P F CHANGS CHINA BISTRO INC - 10-Q Quarterly Report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o

As of June 29, 2003, there were outstanding 25,359,144 shares of the registrant’s Common Stock.

As of June 29, 2003, P.F. Chang’s China Bistro, Inc. owned and operated 85 full service restaurants throughout the United States under the name of “P.F. Chang’s China Bistro.” We also owned and operated 23 limited service restaurants under the name of “Pei Wei Asian Diner.”

The accompanying condensed financial statements have been prepared by P.F. Chang’s without audit and reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of financial position and the results of operations for the interim periods. The statements have been prepared in accordance with accounting principles generally accepted in the United States and with the regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted pursuant to such SEC rules and regulations. Operating results for the six month period ended June 29, 2003 are not necessarily indicative of the results that may be expected for the year ending December 28, 2003.

The balance sheet at December 29, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the financial statements and notes thereto for the fiscal year ended December 29, 2002 included in our Form 10-K.

The Company grants stock options for a fixed number of shares to certain employees and directors with an exercise price equal to or greater than the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” and related interpretations, and, accordingly, recognizes no compensation expense for the stock option grants.

The following table represents the effect on net income and earnings per share if the Company had applied the fair value based method and recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation:

The effects of applying SFAS 123 for providing pro forma disclosures may not be representative of the effects on reported net income for future periods until all options outstanding are included in the pro forma disclosures. For purposes of pro forma disclosures, the estimated fair value of stock-based compensation plans and other options is amortized to expense primarily over the vesting period.

Net income per share is computed in accordance with SFAS No. 128, “Earnings per Share.” Basic net income per share is computed based on the weighted average of common shares outstanding during the period. Diluted net income per share is computed based on the weighted average number of common shares and common stock equivalents, which includes options outstanding under our stock option plans and outstanding warrants. None of the Company’s shares were excluded from the net income per share computation due to their anti-dilutive effect for the quarters ended June 30, 2002 and June 29, 2003 or for the six months ended June 30, 2002 and June 29, 2003. In addition to the potentially dilutive shares of the Company’s stock addressed above, there is also a potentially dilutive effect of unexercised Pei Wei stock options should the fair value of such stock increase above the grant price and Pei Wei have a positive net worth and profitability.

In December of 2002, the Company entered into a senior secured revolving credit facility with a commercial lending institution. The credit facility allows for borrowings up to $20 million at an interest rate ranging from 125 to 200 basis points over the applicable London Interbank Offered Rate (LIBOR). At any time, but only one time, the Company has the right to increase the credit facility up to the maximum aggregate principal amount of $50 million provided the Company is in compliance with the terms of the facility. The revolving credit facility expires on December 20, 2005 and contains certain restrictions and conditions which require the Company to: maintain a certain minimum tangible net worth, an adjusted leverage ratio at a maximum of 3.50:1, and a minimum fixed-charge coverage ratio no less than 1.25:1. The Company was in compliance with these restrictions and conditions as of June 29, 2003. Shares of the Company’s subsidiary, Pei Wei Asian Diner, Inc. serve as collateral for the credit facility. The Company had no borrowings outstanding under the credit facility as of June 29, 2003.

The Company operates exclusively in the food-service industry and has determined that its reportable segments are those that are based on the Company’s methods of internal reporting and management structure. The Company’s reportable segments are Bistro and Pei Wei. There were no material amounts of revenues or transfers among reportable segments.

At June 29, 2003, P.F. Chang’s took advantage of additional tax deductions available relating to the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options. Accordingly, for the six months ended June 29, 2003, P.F. Chang’s recorded a $3.4 million increase to equity with a corresponding $3.4 million reduction to income tax liability. Quarterly adjustments for the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options may vary as they relate to the actions of the option holder or shareholder.

In February 2003, a former server filed a class action complaint against the Company in Orange County Superior Court in California. The plaintiff alleges that the Company failed to give food servers, bussers, runners and bartenders the rest and meal breaks that are required by California law. The plaintiff seeks on behalf of the entire class of these employees in California restitution and civil penalties of at least one hour of wages per employee per day worked for the past three years. If the plaintiff is able to achieve class certification and prevails on the merits of the claim, the Company could potentially be liable for significant amounts. The Company believes that all of its employees were provided with the opportunity to take required meal and rest breaks, and therefore intends to vigorously defend its position. The Company, after consultation with legal counsel, does not believe that the ultimate outcome of this matter will have a material adverse impact on its financial position. However, the matter is at a very early stage, and accordingly, the ultimate amount of loss, if any, is inherently more difficult to evaluate.

