeks injunctiverelief and monetary compensation, including for emotional pain and suffering,among other damages.  We filed our answer to the complaint on December 24,2008. The parties thereafter engaged in settlement discussions whichresulted in settlement of all matters raised in such cases as provided in aconsent decree approved by the United States District Court for the District ofArizona on November 6, 2009. Pursuant to the terms of the settlement, wepaid the claimants an aggregate total of $345,000 and agreed to provideadditional training for hourly staff and managers for a period of two years. Wedid not admit to liability in this matter and settled in order to avoid futurecosts of litigation and risks at trial.

 

TheInternal Revenue Service (“IRS”) audited our tax returns for fiscal years 2003through 2006 with respect to the deductibility, under the provisions ofInternal Revenue Code Section 162(m), of certain compensation in excess of$1 million per year paid to three current executive officers and one formerexecutive officer resulting from their respective exercises of stock optionslater determined to be misdated.  On May 1, 2008, the IRS issued aNotice of Proposed Adjustment to us disallowing the deduction of approximately$5.1 million of compensation expense with respect to the exercise of stockoptions by such executive officers.  We believe that such stock optioncompensation qualifies as performance-based compensation that is not subject tothe limitations on deductibility under Internal Revenue Code Section 162(m). We received a Statutory Notice of Deficiency from the IRS for fiscal 2005 onlyand have petitioned for redetermination of this notice with the United StatesTax Court.  With respect to all other tax years, we intend to continue discussionswith the IRS in an effort to reach a favorable resolution and, if suchresolution is not reached, to pursue all available administrative and legalremedies.  While we believe that such stock option compensation qualifiedas 

 

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performance-basedcompensation that is not subject to the limitations on deductibility, we havereserved $2.4 million for estimated taxes and interest due through December 29,2009.  This reserve does not include penalties.

 

OnAugust 5, 2009, two former hourly restaurant employees in the Stateof California filed a class action lawsuit in the Los Angeles County SuperiorCourt (Luque v. The Cheesecake Factory Restaurants, Inc.; Case No. BC415640)against us alleging violations of California’s wage and hour laws with respectto alleged failure to pay proper vacation wages at termination, failure tofurnish wage statements, and violations of the California Business andProfessions Code, among others claims.  This lawsuit seeks unspecifiedamounts of penalties and other monetary payments on behalf of the respectiveplaintiffs and other purported class members. The plaintiffs also seekattorneys’ fees for themselves.  We intend to vigorously defend thisaction.  Based on the current status of this matter, we have not reservedfor any potential future payments.

 

OnJanuary 20, 2009, one former hourly restaurant employee in the Stateof California filed a lawsuit in the San Diego County Superior Court (Giradinv. The Cheesecake Factory, Inc.; Case No. 37-2009-00081696-CU-OE-CTL)against us alleging violations of California’s wage and hour laws with respectto alleged failure to pay proper wages, failure to furnish accurate wagestatements and violations of the California reporting time laws, amongothers claims.  This lawsuit seeks unspecified amounts of penalties andother monetary payments on behalf of the respective plaintiff and other purportedclass members.  The plaintiff also seeks attorneys’ fees.  On January 8,2010, the Plaintiff filed a First Amended Complaint naming a new classrepresentative and asserting additional claims under the California Labor CodePrivate Attorneys General Act of 2004.  We intend to vigorously defendthis action.  Based on the current status of this matter, we have notreserved for any potential future payments.

 

OnJuly 2, 2008, the Equal Employment Opportunity Commission (EEOC) for theCleveland District Office issued determination letters in Charges532-2006-01040, -01030, -01042 in favor of three former employees alleging thatwe engaged in a pattern and practice of sex discrimination, and in the case ofone claimant, racial discrimination, in violation of Title VII of the CivilRights Act of 1964 (Title VII).  The determination alleges that ouractions resulted in females as a class being denied entry and progression intoupper ranks of management at our restaurants.  We deny these allegations. The EEOC is seeking payment of actual damages incurred by the claimants as wellas compensatory and/or punitive monetary costs and remedial actions.  Theparties failed to reach a conciliated settlement in 2008 and, to date, nofurther action has been taken by the EEOC with respect to these charges. On July 30, 2008, the EEOC Cleveland District Office also filed aCommissioner’s Charge 532-2008-01856 alleging we violated Title VII for failingor refusing to select females for management positions because of theirsex.  This Charge arises out of the facts alleged in EEOC Charges532-2006-01040, -01030, -01042.  The EEOC is currently conducting itsinvestigation into this Commissioner’s Charge.  While we are cooperatingwith the EEOC’s investigation, we deny these allegations and intend tovigorously defend against this charge.  Based upon the current status ofthese matters, we have not reserved for any potential future payments.

 

OnJanuary 9, 2007, two former hourly restaurant employees in the State ofCalifornia filed a lawsuit in the Los Angeles County Superior Court against usalleging violations of California’s wage and hour laws with respect to allegedfailure to pay proper wages, improper payroll deductions, and violations of theCalifornia meal and break period laws, among others claims (Guardado v. TheCheesecake Factory Restaurants, Inc. et al; Case No. BC360426). This case was previously stayed by the parties through December 2008,pending the California Supreme Court’s decision to review Brinker RestaurantCorp. v. Superior Court of San Diego County (No. S166350, 2008).Subsequently, the parties entered into mediation proceedings that, todate, have not been successful. On February 23, 2009, an additionallawsuit with similar allegations was filed by another hourly restaurantemployee in Santa Clara County Superior Court (Benitez v. The CheesecakeFactory Restaurants, Inc., et al; Case No. 109CV135687).  InApril, 2009, we gave notice to the respective courts in Case No. 109CV135687and Case No. BC360426 that such cases may be related matters.  Theparties have resumed discovery and will continue settlement discussions as partof ongoing mediation efforts in Case No. BC360426, and are engaged inongoing settlement discussions in Case No. 109CV135687.  Theselawsuits seek unspecified amounts of penalties and other monetary payments onbehalf of the respective plaintiffs and other purported class members. The respective plaintiffs also seek attorneys’ fees for themselves.  Weintend to vigorously defend these actions.  Based on the current status ofthese matters, we have not reserved for any potential future payments.

