What is the WACC for Cheesecake Factory as of 12/29/09 (using the Capital Asset Pricing Model to determine the cost of equity)?At that time, Cheesecake Factory's stock had a Beta of 1.25 and used a Risk Free Rate of 3% and used 9% for its Market Return. (Note, calculate the WACC using the historical balances as stated on the balance sheet.)

Reading the footnotes for its long term debt, Cheesecake had a credit facility that is based on LIBOR (The London Interbank Offering Rate, which is a common index used for borrowing money, analogous to the Prime Rate.) As of 12/29/09 assume the LIBOR rate was 3%.Also you need to carefully read the footnote to calculate the correct debt rate for Cheeesecake Factory.

CHEESECAKE FACTORY INC (CAKE) 10-K Annual report pursuant to section 13 and 15(d) Filed on 02/26/2010 Filed Period 12/29/2009 Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 29, 2009 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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) 51-0340466 (I.R.S. Employer Identification No.) 26901 Malibu Hills Road Calabasas Hills, California (Address of principal executive offices) 91301 (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 Preferred Stock Purchase Rights The NASDAQ Stock Market LLC (NASDAQ Global Select Market) (Currently attached to and trading with the Common Stock) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No 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 No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).* Yes No * The registrant has not yet been phased into the interactive data requirements. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No The aggregate market value of the voting stock held by non-affiliates of the registrant 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 Stock Market on that date). As of 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 III of this Form 10-K incorporates by reference information from the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on June 2, 2010. Table of Contents TABLE OF CONTENTS Page PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Submission of Matters to a Vote of Security Holders 1 14 21 21 22 22 PART II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures about Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information 23 25 26 38 39 39 39 40 PART III Item 10. Item 11. Item 12. Item 13. Item 14. Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services 41 41 41 41 41 PART IV Item 15. Exhibits and Financial Statement Schedules 42 Table of Contents PART I Forward-Looking Statements Certain information included in this Form 10-K and other materials filed or to be filed by us with the Securities and Exchange Commission ("SEC"), as well as information included in oral or written statements made by us or on our behalf, may contain forward-looking statements about our current and expected performance trends, growth plans, business goals and other matters. These statements 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 the approval of one of our authorized officers. Words or phrases such as "believe," "plan," "will likely result," "expect," "intend," "will continue," "is anticipated," "estimate," "project," "may," "could," "would," "should," and similar expressions are intended to identify forward-looking statements. These statements, and any other statements that are not historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Acts"). In connection with the "safe harbor" provisions of the Acts, we have identified and are disclosing important factors, risks and uncertainties that could cause our actual results to differ materially from those projected in forward-looking statements made by us, or on our behalf (See Item 1A, "Risk Factors"). These cautionary statements are to be used as a reference in connection with any forward-looking statements. The factors, risks and uncertainties identified in these cautionary statements are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the SEC. Because of these factors, risks and uncertainties, we caution against placing undue reliance on forward-looking statements. Although we believe that the assumptions underlying forward-looking statements are reasonable, any of the assumptions could be incorrect, and there can be no assurance that forward-looking statements will prove to be accurate. Forward-looking statements speak only as of the date on which they are made. Except as may be required by law, we do not undertake any obligation to modify or revise any forward-looking statement to take into account or otherwise reflect subsequent events or circumstances arising after the date that the forward-looking statement was made. ITEM 1. BUSINESS General As of February 26, 2010, The Cheesecake Factory Incorporated (referred to herein 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 Asian Kitchen mark. We also operated two bakery production facilities and licensed two limited menu bakery cafes under The Cheesecake Factory Bakery Cafe mark to another foodservice operator. Throughout this report, we use the term "restaurants" to include The Cheesecake Factory, Grand Lux Cafe and RockSugar Pan Asian Kitchen, unless otherwise noted, and exclude the two bakery production facilities and two licensed bakery cafes, unless otherwise noted. Our business operations originated in 1972 when Oscar and Evelyn Overton founded a small bakery in the Los Angeles area. Their son, David Overton, our Chairman of the Board and Chief Executive Officer, led the creation and opening of the first The Cheesecake Factory restaurant in Beverly Hills, California in 1978. In February 1992, our Company was incorporated in Delaware to consolidate the restaurant and bakery businesses 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. Restaurant sales represented 96% of our revenues in fiscal 2009, 2008 and 2007. Our restaurants currently range in size from 5,400 to 21,000 interior square feet, provide full alcoholic beverage service and are generally open seven days a week for lunch and dinner, as well as Sunday brunch. Hours of operation are generally from 11:00 a.m. to 11:00 p.m., except on weekends when most of our restaurants stay open past midnight, and on Sunday when our restaurants open at 10:00 a.m. for brunch. Our bakery operations are in the business of creating and marketing branded bakery products under The Cheesecake Factory, The Cheesecake Factory Bakery and The Dream Factory marks as well as private-label bakery products to other foodservice operators, retailers and distributors ("bakery sales") in order to leverage our brand identity with consumers and take advantage of excess bakery production capacity. Bakery sales represented approximately 4% of our revenues for fiscal 2009, 2008 and 2007. For segment information, see Note 16 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report. 