Also in February, the Company was served with a 60 day “Notice of Intent to Sue” under California Health and Safety Code Section 25249.6. The plaintiff asserts on behalf of the general public that the Company failed to provide required warning notices under the Health and Safety Code provisions commonly known as Proposition 65 in connection with the serving of fish potentially containing unacceptably high levels of mercury. The California Attorney General has the right to take over this lawsuit and has recently done so. The plaintiff has also asserted an unfair competition claim based on the same facts that may proceed even though the California Attorney General has taken over the Proposition 65 claim. The plaintiff seeks civil damages of $2,500 per day for each alleged violation and a permanent injunction requiring the Company to post warning notices. The Company is in the process of working with the California Attorney General to resolve this matter and intends to vigorously defend its position with respect to the unfair competition claim. The Company, after consultation with legal counsel, does not believe that the ultimate outcome of this matter will have a material adverse impact on its financial position. However, the matter is at a very early stage, and accordingly, the ultimate amount of loss, if any, is inherently more difficult to evaluate.

The Company is also engaged in other legal actions arising in the ordinary course of business and believe that the ultimate outcome of these actions will not have a material adverse effect on the results of operations, liquidity or financial position.

Certain prior year amounts have been reclassified to conform to the current period presentation.

This information should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 29, 2002 contained in our 2002 Annual Report on Form 10-K.

The following section contains forward-looking statements concerning P.F. Chang’s which involve risks and uncertainties. These forward-looking statements include those regarding anticipated restaurant openings, anticipated costs and sizes of future restaurants and the adequacy of anticipated sources of cash to fund our future capital requirements. P.F. Chang’s actual results may differ materially from those discussed in the forward-looking statements. Factors that might cause actual events or results to differ materially from those indicated by such forward-looking statements may include matters noted elsewhere in this Form 10-Q, such as development and construction risks, potential labor shortages, fluctuations in operating results, and changes in food costs. Words such as “believes,” “anticipates,” “expects,” “intends,” “plans” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.

As of June 29, 2003, we owned and operated 85 full service restaurants, or Bistros, that combine a distinctive blend of high quality, traditional Chinese cuisine and American hospitality in a sophisticated, contemporary bistro setting. P.F. Chang’s was formed in early 1996 with the acquisition of the four original P.F. Chang’s restaurants and the hiring of an experienced management team. Utilizing a partnership management philosophy, we embarked on a strategic expansion of the concept targeted at major metropolitan areas throughout the United States.

As of June 29, 2003, we also owned and operated 23 limited service restaurants under the name of Pei Wei Asian Diner, or Pei Wei, a concept that caters to a quicker, more casual dining experience as compared to P.F. Chang’s China Bistro. Pei Wei opened its first unit in July 2000 in the Phoenix, Arizona area. These restaurants are currently located in Arizona, Colorado, Southern California and Texas.

We intend to open 18 new Bistros by the end of 2003, six of which were open by the end of the second quarter of 2003. The majority of Bistros that we intend to develop in 2003 will be located in new markets across the United States. We have signed lease agreements for all of our development planned for fiscal 2003. We intend to continue to develop Bistros that typically range in size from 6,000 square feet to 7,000 square feet, and that require, on average, a total cash investment of approximately $2.3 million and total invested capital of approximately $3.4 million per restaurant. Preopening expenses are expected to average approximately $325,000 per restaurant. This total capitalized investment includes the capitalized lease value of the property, which can vary greatly depending on the specific trade area. See “Risk Factors — Development and Construction Risks.”

We also intend to develop 16 new Pei Wei restaurants by the end of 2003, seven of which were open by the end of the second quarter of 2003. We will continue our development in the Phoenix, Dallas and Southern California markets and have entered two new markets thus far in 2003 (Houston, Texas, and Denver, Colorado), and plan to enter one additional new market later this year (Las Vegas, Nevada). We have signed leases for all of our development planned for fiscal 2003. Our Pei Wei restaurants are generally 3,000 to 3,200 square feet in size and require an average total cash investment of approximately $750,000 and total invested capital of approximately $1.3 million per restaurant. Preopening expenses at Pei Wei are expected to total approximately $110,000 per restaurant.

The following tables set forth certain unaudited quarterly information for the three months ended June 30, 2002 and June 29, 2003 and for the six months ended June 30, 2002 and June 29, 2003, expressed as a percentage of revenues, except for revenues, which are expressed in thousands. This quarterly information

has been prepared on a consistent basis with the audited financial statements and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented. P.F. Chang’s quarterly operating results may fluctuate significantly as a result of a variety of factors, and operating results for any quarter are not necessarily indicative of results for a full fiscal year.

Historically, we have experienced variability in the amount and percentage of revenues attributable to preopening expenses. We typically incur the most significant portion of preopening expenses associated with a given restaurant within the two months immediately preceding and the month of the opening of the restaurant. In addition, our experience to date has been that labor and operating costs associated with a newly opened restaurant (for approximately its first four to six months of operation) are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Accordingly, the volume and timing of new restaurant openings has had, and is expected to continue to have, a meaningful impact on preopening expenses, labor and operating costs until such time as a larger base of restaurants in operation mitigates such impact.

