10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 2, 2002
Commission File Number 0-20574

THE CHEESECAKE FACTORY INCORPORATED
(Exact Name of Registrant as Specified in its Charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

26950 Agoura Road
Calabasas Hills, California
(Address of principal executive offices) 51-0340466
(IRS Employer Identification No.)


91301
(Zip Code)

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X|     No  |_|

    As of July 22, 2002, 50,632,620 shares of the registrant’s Common Stock, $.01 par value, were outstanding

THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

INDEX

Page
Number

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements:

Consolidated Balance Sheets - July 2, 2002 and January 1, 2002 1  

Consolidated Statements of Operations - Thirteen and twenty-six weeks ended July 2, 2002 and July 3, 2001 2  

Consolidated Statement of Stockholders’ Equity - Twenty-six weeks ended July 2, 2002 3  

Consolidated Statements of Cash Flows - Twenty-six weeks ended July 2, 2002 and July 3, 2001	4
Notes to Consolidated Financial Statements - July 2, 2002	5

Item 2.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations 7  

Item 3. Quantitative and Qualitative Disclosures about Market Risk 14  

PART II. OTHER INFORMATION

Item 4.	Submission of Matters to a Vote of Stockholders	15
Item 6.	Exhibits and Reports on Form 8-K	15

Signatures 16  

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

	July 2, 2002				January 1, 2002
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	22,329		$	14,025
Investments and marketable securities			9,753			8,960
Accounts receivable			5,379			5,745
Other receivables			7,295			13,266
Inventories			13,059			10,771
Prepaid expenses			2,357			3,074
Deferred income taxes			2,148			2,212
Total current assets			62,320			58,053
Property and equipment, net			245,049			218,284
Other assets:
Marketable securities			83,965			69,299
Other receivables			5,562			5,509
Trademarks			1,988			1,965
Other			4,229			3,817
Total other assets			95,744			80,590
Total assets		$	403,113		$	356,927
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	12,116		$	18,885
Income taxes payable			3,510			2,837
Other accrued expenses			39,808			35,385
Total current liabilities			55,434			57,107
Deferred income taxes			10,349			10,349
Stockholders’ equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; none
issued and outstanding			—			—
Junior participating cumulative preferred stock, $.01 par value,
150,000 shares authorized; none issued and outstanding			—			—
Common stock, $.01 par value, 150,000,000 shares authorized;
50,632,620 and  48,610,303 issued at July 2, 2002 and January 1, 2002,
respectively			506			486
Additional paid-in capital			190,036			159,075
Retained earnings			162,515			138,701
Unrealized gain on available-for-sale securities			653			530
Treasury stock, 1,047,300 and 850,500 shares at cost at July 2, 2002 and
January 2, 2001, respectively			(16,380	)		(9,321	)
Total stockholders’ equity			337,330			289,471
Total liabilities and stockholders’ equity		$	403,113		$	356,927

The accompanying notes are an integral part of these consolidated financial statements.

1

THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except net income per share data)
(Unaudited)

	Thirteen Weeks Ended July 2, 2002			Thirteen Weeks Ended July 3, 2001			Twenty-six Weeks Ended July 2, 2002			Twenty-six Weeks Ended July 3, 2001
Revenues:
Restaurant sales		$	151,203		$	124,231		$	288,840		$	236,590
Bakery sales to other foodservice       operators, retailers and distributors			14,157			8,004			26,754			16,166
Total revenues			165,360			132,235			315,594			252,756
Costs and expenses:
Restaurant cost of sales			35,991			31,709			69,411			60,475
Bakery cost of sales			6,725			3,986			12,806			7,913
Labor expenses			50,681			40,494			96,943			77,791
Other operating costs and expenses			36,683			29,131			70,708			56,766
General and administrative expenses			8,314			6,980			15,873			13,308
Depreciation and amortization expenses			5,532			4,093			10,711			7,974
Preopening costs			2,247			1,420			4,931			2,848
Total costs and expenses			146,173			117,813			281,383			227,075
Income from operations			19,187			14,422			34,211			25,681
Interest income, net			994			1,090			1,990			2,438
Other income, net			423			454			834			925
Income before income taxes			20,604			15,966			37,035			29,044
Income tax provision			7,356			5,748			13,221			10,456
Net income		$	13,248		$	10,218		$	23,814		$	18,588
Net income per share:
Basic		$	0.27		$	0.22		$	0.49		$	0.39
Diluted		$	0.26		$	0.21		$	0.47		$	0.37
Weighted average shares outstanding:
Basic			48,898			47,382			48,832			47,327
Diluted			50,915			49,631			51,069			49,677

The accompanying notes are an integral part of these consolidated financial statements.

2

THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)

	Common Stock	Additional Paid-in Capital	Retained Earnings	Gain (Loss) on Available-for-Sale Securities	Treasury Stock		Total
Balance, January 1, 2002	$486	$159,075	$138,701	$530	$  (9,321	)	$289,471
Comprehensive income:
Net income	—	—	23,814	—	—
Net unrealized gain	—	—	—	123	—
Total comprehensive income							23,937
Issuance of common stock pursuant to   stock option plan	20	17,740	—	—	—		17,760
Tax benefit related to stock option   plan	—	13,221	—	—	—		13,221
Purchase of treasury stock	—	—	—	—	(7,059	)	(7,059	)
Balance, July 2, 2002	$506	$190,036	$162,515	$653	$(16,380	)	$337,330

The accompanying notes are an integral part of these consolidated financial statements.

3

THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	Twenty-six Weeks Ended July 2, 2002				Twenty-six Weeks Ended July 3, 2001
Cash flows from operating activities:
Net income		$	23,814		$	18,588
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			10,711			7,974
Gain on available-for-sale securities			(670	)		(978	)
Deferred income taxes			(4	)		(27	)
Changes in assets and liabilities:
Accounts receivable			366			826
Other receivables			5,918			4,096
Inventories			(2,288	)		(2,114	)
Prepaid expenses			717			340
Trademarks			(68	)		(80	)
Other			(472	)		(407	)
Accounts payable			(6,769	)		(2,537	)
Income taxes payable			13,894			6,679
Other accrued expenses			4,423			478
Net cash provided by operating activities			49,572			32,838
Cash flows from investing activities:
Additions to property and equipment			(37,371	)		(41,740	)
Investments in available-for-sale securities			(67,958	)		(70,555	)
Sales of available-for-sale securities			53,360			62,642
Net cash used in investing activities			(51,969	)		(49,653	)
Cash flows from financing activities:
Issuance of common stock			20			2
Dividends paid for fractional shares			—			(28	)
Proceeds from exercise of employee stock options			17,740			3,215
Purchase of treasury stock			(7,059	)		(2,198	)
Net cash provided by financing activities			10,701			991
Net change in cash and cash equivalents			8,304			(15,824	)
Cash and cash equivalents at beginning of period			14,025			34,284
Cash and cash equivalents at end of period		$	22,329		$	18,460
Supplemental disclosures:
Interest paid		$	—		$	—
Income taxes paid		$	145		$	3,775

The accompanying notes are an integral part of these consolidated financial statements.

4

THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 2, 2002
(Unaudited)

NOTE A – BASIS OF PRESENTATION

     The accompanying consolidated financial statements include the accounts of The Cheesecake Factory Incorporated (referred to herein as the “Company” or in the first person notations “we”, “us” and “our”) and all of its subsidiaries (The Cheesecake Factory Restaurants, Inc.; The Cheesecake Factory Bakery Incorporated; The Cheesecake Factory Assets Co. LLC; The Houston Cheesecake Factory Corporation; TCF Stonebriar Club Incorporated and Grand Lux Cafe LLC) for the thirteen weeks and twenty-six weeks ended July 2, 2002 prepared in accordance with generally accepted accounting principles and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The financial statements presented herein have not been audited by independent public accountants, but include all material adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the financial condition, results of operations, changes in stockholders’ equity and cash flows for the period. However, these results are not necessarily indicative of results for any other interim period or for the full fiscal year. The consolidated balance sheet data presented herein for January 1, 2002 was derived from our audited consolidated financial statements for the fiscal year then ended, but does not include all disclosures required by generally accepted accounting principles. The preparation of financial statements in accordance with generally accepted accounting principles requires us to make certain estimates and assumptions for the reporting periods covered by the financial statements. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses. Actual amounts could differ from these estimates.

