SCHEDULE 14A
SCHEDULE 14 INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [ x ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section
240.14a-11(c) or Section 240.14a-12
Name of Registrant as Specified in Its Charter:
The Cheesecake Factory Incorporated
Name of Person(s) Filing Proxy Statement:
Culinary Workers Union, Local 226
Payment of Filing Fee (check the appropriate box)
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii),
14a-6(i)(1), or 14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to
Exchange Act Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules
14a-6(i)(4) and 0-11.
[PRELIMINARY] PROXY STATEMENT
INDEPENDENT SHAREHOLDER SOLICITATION for
Annual Shareholders Meeting
The Cheesecake Factory Incorporated
May __, 2003
[LOCATION]
First released to Shareholders 4/ ___/03
Culinary Workers Union 226
Research Dept.
1630 S. Commerce St.
Tel. (702) 387-7005
Fax: (702) 385-1997
To Fellow Cheesecake Factory shareholders:
We are writing to urge you to support our shareholder
proposals to improve corporate governance at The Cheesecake
Factory Incorporated (the "Company") and to reform the
Company's stock option policies.
In our view, a key lesson from the recent corporate scandals
is the importance of good corporate governance and clear and
transparent accounting standards. In the long term, we
believe that good corporate governance can maximize shareholder
value, and protect shareholders from potential risks to a
company's long-term success.
However, we are concerned about the Company's poor corporate
governance practices--and restrictions on shareholder rights. We
believe the Company's arsenal of anti-takeover devices a
classified board, a stockholder rights plan (or "poison pill"),
blank check preferred stock, 80% supermajority voting
requirements, and restrictions on shareholders' ability to call
special meetings or act by written consent--serve to unduly
entrench management and our Board of Directors from shareholder
influence. It is our opinion that enhancing shareholder rights
at the Company and strengthening the Board's oversight role,
rather than maintaining the Company's current entrenchment
devices, is the best guarantee to ensure the continuing success
of The Cheesecake Factory.
In our view, The Cheesecake Factory's corporate governance
practices, by insulating our Board from shareholder
accountability, have contributed to the Company's practices
regarding stock options. Our Company has aggressively awarded
stock options to employees, resulting in significant dilution
(and potential future dilution) for shareholders of the Company
(see Proposal 1 below for more information). However, the
Company has awarded these stock options without accounting for
the compensation cost in the income statement, and in large part
through an employee stock option plan that has not been approved
by shareholders. While these practices are legal, we believe
they do not contribute to a clear and straightforward
understanding by shareholders of the costs of the Company's stock
option policies.
Accordingly, we urge shareholders to our support our call
for improved corporate governance and reform of the Company's
stock option policies by voting FOR the following proposals:
1. Adopt a policy to submit for shareholder approval all
equity compensation plans, including the Year 2000 Performance
Stock Option Plan.
2. Establish a policy of expensing in the Company's annual
income statement the costs of all future stock options issued by
the Company.
3. Submit the Stockholder Rights Plan or "Poison Pill" to a
shareholder vote for approval, and if this approval is not
granted in the form of a majority of shares outstanding, then the
rights plan be redeemed.
4. Repeal the provisions in the Articles of Incorporation
and Bylaws that provide for the Company's classified board.
5. Separate the position of the Chairman of the Board and
Chief Executive Officer, and provide that the Chairman be an
independent outside director elected by the directors.
6. Broaden shareholder rights by removing the
"super-majority" voting requirement and the restrictions on
written consent and the ability to call special meetings.
Below are the full text of our proposal, along with
supporting statements for those proposals.
I. SHAREHOLDER PROPOSALS
Proposal 1: STOCKHOLDER APPROVAL OF EQUITY COMPENSATION
PLANS
RESOLVED, that the Shareholders of The Cheesecake Factory
("the Company") request the Board of Directors adopt a policy to
submit to shareholder approval all equity compensation plans,
including the Year 2000 Performance Stock Option Plan.
SUPPORTING STATEMENT
Equity-based compensation plans have been used for many
years by the Company to provide incentives for attracting and
retaining qualified employees. Shareholders, including the
proponent of this resolution, have supported the reasonable use
of stock options. However, we believe that excessive dilution of
shareholders' equity related to such plans can be unfair and
costly to existing shareholders.
Since 1992, the Company has authorized over 16 million stock
options for employees,executives, and directors of the company.
From 1995 through 2002 more than 7.6 million stock options have
been exercised by employees or over 15% of the outstanding
shares (in 2002)leading to significant dilution at the company.