P.F. Chang’s revenues are derived entirely from food and beverage sales. Consolidated revenues increased by $34.9 million, or 34.4%, to $136.6 million in the three months ended June 29, 2003 from $101.7 million in the three months ended June 30, 2002. Each segment contributed to the increase as follows:


	Bistro: Revenues increased by $26.3 million at our Bistro restaurants. This increase was attributable to revenues of $8.4 million generated by new restaurants opened in 2003, $11.0 million of revenues in 2003 for restaurants that opened subsequent to June 30, 2002 and a $6.9 million increase in revenues for restaurants that opened before June 30, 2002. Increased customer visits and a modest price increase implemented in the first quarter of 2003 produced comparable restaurant sales gains of 5.4% in the three months ended June 29, 2003. Restaurants are included in this comparable restaurant measure once they reach their eighteenth month of operation.

	Pei Wei: Revenues increased by $8.6 million at our Pei Wei restaurants. The increase was attributable to revenues of $3.9 million generated by new restaurants opened in 2003, $4.4 million of revenues in 2003 for restaurants that opened subsequent to June 30, 2002 and a $300,000 increase in revenues for restaurants that opened before June 30, 2002.

Cost of Sales. Cost of sales is composed of the cost of food and beverages. Consolidated cost of sales increased by $10.5 million, or 39.3%, to $37.2 million in the three months ended June 29, 2003 from $26.7 million in the three months ended June 30, 2002. Each segment contributed as a percentage of revenues as follows:


	Bistro: Cost of sales at the Bistro increased as a percentage of revenues to 27.0% in the three months ended June 29, 2003 from 26.2% in the three months ended June 30, 2002. This increase was primarily the result of an increase in produce and poultry prices.

	Pei Wei: Cost of sales at Pei Wei increased as a percentage of revenues to 29.4% in the three months ended June 29, 2003 from 27.5% in the three months ended June 30, 2002. This increase was primarily attributable to an increase in produce and poultry prices.

Labor. Labor expenses consist of restaurant management salaries, hourly staff payroll costs and other payroll-related items. Consolidated labor expenses increased by $10.7 million, or 33.2%, to $42.8 million in the three months ended June 29, 2003 from $32.1 million in the three months ended June 30, 2002. Each segment contributed as a percentage of revenues as follows:


	Bistro: As a percentage of revenues, labor expenses at the Bistro decreased to 31.2% in the three months ended June 29, 2003 from 31.5% in the three months ended June 30, 2002. This decrease was primarily due to improvement in labor efficiencies at newer units, partially offset by higher insurance costs.

	Pei Wei: As a percentage of revenues, labor expenses at Pei Wei decreased to 32.4% in the three months ended June 29, 2003 from 35.2% in the three months ended June 30, 2002. This decrease was primarily due to improvement in labor efficiencies.

Operating. Operating expenses consist primarily of various restaurant-level costs, which are generally variable and are expected to fluctuate with revenues. Our experience to date has been that operating costs associated with a newly opened restaurant, for approximately its first four to six months of operation, are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Consolidated operating expenses increased by $5.7 million, or 33.7%, to $22.8 million in the three months ended June 29, 2003 from $17.0 million in the three months ended June 30, 2002. Each segment contributed as a percentage of revenues as follows:


	Bistro: Operating expenses as a percentage of revenues for our Bistro restaurants were at 16.8% in both the three months ended June 29, 2003 and June 30, 2002. Increased sales leverage achieved in the


	second quarter of 2003 on that portion of operating costs that are fixed in nature was offset by slightly higher utility expenses.

	Pei Wei: Operating expenses as a percentage of revenues increased at our Pei Wei restaurants to 15.4% for the three months ended June 29, 2003 from 14.8% in the three months ended June 30, 2002. This increase was primarily attributable to an increase in utility expense.

Occupancy. Occupancy costs include both fixed and variable portions of rent, common area maintenance charges, property insurance and property taxes. Consolidated occupancy costs increased by $1.4 million, or 22.4%, to $7.6 million in the three months ended June 29, 2003 from $6.2 million in the three months ended June 30, 2002. Occupancy costs decreased as a percentage of revenues to 5.6% in the three months ended June 29, 2003 from 6.1% in the three months ended June 30, 2002. Each segment contributed as a percentage of revenues as follows:


	Bistro: Occupancy costs at the Bistro decreased as a percentage of revenues to 5.5% for the three months ended June 29, 2003 from 6.1% for the three months ended June 30, 2002. This decrease in occupancy was primarily the result of the sales leverage achieved on those occupancy costs that are fixed in nature and more favorable lease terms associated with new restaurants.