     Certain information and footnote disclosures normally included in financial statements in accordance with generally accepted accounting principles have been omitted pursuant to requirements of the Securities and Exchange Commission. We believe the disclosures included in the accompanying interim financial statements and footnotes are adequate to make the information not misleading, but should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K for the fiscal year ended
January 1, 2002.

NOTE B – INVESTMENTS AND MARKETABLE SECURITIES

     Investments and marketable securities, all classified as available-for-sale, consisted of the following as of July 2, 2002 (in thousands):

Classification	Cost	Fair Value	Unrealized Pretax Gain/ (Loss)			Balance Sheet Amount	Maturity
Current assets:
Available-for-sale securities:
Corporate debt securities	$  9,660	$ 9,753		$	93	$ 9,753	December 2002 to June 2003
Other assets:
Available-for-sale securities:
U.S. Treasury and Agency securities	$52,935	$53,419		$	484	$53,419	November 2003 to November 2006
Corporate debt securities	30,108	30,546			438	30,546	August 2003 to October 2006
Total	$80,043	$83,965		$	922	$83,965

5

THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July 2, 2002
(Unaudited)

NOTE C – NET INCOME PER SHARE

     Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per share includes the dilutive effect of potential stock option exercises, calculated using the treasury stock method.

NOTE D – STOCK TRANSACTIONS

     During fiscal 1998, our Board of Directors authorized the repurchase of up to 1,687,500 shares of our common stock for reissuance upon the exercise of stock options under the Company’s current stock option plans. As of July 2, 2002, we have repurchased 1,047,300 shares at a total cost of approximately $16.4 million under this authorization.

NOTE E – COMPREHENSIVE INCOME

     Comprehensive income consisted of (in thousands):

	Thirteen Weeks Ended July 2, 2002			Thirteen Weeks Ended July 3, 2001				Twenty-six Weeks Ended July 2, 2002			Twenty-six Weeks Ended July 3, 2001
Net income		$	13,248		$	10,218			$	23,814		$	18,588
Net unrealized gain (loss) on available-      for-sale securities			985			(353	)			123			(200	)
Total comprehensive income		$	14,233		$	9,865			$	23,937		$	18,388

     The Company principally invests its excess cash balances in U.S. Treasury and Agency securities, investment grade corporate debt securities rated “A” or better and money market mutual funds. The Company has historically classified all of its investments and marketable securities as available-for-sale securities, even though its current liquidity position and requirements provide it with the ability to hold a substantial amount of such securities to maturity. Available-for-sale securities are reported at their fair values, with unrealized gains and losses on such securities reflected, net of tax effect, in total comprehensive income and as a separate component of stockholders’ equity. Realized gains and losses are included, net of tax effect, in net income. The net unrealized gain or loss on the Company’s available-for-sale securities will fluctuate from period to period depending on changes in the general level of interest rates and other factors.

NOTE F – RECENT ACCOUNTING PRONOUNCEMENTS

     In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 was effective in July 2001 and SFAS No. 142 became effective in January 2002. The new standards did not have any impact on our consolidated financial statements.

6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     Certain statements in this Form 10-Q which are not historical facts may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe”, “expect”, “anticipate”, “plan”, “intend”, “may”, “will”, “can”, “should”, “could” and similar expressions are intended to identify such forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company and its subsidiaries to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements. Such risks, uncertainties, and other factors include, but are not limited to: changes in general economic, political or public safety conditions which affect consumer behavior and spending for restaurant dining occasions, including the ongoing ramifications of the September 11, 2001 terrorist attacks and the governmental response thereto; increasing competition in the upscale casual dining segment of the restaurant industry; adverse weather conditions which impact customer traffic at the Company’s restaurants in general and which cause the temporary underutilization of outdoor patio seating available at several of the Company’s restaurants; various factors which increase the cost to develop and/or affect the number and timing of the openings of new restaurants, including factors under the influence and control of government agencies and landlords; changes in the availability and/or cost of raw materials, management and hourly labor, energy or other resources necessary to successfully operate the Company’s restaurants and bakery production facility; the Company’s ability to raise prices sufficiently to offset cost increases, including increased costs for minimum wages, employee benefits and insurance arrangements; the success of strategic and operating initiatives, including new restaurant concepts and new bakery product lines; depth of management; adverse publicity about the Company, its restaurants or bakery products; the Company’s current dependence on a single bakery production facility; the Company’s ability to obtain and retain customers for its bakery operations; changes in timing and/or scope of the purchasing plans of large-account bakery customers which can cause fluctuations in bakery sales and the Company’s consolidated operating results; the rate of growth of general and administrative expenses associated with building a strengthened corporate infrastructure to support the Company’s growing operations; relations between the Company and its employees; the availability, amount, type, and cost of capital for the Company and the deployment of such capital, including the amounts of planned capital expenditures; changes in, or any failure to comply with, governmental regulations; the amount of, and any changes to, tax rates and the success of various initiatives to minimize taxes; and other risks and uncertainties referenced in this Form 10-Q and the Company’s Form 10-K filed with the Securities and exchange Commission for the fiscal year ended January 1, 2002.

General

     As of July 22, 2002, The Cheesecake Factory Incorporated operated 52 upscale, full-service, casual dining restaurants under The Cheesecake Factory® mark. We also operated three upscale casual dining restaurants under the Grand Lux Cafe® mark in Los Angeles, California, Las Vegas, Nevada and Chicago, Illinois; one self-service, limited menu “express” foodservice operation under The Cheesecake Factory Express® mark inside the DisneyQuest® family entertainment center in Orlando, Florida; and a bakery production facility. We also licensed three limited menu bakery cafes under The Cheesecake Factory Bakery Cafe® mark to another foodservice operator.

     Our revenues consist of sales from our restaurant operations and sales from our bakery operations to other foodservice operators, retailers and distributors (“bakery sales”). Sales and cost of sales are separately reported for restaurant and bakery activities. All other operating cost and expense categories are reported on a combined basis for both restaurant and bakery activities.

     The Company utilizes a 52/53 week fiscal year ending on the Tuesday closest to December 31 for financial reporting purposes. Fiscal 2002 will consist of 52 weeks and will end on December 31, 2002.

7

Results of Operations

     The following table sets forth, for the periods indicated, the Consolidated Statements of Operations of the Company expressed as percentages of total revenues. The results of operations for the thirteen weeks and twenty-six weeks ended July 2, 2002 are not necessarily indicative of the results to be expected for the full fiscal year.

	Thirteen Weeks Ended July 2, 2002	Thirteen Weeks Ended July 3, 2001	Twenty-six Weeks Ended July 2, 2002	Twenty-six Weeks Ended July 3, 2001
	%	%	%	%
Revenues:
Restaurant sales	91.4	93.9	91.5	93.6
Bakery sales to other foodservice       operators, retailers and distributors	8.6	6.1	8.5	6.4
Total revenues	100.0	100.0	100.0	100.0
Costs and expenses:
Restaurant cost of sales	21.8	24.0	22.0	23.9
Bakery cost of sales	4.1	3.0	4.1	3.1
Labor expenses	30.6	30.6	30.7	30.8
Other operating costs and expenses	22.2	22.0	22.4	22.4
General and administrative expenses	5.0	5.3	5.0	5.3
Depreciation and amortization       expenses	3.3	3.1	3.4	3.2
Preopening costs	1.4	1.1	1.6	1.1
Total costs and expenses	88.4	89.1	89.2	89.8
Income from operations	11.6	10.9	10.8	10.2
Interest income, net	0.6	0.8	0.6	1.0
Other income, net	0.3	0.3	0.3	0.3
Income before income taxes	12.5	12.0	11.7	11.5
Income tax provision	4.5	4.3	4.2	4.1
Net income	8.0	7.7	7.5	7.4

Thirteen Weeks Ended July 2, 2002 Compared to Thirteen Weeks Ended July 3, 2001

Revenues

     For the thirteen weeks ended July 2, 2002, the Company’s total revenues increased 25.1% to $165.4 million compared to $132.2 million for the thirteen weeks ended July 3, 2001. Restaurant sales increased 21.7% to $151.2 million compared to $124.2 million for the same period of the prior year. The $27.0 million increase in restaurant sales consisted of a $1.5 million or 1.6% increase in comparable restaurant sales and a $25.5 million increase from the openings of new restaurants. Sales in comparable restaurants benefited, in part, from the impact of an effective menu price increase of approximately 1% which was taken in January 2002.