The Street.com wrote on January 16, 2003 that "Cheesecake
illustrates well the "dirty little secret" of dilution from
options. Its option program has resulted in a material transfer
of property from shareholders to company management."
At the end of 2002, the Company's "option overhang" (the
number of options outstanding and available for grant divided by
shares outstanding) was over 17%. That means there is the
potential of an additional 17% of the company's shares being
introduced into the market, further diluting shareholders. On
February 15, 2003, Standard and Poors noted in a report about The
Cheesecake Factory that "Investors should be aware that the
company's use of stock option grants could significantly dilute
future earnings."
Given the risks of dilution at the Company, we are concerned
that shareholders have never approved one of the major stock
option plans at the Company. At the 1999 annual meeting, the
Board adopted the Year 2000 Performance Stock Option Plan (the
"Plan") without shareholder approval. The Company did not
disclose the existence of the Plan to shareholders until almost a
year later, filing the Plan as an exhibit to a Registration
Statement. Over the last 3 years, our Board of Directors has
steadily authorized shares for grant under the plan from 675,000
shares in 1999 (split adjusted) to over 5.3 million shares in
2002 all without shareholder approval.
Our Company did not require shareholder approval of the Plan
because of the listing regulations of NASDAQ which do not require
approval of "broad based" stock option plans. However, reacting
to widespread criticism of the abuse of stock option plans,
NASDAQ has proposed requiring shareholder approval of most
option plans. The rules await final approval from the SEC.
Given the potential dilution resulting from this plan, and
given that the Plan allows the Board to terminate the Plan at any
time, we believe the Company should submit the Plan and future
stock option plans for shareholder approval, whether or not the
proposed NASDAQ rule is adopted.
By voting for this resolution, shareholders can send a
message strongly supporting the right of shareholders to vote on
equity compensation plans.
Proposal 2: EXPENSE STOCK OPTIONS
RESOLVED, that the shareholders of The Cheesecake Factory
(the "Company") hereby request that the Company's Board of
Directors establish a policy of expensing in the Company's
annual income statement the costs of all future stock options
issued by the Company.
SUPPORTING STATEMENT
Current accounting rules give companies the choice of
reporting stock option expenses annually in the company income
statement or as a footnote in the annual report (See: Financial
Accounting Standards Board Statement 123). Most companies,
including ours, report the cost of stock options as a footnote in
the annual report, rather than include the option costs in
determining operating income. We believe that expensing stock
options would more accurately reflect a company's operational
earnings.
In our view, the lack of option expensing can promote
excessive use of options in a company's compensation plans,
obscuring and understating the cost of compensation. Our
Company has used stock options as a compensation tool without
directly accounting for the costs in the income statement.
Prominent voices in the financial community are now calling
for option expensing. "The failure to expense stock option
grants has introduced a significant distortion in reported
earnings," stated Federal Reserve Board Chairman Alan Greenspan.
"Reporting stock options as expenses is a sensible and positive
step toward a clearer and more precise accounting of a company's
worth."
Warren Buffett wrote in a New York Times Op-Ed piece on July
24, 2002 that "Options are a huge cost for many corporations and
a huge benefit to executives. No wonder, then, that they have
fought ferociously to avoid making a charge against their
earnings. Without blushing, almost all C.E.O.'s have told their
shareholders that options are cost-free ... When a company
gives something of value to its employees in return for their
services, it is clearly a compensation expense. And if expenses
don't belong in the earnings statement, where in the world do
they belong?"
Many companies have responded to investors' concerns about
their failure to expense stock options. In recent months, more
than 100 companies, including such prominent ones as Coca Cola,
Washington Post, and General Electric, have decided to expense
stock options in order to provide their shareholders more
accurate financial statements. Our Company has yet to
act.
Proposal 3: SHAREHOLDER APPROVAL OF POISON PILLS
RESOLVED, Resolved, that shareholders of The Cheesecake
Factory urge the Board of Directors to submit its Stockholder
Rights Plan or "Poison Pill" to a shareholder vote for
approval, and if this approval is not granted in the form of a
majority of shares outstanding, then the rights plan be redeemed.
SUPPORTING STATEMENT
On August 4, 1998, the Board of Directors of the Company
adopted, without shareholder approval, a poison pill labeled a "
Stockholder Rights Plan." We believe this plan injures
shareholders by reducing management accountability. The plan
provides that should the Board be opposed to an offer for more
than 15% of stock, then the Board can dilute the potential
acquirer's interests by giving all other shareholders an
additional share of stock for each share owned.