	Pei Wei: Occupancy costs at Pei Wei decreased as a percentage of revenues to 6.5% for the three months ended June 29, 2003 from 7.7% for the three months ended June 30, 2002. This decrease in occupancy was primarily the result of the sales leverage achieved on those occupancy costs that are fixed in nature.

General and Administrative. General and administrative expenses are composed of expenses associated with corporate and administrative functions that support development and restaurant operations and provide infrastructure to support future growth, including management and staff salaries, employee benefits, travel, legal and professional fees, technology and market research. Consolidated general and administrative expenses increased to $7.3 million in the three months ended June 29, 2003 from $5.5 million in the three months ended June 30, 2002. Consolidated general and administrative expenses as a percentage of revenues were at 5.4% in both the three months ended June 29, 2003 and June 30, 2002. Each segment contributed to the increase in dollars as follows:


	Bistro: General and administrative expenses at the Bistro increased by $1.6 million to $6.4 million in the three months ended June 29, 2003 from $4.8 million in the three months ended June 30, 2002. This increase was due primarily to the addition of corporate management personnel and higher health insurance costs, which resulted in approximately $1.2 million of additional compensation and benefits expense, as well as additional travel and other costs to support a larger restaurant base. We also had additional costs related to accounting and legal fees resulting from continued maintenance of high standards of corporate governance, compliance with the Sarbanes-Oxley Act and new SEC regulations, litigation defense and other corporate matters.

	Pei Wei: General and administrative expenses at Pei Wei increased by $250,000 to $920,000 in the three months ended June 29, 2003 from $670,000 in the three months ended June 30, 2002. This increase was due to the addition of corporate management personnel, which resulted in approximately $250,000 of additional compensation and benefits expense, as we continue to expand the concept and add infrastructure to support our operations.

Depreciation and Amortization. Depreciation and amortization expenses include the depreciation of fixed assets and the amortization of intangibles associated with the acquisition of ownership interests from partners in our restaurants. Consolidated depreciation and amortization increased by $1.1 million, or 33.3%, to $4.6 million in the three months ended June 29, 2003 from $3.5 million in the three months ended June 30, 2002. Depreciation and amortization as a percentage of revenues were at 3.4% in both the three months ended June 29, 2003 and June 30, 2002. Each segment contributed to the increase in dollars as follows:


	Bistro: At our Bistro restaurants, depreciation and amortization increased by $900,000 to $4.2 million for the three months ended June 29, 2003 from $3.3 million for the three months ended June 30,


	2002. This increase was primarily due to depreciation and amortization on restaurants opened subsequent to June 30, 2002 totaling $750,000 for the three months ended June 29, 2003; as well as a full quarter’s depreciation and amortization on fixed assets in restaurants opened during the second quarter of 2002.

	Pei Wei: At our Pei Wei restaurants, depreciation and amortization increased by $280,000 to $470,000 for the three months ended June 29, 2003 from $190,000 for the three months ended June 30, 2002. This increase was primarily due to depreciation and amortization on restaurants opened subsequent to June 30, 2002 totaling $264,000 for the three months ended June 29, 2003; as well as a full quarter’s depreciation and amortization on fixed assets in restaurants opened during the second quarter of 2002.

Preopening Expense. Preopening costs, which are expensed as incurred, consist of expenses incurred prior to opening a new restaurant and are comprised principally of manager salaries and relocation, employee payroll and related training costs. Consolidated preopening expenses in the three months ended June 29, 2003 decreased to $1.2 million from $1.5 million in the three months ended June 30, 2002. Preopening expenses decreased as a percentage of revenues to 0.9% in the three months ended June 29, 2003 from 1.5% in the three months ended June 30, 2002. Each segment contributed to the decrease in dollars as follows:


	Bistro: Preopening expenses decreased by $240,000 to $860,000 as of the three months ended June 29, 2003 from $1.1 million as of the three months ended June 30, 2002. This decrease was primarily due to the opening of one Bistro in the second quarter of 2003 as compared to three Bistros in the second quarter of 2002.

	Pei Wei: Preopening expenses decreased by $60,000 to $310,000 as of the three months ended June 29, 2003 from $370,000 as of the three months ended June 30, 2002. This decrease is primarily due to the costs incurred for our planned opening of one Pei Wei in July 2003 as compared to three Pei Wei openings in July 2002, partially offset by the three Pei Weis opened in the second quarter of 2003 as compared to one Pei Wei in the second quarter of 2002.

Consolidated net interest income and other income (expense) was $(3,000) in the three months ended June 29, 2003 as compared to $(18,000) in the three months ended June 30, 2002. The increase was primarily a result of interest income earned on our larger cash reserves and capitalization of interest in the second quarter of 2003.