     Bakery sales increased 77.5% to $14.2 million for the thirteen weeks ended July 2, 2002 compared to $8.0 million for the same period of the prior year. The increased sales were principally attributable to the expanded rollout of selected baked products to substantially all outlets of an existing national warehouse club customer and the initial rollout of selected products to two new national foodservice customers. Now that these rollouts are substantially completed, we currently expect our bakery sales comparisons for the second half of fiscal 2002 to be positive compared to the same period of the prior year, but not in the same magnitude as achieved during the first half of the year. For the thirteen weeks ended July 2, 2002, sales to warehouse clubs comprised approximately 51% of total bakery sales compared to approximately 47% for the same period of the prior year.

8

Restaurant Cost of Sales

     During the thirteen weeks ended July 2, 2002, restaurant cost of sales increased 13.6% to $36.0 million compared to $31.7 million for the comparable period last year. The related increase of $4.3 million was primarily attributable to new restaurant openings. As a percentage of restaurant sales, these costs decreased to 23.8% versus 25.5% for the same period of the prior year, principally as a result of lower market prices in general for most of the food commodities used in our restaurants, and increased volume purchase discounts and purchasing power as a result of our continued growth. Assuming that weather or other market conditions outside of our control do not disrupt the current favorable food cost environment, we currently expect our restaurant cost of sales for the second half of fiscal 2002 to continue to compare favorably to the same period of the prior year.

     The menu at our restaurants is one of the most diversified in the industry and, accordingly, is not overly dependent on a single commodity. The principal commodity categories for our restaurants include produce, poultry, meat, fish and seafood, cheese, other dairy products, bread and general grocery items. While we have taken steps to qualify multiple suppliers and enter into longer-term supply agreements for some of the key commodities used in our restaurant operations, there can be no assurance that future supplies and costs for commodities used in our restaurant operations will not fluctuate due to weather and other market conditions outside of our control. Approximately one-third of our restaurant cost of sales consists of fresh produce, poultry and dairy commodities that can be subject to supply and cost fluctuations due principally to weather and general agricultural conditions. For new restaurants, cost of sales will typically be higher than normal during the first 90-120 days of operations until our management team at each new restaurant becomes more accustomed to optimally predicting, managing and servicing the high sales volumes typically experienced by our restaurants.

Bakery Cost of Sales

     Bakery cost of sales, which include ingredient, packaging and production supply costs, were $6.7 million for the thirteen weeks ended July 2, 2002 compared to $4.0 million for the same period of the prior year. As a percentage of bakery sales, bakery costs for the thirteen weeks ended July 2, 2002 decreased to 47.5% compared to 49.8% for the comparable period last year. This decrease was primarily attributable to a shift in the mix of sales to products with slightly lower cost of sales as a percentage of their associated price (but with slightly higher selling expenses, which are included in the “other operating costs and expenses” category). While we have taken steps to qualify multiple suppliers and enter into longer-term supply agreements for some of the key commodities used in our bakery operations, there can be no assurance that future supplies and costs for commodities used in our bakery operations will not fluctuate due to weather and other market conditions beyond our control. During the first quarter of fiscal 2002, we entered into agreements for substantially all of our cream cheese requirements for the 12-month period thereafter with two suppliers at a fixed cost per pound that is slightly higher than the cost experienced for fiscal 2001. We may also purchase cream cheese on the spot market as necessary to supplement these agreements.

Labor Expenses

     Labor expenses, which include restaurant-level labor costs and bakery direct production labor costs (including associated fringe benefits), increased 25% to $50.7 million for the thirteen weeks ended July 2, 2002 compared to $40.5 million for the same period of the prior year. This increase was principally due to the impact of new restaurant openings. As a percentage of total revenues, labor expenses were unchanged from the comparable period last year at 30.6%, as the California minimum wage increase of $0.50 per hour effective January 2002 and other wage increases were effectively offset by the 25% increase in total revenues that leveraged the fixed cost component of our labor expenses. As of July 22, 2002, 14 of our restaurant locations (approximately 25%) were in California. We believe the latest California minimum wage increase will not have a material impact on our labor expenses as a percentage of our total revenues. For new restaurants, labor expenses will typically be higher than normal during the first 90-120 days of operations until our management team at each new restaurant becomes more accustomed to optimally predicting, managing and servicing the high sales volumes typically experienced by our restaurants.

9

Other Operating Costs and Expenses

     Other operating costs and expenses consist of restaurant-level occupancy expenses (rent, insurance, licenses, taxes and utilities), other operating expenses (excluding food costs and labor expenses reported separately) and bakery production overhead, selling and distribution expenses. Other operating costs and expenses increased 26% to $36.7 million for the thirteen weeks ended July 2, 2002 compared to $29.1 million for the same period of the prior year. This increase was principally attributable to new restaurant openings. As a percentage of total revenues, other operating costs and expenses increased slightly to 22.2% for the thirteen weeks ended July 2, 2002 versus 22.0% for the same period of fiscal 2001. This slight percentage increase was primarily attributable to the impact of increased costs of our insurance arrangements and increased selling costs associated with higher bakery sales, partially offset by slightly lower costs for electric and natural gas services to our restaurants.

General and Administrative Expenses

     General and administrative (“G&A”) expenses consist of restaurant support expenses (field supervision, manager recruitment and training, relocation and other related expenses), bakery administrative expenses, and corporate support and governance expenses. G&A expenses increased 18.6% to $8.3 million for the thirteen weeks ended July 2, 2002 compared to $7.0 million for the same period of fiscal 2000. As a percentage of total revenues, G&A expenses decreased to 5.0% for the thirteen weeks ended July 2, 2002 compared to 5.3% for the same period of the prior year. This decrease was principally attributable to the leveraging of the fixed component of these costs with higher sales volumes. We intend to continue strengthening our operational support infrastructure during the remainder of fiscal 2002, which will likely generate a higher absolute amount of general and administrative expenses for the fiscal year.

Depreciation and Amortization Expenses

     Depreciation and amortization expenses were $5.5 million for the thirteen weeks ended July 2, 2002 compared to $4.1 million for the thirteen weeks ended July 3, 2001. As a percentage of total revenues, depreciation and amortization expenses increased slightly to 3.3% for the thirteen weeks ended July 2, 2002 compared to 3.1% for the same period last year. The increase of $1.4 million for the thirteen weeks ended
July 2, 2002 primarily consisted of higher restaurant depreciation expenses which was principally due to the openings of new restaurants.

Preopening Costs

     Incurred preopening costs were $2.2 million for the thirteen weeks ended July 2, 2002 compared to $1.4 million for the same period of the prior year. We opened one Cheesecake Factory restaurant during each of the thirteen weeks ended July 2, 2002 and July 3, 2001. However, we also incurred substantial preopening costs during the thirteen weeks ended July 2, 2002 related to the third Grand Lux Cafe restaurant, which opened in Chicago on July 16, 2002.

     Preopening costs include incremental out-of-pocket costs that are directly related to the openings of new restaurants that are not otherwise capitalizable. As a result of the highly customized and operationally complex nature of our upscale, high volume concepts, the restaurant preopening process for our new restaurants is more extensive, time consuming and costly relative to that of most chain restaurant operations. The preopening cost for one of our Cheesecake Factory restaurants usually includes costs to relocate and compensate an average of 11-12 restaurant management employees prior to opening; costs to recruit and train an average of 200-250 hourly restaurant employees; wages, travel and lodging costs for our opening training team and other support employees; and costs for practice service activities. Preopening costs will vary from location to location depending on a number of factors, including the proximity of our existing restaurants; the size and physical layout of each location; the number of management and hourly employees required to open each restaurant; the relative difficulty of the restaurant staffing process; the cost of travel and lodging for different metropolitan areas; and the extent of unexpected delays, if any, in obtaining final licenses and permits to open the restaurants, which may also be caused by landlords.