1 Table of Contents We maintain 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, all amendments to those reports, and our proxy statements as soon as reasonably practicable after we electronically file this material with or furnish it to the SEC. Our filings are also available on the SEC's website at www.sec.gov. The contents of our website are not incorporated by reference into this Form 10-K. The Cheesecake Factory Restaurant Concept The Cheesecake Factory restaurants strive to provide a distinctive, high quality dining experience at moderate prices by offering an extensive, innovative and evolving menu in an upscale, casual, high energy setting with attentive, efficient and friendly service. As a result, The Cheesecake Factory restaurants appeal to a diverse guest base across a broad demographic range. Our extensive menu enables us to compete for substantially all dining preferences and occasions from the key lunch and dinner day parts to the mid-afternoon and late-night day parts, which are traditionally weaker times for most casual dining restaurant operations. The Cheesecake Factory restaurants are not open for breakfast, but do offer Sunday brunch. All of our restaurants are open seven days a week. All items on the menu, including approximately 40 varieties of cheesecake and other quality baked desserts, may be purchased for off-premise consumption, which represents approximately 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 service utilizing third-party delivery partners and all of our restaurants offer a catering menu. Our menu features approximately 200 items, supplemented by additional items presented on separate menu cards, including appetizers, pizza, seafood, steaks, chicken, burgers, specialty items, pastas, salads, sandwiches, omelets and desserts. Examples of menu offerings include Chicken Madeira, Cajun Jambalaya Pasta, Thai Lettuce Wraps and Crispy Chicken Costoletta. Menu items, 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 consider the extensive selection of items on our menu to be an important factor in the differentiation of our restaurants from our competitors. Our menu features all-natural chicken with no added hormones, premium beef that is Certified Angus, U.S.D.A. American Style Kobe Wagyu; Prime or Choice, fresh fish that is either longline or hook & line caught whenever possible, cooking oils that contain no trans fat according to United States Food and Drug Administration Food Labeling Guidelines, and produce that is mainly sourced directly from premium growers. In addition, we offer certified organic, fair trade, shade-grown coffee, and certified organic black and herbal teas. One of our competitive strengths is the ability to anticipate consumer dining and taste preferences and adapt our menu to the latest trends in food consumption to keep it relevant to consumers. We create new menu items to keep pace with changing consumer tastes and preferences, and regularly update our ingredients and cooking methods to improve the quality and consistency of our food. Generally, we review our entire menu every six months, in the winter and in the summer, for guest appeal and pricing. All new menu items are tested and selected based on uniqueness, anticipated sales popularity, preparation technique and profitability. Our ability to create, promote and attractively display our unique line of desserts is also important to the competitive positioning and financial success of our restaurants. Our brand identity and reputation for offering high quality desserts results in a higher percentage of dessert sales relative to that of most chain restaurant operators. Dessert sales represented approximately 15% for fiscal 2009, and 14% for fiscal 2008 and 2007, of The Cheesecake Factory restaurant sales. Each of our restaurants offers a full-service bar where our entire menu is served. The sale of alcoholic beverages represents approximately 13% of The Cheesecake Factory restaurant sales for fiscal 2009, 2008 and 2007. Most of our alcoholic beverage sales occur with meal purchases. We place significant emphasis on the unique interior design and decor of our restaurants, which results in a higher investment per square foot of restaurant space than is typical for the casual dining industry. However, each of our restaurants has historically generated annual sales per square foot that are also typically higher than our competitors. Our stylish restaurant design and decor contributes to the distinctive dining experience enjoyed by our guests. Each restaurant features large, open dining areas and a contemporary kitchen design, which, in some cases, features exhibition cooking. More than 85% of our restaurants offer outdoor patio seating as weather permits. Approximately 20% of our total estimated productive seating capacity is located on outdoor patios, which can be subject to underutilization from time to time due to adverse or unseasonable weather conditions. The table and seating layouts of our restaurants are flexible, permitting tables and seats to be easily rearranged to accommodate large groups or parties, thus permitting more effective utilization of seating capacity. Grand Lux Cafe Restaurant Concept Grand Lux Cafe is an upscale casual dining concept that offers unique American and international menu items in an elegant but relaxed atmosphere. The menu at Grand Lux Cafe offers approximately 200 items including appetizers, pasta, seafood, steaks, 2 Table of Contents chicken, burgers, salads, specialty items and desserts. Examples of menu offerings include Chop House Burger, Buffalo Chicken Rolls, Crispy Caramel Chicken and Santa Barbara Grilled Chicken Sandwich. A full-service bar, as well as an onsite bakery which produces made-to-order deserts, are also elements of this concept. All of our Grand Lux Cafes are open seven days a week. Our location in the Venetian Resort-Hotel-Casino in Las Vegas, Nevada is open 24 hours a day and its sister location in the Palazzo Resort-Hotel-Casino is open 20 to 21 hours a day; both locations also serve a breakfast menu. Approximately 70% of our Grand Lux Cafe locations offered home and business delivery service utilizing third-party delivery partners. We continue to refine Grand Lux Cafe's menu and operations in order to position the concept appropriately for potential future growth. Although we did not open any new Grand Lux Cafes in fiscal 2008 or fiscal 2009 and do not plan to open any new locations in fiscal 2010, we continue to search for premier sites that would be suitable for this concept. There are inherent risks in expanding any new restaurant concept including, but not limited to, consumer acceptance, recruiting and training qualified staff members and managers, and achieving an acceptable return on investment. We incurred an impairment charge of $26.5 million in fiscal 2009 related to four Grand Lux Cafe locations. All of these restaurants remain open. See Note 1 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for additional information concerning our accounting policies for impairment of long-lived assets. RockSugar Pan Asian Kitchen Concept RockSugar Pan Asian Kitchen is a unique concept featuring a Southeast Asian menu in an upscale casual dining setting. Its menu showcases the cuisines of Thailand, Vietnam, Malaysia, Singapore, Indonesia and India with dishes served Asian family-style to create an atmosphere that encourages sharing and conversation. Examples of menu offerings include Shaking Beef, Crispy Chicken Samosas, Lacquered BBQ Ribs and Banana Leaf Chilean Sea Bass. We currently have one RockSugar Pan Asian Kitchen restaurant in operation located in the Century City Shopping Center in Los Angeles, California. The unique dcor of the restaurant features design elements true to the restaurant's Southeast Asian branding. The restaurant also features a full-service bar with an extensive wine list and exotic cocktails, as well as an onsite bakery where we create freshly-made desserts that infuse traditional