Minority interest represents the portion of our net earnings (losses) which are attributable to the collective ownership interests of our minority investors. P.F. Chang’s employs a partnership management structure in which we have entered into a series of partnership agreements with our regional managers, certain of our general managers, and certain of our executive chefs. We also have minority shareholders in our Pei Wei Asian Diner, Inc. subsidiary. Consolidated minority interest for the three months ended June 29, 2003 increased to $2.3 million from $1.6 million for the three months ended June 30, 2002. As a percentage of revenues, minority interest increased to 1.7% of revenues for the three months ended June 29, 2003 from 1.6% of revenues for the three months ended June 30, 2002. The majority of this increase as a percentage of revenues resulted from an increase in the operating profit at many of our existing restaurants in the second quarter of 2003 as compared to the second quarter of 2002.

Our effective tax rate for the three months ended June 29, 2003 was 34.0%. For the three months ended June 30, 2002, the effective tax rate was 35.0%. The income tax rates for the three months ended June 29, 2003 and June 30, 2002 differ from the expected provision for income taxes, which is derived by applying the statutory income tax rate, primarily as a result of FICA tip credits.

Consolidated revenues increased by $69.0 million, or 34.7%, to $268.2 million in the six months ended June 29, 2003 from $199.2 million in the six months ended June 30, 2002. Each segment contributed to the increase as follows:


	Bistro: Revenues increased by $53.2 million at our Bistro restaurants. This increase was attributable to revenues of $13.2 million generated by new restaurants opened in 2003, $22.8 million of revenues in 2003 for restaurants that opened subsequent to June 30, 2002 and a $17.2 million increase in revenues for restaurants that opened before June 30, 2002. Increased customer visits as well as a modest price increase implemented in the first quarter of 2003 produced comparable restaurant sales gains of 5.9% in the six months ended June 29, 2003. Restaurants are included in this comparable restaurant measure once they reach their eighteenth month of operation.

	Pei Wei: Revenues increased by $15.8 million at our Pei Wei restaurants. The increase was attributable to revenues of $5.7 million generated by new restaurants opened in 2003, $8.8 million of revenues in 2003 for restaurants that opened subsequent to June 30, 2002 and a $1.3 million increase in revenues for restaurants that opened before June 30, 2002.

Cost of Sales. Consolidated cost of sales increased by $19.3 million, or 36.3%, to $72.5 million in the six months ended June 29, 2003 from $53.2 million in the six months ended June 30, 2002. Cost of sales increased as a percentage of revenues to 27.0% in the six months ended June 29, 2003 from 26.7% in the six months ended June 30, 2002. Each segment contributed as a percentage of revenues as follows:


	Bistro: Cost of sales at the Bistro increased as a percentage of revenues to 26.8% in the six months ended June 29, 2003 from 26.6% in the six months ended June 30, 2002. This increase was primarily the result of higher poultry prices.

	Pei Wei: Cost of sales at Pei Wei increased as a percentage of revenues to 29.1% in the six months ended June 29, 2003 from 27.8% in the six months ended June 30, 2002. This increase was primarily attributable to an increase in poultry prices.

Labor. Consolidated labor expenses increased by $21.6 million, or 34.5%, to $84.4 million in the six months ended June 29, 2003 from $62.8 million in the six months ended June 30, 2002. Labor expenses as a percentage of revenues were at 31.5% in both the six months ended June 29, 2003 and June 30, 2002. Each segment contributed as a percentage of revenues as follows:


	Bistro: As a percentage of revenues, labor expenses for our Bistro restaurants were at 31.4% in both the six months ended June 29, 2003 and June 30, 2002. The improvement in labor efficiencies at newer units was offset by higher insurance costs.

	Pei Wei: As a percentage of revenues, labor expenses at Pei Wei decreased to 32.8% in the six months ended June 29, 2003 from 35.3% in the six months ended June 30, 2002. This decrease was primarily due to improvement in labor efficiencies in newer units.

Operating. Consolidated operating expenses increased by $11.3 million, or 34.2%, to $44.4 million in the six months ended June 29, 2003 from $33.1 million in the six months ended June 30, 2002. Operating expenses as a percentage of revenues decreased to 16.5% in the six months ended June 29, 2003 from 16.6% in the six months ended June 30, 2002. Each segment contributed as a percentage of revenues as follows:


	Bistro: Operating expenses as a percentage of revenues at our Bistro restaurants were at 16.7% in both the six months ended June 29, 2003 and June 30, 2002. Increased sales leverage achieved in the first two quarters of 2003 on that portion of operating costs that are fixed in nature was offset by slightly higher utility and repairs and maintenance expenses.

	Pei Wei: Operating expenses as a percentage of revenues increased at our Pei Wei restaurants to 15.3% in the six months ended June 29, 2003 from 14.6% in the six months ended June 30, 2002. This increase was primarily attributable to an increase in utility costs.