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     Our direct preopening cost for a 10,000 square foot, single-story Cheesecake Factory restaurant in an established Company market averages approximately $600,000 to $700,000. Preopening costs will usually be higher for larger restaurants, our initial entry into new markets and for new concepts such as Grand Lux Cafe. We usually incur the most significant portion of preopening costs for a typical restaurant opening within the two-month period immediately preceding and the month of the restaurant’s opening. Preopening costs will fluctuate from period to period, based on the number and timing of restaurant openings and the specific preopening costs incurred for each restaurant, and the fluctuations could be significant. We expense preopening costs as incurred. Based on current growth objectives for fiscal 2002 and 2003, preopening costs for each of those years will likely exceed the respective amount of preopening costs for the applicable prior year.

Twenty-six Weeks Ended July 2, 2002 Compared to Twenty-six Weeks Ended July 3, 2001

Revenues

     For the twenty-six weeks ended July 2, 2002, the Company’s total revenues increased 24.8% to $315.6 million compared to $252.8 million for the twenty-six weeks ended July 3, 2001. Restaurant sales increased 22.1% to $288.8 million compared to $236.6 million for the same period of the prior year. The $52.2 million increase in restaurant sales consisted of a $3.6 million or 1.8% increase in comparable restaurant sales and a $48.6 million increase from the openings of new restaurants. Sales in comparable restaurants benefited, in part, from the impact of an effective menu price increase of approximately 1% which was taken in January 2002.

     Bakery sales increased 65.4% to $26.8 million for the twenty-six weeks ended July 2, 2002 compared to $16.2 million for the same period of the prior year. The increase was principally attributable to higher sales volumes to warehouse clubs, foodservice operators and distributors.

Restaurant Cost of Sales

     During the twenty-six weeks ended July 2, 2002, restaurant cost of sales increased 14.7% to $69.4 million compared to $60.5 million for the comparable period last year. The related increase of $8.9 million was primarily attributable to new restaurant openings. As a percentage of restaurant sales, this cost decreased to 24.0% versus 25.6% for the same period of the prior year, principally as a result of slightly lower commodity costs due to favorable market prices and increased volume purchase discounts.

Bakery Cost of Sales

     Bakery cost of sales were $12.8 million for the twenty-six weeks ended July 2, 2002 compared to $7.9 million for the same period of the prior year. As a percentage of bakery sales, bakery cost of sales for the twenty-six weeks ended July 2, 2002 decreased to 47.9% compared to 48.9% for the comparable period last year. This percentage decrease was primarily due to a shift in the mix of sales to products with slightly lower cost of sales as a percentage of their associated price (but with slightly higher selling expenses, which are reported in the “other operating costs and expenses” category) partially offset by a slight increase in the cost for certain dairy-related commodities.

Labor Expenses

     Labor expenses were $96.9 million for the twenty-six weeks ended July 2, 2002 compared to $77.8 million for the same period of the prior year. The related increase of $19.1 million was principally due to the impact of new restaurant openings. As a percentage of total revenues, labor expenses for the twenty-six weeks ended
July 2, 2002 decreased slightly to 30.7% compared to 30.8% for the comparable period last year.

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Other Operating Costs and Expenses

     Other operating costs and expenses increased 24.5% to $70.7 million for the twenty-six weeks ended July 2, 2002 compared to $56.8 million for the same period of the prior year. The related increase of $13.9 million was principally attributable to new restaurant openings. As a percentage of total revenues, occupancy and other expenses were 22.4% for both the twenty-six weeks ended July 2, 2002 and the comparable period of fiscal 2001.

General and Administrative Expenses

     General and administrative expenses increased to $15.9 million for the twenty-six weeks ended July 2, 2002 compared to $13.3 million for the same period of fiscal 2001, an increase of $2.6 million or 19.5%. As a percentage of total revenues, general and administrative expenses decreased to 5.0% for the twenty-six weeks ended July 2, 2002 compared to 5.3% for the same period of the prior year. This decrease was principally attributable to the leveraging of the fixed component of these costs with higher sales volumes.

Depreciation and Amortization Expenses

     Depreciation and amortization expenses were $10.7 million for the twenty-six weeks ended July 2, 2002 compared to $8.0 million for the same period of the prior year. The related increase of $2.7 million was principally attributable to new restaurant openings. As a percentage of total revenues, depreciation and amortization expenses were 3.4% for the twenty-six weeks ended July 2, 2002 compared to 3.2% for the same period last year.

Preopening Costs

     Incurred preopening costs were $4.9 million for the twenty-six weeks ended July 2, 2002 compared to $2.8 million for the same period of the prior year. We incurred preopening costs to open four Cheesecake Factory restaurants during the twenty-six weeks ended July 2, 2002 and a Grand Lux Cafe on July 16, 2002 compared to three Cheesecake Factory restaurants during the same period of the prior year. In addition, we incurred preopening costs in both periods for other restaurant openings in progress.

Liquidity and Capital Resources

     The following table sets forth a summary of the Company’s key liquidity measurements at July 2, 2002 and January 1, 2002.

	July 2, 2002		January 1, 2002
	(dollar amounts in millions)
Cash and marketable securities on hand	$	116.0	$	92.3
Net working capital (1)	$	6.9	$	0.9
Adjusted net working capital (1)	$	90.9	$	70.3
Current ratio		1.1:1		1.0:1
Adjusted current ratio (1)		2.6:1		2.2:1
Long-term debt		—		—

          (1) Includes all marketable securities classified as either current or noncurrent assets.

     During the twenty-six weeks ended July 2, 2002, our balance of cash and marketable securities on hand increased by $23.7 million to $116.0 million from the January 2, 2001 balance. This increase was primarily attributable to increased cash flow from operations and proceeds from the exercise of employee stock options. In the table above, we also present adjusted net working capital and current ratio calculations that include all marketable securities classified as either current or noncurrent assets. We believe these adjusted calculations more properly reflect our overall liquidity position. In response to the recent decrease in the general level of interest rates and our forecasted cash flow requirements, we have been slightly lengthening the average maturity of our marketable securities portfolio in order to capture additional investment yield. As a result, most of our investments in marketable securities now have maturities in excess of one year and are classified as noncurrent assets, but remain available for our liquidity requirements.

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     As of July 22, 2002, there were no borrowings outstanding under the Company’s $25 million revolving credit and term loan facility (the “Credit Facility”). $1 million of the Credit Facility has been reserved to support a letter of credit for our insurance programs. Borrowings under the Credit Facility will bear interest at variable rates based, at our option, on either the prime rate of interest, the lending institution’s cost of funds rate plus 0.75% or the applicable LIBOR rate plus 0.75%. The Credit Facility expires on May 31, 2003. On that date, a maximum of $25 million of any borrowings outstanding under the Credit Facility automatically convert into a four-year term loan, payable in equal quarterly installments at interest rates of 0.5% higher than the applicable revolving credit rates. The Credit Facility is not collateralized and requires us to maintain certain financial ratios and to observe certain restrictive covenants with respect to the conduct of its operations, with which we are currently in compliance.

     During fiscal 2001, our cash outlays and accrued liability for capital expenditures were approximately $74 million. Of that amount, approximately $56 million was related to new restaurant openings (including several restaurants under construction as of fiscal year-end). The remainder consisted of approximately $8 million for maintenance and capacity addition expenditures for our existing restaurants; approximately $8 million for restaurant-level technology upgrades and approximately $2 million for bakery and corporate capital expenditures.