French flair into nearly a dozen Asian-influenced items. Competition The restaurant industry is highly competitive. There are a substantial number of restaurant operators that compete directly and indirectly with us, many of which have significantly greater financial and operational resources, higher revenues and greater economies of scale than we do. The restaurant business is affected by many factors, including changes in consumer tastes and discretionary spending patterns; macroeconomic conditions; demographic trends; weather conditions; the cost and availability of raw materials, labor and energy; government regulations; and local competitive factors. Any change in these or other related factors could adversely affect our restaurant operations. In addition, with improving product offerings at fast casual restaurants, quick-service restaurants and grocery stores, consumers may choose to trade down to these alternatives, which could also negatively affect our financial results. The macroeconomic downturn in 2008 and 2009 decreased the frequency of our guests' visits and, if the economy worsens in 2010, we could be negatively impacted further. As a result of these competitive factors, we must constantly evolve and refine the critical elements of our restaurant concepts over time to protect their longer-term competitiveness. (See "Restaurant Competitive Positioning" below.) With regard to our bakery operations, national competition within the premium baked dessert category has shifted over the past several years to a lesser number of manufacturers, and the market remains highly competitive. We believe that our restaurant and bakery operations compete favorably for consumers on the critical attributes of quality, variety, taste, service, consistency and overall value. Restaurant Competitive Positioning The restaurant industry is comprised of multiple segments, including fine dining, casual dining and quick-service. Casual dining can be further sub-divided into core casual and upscale casual dining. Our restaurants operate in the upscale casual dining segment, which we believe is differentiated by freshly prepared and innovative food, flavorful recipes with creative presentations, unique restaurant layouts, eye-catching design elements and more personalized service. Upscale casual dining is positioned higher than core casual dining with standards that are closer to fine dining. We believe that we are a leader in upscale casual dining given our high average sales per restaurant and strong competitive positioning, the key elements of which include the following: High Quality, High Profile Restaurant Locations and Flexible Site Layouts. We generally locate our restaurants in high quality, high profile locations within densely populated areas with a balanced mix of residences and businesses, including shopping and entertainment outlets. Our restaurants rely principally on the visit frequency and loyalty of consumers who work, reside or shop 3 Table of Contents near each of our restaurants. We have the flexibility to design our restaurants to accommodate a wide variety of urban and suburban site layouts, including multi-level locations. In addition, we have a variety of restaurant sizes, generally from 7,000 to 16,000 square feet, from which we are able to select appropriately for each market and specific site. Extensive and Innovative Menu with Award-Winning Bar and Bakery Programs. Our restaurants offer one of the broadest menus in casual dining featuring a wide array of flavors with portions designed for sharing. Substantially all of our menu items (except the desserts manufactured at our bakery production facilities) are prepared fresh daily on the restaurant premises using high quality ingredients based on innovative and proprietary recipes. Our menus are generally updated twice each year to respond to evolving consumer dining preferences and needs, as well as food trends and nutritional awareness. These menu updates keep our concepts relevant with consumers. Our bakery production facilities produce over 70 varieties of quality cheesecake and other baked desserts using high quality dairy and other raw ingredients available. Affordability. We believe our restaurants are recognized by consumers for offering value with menu items across a broad array of price points and generous food portions at moderate prices. This year, we introduced new menu items and categories at our restaurants, further enhancing the variety and price point offerings to our guests. The estimated average check per The Cheesecake Factory restaurant guest, including beverages and desserts, was approximately $19.00, $18.50 and $18.00 for fiscal 2009, 2008 and 2007, respectively. The estimated average check per restaurant guest at Grand Lux Cafe was approximately $19.00 for fiscal 2009, 2008 and 2007. Distinctive Restaurant Design and Decor. Our restaurants' distinctive contemporary design and decor create a high energy, non-chain image and upscale ambiance in a casual setting. Whenever possible, outdoor patio seating is incorporated in the design of our restaurants, allowing for additional restaurant capacity, as weather permits, at a comparatively low occupancy cost per seat. Outdoor patio seating is available at more than 85% of our restaurants. Commitment to Excellent Service and Hospitality through the Selection, Training and Retention of High Quality Employees. Our mission is "to create an environment where absolute guest satisfaction is our highest priority." We strive to consistently exceed the expectations of guests in all aspects of their experience in our restaurants. One of the most important aspects of delivering dependable, quality service is experienced staff members who can execute our concepts according to our high standards. We believe our recruitment, selection, training, and rewards and recognition programs are among the most comprehensive in the restaurant industry and allow us to attract and retain qualified staff members who are motivated to consistently provide excellence in guest hospitality. By providing extensive training and innovative compensation programs, we seek to have our staff members develop a sense of personal commitment to our core values and culture of excellence in restauranteuring and guest hospitality. These programs have resulted in generally higher retention rates relative to the restaurant industry. (See "Restaurant Operations and Management" below.) 