Occupancy. Consolidated occupancy costs increased by $2.7 million, or 21.8%, to $15.0 million in the six months ended June 29, 2003 from $12.3 million in the six months ended June 30, 2002. Occupancy costs decreased as a percentage of revenues to 5.6% in the six months ended June 29, 2003 from 6.2% in the six months ended June 30, 2002. Each segment contributed as a percentage of revenues as follows:


	Bistro: Occupancy costs at the Bistro decreased as a percentage of revenues to 5.5% for the six months ended June 29, 2003 from 6.1% for the six months ended June 30, 2002. This decrease in occupancy was primarily the result of the increased sales leverage achieved on those occupancy costs that are fixed in nature and more favorable lease terms associated with new restaurants.

	Pei Wei: Occupancy costs at Pei Wei decreased as a percentage of revenues to 6.5% for the six months ended June 29, 2003 from 7.6% for the six months ended June 30, 2002. This decrease in occupancy was primarily the result of the increased sales leverage achieved on those occupancy costs that are fixed in nature.

General and Administrative. Consolidated general and administrative expenses increased to $14.1 million in the six months ended June 29, 2003 from $10.4 million in the six months ended June 30, 2002.

Consolidated general and administrative expenses increased as a percentage of revenues to 5.3% for the six months ended June 29, 2003 from 5.2% for the six months ended June 30, 2002. Each segment contributed to the increase in dollars as follows:


	Bistro: General and administrative expenses at the Bistro increased by $3.2 million to $12.4 million in the six months ended June 29, 2003 from $9.2 million in the six months ended June 30, 2002. This increase was due primarily to the addition of corporate management personnel and higher health insurance costs, which resulted in approximately $2.5 million of additional compensation and benefits expense, as well as additional travel and other costs to support a larger restaurant base. We also spent an additional $375,000 in accounting and legal fees resulting from continued maintenance of high standards of corporate governance, compliance with the Sarbanes-Oxley Act and new SEC regulations, litigation defense and other corporate matters.

	Pei Wei: General and administrative expenses at Pei Wei increased by $600,000 to $1.8 million in the six months ended June 29, 2003 from $1.2 million in the six months ended June 30, 2002. This increase was due primarily to the addition of corporate management personnel, which resulted in approximately $440,000 of additional compensation and benefits expense, as we continue to expand the concept and add infrastructure to support our operations. Pei Wei also experienced increases in general and administrative expenses in the following areas: travel expenses associated with new store openings, accounting, legal and occupancy costs.

Depreciation and Amortization. Consolidated depreciation and amortization increased by $2.2 million, or 31.0%, to $9.0 million in the six months ended June 29, 2003 from $6.8 million in the six months ended June 30, 2002. Consolidated depreciation and amortization decreased as a percentage of revenues to 3.3% in the six months ended June 29, 2003 from 3.4% in the six months ended June 30, 2002. Each segment contributed to the increase in dollars as follows:


	Bistro: At our Bistro restaurants, depreciation and amortization increased by $1.6 million to $8.1 million for the six months ended June 29, 2003 from $6.5 million for the six months ended June 30, 2002. This increase was primarily due to depreciation and amortization on restaurants opened subsequent to June 30, 2002 totaling $1.3 million for the six months ended June 29, 2003; as well as a full six months of depreciation and amortization on fixed assets in restaurants opened during the first half of 2002.

	Pei Wei: At our Pei Wei restaurants, depreciation and amortization increased by $550,000 to $870,000 for the six months ended June 29, 2003 from $320,000 for the six months ended June 30, 2002. This increase was primarily due to depreciation and amortization on restaurants opened subsequent to June 30, 2002 totaling $456,000 for the six months ended June 30, 2002; as well as a full six months of depreciation and amortization on fixed assets in restaurants opened during the first half of 2002.

Preopening Expense. Consolidated preopening expenses in the six months ended June 29, 2003 increased to $3.2 million from $2.1 million in the six months ended June 30, 2002. Consolidated preopening expenses increased as a percentage of revenues to 1.2% in the six months ended June 29, 2003 from 1.1% in the six months ended June 30, 2002. Each segment contributed to the increase in dollars as follows:


	Bistro: Preopening expenses increased by $900,000 to $2.5 million as of the six months ended June 29, 2003 from $1.6 million as of the six months ended June 30, 2002. This increase was primarily due to the opening of six Bistros in the first half of 2003 as compared to five Bistros in the first half of 2002, as well as higher costs incurred for training and management support at the new units opened in the first half of 2003 due to their high opening unit volumes.

	Pei Wei: Preopening expenses increased by $165,000 to $625,000 as of the six months ended June 29, 2003 from $460,000 as of the six months ended June 30, 2002. This increase was primarily due to our opening seven Pei Weis in the first half of 2003 as compared to three Pei Weis in the first half of 2002.