     For fiscal 2002, we currently estimate our capital expenditure requirement to range between $70-$75 million, net of agreed-upon landlord construction contributions and excluding $9-$10 million of expected noncapitalizable preopening costs for new restaurants. This estimate contemplates $60-$64 million for as many as 12 new restaurants to be opened during fiscal 2002, which includes an increase in estimated construction-in-progress disbursements for anticipated fiscal 2003 openings. The estimated capital expenditures also reflect the fact that two of our planned 12 restaurant openings for fiscal 2002 do not have any landlord construction contributions. Not every potential location that we seek to develop into a restaurant may have landlord construction contributions available, and we would therefore not expect to incur a contingent rent obligation on such locations. Expected capital expenditures for fiscal 2002 also include approximately $5 million for maintenance and capacity addition expenditures to our existing restaurants; $4-$5 million to build out the new leased space for additional training, R&D and office space adjacent to our existing corporate facility (that is scheduled to commence during the second half of fiscal 2002); and $1 million to add capacity to our existing bakery production facility. We lease the land and building shells for substantially all of our restaurants for primary lease terms that usually range from 15 to 20 years for our new restaurants. We expend cash for leasehold improvements and furnishings, fixtures and equipment for our new restaurants.

     We have commenced an evaluation of various alternatives to increase our future bakery production capacity, which will likely be located in a region of the country other than the West Coast. We currently expect to complete our evaluation before the end of fiscal 2002 and to commence initial capacity addition activities during fiscal 2003.

     Based on our current expansion objectives and opportunities, we believe that our cash and short-term investments on hand, coupled with expected cash provided by operations, available borrowings under our Credit Facility and expected landlord construction contributions should be sufficient to finance our planned capital expenditures and other operating activities through fiscal 2003. We may seek additional funds to finance our growth in the future. However, there can be no assurance that such funds will be available when needed or be available on terms acceptable to us.

     During fiscal 1998, our Board of Directors authorized the repurchase of up to 1,687,500 shares of our common stock for reissuance upon the exercise of stock options under the Company’s current stock option plans. As of July 2, 2002, we have repurchased 1,047,300 shares at a total cost of approximately $16.4 million under this authorization.

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Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 was effective in July 2001 and SFAS No. 142 became effective in January 2002. The new standards did not have any impact on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     We are exposed to market risk from changes in interest rates on funded debt. This exposure relates to our $25 million revolving credit and term loan facility (the “Credit Facility”). There were no borrowings outstanding under the Credit Facility during the second quarter of 2002. Borrowings under the Credit Facility bear interest at variable rates based on either the prime rate of interest, the lending institution’s cost of funds plus 0.75% or LIBOR plus 0.75%. A hypothetical 1% interest rate change would not have any current impact on our results of operations.

     A change in market prices also exposes us to market risk related to our investments in marketable securities. As of July 2, 2002, we held $93.7 million in marketable securities. A hypothetical 10% decline in the market value of those securities would result in a $9.4 million unrealized loss and a corresponding decline in their fair value. This hypothetical decline would not affect cash flow from operations and would not have an impact on net income until the securities were disposed of.

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PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Stockholders

     Our Annual Meeting of Stockholders was held on May 16, 2002. The matter submitted for a vote and the related election results are as follows:

1. To reelect David Overton to the Board of Directors of the Company for a three-year term which will expire at the Annual Meeting of Stockholders to be held in the year 2005. The results of proxies voted for the reelection of Mr. Overton are as follows:

Votes For	Votes Withheld
47,811,045	271,895

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.

10.12 Michael P. Berry Employment Agreement.

(b) Reports on Form 8-K.

None.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

THE CHEESECAKE FACTORY INCORPORATED

Date: July 22, 2002

By:   /s/ DAVID OVERTON
      ——————————————

David Overton
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)

By: /s/   GERALD W. DEITCHLE
      ——————————————

Gerald W. Deitchle
Executive Vice President, Corporate Operations
and Chief Financial Officer
(Principal Financial Officer)

By: /s/   MICHAEL J. DIXON
      ——————————————

Michael J. Dixon
Vice President - Finance and Controller
(Principal Accounting Officer)

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EX-10.12

EXHIBIT 10.12

EMPLOYMENT AGREEMENT

     This EMPLOYMENT AGREEMENT (the “Agreement”) is entered into this 23rd day of May, 2002, between THE CHEESECAKE FACTORY RESTAURANTS, INC., a California corporation (the “Company”) and MICHAEL BERRY (the “Employee”).

     WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions for the employment relationship of the Employee with the Company.

     NOW, THEREFORE, in consideration of the promises and mutual covenants and agreements herein contained and intending to be legally bound hereby, the Company and the Employee hereby agree as follows:

     1. Certain Terms Defined. For purposes of this Agreement:

               1.1 “Permanently Disabled” means a physical or mental condition that occurs and persists which, in the written opinion of a licensed physician (a specialist in the field) selected by the Board in good faith, has rendered Employee unable to perform Employee’s duties hereunder for a period of ninety (90) days or more and, in the written opinion of such physician, the condition will continue for an indefinite period of not less than an additional ninety (90) day period, rendering the Employee unable to return to Employee’s duties.

               1.2 “Affiliate” shall have the meaning given such term in the Exchange Act.

               1.3 “Base Salary” means, as of the date of determination or Date of Termination, the base salary of Employee then in effect pursuant to Section 4.

               1.4 “Beneficial Owner” shall have the meaning given to such term in the Exchange Act.

               1.5 “Board” shall mean the Board of Directors of the Company.

               1.6 “Cause” means: (1) the willful failure by the Employee to substantially perform his duties for the Company (other than any such failure resulting from his incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to him by the Board, which demand specifically identifies the manner in which the Board believes that he has not substantially performed his duties; (2) the Employee’s willful misconduct that is demonstrably and materially injurious to the Company, CFI, or its Affiliates, monetarily or otherwise; (3) Employee’s willful failure to comply with written policies of CFI and the Company, including the CFI Code of Ethics and Code of Conduct and securities trading policies, (4) willful breach of Section 13 hereof, or (5) the Employee’s commission of such acts of dishonesty, fraud, misrepresentation or other acts of moral turpitude as would prevent the effective performance of his duties. No act, or failure to act, on the Employee’s part shall be deemed “willful” unless done, or omitted to be done, by him not in good faith and without the reasonable belief that his action or omission was in the best interest of the Company.

               1.7 “Change of Control” means the occurrence of any of the following:

                          (a) any Person (other than Employee) or that Person’s Affiliate is or becomes the Beneficial Owner, directly or indirectly, of securities of CFI representing 30% or more of the combined voting power of CFI’s then outstanding voting securities (“Voting Securities”); or

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                          (b) the stockholders of CFI approve a merger or consolidation of CFI with any other corporation (or other entity), other than:

                               (i) a merger or consolidation which would result in the Voting Securities of CFI outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the Voting Securities of CFI or such surviving entity outstanding immediately after such merger or consolidation;

                               (ii) a merger or consolidation effected to implement a recapitalization of CFI (or similar transaction) in which no Person acquires more than 20% of the combined voting power of CFI’s then outstanding Voting Securities; or

                               (iii) a merger or consolidation which would result in the directors of CFI (who were directors immediately prior thereto) continuing to constitute at least 50% of all directors of the surviving entity after such merger or consolidation. In this paragraph (iii), “surviving entity” shall mean only an entity in which all CFI’s stockholders immediately before such merger or consolidation (determined without taking into account any stockholders properly exercising appraisal or similar rights) become stockholders by the terms of such merger or consolidation, and the phrase “directors of CFI (who were directors immediately prior thereto)” shall include only individuals who were directors of CFI at the beginning of the 24 consecutive month period preceding the date of such merger or consolidation; or

                          (c) the stockholders of CFI approve a plan of complete liquidation or an agreement for the sale or disposition of all or substantially all of CFI’s assets; or

                          (d) during any period of 24 consecutive months, individuals, who at the beginning of such period constitute the Board of Directors of CFI, and any new director whose election by the Board of Directors of CFI, or whose nomination for election by CFI’s stockholders, was approved by a vote of at least one-half (½) of the directors then in office (other than in connection with a contested election), cease for any reason to constitute at least a majority of the Board of Directors of CFI.

               1.8 “CFI” means The Cheesecake Factory Incorporated, a Delaware corporation.

               1.9 “Code” means the Internal Revenue Code of 1986, as amended.

               1.10 “Committee” means the Compensation Committee of the CFI Board of Directors.