 

OnAugust 29, 2006, five present and former hourly restaurant employees inthe States of Tennessee, Texas and Arizona filed a lawsuit in the U.S. DistrictCourt for the Middle District of Tennessee against us alleging violations ofthe Fair Labor Standards Act with respect to alleged minimum wage violations,improper payroll deductions and requiring work “off the clock,” among otherclaims (Smith v. The Cheesecake Factory Restaurants, Inc. et al; Case No. 306 0829).  The lawsuit seeks unspecified amounts of penalties and othermonetary payments on behalf of the plaintiffs and other purported classmembers. The plaintiffs also seek attorneys’ fees for themselves.  On February 4,2010, the Court granted the Company’s motion to compel arbitration and issuedan order dismissing all individual defendants in the case. We intend tovigorously defend this action.  Based on the current status of this matter,we have not reserved for any potential future payments.

 

OnNovember 18, 2009, one former hourly restaurant employee in the Stateof Illinois filed a lawsuit in the U.S. District Court for the NorthernDistrict of Illinois (Morales v. The Cheesecake Factory, Inc.; Case No. 09CV 7005) against us alleging 

 

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violationsof the Fair Labor Standards Act and Illinois Minimum Wage Law for allegedfailure to pay overtime, and minimum wage among other claims.  Thislawsuit seeks unspecified amounts of penalties and other monetary payments onbehalf of the respective plaintiff and other purported class members.  Theplaintiff also seeks attorneys’ fees.  The Company filed its answer on January 15,2010.  We intend to vigorously defend this action.  Based on thecurrent status of this matter, we have not reserved for any potential futurepayments.

 

Weare also subject to other private lawsuits, administrative proceedings andclaims that arise in the ordinary course of our business.  These claimstypically involve claims from guests, staff members and others related tooperational issues common to the foodservice industry.  A number of theseclaims may exist at any given time and some of the employee claims may be pleadas class actions.  We could be affected by adverse publicity andlitigation costs resulting from such allegations, regardless of whether theseallegations are valid or whether we are determined to be liable.  Fromtime to time, we are also involved in lawsuits with respect to infringementsof, or challenges to, our registered trademarks.  At this time, we believethat the final disposition of these lawsuits, proceedings and claims will nothave a material adverse effect on our financial position, results of operationsor liquidity.  It is possible, however, that our future results ofoperations for a particular quarter or fiscal year could be impacted by changesin circumstances relating to lawsuits, proceedings or claims.

 

Wehave employment agreements with certain of our executive officers that providefor payments to those officers in the event of an actual or constructivetermination of their employment, including following a change in control of theCompany or otherwise without cause or in the event of death or disability, asdefined in those agreements.  Aggregate payments totaling approximately$3.1 million would have been required by those agreements had all such officersterminated their employment for reasons requiring such payments as of December 29,2009.  In addition, the employment agreement with our Chief ExecutiveOfficer, which is in effect through May 7, 2012, specifies an annualfounder’s retirement benefit of $650,000 for ten years after termination of hisfull time employment.  During fiscal2009, we incurred compensation expense of $2.9 million for this retirementbenefit.

 

**11.  Stockholders’ Equity:**

 

Our Board of Directors increased the authorizationto repurchase shares of our common stock by 10 million shares during fiscal2008 and by 15 million shares in fiscal 2007, for a total authorization of 31million shares.  No increases wereauthorized during fiscal 2009.  Underthis authorization, we cumulatively repurchased a total of 23.1 million sharesfor a total cost of $506.2 million through December 29, 2009.  The authorization does not have an expirationdate, does not require us to purchase a specific number of shares and may bemodified, suspended or terminated at any time.

 

In August 2008, we entered into a prearrangedstock repurchase plan intended to qualify for the safe harbor under Rule 10b5-1under the Securities Exchange Act of 1934, as amended (“10b5-1 Plan”).  In October 2008, we suspended our sharerepurchase program in order to maintain maximum flexibility in our capitaldecisions in light of the unprecedented crisis in the global financial marketsand the indeterminate future impact it could have on the overall economy and onour business.  Concurrently with theeffective date of such suspension, we terminated our 10b5-1 Plan.  On February 25, 2010, our Board of Directorsreinstated our stock repurchase program and approved the adoption of a new10b5-1 Plan, which will become effective on March 27, 2010.  In addition, we may also make purchases inthe open market in compliance with Rule 10b-18 under the Securities ExchangeAct of 1934.

 

The timing and number of shares repurchased pursuantto the share repurchase authorization are subject to a number of factors,including current market conditions, legal constraints, financial covenantsunder our credit facility, and available cash or other sources of funding.  Shares may be repurchased in the open marketor through privately negotiated transactions at times and prices consideredappropriate by us.  We make thedetermination to repurchase shares based on several factors, including anevaluation of current and future capital needs associated with new restaurantdevelopment, current and forecasted cash flows, a review of our capitalstructure and cost of capital, and our share price.

 

Duringfiscal 2008 and 2007, we repurchased 9.6 million and 9.9 million shares of ourcommon stock at a cost of $172.5 million and $253.3 million, respectively.  We did not repurchase any shares duringfiscal 2009.  Of the shares purchased infiscal 2007, 7.7 million were acquired through an accelerated share repurchaseprogram (“ASR”).  We recorded the marketvalue of the ASR shares at each settlement date in treasury stock, with thedifference between the total cash outlay of $200.0 million and the market valueof $204.3 million recorded to additional paid-in capital.  Repurchased common stock is reflected as areduction of stockholders’ equity.

 

**12.  Stock-Based Compensation**

 

We maintain performanceincentive plans under which incentive stock options, non-qualified stockoptions, stock appreciation rights, restricted shares, deferred shares,performance shares and performance units may be granted to employees andconsultants.  Our current practice is toissue new shares, rather than treasury shares, upon stock option exercises andfor restricted share grants.  Our current performance incentive planpermits the issuance of up to 3.8 million shares of our common stock, of which1.9 million are currently available for grant.  To date, we have onlygranted non-qualified stock options and restricted shares of common stock underthese plans.  Stock options generally vest at 20% per year or, in the caseof restaurant management, cliff vest in five years and expire eight to tenyears from the date of grant.  Certainstock options require that either the grantee or the Company satisfy specifiedperformance criteria prior to exercisability of vested stock options.  Restricted shares vest 100% not prior tothree 

 

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years from the date ofgrant, and require that the staff member remains employed in good standing withthe Company as of the vesting date. Certain executive officer stock options and restricted stock may vestearlier in the event of a change of control, as defined in the plan.

 

Non-employee directorshave received only non-qualified stock options under a non-employee directorequity plan, which expired in May 2007. Currently, we do not have a plan under which non-employee directors maybe granted stock options or other equity interests in the Company.