Consolidated net interest income and other income (expense) was $38,000 in the six months ended June 29, 2003 as compared to $(27,000) in the six months ended June 30, 2002. The increase was primarily a result of interest income earned on our larger cash reserves and capitalization of interest in the first six months of 2003.

Consolidated minority interest for the six months ended June 29, 2003 increased to $4.7 million from $3.1 million for the six months ended June 30, 2002. As a percentage of revenues, consolidated minority interest increased to 1.7% of revenues for the six months ended June 29, 2003 from 1.6% of revenues for the six months ended June 30, 2002. The majority of this increase as a percentage of revenues resulted from an increase in the operating profit at many of our existing restaurants in the first half of 2003 as compared to the half of 2002.

Our effective tax rate for the six months ended June 29, 2003 was 34.0%. For the six months ended June 30, 2002, the effective tax rate was 35.0%. The income tax rates for the six months ended June 29, 2003 and June 30, 2002 differ from the expected provision for income taxes, which is derived by applying the statutory income tax rate, primarily as a result of FICA tip credits.

P.F. Chang’s has funded its capital requirements since its inception through sales of equity securities, debt financing and cash flows from operations. Net cash provided by operating activities was $36.6 million and $22.0 million for the six months ended June 29, 2003 and June 30, 2002, respectively. Net cash provided by operating activities exceeded net income for the six months ended June 29, 2003 due principally to the effect of minority interest and depreciation and amortization as well as an increase in income tax liability that was satisfied by the tax benefit of stock option exercises recorded in equity and an increase in accrued expenses. Net cash provided by operating activities exceeded net income for the six months ended June 30, 2002 due principally to the effect of minority interest and depreciation and amortization as well as an increase in income tax liability that was partially satisfied by the tax benefit of stock option exercises recorded in equity.

We use cash primarily to fund the development and construction of new restaurants. Net cash used in investing activities for the six months ended June 29, 2003 and June 30, 2002 was $25.7 million and $21.6 million, respectively. Capital expenditures made up the majority of our investing activities in both periods. In the six months ended June 29, 2003 and June 30, 2002, investing activities also included a purchase of short-term investments. We intend to open 18 new Bistros in 2003, six of which were open as of June 29, 2003. We also intend to open 16 new Pei Wei restaurants in 2003, seven of which were open as of June 29, 2003. We expect that our planned future Bistro restaurants will require, on average, a total cash investment per restaurant of approximately $2.3 million. Preopening expenses are expected to average approximately $325,000 per Bistro restaurant. We anticipate that each Pei Wei restaurant will require, on average, a total cash investment of $750,000 and will incur preopening costs of approximately $110,000. Any unexpected delays in construction, labor shortages, or other factors could result in higher than anticipated preopening costs.

Net cash used in financing activities for the six months ended June 29, 2003 and June 30, 2002 was $2.5 million and $54,000, respectively. Financing activities for both the six months ended June 29, 2003 and June 30, 2002 consisted principally of distributions to minority partners as well as the repayment of debt, offset by proceeds from stock options exercised and employee stock purchases.

In December of 2002, we entered into a senior secured revolving credit facility with a commercial lending institution. The credit facility allows for borrowings up to $20 million at an interest rate ranging from 125 to 200 basis points over the applicable London Interbank Offered Rate (LIBOR). At any time, but only one

time, P.F. Chang’s has the right to increase the credit facility up to the maximum aggregate principal amount of $50 million provided we are in compliance with the terms of the facility. The revolving credit facility expires on December 20, 2005 and contains certain restrictions and conditions which require us to: maintain a certain minimum tangible net worth, an adjusted leverage ratio at a maximum of 3.50:1, and a minimum fixed-charge coverage ratio no less than 1.25:1. We were in compliance with these restrictions and conditions as of June 29, 2003. Shares of our subsidiary, Pei Wei Asian Diner, Inc. serve as collateral for the credit facility. We had no borrowings outstanding under the credit facility as of June 29, 2003.

Our capital requirements, including development costs related to the opening of additional restaurants, have been and will continue to be significant. Our future capital requirements and the adequacy of its available funds will depend on many factors, including the pace of our expansion, real estate markets, site locations and the nature of the arrangements negotiated with our landlords. We believe that our cash flow from operations together with our current cash reserves will be sufficient to fund our projected capital requirements throughout the remainder of 2003. In the event that additional capital is required, we will first access our existing credit facility. In the unlikely event that further additional capital is required, we may seek to raise such capital through public or private equity or debt financings. Future capital funding transactions may result in dilution to current stockholders. We can not assure you that such capital will be available on favorable terms, if at all.

