A Sweet Offering of Stock : Calabasas: The Cheesecake Factory wants cash to expand, but the owners will get about half the proceeds. An observer calls this a ‘negative sign.’

The Cheesecake Factory, a Calabasas-based restaurant chain and bakery known for its stylish and high volume restaurants, plans a $35-million stock offering to raise cash for the company to expand.

But the initial public stock offering by the 20-year-old company will enrich its owners nearly as much as it will provide the company capital for expansion. Almost half of the net proceeds from the stock offering are set to go to current owners--including $13.9 million to David Overton, The Cheesecake Factory’s CEO, and his mother Evelyn Overton, one of the company’s founders.

“It raises at least a yellow flag,” said Norman G. Fosback, editor of New Issues, a Florida newsletter that gives information and advice on initial public offerings. While it isn’t uncommon for owners to benefit from a stock offering, Fosback said, it is a “negative sign” when a large chunk of the proceeds are not being used to enhance the company.

Cheesecake Factory officials and their attorneys declined to comment, citing the Securities and Exchange Commission’s so-called “quiet period” during a pending stock offering.

Last year The Cheesecake Factory earned $1.7 million on revenue of $46.4 million, compared with earnings of $1.66 million on revenue of $30.7 million in 1990. The company’s restaurants grossed an average $8 million each last year--a figure that analysts say is substantially higher than most other dinner houses of their size.

“That kind of volume is extraordinary,” said Michael Bartlett, editor of Restaurant and Institutions, a trade publication for the restaurant industry. “They are extremely successful against any kind of norm you want to set.”

In its SEC filing, The Cheesecake Factory said it plans to sell 2.5 million shares of common stock for between $13 and $15 a share.

After the offering, there will be about 6.2 million shares of common stock outstanding, assuming a price of $14 per share, that would give the company a total market value of $87 million--or about 51 times last year’s earnings.

Fosback agreed that the company’s restaurant sales were “phenomenal.” But he said the expected stock offering price “strikes me as excessively priced.”

The Cheesecake Factory operates four restaurants in Southern California and one in a Washington, D.C., suburb. It plans to open a restaurant in Newport Beach in December and one in Atlanta next May. Last year 86% of its revenues came from the restaurants.

After paying underwriting fees, the company hopes that the offering will raise $32 million, of which $9.3 million would go to Evelyn Overton, who is now a vice president, and $4.6 million to David Overton, who also serves as the company’s chairman.

The company said these cash payments would be in lieu of shares of common stock that the Overtons would otherwise be entitled. In a reorganization earlier this year to prepare for the stock offering, the Overtons were also issued 1.6 million shares of common stock. One source at The Cheesecake Factory said Evelyn Overton, 70, preferred cash to additional stock because she wanted to leave liquid assets for her heirs. After the stock offering the Overtons would own 26% of the company’s stock.

The Cheesecake Factory plans to use an additional $1.7 million of the stock proceeds to pay other current equity owners for their stake in the company. In all, $15.6 million--or 49% of the net proceeds--would go to company owners.

Of the remaining money, $4 million would be used to open its Atlanta restaurant; $3 million to expand its bakery facilities in Calabasas; and the rest to repay debts and for other expansion and working capital.

The company also plans to expand its bakery operation in Calabasas where it makes about 40 varieties of cheesecakes and other baked desserts that are sold to restaurants and retailers, including Ralphs’ Grocery and Price Club Warehouse.

Others who follow the restaurant industry said they thought that the company’s public offering was well priced. Janet Lowder, president of the Los Angeles consulting firm Restaurant Management Services, said that given the company’s past performance, “they shouldn’t have any trouble with the offering.”

Analysts attribute the company’s success to its innovative decor, spacious setting--its restaurants average 12,900 square feet in size--and an extensive and diverse menu selection that includes Thai-spiced chicken, Cajun seafood, pastas and burgers.

One of its newer restaurants is in Woodland Hills. Opened in July, 1989, at a cost of $2.8 million, the 11,500-square-foot restaurant had revenue of $6.7 million in its first full year of operations. Designed with sand-washed walls, classical pillars and murals, the restaurant has seating for 290 people, a full bar, and it offers about 200 food items in a 17-page menu--of which several pages are ads for clothing and other retailers in the area.

“They’re very savvy operators,” said Lee Healy, a spokeswoman for El Torito Restaurant & Cantino, an Irvine-based chain that operates a restaurant near The Cheesecake Factory at Marina del Rey. “They’re known for having really large portions and for good quality,” she said.

In its registration filing, The Cheesecake Factory noted that California’s shaky economy, intense competition and increasing government regulations continue to pose challenges for the company.

The Cheesecake Factory’s “reputation has been pretty good, both in the standpoint of being good operators and being creative,” said Stan Kyker, executive vice president of the California Restaurant Association, which represents about 10,000 restaurants in the state.

“In California, it’s very tough,” Kyker added. “And after the riots, it’s tougher yet in Los Angeles.”

The Cheesecake Factory at a Glance The Cheesecake Factory, which plans an initial public stock offering, operates five upscale restaurants, and a bakery that sells cheesecakes and other baked desserts to grocers and other retailers. Founded in1972, the Calabasas-based company plans to open two more restaurants in the next year.