 

The following table presentsinformation related to stock-based compensation (in thousands):

 
| ** **                                | ** ** | **Fiscal Year** | ** ** |
|-------------------------------------------|------------|-----------------|------------|
| ** **                                | ** ** | **2009**        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                      |       |            |       |   |   |   |   |
| Stock-based compensation  expense         |       | $               | 14,610     |   | $ | 13,134 |   | $ | 18,171 |   |
|                                      |       |            |       |   |   |   |   |
| Income tax benefit                        |       | 5,537           |       | 3,901 |   | 5,451 |   |
|                                      |       |            |       |   |   |   |   |
| Capitalized stock-based  compensation (1) |       | 473             |       | 1,292 |   | 1,684 |   |
|                                           |            |                 |            |  |  |  |  |  |  |  |

 

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(1)          It is our policy to capitalize the portion ofstock-based compensation costs for our internal development and construction,legal, and facilities departments that relates to capitalizable activities suchas the design and construction of new restaurants, remodeling existinglocations, lease, intellectual property and liquor license acquisitionactivities and equipment installation. Capitalized stock-based compensation is included in property and equipment,net and other assets on the consolidated balance sheets.

 

***Stock Options***

** **

Theweighted average fair value at the grant date for options issued during fiscal2009, 2008 and 2007 was $5.29, $6.78 and $9.13 per option, respectively. The fair value of options at the grant date was estimated utilizing theBlack-Scholes valuation model with the following weighted average assumptionsfor fiscal 2008, 2007 and 2006, respectively: (a) no dividend yield on ourstock, (b) expected stock price volatility of 55.5%, 39.9% and 31.3%, (c) arisk-free interest rate of 2.0%, 3.0% and 4.5%, and (d) an expected optionterm of 5.4 years, 5.3 years and 5.0 years. The fair value of options is then amortized on a straight-line basisover the requisite service period.

 

Theexpected option term represents the estimated period of time until exercise andis based on historical experience of similar options, giving consideration tothe contractual terms, vesting schedules and expectations of future employeebehavior.  Expected stock price volatility is based on a combination ofthe historical volatility of our stock and the implied volatility of activelytraded options on our common stock.  The risk-free interest rate is basedon the U.S. Treasury yield curve in effect at the time of grant with anequivalent remaining term. We have not paid dividends in the past and do notcurrently plan to pay dividends in the near future.  Compensation expense is recognized only forthose options expected to vest, with forfeitures estimated based on ourhistorical experience and future expectations.

 

Stockoption activity during fiscal 2009 was as follows:

 
| ** **                   | ** ** | **Shares**              | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|------------------------------|------------|-------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                   | ** ** | **(In thousands)** | ** ** | ** **                                 | ** ** | **(In years)**                                 | ** ** | **(In thousands)**             | ** ** |
| Outstanding at start of year |       | 9,428                   |       | $                                          | 24.58      |                                                |       |                                |       |   |
| Granted                      |       | 1,817                   |       | $                                          | 10.45      |                                                |       |                                |       |   |
| Exercised                    |       | (182                    | )          | $                                          | 9.25       |                                                |       |                                |       |   |
| Cancelled                    |       | (809                    | )          | $                                          | 23.97      |                                                |       |                                |       |   |
| Outstanding at end of year   |       | 10,254                  |       | $                                          | 22.40      |                                                | 5.9        |                                | $          | 32,450 |   |
|                         |       |                    |       |                                       |       |                                                |       |                                |       |
| Exercisable at end of year   |       | 4,549                   |       | $                                          | 25.45      |                                                | 4.1        |                                | $          | 3,801 |   |

 

The total intrinsic value in the table above represents the totalpretax intrinsic value (the difference between our closing stock price atfiscal year end and the exercise price, multiplied by the number of in-the-moneyoptions) that would have been received by the option holders, had all optionholders exercised their options on the fiscal year end date.  This amountfluctuates based on the fair 

 

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marketvalue of our stock.  Total intrinsic value of options exercised duringfiscal years 2009, 2008 and 2007 was $1.5 million, $2.1 million and $7.6million, respectively.  As of December 29, 2009, total unrecognizedstock-based compensation expense related to nonvested stock options was $20.5million, which we expect to recognize over a weighted average period ofapproximately 3.0 years.

 

***Restricted Shares***

 

Restricted share activity during fiscal 2009 was as follows:

 
| ** **                   | ** ** | **Shares**              | ** ** | **Weighted  Average  Fair  Value** | ** ** |
|------------------------------|------------|-------------------------|------------|------------------------------------|------------|
| ** **                   | ** ** | **(In thousands)** | ** ** | ** **                         | ** ** |
| Outstanding at start of year |       | 446                     |       | $                                  | 26.13      |   |
| Granted                      |       | 369                     |       | $                                  | 10.29      |   |
| Vested                       |       | (171                    | )          | 26.03                              |       |
| Forfeited                    |       | (21                     | )          | $                                  | 22.18      |   |
| Outstanding at end of year   |       | 623                     |       | $                                  | 16.32      |   |

 

Fair value of our restricted shares is based on our closing stock priceon the date of grant.  The weightedaverage fair value at the grant date for restricted shares issued during fiscal2009, 2008 and 2007 was $10.29, $17.28 and $25.55 per option,respectively.  As of December 29, 2009, total unrecognizedstock-based compensation expense related to nonvested restricted shares was$4.0 million, which is expected to be recognized over a weighted average periodof approximately 2.8 years.  The fairvalue of shares that vested during fiscal 2009 totaled $3.1 million.  No restricted shares vested in either fiscal2008 or fiscal 2007.

 

**13.  Employee Benefit Plans:**

 

Wehave a defined contribution benefit plan in accordance with section 401(k) ofthe Internal Revenue Code (“401(k) Plan”) that is open to staff membersfrom our three restaurant concepts, as well as our bakery production facilitiesand corporate office, who meet certain compensation and eligibilityrequirements.  The 401(k) Plan allows participating staff members todefer the receipt of a portion of their compensation and contribute such amountto one or more investment options.  Our executive officers and otherhighly compensated staff members are not eligible to participate in the 401(k) Plan. We have historically matched in cash a certain percentage of the employeecontributions to the 401(k) Plans; however, we suspended this benefit in May 2009.  We pay for the 401(k) Planadministrative expenses.  Neither thecost of matching contributions nor administrative expenses were significantamounts during fiscal 2009, 2008 and 2007.

