Human Capital & Careers

Cheesecake Restates and Mulls Changes

Following an internal options probe, the restaurant company's audit committee wants to boost the size of the board and add a chief compliance officer.
Stephen TaubNovember 20, 2006

Following an audit committee review of its stock-option-granting practices, The Cheesecake Factory announced plans to restate previous financial statements and record a non-cash, after-tax compensation expense totaling $5.5 million.

The audit committee’s review, which covered all periods starting with the company’s initial public offering registration in 1992, concluded that the company incorrectly applied certain measurement dates to stock option grants made to executive officers from 1997 through 2001. The company also applied inaccurate measurement dates to options awarded to non-executive officers and other employees from1997 through 2004 and to options handed out to outside directors in 2000 and 2001.

The audit committee found that the company used date selection methodologies that were generally limited to 30-day time windows, according to the announcement. The restaurant company reported that the adjustments will have no impact on previously reported revenues or net cash flows.

The company contends that the committee found no evidence that any person acted with the intention to deceive or mislead. The Cheesecake Factory also didn’t recommend firing any current senior management or any board member.

The audit committee did, however, recommend that the company get repayments from some current and former officers who oversaw the stock option granting process, as well as from compensation committee members who received misdated options. The reimbursements should equal the difference between the stock option proceeds received and the proceeds that would have been received if the proper measurement dates been used. The committee also called on all unexercised stock option grants be treated in the same way.

The company reported that all of those who benefited from the misdating have said that they intend to pay the money back. Further, the audit committee recommended that the company install a number of governance changes. For instance, the committee called on the company to boost the size of the board by at least one member and preferably two and to create the position of chief compliance officer.

The committee also recommended some options-related measures, including compensation committee approval of all equity-related compensation only on regularly scheduled review dates. It also suggested that the company put in place tighter controls over the use of unanimous written consents and revise the board’s compensation arrangements to provide competitive pay and place less emphasis on stock-based compensation and an automatic mechanism for stock option grants.

“The audit committee and company management are considering the impact of these recommendations on their assessment of internal controls,” the company stated in a press release. The Cheesecake Factory also said it told the Securities and Exchange Commission of the findings and recommendations from the audit committee and that it will continue to cooperate fully with the SEC’s informal inquiry into the company’s stock option granting practices.