4 Table of Contents Existing Restaurant Locations As of February 26, 2010, we operated 161 upscale, casual, full-service dining restaurants: 147 under The Cheesecake Factory mark in 34 states and the District of Columbia; 13 under the Grand Lux Cafe mark in nine states; and one RockSugar Pan Asian Kitchen in California. Additionally, we licensed two bakery cafes under The Cheesecake Factory Bakery Cafe mark to another foodservice operator. The following table sets forth information with respect to our Company-operated, full-service restaurant locations: Existing Company-Operated Full-Service Restaurant Locations by State State Alabama Arizona California Colorado Connecticut District of Columbia Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Maryland Massachusetts Minnesota Missouri Nebraska Nevada New Jersey New York North Carolina Oklahoma Ohio Oregon Pennsylvania Rhode Island Tennessee Texas Utah Virginia Washington Wisconsin Total The Cheesecake Factory Grand Lux Cafe 1 6 32 3 1 1 14 4 1 1 5 2 1 1 1 5 7 1 3 1 3 5 8 3 2 6 1 4 1 1 10 1 6 3 2 147 RockSugar Pan Asian Kitchen 1 1 1 Total 1 3 1 2 1 1 2 13 1 1 7 34 4 1 1 17 4 1 1 6 2 1 1 1 5 7 1 3 1 5 6 9 3 2 6 1 4 1 1 12 1 6 3 2 161 Restaurant Expansion We believe the viability of The Cheesecake Factory concept has been successfully demonstrated in a variety of layouts (single or multi-level, generally from 7,000 to 16,000 square feet), site locations (i.e., urban or suburban shopping malls, lifestyle centers, retail strip centers, office complexes and entertainment centers either freestanding or in-line) and trade areas across the United States. Accordingly, we intend to continue developing The Cheesecake Factory restaurants in high quality, high profile 5 Table of Contents locations that meet our site standards and demographic requirements within densely populated areas in both existing and new markets. In addition to expanding The Cheesecake Factory concept, we plan to selectively pursue other opportunities to leverage the competitive strengths of our restaurant operations, including Grand Lux Cafe and RockSugar Pan Asian Kitchen, as well as the potential development or acquisition of new restaurant concepts. During fiscal 2008 and 2009, many landlords delayed or cancelled new development projects, as well as extensions and renovations of existing projects due to the instability in the credit market and a decline in consumer spending brought on by the economic downturn. This reduced the number of premier sites available that we would consider for our restaurants. As a result, we opened seven new restaurants in fiscal 2008 and only one new restaurant in fiscal 2009. As of the date of this report, we have opened one The Cheesecake Factory restaurant and expect to open as many as two additional The Cheesecake Factory restaurants during the remainder of fiscal 2010. We do not plan to open any Grand Lux Cafe or RockSugar Pan Asian Kitchen restaurants during fiscal 2010. It is difficult for us to predict precisely the timing of our new restaurant openings due to many factors that are outside of our control (see "New Restaurant Site Selection and Development" below). We are currently looking for additional sites that meet our standards and are negotiating leases for potential future locations. From time to time, we will evaluate opportunities to acquire and convert other restaurant locations into our concepts. However, we currently have no binding commitments or agreements to acquire or convert any other restaurant locations to our concepts. Our upscale, highly customized, casual dining restaurants draw guests from a much larger geographical area compared to most casual dining chain restaurants. The size of our restaurant trade areas varies by location, depending on a number of factors such as population density, retail traffic generators and geography. As a result, the opening of a new restaurant could impact the sales of one or more of our nearby restaurants. Generally, this impact lessens over time, although we can provide no assurances that the sales levels of previously opened restaurants in the same market will return to their prior levels. It is not our intention to open new restaurants that materially cannibalize the sales of our existing restaurants. However, as with most growing retail and restaurant chain operations, we can provide no assurance that sales cannibalization will not occur or become more significant in the future as we gradually increase our presence in existing markets to maximize our competitive position and financial performance in each market. New Restaurant Site Selection and Development We believe the locations of our restaurants are critical to our long-term success and, accordingly, we devote significant time and resources to analyzing each prospective site. Since our restaurant concepts can be successfully executed within a variety of site locations and layouts, we can be highly selective and flexible in choosing suitable locations. In general, we focus on high quality, high profile sites within larger metropolitan areas with dense populations and above-average household incomes. While our restaurants typically share common interior decor elements, the design of each restaurant is customized to accommodate the specifics of each site, including the building type, square footage and layout of available space. In addition to carefully analyzing demographic information and both historical and anticipated population growth for each prospective site, we consider many other factors to assess the suitability of a location. Our restaurants principally rely on the visit frequency and loyalty of consumers who work, reside or shop in each of our trade areas. Our restaurant development model closely resembles a retail business model that occupies leased space in shopping malls, office complexes, retail strip centers, entertainment centers and other real estate developments. We also develop freestanding restaurant locations using both ground leases and built-to-suit leases, which are commonly used to finance freestanding locations in the restaurant industry. However, we do not rely on third party financing to obtain or construct sites. We generally lease our restaurant locations for primary periods of 15 to 20 years, with an option to renew. Our rent structures vary from lease to lease, but generally provide for the payment of both minimum base rent and contingent (percentage) rent based on restaurant sales. We are also generally responsible for our proportionate share of common area maintenance ("CAM"), insurance, property tax and other occupancy-related expenses under our leases. Many of our leases provide for maximum allowable annual percentage or fixed dollar increases in CAM, insurance, and property tax expenses to enable us to better predict and control future variable lease costs. Our sales volumes generally have been in excess of the threshold for percentage rent payments at a large percentage of our restaurant locations that are subject to leases with percentage rent payment provisions. We expend cash for leasehold improvements and furnishings, fixtures and equipment ("FF&E") to build out our leased premises. We may also expend cash for structural additions that we make to leased premises. Generally, a portion of the leasehold improvement and building costs are reimbursed to us by our landlords as construction contributions pursuant to agreed-upon terms in our leases. If obtained, landlord construction contributions usually take the form of up-front cash, full or partial credits against minimum or percentage rents otherwise payable by us, or a combination thereof. However, we can provide no assurance that contributions will be available for every potential location that we seek to develop into a new restaurant and recoupment of all or a portion of such contributions may depend upon the financial viability of our landlords and our ability to achieve sales levels sufficient to permit deductions against percentage rent. We own substantially all of the FF&E in our restaurants and currently plan to do so in the future. 