 

Wehave also established The Cheesecake Factory Incorporated Executive SavingsPlan (“ESP”).  The ESP is a non-qualified deferred compensation plan forour executive officers and other highly compensated staff members as defined inthe ESP and who are otherwise ineligible for participation in our 401(k) Plans. The ESP allows participating staff members to defer the receipt of a portion oftheir base compensation and up to 100% of their eligible bonuses. Non-employee directors may also participate in the ESP and defer the receipt oftheir earned director fees.  We have historically matched in cash acertain percentage of the base compensation and bonus deferred by participatingstaff members; however we suspended this benefit in May 2009. We pay forthe ESP administrative expenses.  Neitherthe cost of matching contributions nor administrative expenses were significantamounts during fiscal 2009, 2008 and 2007. Employee deferrals and any matching funds are deposited into a rabbitrust, and are generally invested in individual variable life insurancecontracts owned by us that are specifically designed to informally fund savingsplans of this nature.  Our consolidated balance sheets reflect ourinvestment in variable life insurance contracts in other assets.  Ourobligation to participating staff members is reflected in other noncurrentliabilities.  All income and expenses related to the rabbi trust arereflected in our consolidated statements of operations.

 

Wemaintain a self-insured medical and dental benefit plan for our staffmembers.  We have purchased individual stop-loss coverage in order tolimit our exposure to any significant medical claims.  Medical benefitplan expenses are accrued based on our estimate of the aggregate liability foruninsured claims incurred using actuarial methods commonly followed in theinsurance industry and our historical experience.  The accrued liabilityfor our self-insured medical benefit plan, which is included in other accruedexpenses, as of December 29, 2009 and December 30, 2008, was $5.1million and $3.6 million, respectively.

 

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**14.     Income Taxes:**

 

Theprovision for income taxes consisted of the following (in thousands):

 
| ** **                 | ** ** | **Fiscal Year** | ** ** |
|----------------------------|------------|----------------------|------------|
| ** **                 | ** ** | **2009**             | ** ** | **2008** | ** ** | **2007** | ** ** |
|                       |       |                 |       |   |   |   |   |
| Income before income taxes |       | $                    | 51,307     |   | $ | 73,255 |   | $ | 105,663 |   |
| Income tax provision:      |       |                 |       |   |   |   |   |
| Current:                   |       |                 |       |   |   |   |   |
| Federal                    |       | $                    | 9,927      |   | $ | (2,822 | ) | $ | 26,943 |   |
| State                      |       | 3,345                |       | 1,605 |   | 4,945 |   |
| Total current              |       | 13,272               |       | (1,217 | ) | 31,888 |   |
| Deferred:                  |       |                 |       |   |   |   |   |
| Federal                    |       | (4,318               | )          | 20,397 |   | (1,205 | ) |
| State                      |       | (480                 | )          | 1,782 |   | 1,016 |   |
| Total deferred             |       | (4,798               | )          | 22,179 |   | (189 | ) |
| Total provision            |       | $                    | 8,474      |   | $ | 20,962 |   | $ | 31,699 |   |

 

Thefollowing is a reconciliation between the U.S. federal statutory rate and theeffective tax rate:

 
| ** **                                                          | ** ** | **Fiscal Year** | ** ** |
|---------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                          | ** ** | **2009**             | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                |       |                 |       |   |   |   |   |
| Tax at U.S. federal statutory rate                                  |       | 35.0                 | %          | 35.0 | % | 35.0 | % |
| State and district income taxes, net of federal  income tax benefit |       | 3.7                  |       | 3.4 |   | 3.0 |   |
| Tax credits and incentives                                          |       | (17.0                | )          | (11.6 | ) | (6.5 | ) |
| Executive compensation                                              |       | —               |       | 3.1 |   | — |   |
| Change in uncertain tax positions                                   |       | (0.2                 | )          | (2.4 | ) | 0.9 |   |
| Manufacturing deductions                                            |       | (2.6                 | )          | (1.5 | ) | (1.6 | ) |
| Deferred compensation                                               |       | (2.0                 | )          | 3.5 |   | (0.4 | ) |
| Other                                                               |       | (0.4                 | )          | (0.9 | ) | (0.4 | ) |
| Effective tax rate                                                  |       | 16.5                 | %          | 28.6 | % | 30.0 | % |

 

Followingare the temporary differences that created our deferred tax assets andliabilities (in thousands):

 
| ** **                                    | ** ** | **December 29, 2009** | ** ** | **December 30, 2008** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Current deferred tax assets/(liabilities):    |       |                            |       |                            |       |
| Employee benefits                             |       | $                               | 6,212      |                            | $          | 4,688 |   |
| Insurance                                     |       | 11,527                          |       | 9,375                           |       |
| Inventory                                     |       | (8,469                          | )          | (8,379                          | )          |
| Prepaid expenses                              |       | (6,861                          | )          | (6,010                          | )          |
| Accrued bonuses                               |       | 3,085                           |       | —                          |       |
| Derivative asset                              |       | 1,292                           |       | 1,450                           |       |
| Tax credit carryforwards                      |       | —                          |       | 609                             |       |
| Other, net                                    |       | 951                             |       | 1,268                           |       |
| Total                                         |       | $                               | 7,737      |                            | $          | 3,001 |   |
|                                          |       |                            |       |                            |       |
| Noncurrent deferred tax assets/(liabilities): |       |                            |       |                            |       |
| Property and equipment                        |       | $                               | (144,416   | )                               | $          | (139,159 | ) |
| Accrued rent                                  |       | 20,384                          |       | 18,240                          |       |
| Stock-based compensation                      |       | 21,088                          |       | 17,846                          |       |
| Employee benefits                             |       | 6,394                           |       | 5,451                           |       |
| Tax credit carryforwards                      |       | 2,278                           |       | 1,675                           |       |
| State taxes                                   |       | 2,260                           |       | 2,167                           |       |
| Derivative asset                              |       | 1,558                           |       | 4,576                           |       |
| Net state operating loss carryforwards        |       | 270                             |       | 178                             |       |
| Other, net                                    |       | 3,136                           |       | 1,981                           |       |
| Total                                         |       | $                               | (87,048    | )                               | $          | (87,045 | ) |

 

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AtDecember 29, 2009 and December 30, 2008, we had $6.0 million and $4.3million, respectively, of state net operating loss carryforwards.  These losses begin to expire in 2023.  We had $2.3 million of state tax creditcarryforwards at both December 29, 2009 and December 30, 2008.  These credits begin to expire in 2011. We havenot recorded valuation allowances against these items, as we believe it is morelikely than not that future taxable income will be sufficient to fully realizethe benefit of these assets.  Theearliest tax year still subject to examination by a significant taxingjurisdiction is 2003.

