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The Cheesecake Factory Incorporated and Subsidiaries 7. Commitments and Contingencies: We lease all of our restaurant locations under operating leases, with primary terms ranging from 10 to 25 years. The restaurant leases typically include land and building shells, require contingent rent above the minimum base rent payments based on a percentage of sales ranging from 3.5% to 10%, and require various expenses incidental to the use of the property. Most leases have renewal options. We have always exercised our renewal options in the past. We also lease certain restaurant and bakery equipment under operating lease agreements. The aggregate minimum annual lease payments under operating leases (including those for seven restaurants with executed leases as of December 28, 2004 that are planned for fiscal 2005 openings) are as follows (in thousands):
Rent expense charged to operations on all operating leases were as follows (in thousands):
With respect to the seven potential restaurant locations with executed leases as of December 28, 2004 that are currently planned for openings in fiscal 2005, we have estimated construction commitments (leasehold improvements and fixtures and equipment), net of agreed-upon up-front cash landlord construction contributions, totaling approximately $43 million. As credit guarantees to insurers, the Company is contingently liable under standby letters of credit issued under the Credit Facility. As of December 28, 2004, the Company had $14.25 million of standby letters of credit related to the self-insurance liabilities accrued in the Company’s Consolidated Financial Statements. All standby letters of credit are renewable annually. We are self-insured for a significant portion of our risks and associated liabilities with respect to workers’ compensation, general liability, employee health benefits and other insurable risks. The accrued liabilities associated with these programs are based on our estimate of the ultimate costs to settle known claims as well as claims incurred but not yet reported to us (“IBNR claims”) as of the balance sheet date. Our estimated liabilities are not discounted and are based on information provided by our insurance brokers and insurers, combined with our judgments regarding a number of assumptions and factors, including the frequency and severity of claims, claims development history, case jurisdiction, applicable legislation and our claims settlement practices. The Company maintains stop-loss coverage with third party insurers to limit its total exposure for each of these programs. The estimated amounts receivable from our third-party insurers under this coverage are recorded in other assets. Significant judgment is required to estimate IBNR claims as parties have yet to assert such claims. If actual claims trends, including the severity or frequency of claims, differ from our estimates, our financial results could be impacted. The Attorney General of the State of California (State Attorney General) filed lawsuits on or about April 10, 2003 in the Los Angeles County Superior Court against the Company, as well as several other restaurant chains, alleging that the defendants violated the provisions of an initiative statute known as “Proposition 65” and California Business and Professions Code Section 17200 by offering for sale in California certain types of fish allegedly containing mercury and mercury compounds without providing the warnings required by Proposition 65. The Company has reached a settlement with the State Attorney General’s office, which requires the Company to pay $13,000 in settlement and penalties and $10,000 in attorney’s fees and costs as well as to post a prescribed notice at its restaurants in California. In December 2002, two former hourly restaurant employees in California filed a lawsuit in the Superior Court in Orange County, California against the Company alleging violations of California labor laws with respect to providing meal and rest breaks. In October 2003, an hourly restaurant employee in California filed a lawsuit in Superior Court in Orange County, California against the Company alleging violations of California labor laws with respect to the providing of meal and rest breaks and improper deductions, among other claims. In May 2004, an hourly restaurant employee filed a lawsuit alleging similar violations in Superior Court in Los Angeles County, California. These cases were filed on behalf of the named plaintiffs and other purported class members. The parties have completed settlement negotiations, and the designated plaintiffs in all three cases and their attorneys have executed a settlement agreement with the Company. Approval of such settlement will be sought from the Superior Court. A number of former and current employees also filed individual wage and hour claims, based upon alleged similar violations, directly with various offices of the California Division of Labor Standards Enforcement (DLSE). Hearings on most of these claims are currently being deferred by the various offices of the DLSE pending approval of the litigation settlement by the Superior Court. The DLSE claims filed by employees who joined the approved settlement will also be resolved by such settlement. In the third quarter of 2004, the Company recorded a $4.5 million reserve based on an estimate of the ultimate costs, expenses and fees which may be incurred in connection with these matters. Revisions to this estimate may be made in the future and will be reported in the periods in which additional information is known. The Company is also subject to other private lawsuits, administrative proceedings and claims that arise in the ordinary course of our business. Such claims typically involve claims from guests, employees and others related to operational issues common to the foodservice industry. A number of such claims may exist at any given time. We could be affected by adverse publicity resulting from such allegations, regardless of whether or not such allegations are valid or whether we are determined to be liable. From time to time, we are also involved in lawsuits with respect to infringements of, or challenges to, our registered trademarks. We believe that the final disposition of such lawsuits, proceedings and claims will not have a material adverse effect on our financial position, results of operations or liquidity. It is possible, however, that our future results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, proceedings or claims. We have severance and employment agreements with certain of our executive officers that provide for payments to those officers in the event of a termination of their employment as a result of a change in control of the Company or without cause, as defined in those agreements. Aggregate payments totaling approximately $2.8 million would have been required by those agreements had all such officers terminated their employment for those reasons as of December 28, 2004. In addition, the employment agreement with our chief executive officer specifies an annual founder’s retirement benefit equal to 20% of his base salary (in effect immediately prior to termination) for the first ten years after termination of his full time employment, increasing to 40% for each year thereafter until his death. During 2004, the Company incurred compensation expense of $325,000 for this retirement benefit, with a projected future obligation of $1.2 million. |
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