6 Table of Contents The relatively high sales productivity of our restaurants provides opportunities to obtain suitable and competitive leasing terms from landlords. Due to the flexible and customized nature of our restaurant operations and the complex design, construction and preopening processes for each new location, our lease negotiation and restaurant development timeframes vary. The development and opening process generally ranges from six to eighteen months, depending largely on the availability of the leased space we intend to occupy, and can be subject to delays either due to factors outside of our control or to our selective timing of restaurant openings. The number and timing of new restaurants actually opened during any given period, and their associated contribution to operating week growth for the period, will depend on a number of factors including, but not limited to the identification and availability of high quality locations and acceptable lease terms; the availability of suitable financing for our landlords; the financial viability of our landlords; the timing of the delivery of the leased premises to us from our landlords in order to commence build-out construction activities; the ability of our landlords and us to obtain all necessary governmental licenses and permits on a timely basis to construct and operate our restaurants; our ability to successfully manage the design, construction and preopening processes for each restaurants, and the availability and/or cost of raw materials; any unforeseen engineering or environmental problems with the leased premises; adverse weather during the construction period; the availability of qualified operating personnel in the local market; and general economic conditions. While we attempt to manage those factors within our control, we have experienced unforeseen and planned delays in restaurant openings from time to time in the past, are currently experiencing delays on certain sites, and could experience delays in the future. Unit Economics We believe that our ability to select suitable locations and operate successful, high quality restaurants has resulted in the continuing popularity of our restaurant concepts with consumers. This popularity is reflected in our average food and beverage sales per restaurant, which are among the highest of any publicly-held restaurant company. The following discussion of sales and square foot averages include only The Cheesecake Factory and Grand Lux Cafe restaurant concepts. Average sales per restaurant open for the full year were approximately $9.6 million, $9.9 million and $10.5 million for fiscal 2009, 2008 and 2007, respectively. Since each of our restaurants has a customized layout and differs in size, an effective method to measure the unit economics of our concepts is by square foot. Average sales per productive square 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 metrics for a given fiscal year can be impacted by a number of factors, including consumer preferences, macroeconomic conditions, severe weather conditions and the average size of new restaurants we open during that year. The interior square footage for the Cheesecake Factory restaurant opened during fiscal 2009 was 11,000. The average interior square footage for restaurants opened during fiscal 2008 and 2007 was 9,800 and 11,000, respectively. We currently lease space for each of our restaurants and are required to expend cash 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 The Cheesecake Factory restaurants, excluding preopening costs. The construction costs to build out our leased premises vary geographically. Additionally, our investment cost per square foot will also vary from restaurant to restaurant, depending on the complexity of our build-out of the leased space, site conditions and labor conditions in the local market. We typically seek to obtain construction contributions from our landlords for structural additions and other leasehold improvements that we make to the leased premises. These contributions vary from lease to lease, depending on the scope of construction activities and other factors and are not always achievable at every site. In selecting sites for our restaurants, an important objective is to earn an appropriate return on investment. However, this return cannot be meaningfully measured until our restaurants reach their mature run-rate levels of sales and profitability. The initial return on investment performance targets for newer concepts will typically be lower than the average for an established, highly productive concept such as The Cheesecake Factory, since the first few locations of a new concept are typically in a refinement stage as they build brand recognition for a period of time. Our cash return on fully capitalized investment target does not consider field supervision and corporate support expenses; excludes non-cash items such as depreciation expense; excludes income taxes; and does not represent a targeted return on investment in our common stock. If we select a potential restaurant location for acquisition and development, the actual performance of the location may differ from its originally targeted performance. We can provide no assurance that any new restaurant opened will have similar operating results to those of established restaurants or that we will achieve our targeted results. Our new restaurants historically open with initial sales volumes well in excess of their sustainable run-rate levels. This initial "honeymoon" effect usually results from grand opening publicity, promotions and other consumer awareness activities that generate abnormally high customer traffic for our concepts, particularly in new markets. During the three to six months following the opening of new restaurants, customer traffic generally settles into its normal pattern, resulting in sales volumes that gradually adjust downward to their sustainable run-rate level. . Additionally, our new restaurants usually require a 90 to 120 day period after opening 7 Table of Contents to reach their targeted restaurant-level margin due to cost of sales and labor inefficiencies commonly associated with new, highly complex casual dining restaurants such as ours. As a result, a significant number of restaurant openings in any single fiscal quarter, along with their associated preopening costs, could have a significant impact on our consolidated results of operations for that period. Therefore, our results of operations for any single fiscal quarter are not necessarily indicative of the results for any other fiscal quarter or for a full fiscal year. Preopening Costs for New Restaurants As a result of the highly customized and operationally complex nature of our upscale, high volume concepts, as well as the investment we make in properly training our staff to operate our restaurants, the preopening process for our restaurants is more extensive, time consuming and costly relative to that of most chain restaurant operations. Preopening costs vary by 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 operate each restaurant; the relative difficulty of the restaurant staffing process; the cost of travel and lodging for different metropolitan areas; the timing of the restaurant opening and the extent of unexpected delays, if any, in obtaining final licenses and permits to open the restaurants, which may also depend on our landlords obtaining their licenses and permits, as well as completing their construction activities, for the properties where our leased premises are located. Preopening costs for a typical single-story The Cheesecake Factory restaurant in an established market average approximately $1.2 million to $1.4 million and include all costs to relocate and compensate restaurant management employees during