 

At December 29, 2009, we had $6.5 million of unrecognized taxbenefits.  If recognized, $3.4 million ofthis total would unfavorably affect the annual effective income tax rate.  A reconciliation of the beginning and endingamount of unrecognized tax benefits is as follows (in thousands):

 
| ** **                                                                                       | ** ** | **Fiscal Year** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-----------------|------------|
| ** **                                                                                       | ** ** | **2009**        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                                             |       |            |       |   |   |   |   |
| Balance at beginning of year                                                                     |       | $               | 3,694      |   | $ | 16,142 |   | $ | 12,950 |   |
| Additions based on tax positions taken during a  prior period                                    |       | 139             |       | 570 |   | 12 |   |
| Reductions based on tax positions taken during a  prior period                                   |       | —          |       | (14,907 | ) | — |   |
| Additions based on tax positions taken during the  current period                                |       | 3,334           |       | 1,889 |   | 3,205 |   |
| Reductions related to settlements with taxing  authorities and lapses of statutes of limitations |       | (707            | )          | — |   | (25 | ) |
| Balance at end of year                                                                           |       | $               | 6,460      |   | $ | 3,694 |   | $ | 16,142 |   |

 

Werecognize interest related to uncertain tax positions in income taxexpense.  Penalties related to uncertaintax positions are part of general and administrative expenses.  During fiscal 2009, 2008 and2007, we recognized $0.2 million, $0.5 million and $1.0 million, respectively,of accrued interest associated with uncertain tax positions.  During fiscal 2009, 2008 and 2007, werelieved $0.1 million, $2.2 million and $0, respectively, of interestassociated with settlements of disputes with taxing authorities and lapses ofstatutes of limitations.  At December 29,2009 and December 30, 2008, we had approximately $0.8 million and $0.7million, respectively, of accrued interest related to uncertain tax positions.

 

Includedin the balance of unrecognized tax benefits at December 29, 2009 is $3.5million related to tax positions for which it is reasonably possible that thetotal amount could decrease during the next twelve months based on the lapsesof statutes of limitations for certain jurisdictions or due to otherresolutions of uncertainties surrounding accrued expenses.

 

**15.  Stockholder Rights Plan**

 

Wehave a stockholder rights plan that provides for the distribution to stockholdersof one right to purchase a unit equal to 1/100th of a share of juniorparticipating cumulative preferred stock.  The rights are evidenced by ourcommon stock certificates and automatically trade with our common stock. The rights are not exercisable unless a person or group acquires (or commencesa tender or exchange offer or announces an intention to acquire) 15% or more ofour common stock (or 20% or more if such person or group was beneficial ownerof 10% or more of our common stock on August 4, 1998 or any timethereafter) without the approval of our Board of Directors.  When declaredexercisable, holders of the rights (other than the acquiring person or group)would have the right to purchase units of junior participating cumulativepreferred stock having a market value equal to two times the exercise price ofeach right, which is $110.  Additionally, if we are thereafter merged intoanother entity, or if more than 50% of our consolidated assets or earningspower is sold or transferred, holders of the rights will be entitled to buycommon stock of the acquiring person or group equal to two times the exerciseprice of each right.  During fiscal 2008, our Board of Directors extendedthe rights expiration date to August 4, 2018, unless redeemed earlier byus.

 

**16.  Segment Information**

 

Weoperate in two business segments, restaurants and bakery.  Restaurants consist of The CheesecakeFactory®, Grand Lux Cafe® and RockSugar Pan Asian Kitchen®.  Thebakery segment produces baked desserts and other products for our restaurantsand for other foodservice operators, retailers and distributors.  Bakerysales to our restaurants are recorded at prices similar to third-party nationalaccounts.  Unallocated corporate expenses, which include all stock-basedcompensation, assets and capital expenditures, as well as impairment of assets,are presented below as reconciling items to the amounts presented in theconsolidated financial statements.

 

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Segmentinformation is presented below (in thousands):

 
| ** **                     | ** ** | **Fiscal Year** | ** ** |
|--------------------------------|------------|----------------------|------------|
| ** **                     | ** ** | **2009**             | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenue:                       |       |                 |       |   |   |   |   |
| Restaurants                    |       | $                    | 1,534,311  |   | $ | 1,536,543 |   | $ | 1,448,315 |   |
| Bakery                         |       | 118,447              |       | 119,540 |   | 112,368 |   |
| Intercompany bakery sales      |       | (50,738              | )          | (49,677 | ) | (49,106 | ) |
|                           |       | $                    | 1,602,020  |   | $ | 1,606,406 |   | $ | 1,511,577 |   |
| Income from operations:        |       |                 |       |   |   |   |   |
| Restaurants                    |       | $                    | 184,291    |   | $ | 161,755 |   | $ | 183,911 |   |
| Bakery                         |       | 14,406               |       | 13,109 |   | 16,265 |   |
| Impairment of assets           |       | (26,541              | )          | (2,952 | ) | — |   |
| Corporate                      |       | (98,439              | )          | (84,741 | ) | (89,373 | ) |
|                           |       | $                    | 73,717     |   | $ | 87,171 |   | $ | 110,803 |   |
| Total assets:                  |       |                 |       |   |   |   |   |
| Restaurants                    |       | $                    | 881,545    |   | $ | 926,484 |   | $ | 950,606 |   |
| Bakery                         |       | 53,607               |       | 57,680 |   | 59,041 |   |
| Corporate                      |       | 111,599              |       | 158,466 |   | 136,106 |   |
|                           |       | $                    | 1,046,751  |   | $ | 1,142,630 |   | $ | 1,145,753 |   |
| Capital expenditures:          |       |                 |       |   |   |   |   |
| Restaurants                    |       | $                    | 32,893     |   | $ | 79,185 |   | $ | 196,875 |   |
| Bakery                         |       | 1,544                |       | 2,365 |   | 4,250 |   |
| Corporate                      |       | 2,806                |       | 3,357 |   | 9,900 |   |
|                           |       | $                    | 37,243     |   | $ | 84,907 |   | $ | 211,025 |   |
| Depreciation and amortization: |       |                 |       |   |   |   |   |
| Restaurants                    |       | $                    | 65,702     |   | $ | 64,288 |   | $ | 56,724 |   |
| Bakery                         |       | 3,109                |       | 2,990 |   | 2,851 |   |
| Corporate                      |       | 6,373                |       | 6,012 |   | 4,627 |   |
|                           |       | $                    | 75,184     |   | $ | 73,290 |   | $ | 64,202 |   |

 

**17.  Quarterly Financial Data (unaudited)**

 