Because the poison pill so dramatically curtails
shareholders' rights to sell their stock, we believe shareholders
not management should approve the adoption of any poison pill.
Nell Minow and Robert Monks note in their book Power and
Accountability that poison pills "amount to major de facto shifts
of voting rights away from shareholders to management, on
matters pertaining to the sale of the corporation. They give
target boards of directors absolute veto power over any proposed
business combination, no matter how beneficial it might be for
the shareholders."
The Council of Institutional Investors an organization of
large corporate, union, public pension plans calls for
shareholder approval of all poison pills in its Shareholder Bill
of Rights. Institutional Shareholder Services (ISS), a leading
corporate governance advisor, notes that "since investors suffer
a diminuation of power as a result of the adoption of
anti-takeover proposals, only shareholders should have the right
to give this power away."
Therefore, to assure shareholders that management respects
the rights of shareholders to participate in the decisions that
govern their own rights as shareholders and the Company's
governance, we urge the Board to put the Stockholder Rights Plan
up for a vote.
Proposal 4: DECLASSIFY THE BOARD OF DIRECTORS
RESOLVED, that shareholders of The Cheesecake Factory urge
the Board of Directors to repeal the provisions in the Articles
of Incorporation and Bylaws that provides for the Company's
classified board. The declassification shall be completed in a
manner that does not affect the unexpired terms of Directors
previously elected.
SUPPORTING STATEMENT
The Cheesecake Factory's Board of Directors is divided into
three classes of directors serving staggered three-year terms.
This means an individual director faces election only once
every three years, and shareholders only vote on roughly a third
of the board each year.
We believe that the staggered structure of The Cheesecake
Factory's board is not in the best interests of shareholders
because it reduces the accountability of the Board to
shareholders and is an unnecessary takeover defense. In
addition, because directors at the Company may only be removed
"for cause," it is our view that the Board is further entrenched
at the Company. Shareholders should have the opportunity to vote
on the performance of the entire board each year.
Moreover, according to a May, 2002 study by Harvard
University's John M. Olin Center For Law, Economics, And
Business, classified boards may not lead to higher premiums for
companies subject to hostile takeovers. According to the study,
Shareholders of targets that remained independent were made worse
off, on average, than shareholders of targets that accepted
either the hostile bid or a white knight offer. Furthermore,
effective staggered boards did not seem to provide sufficient
countervailing benefits, in terms of increased premiums, to
offset the costs of remaining independent. Overall, the authors
estimate that effective staggered boards reduced returns for
shareholders of hostile bid targets on the order of 8-10 percent
in the nine months after the hostile bid was launched."
In addition, many institutional investors are increasingly
opposed to classified boards, including Fidelity, the California
Public Employees Retirement System, and Vanguard. According
to Georgeson, in 2001 proposals to declassify the board received
on average 60% of votes cast.
We urge shareholders to demand that The Cheesecake Factory
declassify the Board, and adopt annual elections.
Proposal 5: SEPARATE THE POSITION OF CHAIRMAN AND CHIEF
EXECUTIVE OFFICER
RESOLVED, Resolved, that the shareholders of The Cheesecake
Factory urge the Board of Directors to amend the Company's
Bylaws to separate the position of the Chairman of the
Board and Chief Executive Officer, and that the Chairman be an
independent, outside director, elected by the directors.
SUPPORTING STATEMENTS
The Cheesecake Factory's Board of Directors consists of five
directors, with David Overton serving as both the Chairman of the
Board and as Chief Executive Officer ("CEO") of the Company.
In our view, the positions of Chairman and CEO are distinct
jobs requiring different responsibilities. We believe the
primary purpose of the board of directors is to protect
shareholders' interests by providing independent oversight of
management, including the CEO. We are concerned that one person
holding both positions reduces the board's ability to oversee
the Company. For example, a Board Chairman typically sets the
Board's agenda: if the Chairman does not place a problem on the
agenda, then outside directors may not learn of it in a timely
way.
In January 2003, the Conference Board, an influential
business advisory group, as part of its corporate governance
recommendations urged "companies to carefully consider separating
the offices of Chairman of the Board and CEO." The Conference
Board noted that "the responsibilities of leading the board and
of managing the company are distinct. The CEO is the
highest-ranking member of the management team. As such, he or she
is accountable for the corporation's management and performance.