the preopening period; costs to recruit and train hourly restaurant employees; wages, travel and lodging costs for our opening training team and other support employees; and straight-line minimum base rent during the build-out and in-restaurant training periods. Also included in preopening costs are expenses for maintaining a roster of trained managers for pending openings; the associated temporary housing and other costs necessary to relocate managers in alignment with future restaurant opening and operating needs; and corporate travel and support activities. Preopening costs are usually higher for larger restaurants, initial entry into a new market or newer concepts. We usually incur the most significant portion of preopening costs within the two months immediately preceding and the month of a restaurant's opening. Preopening costs can fluctuate significantly from period to period, based on the number and timing of restaurant openings and the specific preopening costs incurred for each restaurant. Restaurant Operations and Management Our ability to consistently and properly execute a made-from-scratch, complex menu in an upscale, casual, high volume dining environment is critical to our overall success. We employ detailed operating procedures, standards, controls, food line management systems, and cooking methods and processes to accommodate our extensive menu and to drive sales productivity. However, the successful day-to-day operation of our restaurants remains critically dependent on the quality, ability, dedication and engagement of our general managers, executive kitchen managers and all other management and hourly staff members working at our restaurants. The availability and retention of high level restaurant management has been and will likely continue to be a significant industry-wide challenge. We believe that the high average sales volumes and popularity of our restaurants allow us to attract and retain high quality, experienced restaurant-level management and other operational personnel. Also we tend to experience a lower level of management and staff member turnover than the restaurant industry in general. Each full-service restaurant is typically staffed with one general manager, one executive kitchen manager and approximately six to ten additional kitchen and front-of-the-house managers, depending on the size and sales volume of each restaurant. Our general managers possess an average of eight years of experience with the Company. All newly recruited restaurant management personnel complete an extensive training program during which they receive both classroom and on-the-job instruction in food quality, safety and preparation, guest service, alcoholic beverage service, liquor liability avoidance, financial management and cost controls, risk management, staff relations, and our core values and culture of guest hospitality. Managers continue their development by participating in and completing a variety of training and development activities to assess their skills and knowledge necessary for continued upward progression through our management levels. Restaurant general managers report to an area director of operations who typically supervises the operations of six to eight restaurants, depending on geographic and management experience factors. In turn, each area director of operations reports to one of four regional vice presidents of restaurant operations. Our executive kitchen managers report to their general managers, but are also supervised by an area kitchen operations manager responsible for between six and ten restaurants. Our restaurant field supervision organization also includes a chief operating officer, a senior vice president of kitchen operations, and a performance development team who are collectively responsible for managing new restaurant openings and training for all operational managers and staff. To enable us to more effectively compete for and retain the highest quality restaurant management personnel, we offer an innovative and comprehensive compensation program for our restaurant general managers and executive kitchen managers. Each 8 Table of Contents participant in the program receives a competitive base salary and has the opportunity to earn an annual cash bonus (calculated and paid quarterly) based on quantitative restaurant performance metrics. Participating restaurant general managers are also eligible to use a Company-leased vehicle, for which all non-business use is calculated and added to the participants' taxable income in accordance with income tax regulations. A longer-term, wealth-building program, currently based on stock options and restricted stock, is also available to participating restaurant general managers and executive kitchen managers. Participation in our equity compensation program depends on the participants' extended service with us in their respective positions and their achievement of certain established performance objectives during that period. Our restaurant general managers are responsible for selecting and training hourly staff members for their respective restaurants. Each restaurant is staffed, on average, with approximately 180 hourly staff members. The actual number of staff members working in the restaurant on any given day will depend on guest traffic levels and can be scaled accordingly throughout the day as appropriate. We require each hourly staff member to participate in a formal training program for his or her respective position in the restaurant, under the supervision of other experienced staff members and restaurant management. We strive to foster enthusiasm and dedication in our staff members through daily staff meetings and dedicated time for training. We regularly solicit their suggestions concerning restaurant operations and other aspects of our business. In order to equip our restaurant general managers, executive kitchen managers and field supervision management with the necessary tools to effectively operate our restaurants, we prepare a detailed monthly operating budget for each restaurant. The information we provide includes comparisons of actual results to budgeted results, as well as to actual results for the prior year period. We also measure the productivity and efficiency of our restaurant operations using a variety of statistical indicators such as daily table turns, guests served per labor hour worked, operating costs incurred per guest served and other metrics, and provide this statistical package to the management of each restaurant to assist them in better managing financial, labor, operational and 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 square feet, of which approximately 40,000 square feet is devoted to production operations and the remainder is utilized for corporate support purposes. Our facility in Rocky Mount, North Carolina contains approximately 100,000 square feet, of which approximately 70% is devoted to production operations and 20% is being used as a distribution center for our restaurants and customers located in the eastern United States. We intend to build out the remaining space in stages as additional capacity is needed to produce cheesecakes and other bakery products for our restaurants and other foodservice wholesalers, retailers and distributors. We have an option to acquire additional land adjacent to our current facility in North Carolina, should additional capacity be needed in the future. We produce