Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

General and Administrative Expenses

General and administrative (“G&A”) expenses consist of the restaurant management recruiting and training program, the restaurant field supervision organization, the bakery administrative organization and the corporate support organization. G&A expenses increased 13.4% to $40.6 million for fiscal 2004 compared to $35.8 million for fiscal 2003. This increase was principally due to the planned growth of our supervision and support organizations commensurate with the growth of our restaurant and bakery operations during fiscal 2004. As a percentage of total revenues, G&A expenses decreased to 4.2% for fiscal 2004 compared to 4.6% for the prior fiscal year, principally attributable to the leveraging of the fixed component of these costs with higher sales volumes. During fiscal 2005, we plan to continue to add resources to the corporate support, training and field supervision activities of our business, in conjunction with the planned openings of as many as 18 new restaurants during the year.

Depreciation and Amortization Expenses

Depreciation and amortization expenses increased 27.7% to $36.0 million for fiscal 2004 compared to $28.2 million for fiscal 2003. This increase was principally due to increases in property and equipment associated with new restaurant openings and the purchase of a new office building to house our corporate offices. As a percentage of total revenues, depreciation and amortization expenses were 3.7% in both fiscal 2004 and fiscal 2003.

Preopening Costs

Preopening costs increased 21.3% to $14.8 million for fiscal 2004 compared to $12.2 million for the prior fiscal year. We opened fourteen Cheesecake Factory restaurants and two Grand Lux Cafe restaurants during fiscal 2004 compared to fourteen Cheesecake Factory restaurants during fiscal 2003. In addition, preopening costs were incurred in both years for restaurant openings in progress.

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 costs for one of our 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; costs for practice service activities; and straight-line base rent during the in-restaurant training period. 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 construction and/or obtaining final licenses and permits to open the restaurants, which may also be caused by landlord delays.

Our direct preopening costs for an 11,000 square foot, single-story restaurant in an established Company market averages approximately $775,000. There will also be other preopening costs associated with each restaurant opening, including costs for corporate travel and support activities. 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 our current growth objectives for fiscal 2005 and 2006, preopening costs for each of those years will likely exceed the respective amount of preopening costs for the applicable prior year.

Interest Income, Net, Other Income and Income Tax Provision

Interest income, net decreased to $2.2 million for fiscal 2004 compared to $3.4 million for fiscal 2003. This decrease was principally due to a higher level of investment of our interest-bearing cash and short-term investments in instruments with slightly shorter maturities than in the prior year. This shift was primarily driven by the timing of funds needed for the purchase of our corporate support center and our new restaurant construction costs. We generally invest our excess cash balances in U.S. Treasury and Agency securities, investment grade corporate debt securities rated “A” or better and money market mutual funds. In addition, we recorded interest expense of approximately $0.5 million and $0.1 million in fiscal 2004 and fiscal 2003, respectively, associated with landlord construction allowances deemed to be financing in accordance with EITF 97-10, “The Effect of Lessee Involvement in Asset Construction.” See Note 1 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

Other income for fiscal 2004 was $1.0 million compared to $2.9 million for fiscal 2003. This decrease was principally due to lower gains on the sales of investments and marketable securities that were liquidated from time to time to fund the Company’s working capital requirements throughout the year. Our effective income tax rate was 34.8% for fiscal 2004 compared to 35.1% for fiscal 2003. For fiscal 2005, we currently estimate our effective tax rate to remain at 34.8%. The actual effective tax rate for fiscal 2005 may be different than our current estimate due to actual revenues, pretax income and tax credits achieved during the year.

Fiscal 2003 Compared to Fiscal 2002

Revenues

Total revenues increased 19% to $773.8 million for fiscal 2003 compared to $652.0 million for fiscal 2002.