As noted above, the board is charged with ensuring that
management is carrying out its responsibilities in the company's
and the shareowners' best long-term interests. Typically, the CEO
is a member of the board, but he or she is also part of the
management team that the board oversees. This dual role can
provide a potential for conflict, particularly in those cases in
which the CEO attempts to dominate both the management of the
company and the exercise of the responsibilities of the board."
Moreover, the Conference Board added that it was "profoundly
troubled by the corporate scandals of the recent past. The
primary concern in many of these situations is that strong CEOs
appear to have exerted a dominant influence over their boards,
often stifling the efforts of directors to play the central
oversight role needed to ensure a healthy system of corporate
governance."
Two-thirds of directors responding to a McKinsey & Co.
survey favored splitting the roles of chairman and CEO as away to
reform the way corporations operate and prevent business
collapses like Enron, said a McKinsey & Co. corporate governance
survey. That survey was answered by 180 directors sitting on the
boards of more than 500 U.S. companies.
Accordingly, we believe that splitting the positions of
Chairman and CEO will strengthen and improve corporate governance
at the Company. While Mr. Overton's current employment
agreement provides for him to have both positions, the proposal
recommends that future agreements not require this.
Proposal 6: SHAREHOLDER RIGHTS
RESOLVED, that the shareholders of The Cheesecake Factory
urge the company to broaden shareholder rights by removing the
"super-majority" voting requirement and eliminating the
restrictions on written consent and the ability to call special
meetings.
SUPPORTING STATEMENT
We believe the ability of shareholders to exercise their
rights to be fundamental to good corporate governance, including
the ability of shareholders to call special meeting, to act by
written consent, and to enact bylaw amendments or take other
action by a majority of shares outstanding.
However, the Company's bylaws and/or articles of
incorporation do not permit shareholders to call special meetings
or act by written consent, and require a super-majority (80%) of
shares to approve bylaw amendments. We believe these barriers
unduly limit shareholders' influence and role in the company.
Accordingly, we urge the Board of Directors to remover these
barriers to the exercise of shareholder rights.
II. PROXY VOTING:
PLEASE USE THE ENCLOSED PROXY CARD TO VOTE FOR THE
PROPOSALS. YOU WILL ALSO RECEIVE A PROXY CARD FROM MANAGEMENT. IF
YOU SUPPORT ANY OF THE PROPOSALS, DO NOT SEND BACK MANAGEMENT'S
CARD (UNLESS THAT CARD GIVES YOU A CHANCE TO VOTE ON SUCH
PROPOSALS). ANY PROXY CARD YOU HAVE SIGNED IS CANCELLED OUT BY
SUBMITTING A LATER-DATED PROXY CARD.
We intend to solicit at least a majority of the voting power
of the outstanding stock. You can revoke any proxy vote prior to
the tally at the shareholders meeting by signing and submitting
a new proxy card, by sending written notice of revocation to the
proxy holder, or by appearing at the meeting and voting in
person. The record date for eligibility to vote is __, 2003.
Our proposals are non-binding recommendations to the board.
Passage of these proposals requires approval of a majority of
votes cast. We seek no discretionary voting authority for the
meeting: we will vote your stock as you instruct us. If you
return the enclosed card but give us no instructions, we will
vote your stock FOR our proposals and not vote the card in the
director selection nor on any other matter. The Company's bylaws
require 60 days' advance notice before any matter may be raised
at the meeting, and therefore we do not expect any matter to be
raised at the meeting that is not addressed in this proxy
statement. We incorporate by reference all information concerning
the board of directors [and management's proposal to _____] and
voting procedures contained in management's proxy statement at
pages ___.
III. INFORMATION ON PARTICIPANTS IN THIS SOLICITATION:
The sole participants in this solicitation will be the
Culinary Workers Local 226 ("Culinary"), and its staff. The
Culinary offices are at the above address. Culinary represents
approximately 25,000 employees of Las Vegas resorts in collective
bargaining. Also, Culinary owns 106 shares of Cheesecake common
stock. Culinary representatives are co-trustees (along with
management representatives) of the Southern Nevada Culinary &
Bartenders Pension Trust Fund. This Trust Fund beneficially
owned 25,900 shares of Cheesecake common stock [as of last
report (1/31/03)]. Culinary is affiliated with the Hotel
Employees and Restaurant Employees International Union (HEREIU).
HEREIU and its affiliates have engaged in shareholder
solicitations on corporate governance issues at several companies
in the last 5 years.