Summarizedunaudited quarterly financial data for fiscal 2009 and 2008, is as follows (inthousands, except per share data):

 
| **Quarter Ended:**           | ** ** | **March 31, 2009** | ** ** | **June 30, 2009** | ** ** | **September 29, 2009** | ** ** | **December 29, 2009** | ** ** |
|-----------------------------------|------------|------------------------------|------------|-----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Revenues                          |       | $                            | 392,794    |                        | $          | 407,944                          |       | $                               | 400,640    |   | $ | 400,642 |   |
| Income/(loss) from operations (1) |       | $                            | 17,981     |                        | $          | 28,959                           |       | $                               | 27,336     |   | $ | (559 | ) |
| Net income/(loss)                 |       | $                            | 10,019     |                        | $          | 16,569                           |       | $                               | 16,258     |   | $ | (13 | ) |
| Basic net income per share (2)    |       | $                            | 0.17       |                        | $          | 0.28                             |       | $                               | 0.27       |   | $ | 0.00 |   |
| Diluted net income per share (2)  |       | $                            | 0.17       |                        | $          | 0.28                             |       | $                               | 0.27       |   | $ | 0.00 |   |

 
| **Quarter Ended:**          | ** ** | **April 1, 2008** | ** ** | **July 1, 2008** | ** ** | **September 30, 2008** | ** ** | **December 30, 2008** | ** ** |
|----------------------------------|------------|-----------------------------|------------|----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Revenues                         |       | $                           | 393,803    |                       | $          | 407,134                          |       | $                               | 405,116    |   | $ | 400,353 |   |
| Income from operations (1)       |       | $                           | 23,721     |                       | $          | 29,968                           |       | $                               | 21,023     |   | $ | 12,459 |   |
| Net income                       |       | $                           | 14,329     |                       | $          | 19,101                           |       | $                               | 11,783     |   | $ | 7,080 |   |
| Basic net income per share (2)   |       | $                           | 0.21       |                       | $          | 0.29                             |       | $                               | 0.19       |   | $ | 0.12 |   |
| Diluted net income per share (2) |       | $                           | 0.21       |                       | $          | 0.29                             |       | $                               | 0.19       |   | $ | 0.12 |   |

 

----

(1)          Income from operationsincludes impairment of assets of $26.5 million and $3.0 million in the fourthquarter of fiscal 2009 and 2008, respectively.

 

(2)          Net income per sharecalculations for each quarter are based on the weighted average diluted sharesoutstanding for that quarter and may not total to the full year amount.

 

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**EXHIBITINDEX**

** **
| **Exhibit  No.** | ** ** | **Item**                                                                                                                                                     | ** ** | **Form**                            | ** ** | **File Number** | ** ** | **Incorporated by  Reference from  Exhibit Number** | ** ** | **Filed with SEC** |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------|------------|----------------------------------------------------------|------------|--------------------|
| 2.1              |       | Form of  Reorganization Agreement                                                                                                                       |       | Amend. No. 1 to  Form S-1 |       | 33-479336       |       | 2.1                                                      |       | 8/17/92            |
| 3.1              |       | Certificate of  Incorporation                                                                                                                                |       | 10-Q                                |       | 000-20574       |       | 3.1                                                      |       | 7/26/05            |
| 3.2              |       | Amendments to  Certificate of Incorporation                                                                                                                  |       | 8-K                                 |       | 000-20574       |       | 3.1                                                      |       | 5/28/08            |
| 3.3              |       | Certificate of  Amendment of Certificate of Incorporation                                                                                                    |       | 10-Q                                |       | 000-20574       |       | 3.3                                                      |       | 7/26/05            |
| 3.4              |       | Amended and Restated  Bylaws as of May 20, 2009                                                                                                         |       | 8-K                                 |       | 000-20574       |       | 3.8                                                      |       | 5/27/09            |
| 3.5              |       | Certificate of  Designation of Series A Junior Participating Cumulative Preferred Stock,  $.01 Par Value                                                |       | 10-Q                                |       | 000-20574       |       | 3.2                                                      |       | 7/26/05            |
| 3.6              |       | Form of Rights  Agreement dated as of August 4, 1998 between The Cheesecake Factory  Incorporated and U.S. Stock Transfer Corporation              |       | 8-A                                 |       | 000-20574       |       | 1                                                        |       | 8/18/98            |
| 3.7              |       | Amendment No. 1 to  Rights Agreement dated as of November 4, 2003 between The Cheesecake  Factory Incorporated and U.S. Stock Transfer Corporation |       | Amend. No. 1 to  Form 8-A |       | 000-20574       |       | 2                                                        |       | 11/13/03           |
| 3.8              |       | Amendment No. 2 to  Rights Agreement dated as of August 1, 2008 between The Cheesecake  Factory Incorporated and Computershare Trust Company       |       | Amend. No 2 to  Form 8-A       |       | 000-25074       |       | 3                                                        |       | 8/1/08             |
| 10.1             |       | David Overton  Employment Agreement effective June 30, 2009*                                                                                            |       | 8-K                                 |       | 000-20574       |       | 10.1                                                     |       | 7/20/09            |
| 10.2             |       | The Cheesecake Factory  Incorporated 1992 Performance Employee Stock Option Plan *                                                                           |       | S-1                                 |       | 33-479336       |       | 10.3                                                     |       | 5/15/92            |
| 10.3             |       | Amendment to The  Cheesecake Factory Incorporated 1992 Performance Employee Stock Option Plan*                                                               |       | S-8                                 |       | 033-88414       |       | 99.1                                                     |       | 1/28/99            |
| 10.4             |       | Second Amendment to The  Cheesecake Factory Incorporated 1992 Performance Employee Stock Option Plan*                                                        |       | 10-Q                                |       | 000-25074       |       | 10.1                                                     |       | 12/8/06            |
| 10.5             |       | The Cheesecake Factory  Incorporated 1997 Non-Employee Director Stock Option Plan (as amended)*                                                              |       | S-8                                 |       | 333-118757      |       | 99.3                                                     |       | 9/2/04             |
| 10.6             |       | Nonqualified Stock  Option Agreement under the Company’s 1997 Non-Employee Director Stock Option  Plan*                                                 |       | 10-Q                                |       | 000-25074       |       | 99.1                                                     |       | 10/26/04           |
| 10.7             |       | Amended and Restated  Year 2000 Omnibus Performance Stock Incentive Plan*                                                                                    |       | S-8                                 |       | 333-118757      |       | 99.1                                                     |       | 9/2/04             |
| 10.8             |       | First Amendment to  Amended and Restated Year 2000 Omnibus Performance Stock Incentive Plan*                                                                 |       | 10-Q                                |       | 000-25074       |       | 10.2                                                     |       | 12/8/06            |
| 10.9             |       | Second Amendment to  Amended and Restated Year 2000 Omnibus Performance Stock Incentive Plan*                                                                |       | 10-K                                |       | 000-25074       |       | 10.10                                                    |       | 2/22/07            |
| 10.10            |       | Third Amendment to  Amended and Restated Year 2000 Omnibus Performance Stock Incentive Plan*                                                                 |       | 8-K                                 |       | 000-25074       |       | 99.1                                                     |       | 7/25/08            |
| 10.11            |       | Amended and Restated  2001 Omnibus Stock Incentive Plan*                                                                                                     |       | S-8                                 |       | 333-118757      |       | 99.2                                                     |       | 9/2/04             |
| 10.12            |       | First Amendment to  Amended and Restated Year 2001 Omnibus Performance Stock Incentive Plan*                                                                 |       | 8-K                                 |       | 000-25074       |       | 99.2                                                     |       | 7/25/08            |
| 10.13            |       | Form of Notice of  Grant of Stock Option and/or Restricted Share Award *                                                                                |       | 8-K                                 |       | 000-25074       |       | 99.1                                                     |       | 1/5/07             |
| 10.14            |       | Amended Form of  Notice of Grant of Stock Option and/or Restricted Share Award*                                                                         |       | 10-K                                |       | 000-25074       |       | 10.17                                                    |       | 2/27/09            |
| 10.15            |       | Amended and Restated  Annual Performance Incentive Plan*                                                                                                     |       | 10-K                                |       | 000-25074       |       | 10.3                                                     |       | 4/4/05             |
| 10.16            |       | Form of Employment  Agreements with Debby R. Zurzolo and Max S. Byfuglin*                                                                               |       | 8-K                                 |       | 000-25074       |       | 99.1                                                     |       | 3/28/06            |
| 10.17            |       | Form of First  Amendment to Employment Agreements                                                                                                       |       | 8-K                                 |       | 000-25074       |       | 99.2                                                     |       | 12/10/07           |