               1.11 “Employment Period” has the meaning set forth in Section 2.

               1.12 “Exchange Act” means the Securities Exchange Act of 1934, as amended.

               1.13 “Person” is given the meaning as such term is used in Sections 13(d) and 14(d) of the Exchange Act; provided, however, that unless this Agreement provides to the contrary, the term shall not include CFI, any trustee or other fiduciary holding securities under an employee benefit plan of CFI, or any corporation owned, directly or indirectly, by the stockholders of CFI in substantially the same proportions as their ownership of stock of CFI.

     2. Employment. The Company shall employ Employee during the Employment Period (as defined below) as its President and Chief Operating Officer. During the Employment Period, Employee shall perform the duties properly assigned to him hereunder, shall devote substantially all of his time and attention and effort to the affairs of the Company and shall use his reasonable best efforts to promote the interests of the Company, including without limitation the performance of all of the duties customarily performed by a President and Chief Operating Officer. Employee shall report directly to the Chief Executive Officer of the Company. Employee shall provide information to the CFI Board as it shall request from time to time. The Employee will not engage in any outside business activity (as distinguished from personal investment activity and affairs), including, but not limited to, activity as a consultant, director, agent, partner, officer, or employee, or provide business services of any nature directly or indirectly to any other corporation or other business enterprise; provided, however, such restriction shall not apply to The Cheesecake Factory Oscar and Evelyn Overton Foundation or any other non-profit corporation; and provided,however, further, Employee shall be entitled to remain in his current position on the board of directors of the corporation described on Schedule 1. Notwithstanding the forgoing, Employee may not, in the aggregate, devote more than eight business days per calendar year in the performance of duties for any enterprise other than the Company.

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     3. Employment Period. Subject to the termination provisions hereinafter provided, the “initial term” of Employee’s employment under this Agreement shall begin on June 17, 2002 and end on June 17, 2005 (“Base Term”); provided, however, that on the such termination date, and on each subsequent anniversary of such termination date thereafter, the term of this Agreement shall automatically be extended for one additional year (each such year a “Rollover Year”) unless, not later than 90 days prior to termination of the Base Term or a Rollover Year, as applicable, the Company or the Employee shall give notice not to extend this Agreement. In the event of a Change of Control occurring at any time after twenty-three (23) months following the date of this Agreement and prior to the termination of the Base Term or a Rollover Year, as applicable, the term shall automatically be extended to that date which is thirteen (13) months after the date of such Change of Control. “Employment Period” shall mean, for purposes of this Agreement, both the “Base Term” and any subsequent Rollover Year.

     4. Salary. The Company shall pay Employee in accordance with its normal payroll practices (including all required payroll deductions for taxes) but not less frequently than monthly, an annual salary at a rate of $350,000. The Company may at any time grant a discretionary bonus to the Employee based on goals and objectives to be agreed upon from time to time. Participation in deferred compensation, discretionary bonus, retirement, stock option and other employee benefit plans and in fringe benefits shall not reduce the Base Salary.

     5. Participation in Stock Option, Bonus, Retirement and Employee Benefit Plans.

               5.1 Stock Option Plan. Employee shall be eligible to participate in The Cheesecake Factory Incorporated 2001 Stock Option Plan (“Stock Option Plan”). As an inducement to Employee to enter into this Agreement, the Committee shall grant Employee, effective on the date of grant designated in the Notice of Grant provided to be delivered to Employee concurrently herewith, options under the Stock Option Plan to purchase 200,000 shares of the common stock of CFI, which options shall vest 20% on the first anniversary of the grant date set forth on the Notice of Grant and then 20% each anniversary thereafter, provided however, that such vesting shall be further subjected to the terms of the Stock Option Plan and Stock Option Agreement accompanying the grant of such options. It being understood that the terms of the Stock Option Agreement and Notice of Grant shall not materially differ from the most recent form of such agreement issued to senior executive officers of CFI. Commencing with the 2003 fiscal year, Employee shall be granted additional options as the Committee may determine and in accordance with the terms of the Stock Option Plan, and on such other terms as generally provided to senior officers in positions commensurate with Employee’s position at the Company.

               5.2 Year 2002 Performance Incentive Bonus Plan. Employee shall participate in The Cheesecake Factory Incorporated Year 2002 Performance Incentive Bonus Plan providing for a potential bonus of 50% of Base Salary for the 2002 fiscal year (prorated based upon the date of this Agreement), subject to the terms, conditions and performance requirements set forth in the plan. Commencing with the 2003 fiscal year the Employee shall participate in the annual Performance Incentive Plan, upon the same terms as other senior officers in positions commensurate with Employee’s position at the Company.

               5.3 The Cheesecake Factory Incorporated Executive Savings Plan. Employee shall be eligible to participate in The Cheesecake Factory Incorporated Executive Savings Plan in accordance with the terms of the plan and on the same basis as senior officers in positions commensurate with Employee’s position at the Company.

               5.4 Other Plans. The Employee shall be entitled to participate in any other plans relating to bonuses, stock options, stock purchases, pension, thrift, profit sharing, life insurance, medical coverage, education, or other retirement or employee benefits adopted or which may be adopted for the benefit of its senior officers in positions commensurate with Employee’s position at the Company from and after the date of this Agreement, on the same terms and conditions as senior officers in positions commensurate with Employee’s position at the Company.

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     6. Additional Stock Grant.

               6.1 As a further inducement to enter into this Agreement, the Committee shall grant Employee, effective on the date of grant designated in the Notice of Grant delivered to Employee concurrently herewith, options under the Stock Option Plan to purchase 10,000 shares of the common stock of CFI, which options shall vest 100% on that date which is six (6) months from the date of this Agreement, provided however, that such vesting shall be further subjected to the terms of the Stock Option Plan and Stock Option Agreement accompanying the grant of such options. It being understood that the terms of the Stock Option Agreement and Notice of Grant shall not materially differ from the most recent form of such agreement issued to senior executive officers of CFI.

     7. Other Benefits

               7.1 Welfare Benefits. During the Employment Period, Employee and/or his family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company (including medical, prescription, dental, disability, salary continuance, employee life, group life, dependent life, accidental death and travel accident insurance plans and programs) applicable to senior officers in positions commensurate with Employee’s position at the Company.

               7.2 Fringe Benefits. During the Employment Period, Employee shall be entitled to all fringe benefits that are from time to time available to senior officers in positions commensurate with Employee’s position at the Company.

               7.3 Vacation. During the Employment Period, Employee shall be entitled to paid vacation time in accordance with the plans, practices, policies, and programs applicable to senior officers in positions commensurate with Employee’s position at the Company, but in no event shall such vacation time be less than three (3) weeks per calendar year.

               7.4 Business Expenses. During the Employment Period, the Employee shall be entitled to incur and be reimbursed for all reasonable business expenses, including but not limited to cellular telephone and travel (including business and first class airline accommodations), in accordance with the CFI’s business expense reimbursement policies and procedures. The Company agrees that it will reimburse the Employee for all such expenses upon the presentation by the Employee, from time to time, of an itemized account of such expenditures setting forth the date, the purposes for which incurred, and the amounts thereof, together with such receipts showing payments in conformity with the Company’s established policies. Reimbursement shall be made in accordance with normal practices after submission of an itemized account.

               7.5 Automobile. During the Employment Period, Employee shall have the option to participate in the Company’s leased car program (providing for a 740i1 BMW) or receive an automobile allowance in the amount of $1,000.00 per month.

     8. Relocation Expenses. The Company shall reimburse Employee for his relocation expenses as follows: (a) expenses incurred for the packing, shipping and unpacking of all household goods and one luxury automobile, (b) payment of all customary closing costs (but not including the payment of any interest for money borrowed) in connection with the sale of Employee’s condominium located in Manhattan, New York, including reasonable attorney fees and 6% real estate brokerage fee (approximately $91,000), (c) payment of all the real estate cost (but not including the payment of any interest or points for money borrowed) associated with Employee’s purchase of a home in the Los Angeles, California metropolitan area (approximately $19,000 or 2% of the purchase price), (d) payment of temporary housing costs not to exceed an agreed upon amount for an agreed upon duration, and (e) such amount as is necessary to reimburse Employee for the Federal and state taxes payable by Employee for the amounts paid pursuant to clauses (a) through (d) of this Section 8 (assuming an aggregate tax rate of 45%).

