|
||||||||||
|
|||||||||||
|
The Cheesecake Factory Incorporated and Subsidiaries 1. Summary of Significant Accounting Policies: Description of Business The Cheesecake Factory Incorporated (referred to herein as the “Company” or in the first person notations “we,” “us” and “our”) operates full-service, casual dining restaurants under The Cheesecake Factory® and Grand Lux Cafe® marks. We also operate one self-service, limited menu “express” foodservice operation under The Cheesecake Factory Express® mark. Additionally, we operate a bakery production facility in Calabasas Hills, California that produces baked desserts and other products for our restaurants and for other foodservice operators, retailers and distributors. We also license three bakery cafes under The Cheesecake Factory Bakery Cafe® mark to another food-service operator. All of our company-operated and licensed restaurants and our bakery production facility are located within the United States of America. Basis of Presentation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions for the periods presented have been eliminated in consolidation. Fiscal Year We utilize a 52/53 week fiscal year ending on the Tuesday closest to December 31 for financial reporting purposes. Fiscal 2004, 2003 and 2002 each consisted of 52 weeks. Fiscal 2005 will consist of 53 weeks and will end on Tuesday, January 3, 2006. Fiscal 2006 will consist of 52 weeks. Restatement of Previously Issued Consolidated Financial Statements Restatement of Financial Statements We began a review of our lease accounting policies following announcements in December 2004 that several restaurant companies were revising their accounting practices for leases. In February 2005, the Chief Accountant of the Securities and Exchange Commission (“SEC”) issued a letter to the American Institute of Certified Public Accountants expressing the SEC staff’s views relating to certain lease accounting issues. As a result of our review, we changed our accounting for leases in 2004 and restated our historical financial statements and certain financial information for prior periods to correct errors in our lease accounting policies. The restatement adjustments are non-cash and had no impact on revenues or net cash flows. The changes to our lease accounting policies fall into several different categories. Contingent Rent We lease all of our restaurant locations under operating lease agreements with terms of approximately 15 to 20 years. Most of these agreements require us to pay contractual annual rent (“minimum base rent”) plus contingent rent based on a percentage of restaurant sales to the extent this amount exceeds the minimum base rent. The lease agreements also generally include scheduled increases in the minimum base rent. In prior periods, we recorded rent expense for the greater of the minimum base rent, as adjusted for scheduled increases over the lease term, or the contingent rent based on a percentage of sales. As our restaurants have consistently operated at very high volumes, contingent rent was historically in excess of such minimum base rent. Consequently, with respect to leases requiring contingent rent payment, our accounting for rent expense reflected the contingent rent amount. We have determined that in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 29, “Determining Contingent Rentals,” we should have recorded the straight-lined minimum base rent over the lease term plus contingent rent to the extent it exceeded minimum base rent per the lease agreement. Total rent expense over the term of the lease will not change as a result of this correction in accounting treatment. Based on our experience of consistently achieving sales requiring the payment of contingent rent, this adjustment will increase rent expense in the first half of the lease term and likewise decrease rent expense in the second half of the lease term. Rent Holiday Historically, we began the recognition of rent expense with the stated rent commencement date (generally the date we open to the public) according to the lease. We have determined that in accordance with SFAS No. 13, “Accounting for Leases,” we should have included the rent holiday period, which is defined as the date from when we began our tenant improvements to the property until the stated rent commencement date per the lease, as part of the lease term for purposes of straight-lining minimum base rent. Of the rent allocated to the rent holiday period, the portion incurred during the tenant improvement construction phase can be capitalized. Once construction is complete and the building is ready for its intended use, rent for the remainder of the holiday period should be expensed. Landlord Contributions We often receive landlord contributions of monies to offset the costs of constructing structural components for the leased space. These monies can be direct cash reimbursements or offsets to minimum or percentage rent payments over the term of the lease. Historically, we have netted these reimbursements against the cost incurred by the Company for the structural components and depreciated the net amount over the lease term. In accordance with SFAS No. 13, “Accounting for Leases,” Emerging Issues Task Force (“EITF”) No. 97-10, “The Effect of Lessee Involvement in Asset Construction” and SFAS No. 98, “Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate, Sales-Type Leases of Real Estate, Definition of the Lease Term, and Initial Direct Costs of Direct Financing Leases,” we should have accounted for each operating lease based on the following criteria:
We restated our Consolidated Balance Sheet at December 30, 2003 and the Consolidated Statements of Operations, Stockholders’ Equity and Cash Flows for the years ended December 30, 2003 and December 31, 2002. The adjustments associated with the above corrections in our accounting for leases reduced net income by $606,000 and $304,000 and had no impact on diluted net income per share for the years ended December 30, 2003 and December 31, 2002, respectively. These adjustments also resulted in a $267,000 reduction in retained earnings as of January 1, 2002. We also restated the quarterly financial information for fiscal 2003 and the first three quarters of fiscal 2004 (see Note 15 of the Notes to Consolidated Financial Statements). We did not amend our previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the restatement since none of the differences in the prior years’ financial statements are considered by management to be material. However, we determined the cumulative adjustment for the above corrections to be significant to the 2004 fourth quarter results and, therefore, restated the prior quarterly and annual information included in this Annual Report on Form 10-K. Accordingly, readers of the financial statements should read the restated information in this Annual Report on Form 10-K as opposed to the previously filed information. The effects of our restatement on previously reported Consolidated Financial Statements as of December 30, 2003 and for the years ended December 30, 2003 and December 31, 2002 are summarized as follows. The following table reflects the effects of the restatement on the Consolidated Balance Sheet (in thousands):
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| "continued" |
      |