 

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|   |   | with Debby R. Zurzolo  and Max S. Byfuglin*                                                                                                                                                                                                                                 |   |   |   |      |   |   |   |           |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|-----------|--------|--------|--------|----------------|
| 10.18  |   | Form of Second  Amendment to Employment Agreements with Debby R. Zurzolo*                                                                                                                                                                                              |   | 8-K    |   | 000-25074 |   | 99.3   |   | 1/5/09         |
| 10.19  |   | Form of Second  Amendment to Employment Agreements with Max S. Byfuglin*                                                                                                                                                                                               |   | 8-K    |   | 000-25074 |   | 99.2   |   | 1/5/09         |
| 10.20  |   | Loan Agreement dated as  of April 3, 2007 between The Cheesecake Factory Incorporated and  JPMorgan Chase Bank as Administrative Agent, Bank of the West as Syndication  Agent, and Bank of America, Wells Fargo Bank and Rabobank Nederland, as  Documentation Agents |   | 10-Q   |   | 000-25074 |   | 10.5   |   | 4/27/07        |
| 10.21  |   | Form of Amendment  No. 1 to Loan Agreement dated as of March 5, 2008 between The  Cheesecake Factory Incorporated and JPMorgan Chase Bank as Administrative  Agent                                                                                           |   | 8-K    |   | 000-25074 |   | 99.1   |   | 3/11/08        |
| 10.22  |   | Form of Amendment  No. 2 to Loan Agreement dated as of January 2, 2009 between TheCheesecake Factory Incorporated and  JPMorgan Chase Bank as Administrative Agent                                                                                           |   | 8-K    |   | 000-25074 |   | 99.1   |   | 1/6/09         |
| 10.23  |   | Cap/Floor Collar  Transaction dated as of April 3, 2007 between The Cheesecake Factory  Incorporated and JPMorgan Chase Bank (22)                                                                                                                                      |   | 10-Q   |   | 000-25074 |   | 10.7   |   | 4/27/07        |
| 10.24  |   | Cap/Floor Collar  Transaction dated as of October 3, 2007 between The Cheesecake Factory  Incorporated and JPMorgan Chase Bank                                                                                                                                         |   | 10-Q   |   | 000-25074 |   | 10.2   |   | 10/26/07       |
| 10.25  |   | Cap/Floor Collar  Transaction dated as of March 5, 2008 between The Cheesecake Factory  Incorporated and Bank of the West                                                                                                                                              |   | 8-K    |   | 000-25074 |   | 99.1   |   | 3/17/08        |
| 10.26  |   | Master Confirmation  dated as of March 12, 2007 between The Cheesecake Factory Incorporated  and Goldman, Sachs & Co.                                                                                                                                         |   | 10-Q   |   | 000-25074 |   | 10.0   |   | 4/27/07        |
| 10.27  |   | Supplemental  Confirmation dated as of March 12, 2007 between The Cheesecake Factory  Incorporated and Goldman, Sachs & Co.                                                                                                                                   |   | 10-Q   |   | 000-25074 |   | 10.1   |   | 4/27/07        |
| 10.28  |   | Amended and Restated  Executive Savings Plan*                                                                                                                                                                                                                               |   | 8-K    |   | 000-25074 |   | 99.3   |   | 7/25/08        |
| 10.29  |   | First Amendment to  Amended and Restated Executive Savings Plan *                                                                                                                                                                                                           |   | 10-K   |   | 000-25074 |   | 10.34  |   | 2/27/09        |
| 10.30  |   | Employment Agreement  between the Company and Michael E. Jannini dated February 11, 2010*                                                                                                                                                                              |   | 8-K    |   | 000-25074 |   | 10.1   |   | 2/17/10        |
| 10.31  |   | Form of  Indemnification Agreement*                                                                                                                                                                                                                                    |   | 8-K    |   | 000-25074 |   | 99.1   |   | 12/14/07       |
| 10.32  |   | Real Estate Option  Agreement dated April 22, 2005                                                                                                                                                                                                                     |   | 8-K    |   | 000-25074 |   | 99.1   |   | 8/2/05         |
| 10.33  |   | First Amendment to  Option Agreement dated as of June 28, 2005                                                                                                                                                                                                         |   | 8-K    |   | 000-25074 |   | 99.2   |   | 8/2/05         |
| 10.34  |   | Inducement Agreement  dated as of July 27, 2005                                                                                                                                                                                                                        |   | 8-K    |   | 000-25074 |   | 99.3   |   | 8/2/05         |
| 10.35  |   | Amended Agreement of  Grant of Stock Option to Debby R. Zurzolo*                                                                                                                                                                                                            |   | 8-K    |   | 000-25074 |   | 99.2   |   | 12/18/06       |
| 10.36  |   | Amended Agreement of  Grant of Stock Option to Debby R. Zurzolo*                                                                                                                                                                                                            |   | 8-K    |   | 000-25074 |   | 99.3   |   | 12/18/06       |
| 10.37  |   | Stipulation of  Settlement                                                                                                                                                                                                                                                  |   | 8-K    |   | 000-25074 |   | 10.1   |   | 2/28/08        |
| 10.38  |   | Form of Employment  Agreement with W. Douglas Benn dated January 19, 2009*                                                                                                                                                                                        |   | 8-K    |   | 000-25074 |   | 99.1   |   | 1/23/09        |
| 10.39  |   | Notice and Agreement of  Grant of Stock Option and/or Restricted Share Award between the Company and  David Overton dated May 7, 2009*                                                                                                                                 |   | 8-K    |   | 000-20574 |   | 99.1   |   | 5/9/09         |
| 21     |   | List of Subsidiaries                                                                                                                                                                                                                                                        |   | — |   | —    |   | — |   | Filed herewith |
| 23     |   | Consent of Independent  Registered Public Accounting Firm                                                                                                                                                                                                                   |   | — |   | —    |   | — |   | Filed herewith |
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certification  of the Principal Executive Officer                                                                                                                                                                                        |   | — |   | —    |   | — |   | Filed herewith |
| 31.2   |   | Rule 13a-14(a)/15d-14(a) Certification  of the Principal                                                                                                                                                                                                          |   | — |   | —    |   | — |   | Filed herewith |