approximately 70 varieties of cheesecake in our two production facilities based on proprietary recipes. Some of our most popular cheesecakes include the Original Cheesecake, Stefanie's Ultimate Red Velvet Cake Cheesecake, Godiva Chocolate, 30th Anniversary Chocolate Cake Cheesecake, Fresh Banana Cream, Adam's Peanut Butter Cup Fudge Ripple and Fresh Strawberry. Other popular baked desserts include Chocolate Tower Truffle CakeTM, Carrot Cake, Black-Out Cake and Lemoncello Cream Torte. In the aggregate, our bakery production facilities currently produce approximately 300 product SKUs (stock keeping units). High quality baked desserts and other products made with the best available ingredients are essential to the successful execution of our restaurant and bakery operations. Our bakery facilities operate under an ongoing, comprehensive food safety and quality assurance program. This program includes, among other things, supplier qualification and plant inspections, inbound raw material testing, microbiological testing of the production environment, safety and sanitation monitoring, and finished goods testing. Our in-house food safety and quality assurance staff constantly audits and monitors our manufacturing practices during operation and closely monitors our compliance with the industry standard Hazard Analysis Critical Control Points ("HACCP") program. We use both internal and external quality control laboratory resources to test raw ingredients and finished products for safety. The commissary role of our bakery operations is to produce innovative, high quality cheesecakes and other baked desserts for sale at our restaurants. Dessert sales represented approximately 15% of our restaurant sales in fiscal 2009 and 14% in fiscal 2008 and 2007, and are important to restaurant-level profitability. We also market cheesecakes and other baked products on a wholesale basis to other foodservice operators, retailers and distributors. Approximately 60% of the bakery's production activities are currently devoted to our outside customers, with the remaining dedicated to supplying our restaurants. Cheesecakes and other items produced for outside accounts are marketed under The Cheesecake Factory trademark, The Dream Factory trademark, The Cheesecake Factory Bakery mark and other private labels. Current large-account customers include the leading national warehouse club operators, a national retail bookstore cafe, institutional foodservice distributors, supermarkets and other restaurant and foodservice operators. Sales to warehouse clubs, which represent approximately two-thirds of our total outside bakery sales, are concentrated with three large warehouse club operators in the United States. Bakery products are shipped to our restaurants and other customers 9 Table of Contents throughout the United States by common carrier. We also fulfill orders received by telephone and through our website. Bakery products are also shipped to international customers. Our bakery sells our baked goods internationally under both The Cheesecake Factory and The Dream Factory trademarks in over ten countries. We have a limited exclusive distribution arrangement with one 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 at another Middle East-based coffee cafe under The Dream Factory trademark. We strive to develop and maintain long-term, growing relationships with our bakery customers, based largely on our 37-year reputation for producing high quality, creative baked desserts. However, bakery sales volumes always will be less predictable than our restaurant sales. It is difficult to predict the timing of bakery product shipments and contribution margins on a quarterly basis. Additionally, the purchasing plans of our large-account customers may fluctuate from quarter to quarter. Due to the highly competitive nature of the bakery business, we are unable to enter into long-term contracts with our large-account bakery customers who may discontinue purchasing our products without advance notice at any time for any reason. We currently maintain a full-time staff of sales and marketing and product development employees dedicated to bakery operations. Additionally, we utilize the services of professional foodservice brokers for certain bakery products and distribution channels. Purchasing and Distribution We strive to obtain quality menu ingredients, raw materials and other supplies and services for our operations from reliable sources at competitive prices. We continually research and evaluate various ingredients and products in an effort to maintain high quality levels and to be responsive to changing consumer tastes. Except for cheesecakes and other baked products, our restaurants do not utilize a central food commissary. Substantially all menu items are prepared on each restaurant's premises daily from scratch using fresh ingredients. In order to maximize purchasing efficiencies and to provide the freshest ingredients for our menu items while obtaining the lowest possible prices for the required quality and consistency, each restaurant's management determines the quantities of food and supplies required and orders the items from local, regional and national suppliers on terms negotiated by our central purchasing staff. Restaurant-level inventories are maintained at a minimum dollar-value level in relation to sales due to the high concentration and relatively rapid turnover of the perishable produce, poultry, meat, fish and dairy commodities that we use in our operations, coupled with limited storage space at our restaurants. We attempt to negotiate short-term and long-term agreements for our principal commodity, supply and equipment requirements, depending on market conditions and expected demand. However, we are currently unable to contract for long periods of time for certain of our commodities such as fish and most dairy items (except for cream cheese used in our bakery operations) and, consequently, these commodities can be subject to unforeseen supply and cost fluctuations. Commodity costs also can fluctuate due to government regulation, severe weather conditions, and disruptions in the supply chain due to food safety concerns. However, our essential food and beverage products generally are available from multiple qualified suppliers in virtually all cities in which our operations are located. Independent foodservice distributors, including the largest foodservice distributor in North America, deliver most food and supply items daily to our restaurants. Information Technology We facilitate financial and accounting controls in our restaurants through the use of a sophisticated point-of-sale (POS) cash register system and computer network in each restaurant that interfaces with the computer network in our corporate offices using a high-speed, secure communication system. The POS system is also used to authorize and transmit credit card sales transactions. The POS system and computer network provide our restaurant management with daily and weekly information regarding sales, cash receipts, inventory, food and beverage costs, labor costs and other controllable operating expenses. Field supervision staff members also use computer systems that interface with the restaurant and corporate computer networks and handheld wireless devices to insure prompt communication. In fiscal 2008, we fully deployed our Kitchen Management System ("KMS"). KMS is an automated routing and cookline balancing