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     9. Indemnity. The CFI shall indemnify, defend and hold the Employee harmless from any cost, expense or liability arising out of or relating to any acts or decisions made by the Employee on behalf of or in the course of performing services for the Company to the same extent CFI indemnifies, defends and holds harmless other senior officers of the Company and in accordance with the CFI’s established policies. CFI agrees to maintain Directors and Officers Liability Insurance to provide coverage for officers the Company.

     10. Termination.

                          (a) Death or Permanent Disability. This Agreement shall terminate upon the Employee’s death or Permanent Disability.

                          (b) Cause. The Company may terminate Employee for Cause, at any time.

                          (c) Change of Control. Employee may terminate this Agreement for any reason or no reason during the 30 day period commencing 12 months after a Change in Control.

                          (d) Notice of Termination. Any termination of the Employee’s employment by the Company for Cause, or without cause, or as permitted in Section 10 (c) shall be communicated by a Notice of Termination to the other party hereto given in accordance with Section 14. Any termination by the Company due to Permanent Disability also shall be communicated by giving to Employee a Notice of Termination. For purposes of this Agreement, a “Notice of Termination” means a written notice which (i) indicates the specific termination provision in this Agreement relied upon; (ii) except in the event of a termination without cause or pursuant to Section 10(c), sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee’s employment under the provision so indicated; and (iii) specifies the Date of Termination (defined below).

                          (e) Date of Termination. “Date of Termination” means the date specified in the Notice of Termination; provided that if the Employee’s employment is terminated due to the Employee’s death, the Date of Termination shall be the date of death.

     11. Certain Benefits Upon Termination.

                          (a) If Employee’s employment terminates by reason of death, or Permanent Disability, the Company shall pay to Employee an amount equal to the sum of (i) Employee’s accrued but unpaid Base Salary up to the Date of Termination, and (ii) if, as, and when payable under such plan(s), an amount equal to Employee’s bonus under any bonus plan then in effect for the then current fiscal year, to the extent the Employee would have qualified for said bonus as of the Date of Termination, on a pro rata basis as of the Date of Termination.

                          (b) If the Company terminates Employee for Cause, the Company shall pay to Employee an amount equal to the Employee’s accrued but unpaid Base Salary up to the Date of Termination.

                          (c) If the Company terminates the Employee without cause, or if Employee terminates his employment pursuant to Section 10 (c), the Company shall pay the Employee the sum of (i) Employee’s accrued but unpaid Base Salary up to the Date of Termination, (ii) ) if, as, and when payable under such plan(s), and amount equal to Employee’s bonus(es) under any bonus(es) plan(s) then in effect for then current fiscal year, to the extent the Employee would have qualified for said bonus as of the Date of Termination, on a pro rata basis as of the Date of Termination, and (iii) an amount equal to one times Employee’s annual Base Salary.

                          (d) Notwithstanding any provision of this Section 11 to the contrary, in the event of a termination of employment due to death or Permanent Disability, twenty percent (20%) of the number of shares subject to unvested options granted under the Stock Option Plan or any other option plan of the Company or CFI (effective on the date hereof or in the future) on the Date of Termination shall vest and become exercisable, if applicable, in accordance with the terms of such plans and the option agreements pursuant to which the options were issued.

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                          (e) Notwithstanding any provision of this Section 11 to the contrary, in the event of a termination by the Company without Cause, twenty percent (20%) of shares subject to unvested options granted under the Stock Option Plan or any other option plan of the Company or CFI (effective on the date hereof or in the future) on the Date of Termination shall vest and become exercisable, if applicable, in accordance with the terms of such plans and the option agreements pursuant to which the options were issued; provided, however, if during the Base Term, Employee is terminated without Cause and, within nine months thereafter, a Change in Control shall occur, one hundred percent (100%) of shares subject to unvested options granted under the Stock Option Plan or any other option plan of the Company or CFI (effective on the date hereof or in the future) on the Date of Termination shall vest and become exercisable in accordance with the terms of such plans and the option agreements pursuant to which the options were issued.

                          (f) Notwithstanding any provision of this Section 11, in the event Employee terminates employment under Section 10 (c), one hundred percent (100%) of shares subject to unvested options granted under the Stock Option Plan or any other option plan of the Company or CFI (effective on the date hereof or in the future) on the Date of Termination shall vest and become exercisable in accordance with the terms of such plans and the option agreements pursuant to which the options were issued.

                          (g) In addition to the payments, provided therein, the Company shall pay all accrued but unpaid or unused vacation and sick pay. In the event the Company terminates the Employee without cause, or if the Employee terminates his employment pursuant to Section 10(c), Company shall maintain Employee’s health insurance benefits then provided for a one year period following the Date of Termination or the expiration of the Employment Period, whichever is earlier.

                          (h) In the event that Employee’s employment terminates by reason of Employee’s death, all benefits provided in this Section 11 shall be paid to Employee’s estate or as Employee’s executor shall direct, but payment may be deferred until Employee’s executor or personal representative has been appointed and qualified pursuant to the laws in effect in Employee’s jurisdiction of residence at the time of Employee’s death.

                          (i) Company shall make all cash payments to which Employee is entitled hereunder within thirty (30) days following the Date of Termination of Employee’s employment or earlier, if required by applicable law except for bonus payments, which shall be due and payable if, as and when payable by the Company to other officers covered by such plan.

                          (j) The provisions contained in this Section 11 may be triggered only once during the term of this Agreement by the first event to occur, so that, for example, should Employee be terminated because of a Permanent Disability and should there thereafter be a Change of Control, then Employee would be entitled to be paid only under Section 11(a) and not under Section 11(c) as well.

                          (k) Excise Tax Payments:

                               (i) In the event that any payment or benefit (within the meaning of Section 280G(b)(2) of the Code, to the Employee or for his benefit paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, his employment with the Company or a change in ownership or effective control of CFI or of a substantial portion of its assets (a “Payment” or “Payments”), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then the Employee will be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by the Employee of all taxes (including any interest or penalties, other than interest and penalties imposed by reason of the Employee’s failure to file timely a tax return or pay taxes shown due on his return, imposed with respect to such taxes and the Excise Tax), including any Excise Tax imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments.

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                               (ii) An initial determination as to whether a Gross-Up Payment is required pursuant to this Agreement and the amount of such Gross-Up Payment shall be made at the Company’s expense by an accounting firm selected by the Company and reasonably acceptable to the Employee which is designated as one of the four largest accounting firms in the United States (the “Accounting Firm”). The Accounting Firm shall provide its determination (the “Determination”), together with detailed supporting calculations and documentation to the Company and the Employee within five days of the Termination Date if applicable, or such other time as requested by the Company or by the Employee (provided the Employee reasonably believes that any of the Payments may be subject to the Excise Tax) and if the Accounting Firm determines that no Excise Tax is payable by the Employee with respect to a Payment or Payments, it shall furnish the Employee with an opinion reasonably acceptable to the Employee that no Excise Tax will be imposed with respect to any such Payment or Payments. Within ten days of the delivery of the Determination to the Employee, the Employee shall have the right to dispute the Determination (the “Dispute”). The Gross-Up Payment, if any, as determined pursuant to this Section 12(i)(ii) shall be paid by the Company to the Employee within five days of the receipt of the Accounting Firm’s determination. The existence of the Dispute shall not in any way affect the Employee’s right to receive the Gross-Up Payment in accordance with the Determination. Upon the final resolution of a Dispute, the Company shall promptly pay to the Employee any additional amount required by such resolution. If there is no Dispute, the Determination shall be binding, final and conclusive upon the Company and the Employee.

     12. Assignment.

                          (a) This Agreement is personal to each of the parties hereto. No party may assign or delegate any rights or obligations hereunder without first obtaining the written consent of the other party hereto, except that this Agreement shall be binding upon and inure to the benefit of any successor corporation to the Company.

                          (b) The Company, or CFI, as applicable, shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place.