Cheesecake's workforce is not unionized. However, Culinary
has an ongoing organizing drive at Cheesecake's Grand Lux Cafe in
Las Vegas, Nevada. That restaurant is within the Venetian
resort, which Culinary has occasionally picketed in recent years
(that resort is non-union and replaced the Sands Hotel, which was
unionized). We do not seek your support in labor matters, and do
not believe that enactment of the proposals would have any impact
on such matters. The proposals and Culinary's proxy cards will be
presented at the meeting regardless of any developments in such
matters.
Culinary will bear all solicitation costs (anticipated at
$10,000) and will not seek reimbursement from the Company.
Culinary will solicit proxies by mail, phone, e-mail, fax and in
person using its regular staff, who shall not receive any
additional compensation, but Culinary may also hire an outside
solicitor. Culinary will reimburse banks, brokers, and other
custodians,nominees or fiduciaries for reasonable expenses
incurred in forwarding proxy material to beneficial owners.
IV. YOUR RIGHT TO MAKE SHAREHOLDER PROPOSALS:
If a shareholder has owned more than $2000 worth of stock
for more than a year and meets the other criteria of SEC Rule
14a-8, then he or she has the legal right to have a proposal
appear in management's proxy statement and proxy card. The
deadline for shareholders to submit proposals for inclusion in
management's proxy materials for the year 2003 is December __,
2003.
V. EXECUTIVE COMPENSATION/SECURITY OWNERSHIP OF
MANAGEMENT AND 5% OWNERS:
We incorporate by reference the information contained in
management's proxy statement at pages __.
______________________________________________________
PLEASE RETURN THE ENCLOSED PROXY CARD TODAY.
For more information, contact Culinary's Research Department
at (702) 387-7005.
VOTE FOR THE CORPORATE GOVERNANCE REFORM PROPOSALS.
[PAGE BREAK]
PROXY CARD
solicited by Culinary for Annual Shareholders Meeting of
Cheesecake Factory, May __ 2003
The undersigned hereby designates Culinary Research Analyst
Chris Bohner, with full power of substitution, as the proxy of
the undersigned for the sole purpose of voting all stock of
the undersigned in the manner marked below at the Cheesecake
Factory annual shareholders meeting for 2003. This proxy card
grants no discretionary voting authority: if matters come
before the meeting other than the items below, the stock of the
undersigned will not be voted on such matters.
[CULINARY RECOMMENDS A VOTE FOR THE FOLLOWING SHAREHOLDER
PROPOSALS]:
1. PUT EQUITY COMPENSATION PLANS UP FOR A SHAREHOLDER VOTE
FOR THIS PROPOSAL: [ ] AGAINST THIS PROPOSAL: [ ] ABSTAIN: [ ]
2. EXPENSE STOCK OPTIONS
FOR THIS PROPOSAL: [ ] AGAINST THIS PROPOSAL: [ ] ABSTAIN: [ ]
3. PUT THE POISON PILL UP FOR A SHAREHOLDER VOTE
FOR THIS PROPOSAL: [ ] AGAINST THIS PROPOSAL: [ ] ABSTAIN: [ ]
4. DECLASSIFY THE BOARD OF DIRECTORS
FOR THIS PROPOSAL: [ ] AGAINST THIS PROPOSAL: [ ] ABSTAIN: [ ]
5. SEPARATE THE CHAIRMANSHIP FROM CEO
FOR THIS PROPOSAL: [ ] AGAINST THIS PROPOSAL: [ ] ABSTAIN: [ ]
6. BROADEN SHAREHOLDER VOTING RIGHTS
FOR THIS PROPOSAL: [ ] AGAINST THIS PROPOSAL: [ ] ABSTAIN: [ ]
7. ELECTION OF DIRECTORS
For: [ ]
MANAGEMENT NOMINEES: [LIST NAMES]
To withhold authority for individual candidates, cross out
name(s).
Withhold Authority as to all above: [ ]
[CULINARY MAKES NO RECOMMENDATION ON THE DIRECTORS ELECTION]
Dated: ________
SIGNATURE:_______________________________________
PRINT NAME:____________________________________
TITLE (if shares not held in above name):
________________________
Optional information so we can make sure your vote gets counted
and provide you more info about shareholder issues at Cheesecake
(your info will not be put to any other use):
Telephone _________ Fax ____________ E-mail address: ____________
This card can be returned in the enclosed envelope or by fax to
(702) 385-1197.