Welcome to the September issue of Condor Monthly! We introduce the new electronic delivery system in "What's New at Condor Capital." In "From the Portfolio Manager" this month, we examine the Cheesecake Factory. Finally in this month’s "Financial Planning Corner," we explain the recently passed Pension Protection Act.
What's New at Condor Capital
Condor Capital is excited to introduce a new feature on it's client exclusive website, Condor Net. In the upcoming quarter, Condor will be migrating its email based electronic delivery system to a web based application. With a Condor Net login, you will have access to all your current and past statements. In addition to electronic statements, you will have access to daily updates of your Condor Capital accounts. If you have not signed up for Condor Net and are interested, please contact Angelica Weber or Mary Policastro at Condor Capital at (732) 356-7323. You can also email them at angelica@condorcapital.com and mary@condorcapital.com, respectively.
From the Portfolio Manager
The Cheesecake Factory (CAKE)
Each year, Americans are spending a higher and higher percentage of their disposable income on dining out. Today's on-the-go lifestyle makes finding time to cook dinner difficult to say the least. One major beneficiary of this trend has been the casual dining industry. Seeking to further capitalize on this nascent trend, Condor has recently added to its position in The Cheesecake Factory (CAKE).
A One of a Kind Restaurant 
While the casual dining sector as a whole stands to benefit from greater discretionary spending on prepared food, The Cheesecake Factory truly separates itself from the pack. Although the company is well-known for its 40 varieties of cheesecake and other desserts, its menu also offers over 200 items ranging from appetizers, pizza, pasta, seafood, steaks, salads, and sandwiches. French limestone floors, decorative columns, modern lighting, and an exhibition kitchen render the restaurant's décor unlike any other and provide customers with a unique dining experience. In order to better anticipate consumers' changing preferences, approximately ten menu items are changed every six months. Overall, The Cheesecake Factory is the most distinctive concept in high-end casual dining.
Growth Prospects are Strong
It's no secret that customers like what The Cheesecake Factory has to offer, as the chain typically boasts the longest wait times in the industry. The question investors typically ask about The Cheesecake Factory is whether it can continue its historically high rate of growth given its relatively low same store sales numbers. In fact, the company's low same store sales numbers are a result of the concept's incredible success. The Cheesecake Factory's restaurants are running virtually at capacity from the moment one opens, so increasing sales at any one unit by means other than price increases proves difficult. However, The Cheesecake Factory's true growth story lies in unit expansion. The company has just over 100 Cheesecake Factories nationwide and 7 of its earlier stage Grand Lux Café concepts. Management believes that it can double this number given that its restaurants are currently represented in only half of the top 100 U.S. markets. Management recently reiterated that it is targeting the opening of as many as 21 new restaurants, including 2 to 3 Grand Lux Cafés, in fiscal 2006. It is also important to note that the company does not need to advertise, relying instead on its prime locations and word-of-mouth.
Stock is Currently Attractive
Much like the majority of stocks in this industry, higher energy costs have weighed on performance. Additionally, concern over the possible backdating of options has also had a negative impact on the stock. The Cheesecake Factory is not the first company to deal with this issue and we don't think the impact will be material in nature. Furthermore, any adjustments would certainly not affect cash.
The stock is currently trading at an attractive valuation. It is trading at a significant discount to its historical P/E and has a PEG ratio of just 1.27. The company has no significant long-term debt and adequate cash on hand. Given The Cheesecake Factory's strong growth prospects, favorable demographic trends and current stock price, we certainly think shares of CAKE are undervalued at this time.
Cheesecake Factory restaurant locations
Financial Planning Corner
The Pension Protection Act of 2006 
On August 17, 2006, President George W. Bush signed into law the Pension Protection Act of 2006, which he called the "most sweeping reform of America's pension laws in over 30 years." The Act is aimed at improving the pension system, while simultaneously expanding individuals' opportunities to save for retirement. It also ends uncertainty regarding several provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 that were set to expire in 2010. Key provisions of the Act are summarized below:
- Funding of Defined Benefit Plans
Defined Benefit Plans, commonly referred to as the more traditional form of pension plan, are those where an employer is solely responsible for pension assets, which are then distributed to employees in fixed monthly amounts upon retirement. Several provisions of the Act strengthen the rules governing these plans by ensuring that employers keep pension plans fully funded to avoid defaulting on their obligations to employees. Companies with plans deemed underfunded by the government will also be required to accelerate contributions to achieve sufficient plan assets. - Roth 401(k)'s
Instead of allowing them to expire in 2010, the Act makes Roth 401(k) plans permanent. Unlike regular 401(k)'s, withdrawals from Roth 401(k)'s are generally tax-free, though contribution amounts are made on an after-tax basis. Making these plans permanent will certainly encourage their adoption by more employers and encourage greater employee participation. Note that current 401(k) contribution limits are the maximum amount that can be contributed to both types of 401(k)'s. - Section 529 Plans
Until now the future of the ubiquitous Section 529 qualified tuition programs was also somewhat uncertain since these savings vehicles were also potentially set to expire in 2010. The Act makes the favorable tax treatments associated with these plans permanent, ensuring that withdrawals from these plans will remain tax- and penalty-free as long as funds are used for qualified education purposes. - Charitable Giving
An appealing provision of the Act makes it easier for older individuals to donate money to charity from IRA's. Individuals age 70½ or older will be able to take tax-free withdrawals of up to $100,000 from their IRA's, as long as the money goes directly to charity and several other requirement are met. It is important to note that the IRA distribution must go directly to charity and cannot pass through the individual. Additionally, private foundations and donor-advised funds (such as the Charitable Gift Funds profiled in last month's newsletter) are not eligible under this provision. Most importantly, the applicable time frame is limited to 2006 and 2007 only. Besides the intrinsic benefit of charitable giving, a withdrawal made under this provision benefits individuals since it will not be taxed as ordinary income and also counts against required minimum distributions for the year. Please contact Condor Capital if you would like to make a donation or learn more about this provision.
Other provisions in the Act are aimed at preventing abuses in charitable giving. Individuals who deduct cash donations will need to keep records of all contributions, 
whereby written receipts will be necessary even for small amounts. The Act also adopts new standards for gifts of clothing and household items. Individuals will no longer be allowed to take deductions for donations of used clothing or household items unless they are in "good" condition, although Congress did not specifically define standards that would lead an item to be considered "good". Additionally, items defined as having "minimal monetary value," such as used socks, will not be eligible for deduction.
Other Provisions Worth Noting
- Hardship Withdrawals
The Act allows a participant to request a hardship withdrawal from a 401(k), 403(b), 457, or nonqualified deferred compensation plan if the plan's beneficiary incurs the hardship. - Reservist Distributions
The Act provides that the 10% early distribution penalty tax will not apply to IRA and retirement plan withdrawals made by a reservist called to active duty for at least 179 days and allows up to 2 years after the end of active duty to re-contribute this amount back to the retirement plan. - Deposit of Tax Refund to IRA's
Beginning in 2007, taxpayers will have the option to have their tax refund checks directly deposited to an IRA, though normal IRA contribution rules will continue to apply. - Phased Retirement
Effective in 2007, the Act will allow distribution of benefits from pension plans to employees who have attained age 62, but have not yet separated from service; thereby encouraging "phased" retirement.