                          (c) This Agreement shall inure to the benefit of and be enforceable by the Employee and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.

13. (a) Confidential Information. During the Employment Period and thereafter, the Employee shall not, except as may be required to perform his duties hereunder or as required by applicable law, disclose to others for use, whether directly or indirectly, any Confidential Information regarding the Company. “Confidential Information” shall mean information about the Company, CFI, their respective subsidiaries and Affiliates, and their respective customers that is not available to the general public and that was learned by the Employee in the course of his employment by the Company, including (without limitation) any data, formulae, information, proprietary knowledge, trade secrets and client and customer lists and all papers, resumes, records and the documents containing such Confidential Information. The Employee acknowledges that such Confidential Information is specialized, unique in nature and of great value to the Company and CFI, and that such information gives the Company and CFI a competitive advantage. Upon the termination of his employment, the Employee will promptly deliver to the Company all documents (and all copies thereof) containing any Confidential Information.

                          (b) Noncompetition. The Employee agrees that during the Employment Period of this Agreement, he will not, directly or indirectly, without the prior written consent of the Company, provide consultative service with or without pay, own, manage, operate, join, control, participate in, or be connected as a stockholder, partner, or otherwise with any business, individual, partner, firm, corporation, or other entity which is then in competition with the Company or any present Affiliate of the Company; provided, however, that the “beneficial ownership” by the Employee, either individually or as a member of a “group,” as such terms are used in Rule 13d of the Exchange Act, of not more than 3% of the voting stock of any publicly held corporation shall not be a violation of this Agreement. It is further expressly agreed that the Company will or would suffer irreparable injury if the Employee were to compete with the Company or any subsidiary or Affiliate of the Company in violation of this Agreement and that the Company would by reason of such competition be entitled to injunctive relief in a court of appropriate jurisdiction, and the Employee further consents and stipulates to the entry of such injunctive relief in such a court prohibiting the Employee from competing with the Company or any subsidiary or Affiliate of the Company in violation of this Agreement.

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                          (c) Right to Company Materials. The Employee agrees that all styles, designs, recipes, lists, materials, books, files, reports, correspondence, records, and other documents (“Company Material”) used, prepared, or made available to the Employee, shall be and shall remain the property of the Company. Upon the termination of his employment or the expiration of this Agreement, all Company Materials shall be returned immediately to the Company, and Employee shall not make or retain any copies thereof.

                          (d) Antisolicitation. The Employee promises and agrees that during the Employment Period of this Agreement, and for a period of two (2) years thereafter, he will not influence or attempt to influence customers, franchisees, landlords, or suppliers of the Company or any of its present or future subsidiaries or Affiliates, either directly or indirectly, to divert their business to any individual, partnership, firm, corporation or other entity then in competition with the business of the Company, or any subsidiary or Affiliate of the Company.

     14. Notice. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered directly to and accepted or rejected by the Person or certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other addresses as either party may have furnished to the other in writing in accordance herewith, except that notice of a change of address shall be effective only upon actual receipt:

Company:	Chief Executive Officer The Cheesecake Factory Restaurants, Inc. The Cheesecake Factory Restaurants, Inc. 26950 Agoura Road Calabasas Hills, California 91301
with copy to:	General Counsel of CFI at the address above;
Employee:	Michael Berry c/o Jay Vogel, Esq. Law Offices of Jay Vogel 1414 North Harper Avenue, Suite #6 West Hollywood, CA 90046

     15. Amendments or Additions. No amendment or additions to this Agreement shall be binding unless in writing and signed by the parties hereto.

     16. Section Headings. The section headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement.

     17. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

     18. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but which together will constitute one and the same instrument.

     19. GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICTING PROVISION OR RULE (WHETHER OF THE STATE OF CALIFORNIA OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF DELAWARE TO BE APPLIED. IN FURTHERANCE OF THE FOREGOING, THE INTERNAL LAW OF THE STATE OF CALIFORNIA WILL CONTROL THE INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT, EVEN IF UNDER SUCH JURISDICTION’S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE SUBSTANTIVE LAW OF SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.

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     20. VENUE; WAIVE OF JURY TRIAL. IN THE EVENT OF ANY ACTION OR PROCEEDING BETWEEN THE EMPLOYEE AND THE COMPANY OR ITS SUBSIDIARIES REGARDING THIS AGREEMENT OR THE PLAN, THE PARTIES AGREE TO SUBMIT THE JURISDICTION OF THE STATE OR FEDERAL COURTS WITHIN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA AND AGREE THAT VENUE IN SUCH COURTS IS ACCEPTABLE TO THE PARTICIPANT AND THE COMPANY BOTH PARTIES AND WAIVE THEIR RIGHTS TO CLAIM FORUM NON CONVENIENS. PARTICIPANT AND THE COMPANY HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY.

     21. Resolution of Disputes.

                          (a) Arbitration. Any dispute, controversy or claim arising out of or relating to this Agreement shall be settled by binding arbitration held in Los Angeles, California, in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect, except as specifically otherwise provided in this Section 21. This Section 21 shall be construed and enforced in accordance with the Federal Arbitration Act, notwithstanding any other choice of law provision in this Agreement. Notwithstanding the foregoing, any party hereto may, in its discretion, apply to a court of competent jurisdiction for equitable relief. Such an application shall not be deemed a waiver of the right to compel arbitration pursuant to this Section 21.

                          (b) Arbitrator. The panel to be appointed shall consist of one neutral arbitrator selected by the Company, and acceptable to the Employee.

                          (c) Procedures. The arbitrator shall allow such discovery as the arbitrator determines appropriate under the circumstances and shall resolve the dispute as expeditiously as practicable, and if reasonably practicable, within one hundred twenty (120) days after the selection of the arbitrator. The arbitrator shall give the parties written notice of the decision, with the reasons therefor set out, and shall have thirty (30) days thereafter to reconsider and modify such decision if any party so requests within ten (10) days after the decision.

                          (d) Authority. The arbitrator shall have authority to award relief under legal or equitable principles, including interim or preliminary relief, and to allocate responsibility for the costs of the arbitration and to award recovery of attorneys’ fees and expenses in such manner as is determined to be appropriate by the arbitrator.

                          (e) Entry of Judgment. Judgment upon the award rendered by the arbitrator may be entered in any court having in personam and subject matter jurisdiction. Company and Employee hereby submit to the in personam jurisdiction of the Federal and State courts in Los Angeles, California, for the purpose of confirming any such award and entering judgment thereon.

                          (f) Confidentiality. All proceedings under this Section 21, and all evidence given or discovered pursuant hereto, shall be maintained in confidence by all parties and by the arbitrators.

                          (g) Continued Performance. The fact that the dispute resolution procedures specified in this Section 21 shall have been or may be invoked shall not excuse any party from performing its obligations under this Agreement and during the pendency of any such procedure all parties shall continue to perform their respective obligations in good faith.

                          (h) Tolling. All applicable statutes of limitation shall be tolled while the procedures specified in this Section 21 are pending. The parties will take such action, if any, required to effectuate such tolling.

     22. Attorneys’ Fees. In the event of any action or proceeding to interpret or enforce this Agreement, the prevailing party in such action shall be entitled to receive reimbursement of reasonable attorneys’ fees and costs incurred from the other party.

     23. Miscellaneous. No waiver by any party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied, with respect to the subject matter hereof have been made by any party which are not expressly set forth in this Agreement. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections.

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     Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. Sections 9, 11, 13, 18, 19, 20, 21 and 22 shall survive the expiration of this Agreement.

     IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement on the date first indicated above.

THE CHEESECAKE FACTORY RESTAURANTS, INC.


By: /s/ DAVID OVERTON
       ——————————————

Name:   David Overton
Title:     Chief Executive Officer

EMPLOYEE:


/s/ MICHAEL BERRY
——————————————
MICHAEL BERRY

As to Provisions obligating The Cheesecake Factory Incorporated:

THE CHEESECAKE FACTORY INCORPORATED


By: /s/ DAVID OVERTON
       ——————————————

Name:   David Overton
Title:     Chief Executive Officer

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SCHEDULE 1

CORANTHIAN COLLEGE

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