Restaurant sales increased 21% to $731.3 million for fiscal 2003 compared to $603.3 million for the prior fiscal year. The increase of $128.0 million for fiscal 2003 consisted of the following components: $57.0 million from the openings of fourteen new restaurants during the fiscal year; $68.4 million from restaurants opened prior to fiscal 2003 that were not considered comparable sales during fiscal 2003; and $2.6 million from comparable restaurant sales. Total restaurant operating weeks increased approximately 21% to 3,531 during fiscal 2003.

Average sales per restaurant operating week for restaurants open during the full fiscal year decreased slightly to $208,100 in fiscal 2003 compared to $210,400 for fiscal 2002. This decline was principally due to severe weather throughout much of the country during the first six months of the year that resulted in approximately 22 lost days of restaurant sales due to restaurant closings and reduced availability of our outdoor patio seats. In addition, several of our newer restaurants experienced expected sales decreases to their sustainable run-rate levels after their “honeymoon” opening period. Refer to Item 1: Business – “New Restaurant Sales and Investment Characteristics” in this Annual Report on Form 10-K.

Comparable restaurant sales increased approximately 0.7% during fiscal 2003 and our effective price increase for the full fiscal year was approximately 1.2%. Comparable restaurant sales were also impacted by the severe weather during the first six months of the year.

Bakery sales to other foodservice operators, retailers and distributors decreased 13% to $42.6 million in fiscal 2003 compared to $48.7 million in the prior fiscal year. During the first half of fiscal 2002, bakery sales were unusually high principally as a result of the initial inventory pipeline fills for new relationships with the largest warehouse club operator and a national retailer. In addition, a former large-account foodservice industry customer discontinued purchasing our product in the third quarter of fiscal 2002 following a voluntary product withdrawal and recall. Sales to warehouse club operators represented approximately 62% of total bakery sales for fiscal 2003 compared to 56% for fiscal 2002.

Restaurant Cost of Sales

Restaurant cost of sales increased 23% to $175.7 million in fiscal 2003 compared to $143.0 million in fiscal 2002. This increase was primarily attributable to the 21% increase in restaurant sales during fiscal 2003. As a percentage of restaurant sales, these costs increased to 24.0% during fiscal 2003 compared to 23.7% for the prior fiscal year.

Bakery Cost of Sales

Bakery cost of sales were $19.7 million for fiscal 2003 compared to $22.6 million for the prior fiscal year. The decrease of $2.9 million was principally attributable to the 13% decrease in bakery sales for fiscal 2003. As a percentage of bakery sales, bakery cost of sales remained relatively unchanged at 46.3% for fiscal 2003 compared to 46.4% for fiscal 2002.

Labor Expenses

Labor expenses increased 19.5% to $239.4 million for fiscal 2003 compared to $200.3 million for fiscal 2002. This increase was principally due to the 19% increase in total revenues during fiscal 2003. As a percentage of total revenues, labor expenses increased slightly to 30.9% for fiscal 2003 compared to 30.7% for fiscal 2002 reflecting the reverse leverage from the lower than expected restaurant and bakery sales due to weather conditions during the first three months of fiscal 2003 on the fixed portion of labor costs in both operations. In addition, the severe winter weather in 2003 made it difficult for managers to adjust hourly labor. Labor expenses were also affected by increased costs for health insurance benefits.

Other Operating Costs and Expenses

Other operating costs and expenses increased 20.3% to $181.0 million for fiscal 2003 compared to $150.5 million for fiscal 2002. This increase was principally attributable to the 19% increase in total revenues for fiscal 2003. As a percentage of total revenues, other operating costs and expenses increased to 23.4% for fiscal 2003 versus 23.1% for fiscal 2002. This increase was due primarily to increased costs for natural gas and electric services to our restaurants amounting to approximately 30 basis points of total revenues; higher costs for our insurance arrangements of approximately 10 basis points and increased selling, distribution and promotional costs related to our outside bakery sales. These increases were partially offset by costs incurred only in fiscal 2002 associated with the August 2002 bakery product withdrawal of approximately $2.1 million or 0.3% of total revenues.