 

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|   |   | Financial Officer                                                                                                                                                  |   |   |   |   |   |   |   |           |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|----------------|
| 32.1   |   | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 for Principal Executive Officer |   | — |   | — |   | — |   | Filed herewith |
| 32.2   |   | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 for Principal Financial Officer |   | — |   | — |   | — |   | Filed herewith |

 

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* Management contract or compensatory plan orarrangement required to be filed as an exhibit.

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized on the 26th day of February 2010.

 
| ** ** | **THE CHEESECAKE FACTORY INCORPORATED** |
|------------|-----------------------------------------|
| ** ** | ** **                              | ** ** |
| ** ** | ** **                              | **/s/ DAVID OVERTON** |
|       | By:                                     | David Overton |
| * *   | * *                                | *Chairman of the Board and**Chief Executive Officer (principal  executive officer)* |
| * *   | * *                                | * * |
| ** ** | ** **                              | **/s/ W. DOUGLAS BENN** |
|       | By:                                     | W. Douglas Benn |
| * *   | * *                                | *Executive Vice President and Chief Financial  Officer (principal  financial officer)* |
| * *   | * *                                | * * |
| ** ** | ** **                              | **/s/ CHERYL M. SLOMANN** |
|       | By:                                     | Cheryl M. Slomann |
| * *   | * *                                | *Vice President, Controller and Chief Accounting  Officer (principal   accounting officer)* |

 

**POWEROF ATTORNEY**

 

KNOWN ALL PERSONS BYTHESE PRESENTS, that each person whose signature appears below constitutes andappoints David Overton and W. Douglas Benn, and each of them, as his true andlawful attorneys-in-fact and agents, each with full power of substitution andresubstitution, for him and in his name, place and stead, in any and allcapacities, to sign any and all amendments to this Annual Report on Form 10-K,and to file the same, with all exhibits thereto, and other documents inconnection therewith, with the Securities and Exchange Commission, grantingunto said attorneys-in-fact and agents, full power and authority to do andperform each and every act and thing requisite and necessary to be done inconnection therewith, as fully to all intents and purposes as he might or coulddo in person, hereby ratifying and confirming all that said attorney-in-factand agent, or his substitute or substitutes, may lawfully do or cause to bedone by virtue hereof.

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant in thecapacities and on the dates indicated.

 
| **Name**                   | ** ** | **Title**                       | ** ** | **Date**                |
|----------------------------|------------|---------------------------------|------------|-------------------------|
| ** **                 | ** ** | ** **                      | ** ** | ** **              |
| ** **                 | ** ** | ** **                      | ** ** | ** **              |
| /s/ DAVID OVERTON          |       | Chairman  of the Board and      |       | February 26,  2010 |
| David Overton              |       | Chief Executive Officer         |       |                    |
|                       |       | (Principal Executive Officer)   |       |                    |
|                       |       |                            |       |                    |
| /s/ W. DOUGLAS BENN        |       | Executive  Vice President and   |       | February 26,  2010 |
| W. Douglas Benn            |       | Chief Financial Officer         |       |                    |
|                       |       | (Principal Financial Officer)   |       |                    |
|                       |       |                            |       |                    |
| /s/ CHERYL M. SLOMANN |       | Vice  President, Controller and |       | February 26,  2010 |
| Cheryl M. Slomann          |       | Chief Accounting Officer        |       |                    |
|                       |       | (Principal Accounting Officer)  |       |                    |
|                       |       |                            |       |                    |
| /s/ ALEXANDER L. CAPPELLO  |       | Director                        |       | February 26,  2010 |
| Alexander L. Cappello      |       |                            |       |                    |

 

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| /s/ ALLEN J. BERNSTEIN  |   | Director |   | February 26,  2010 |
|-------------------------|--------|----------|--------|-------------------------|
| Allen J. Bernstein      |   |     |   |                    |
|                    |   |     |   |                    |
| /s/ THOMAS L. GREGORY   |   | Director |   | February 26,  2010 |
| Thomas L. Gregory       |   |     |   |                    |
|                    |   |     |   |                    |
| /s/ DAVID R. KLOCK      |   | Director |   | February 26,  2010 |
| David R. Klock          |   |     |   |                    |
|                    |   |     |   |                    |
| /s/ JEROME I. KRANSDORF |   | Director |   | February 26,  2010 |
| Jerome I. Kransdorf     |   |     |   |                    |
|                    |   |     |   |                    |
| /s/ DAVID B. PITTAWAY   |   | Director |   | February 26,  2010 |
| David B. Pittaway       |   |     |   |                    |
|                    |   |     |   |                    |
| /s/ AGNIESZKA WINKLER   |   | Director |   | February 26,  2010 |
| Agnieszka Winkler       |   |     |   |                    |

 

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