system installed in all of our restaurants which improves cookline productivity, synchronizes order completion, provides valuable ticket time and cook time data, and allows for more efficient levels of labor without sacrificing quality. In January 2010, we completed the implementation of our new front desk management system, which will further streamline our operations. We continue to innovate and modernize our technology infrastructure to provide improved efficiency, capability, stability and scalability. Marketing and Advertising We believe our commitment to providing a differentiated total guest experience through fresh and innovative menu items, unique restaurant design and decor, and friendly, attentive service where guest satisfaction is our highest priority has created strong 10 Table of Contents brand recognition for our namesake concept. Our operational excellence continues to be a highly effective approach to attracting and retaining customers. Accordingly, we have historically relied on our reputation as well as our high profile locations, media interest and positive "word of mouth" to retain and grow market share rather than using traditional paid advertising. For restaurants opening in new markets, we strive to obtain local television and radio station coverage of the opening in order to benefit from the free publicity. We also attempt to build awareness and relationships with retailers located in the same developments, mall concierges, local hotel concierges, neighborhood groups and others in the community. During fiscal 2009, we implemented a strategic marketing plan with the primary objectives of further building our brand awareness and driving guest engagement in a cost effective way that is consistent with the high quality of our brands. Our fiscal 2009 expenditures for marketing and advertising were approximately 1% of restaurant sales. Seasonality and Quarterly Results Our business is subject to seasonal fluctuations. Historically, our highest levels of revenues and net income for our established restaurants have occurred in the second and third quarters of the fiscal year. Approximately 90% of our restaurants are located in retail centers and malls that typically experience seasonal fluctuations in sales. Patio seating represents approximately 20% of the total available productive seating in our restaurants and can be subject to disruption from inclement weather. Holidays and severe weather, such as hurricanes, thunderstorms and similar conditions, may impact restaurant sales volumes seasonally in some of the markets where we operate. Quarterly results have been and will continue to be significantly impacted by the number and timing of new restaurant openings and their associated preopening costs and operating inefficiencies. Our bakery operations are seasonal to the extent that the fourth quarter's sales are typically higher due to holiday business. Additionally, bakery sales comparisons may fluctuate significantly from quarter to quarter due to the timing and size of orders from our larger bakery customers. As a result of these specific seasonal factors, among others, our financial results for any given quarter may not be indicative of the results that may be achieved for a full fiscal year. Food Quality and Safety Our revenues 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 supply chain, at our competitors' restaurants, at one or more of our restaurants or, with respect to our bakery operations, a single production run of bakery products. In particular, since we depend heavily on The Cheesecake Factory mark for a majority of our revenues, unfavorable publicity with respect to our bakery operations could have a material adverse effect on our restaurant operations. To minimize the risk of food borne illness, we have implemented a HACCP system for managing food safety and quality, training staff in food safety and handling and maintaining quality assurance oversight at our bakery and have extended similar systems with respect to food safety at our restaurants. In addition, our corporate food safety and quality assurance staff supplement our internal operational staff and external food quality monitoring programs, including a monthly review by a third-party provider to audit our food safety and sanitation. Nevertheless, the risk of contamination or food borne illness cannot be completely eliminated. Outbreaks at other restaurant chains, or with respect to similar food products on our menu, may affect our restaurants even if 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 of these factors in the foodservice industry, or in any one of our restaurants or our bakery production facilities, could cause our Company to be adversely affected. Government Regulation We are subject to numerous federal, state and local laws affecting our business. Each of our restaurants is subject to licensing and regulation by a number of government authorities, which may include alcoholic beverage control, nutritional information disclosure, health, sanitation, environmental, zoning and public safety agencies in the state or municipality in which the restaurant is located. Difficulties in obtaining or failures to obtain the required licenses or approvals could delay or prevent the development and openings of new restaurants, or could disrupt the operations of existing restaurants. During fiscal 2009, approximately 13% of our restaurant sales were attributable to alcoholic beverages. Alcoholic beverage control regulations require each of our restaurants to apply to a state authority and, in certain locations, county and municipal authorities, for licenses and permits to sell alcoholic beverages on the premises. Typically, licenses must be renewed annually and may be subject to penalties, temporary suspension or revocation for cause at any time. The failure of a restaurant to obtain or retain its 11 Table of Contents licenses would adversely affect that restaurant's operations and profitability. Alcoholic beverage control regulations impact many aspects of the daily operations of our restaurants, including the minimum ages of patrons and staff members consuming or serving these beverages, respectively; staff member alcoholic beverage training and certification requirements; hours of operation; advertising; wholesale purchasing and inventory control of these beverages; the seating of minors and the servicing of food within our bar areas; special menus and events, such as happy hours, and the storage and dispensing of alcoholic beverages. State and local authorities in many jurisdictions routinely monitor compliance with alcoholic beverage laws. The failure to receive or retain, or a delay in obtaining, a liquor license for a particular restaurant could adversely affect our restaurant sales or the ability to obtain liquor licenses elsewhere. We are 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 to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. We carry liquor liability coverage as part of our existing comprehensive general liability insurance; however, a settlement or judgment against us under a dram shop statute in excess of our liability coverage could have a material adverse effect on our results of operations. Various federal and state labor laws govern our operations and our relationships with our staff members, including such matters as minimum wages, breaks, overtime, fringe benefits, safety, working conditions and citizenship