As of June 29, 2003, there were 133 partners within the P.F. Chang’s China Bistro, Inc. system. During the six months ended June 29, 2003, we purchased a partial interest of one of our minority partners (three interests were available for purchase) for a total of $147,000, of which the majority was recorded as intangibles in accordance with generally accepted accounting principles in the United States and will be amortized generally over 15 years, which coincides with the remaining lease term of the restaurants in which the interest pertained. The entire purchase price was paid in cash. During the remainder of 2003, we will have the opportunity to purchase eight additional partnership interests. If all of these interests are fully purchased in their entirety, the total purchase price would approximate $4.0 to $6.0 million based upon the estimated fair value of the respective interests at June 29, 2003. Such amounts are subject to change based upon changes in the estimated fair value of the respective interests from June 29, 2003 through the date of purchase. If all of these interests are purchased by the Company in 2003, the estimated financial impact would be an additional $0.01 of earnings per share.

Our most critical accounting policies, which are those that require significant judgment include: partnership structure, impairment of long-lived assets, impairment of goodwill, and self insurance. A more in-depth description of these can be found in our most recent Form 10-K, filed on February 12, 2003.

Failure of our existing or new restaurants to achieve predicted results could have a negative impact on our revenues and performance results.

We operated 85 full service, or Bistro, restaurants and 23 limited service, or Pei Wei, restaurants, as of June 29, 2003, 30 of which have been opened within the last twelve months. The results achieved by these restaurants may not be indicative of longer term performance or the potential market acceptance of restaurants in other locations. We can’t assure you that any new restaurant which we open will have similar operating results to those of prior restaurants. We anticipate that our new restaurants will commonly take several months to reach planned operating levels due to inefficiencies typically associated with new restaurants, including lack of market awareness, inability to hire sufficient staff and other factors. The failure of our existing or new restaurants to perform as predicted could negatively impact our revenues and results of operations.

If we do not expand our restaurant operations, our operating revenue could decline.

Critical to our future success is our ability to successfully expand our operations. We have expanded from seven restaurants at the end of 1996 to 108 restaurants as of June 29, 2003. We expect to open 18 Bistros and


	•	identification and availability of suitable locations;

	•	competition for restaurant sites;

	•	negotiation of favorable lease arrangements;

	•	timely development of commercial, residential, street or highway construction near our restaurants;

	•	management of the costs of construction and development of new restaurants;

	•	securing required governmental approvals and permits;

	•	recruitment of qualified operating personnel, particularly managers and chefs;

	•	weather conditions;

	•	competition in new markets; and

	•	general economic conditions.

The opening of additional restaurants in the future will depend in part upon our ability to generate sufficient funds from operations or to obtain sufficient equity or debt financing on favorable terms to support our expansion. We may not be able to open our planned new operations on a timely basis, if at all, and, if opened, these restaurants may not be operated profitably. We have experienced, and expect to continue to experience, delays in restaurant openings from time to time. Delays or failures in opening planned new restaurants could have an adverse effect on our business, financial condition, results of operations or cash flows.

Implementing our growth strategy may strain our management resources and negatively impact our competitive position.

Our growth strategy may strain our management, financial and other resources. We must maintain a high level of quality and service at our existing and future restaurants, continue to enhance our operational, financial and management capabilities and locate, hire, train and retain experienced and dedicated operating personnel, particularly managers and chefs. We may not be able to effectively manage these and other factors necessary to permit us to achieve our expansion objectives, and any failure to do so could negatively impact our competitive position.

The inability to develop and construct our restaurants within projected budgets and time periods will adversely affect our business and financial condition.

Each of our Bistro and Pei Wei restaurants is distinctively designed to accommodate particular characteristics of each location and to blend local or regional design themes with our principal trade dress and other common design elements. This presents each location with its own development and construction risks. Many factors may affect the costs associated with the development and construction of our restaurants, including:


	•	labor disputes;

	•	shortages of materials and skilled labor;

	•	weather interference;

	•	unforeseen engineering problems;

	•	environmental problems;

	•	construction or zoning problems;

	•	local government regulations;


	•	modifications in design to the size and scope of the projects; and

	•	other unanticipated increases in costs, any of which could give rise to delays or cost overruns.

If we are not able to develop additional Bistro and Pei Wei restaurants within anticipated budgets or time periods, our business, financial condition, results of operations or cash flows will be adversely affected.

Potential labor shortages may delay planned openings or damage customer relations.

Our success will continue to be dependent on our ability to attract and retain a sufficient number of qualified employees, including kitchen staff and waitstaff, to keep pace with our expansion schedule. Qualified individuals needed to fill these positions are in short supply in certain areas. Our inability to recruit and retain qualified individuals may delay the planned openings of new restaurants while high employee turnover in existing restaurants may negatively impact customer service and customer relations, resulting in an adverse effect on our revenues or results of operations.

Changes in general economic and political conditions affect consumer spending and may harm our revenues and operating results.

Our country’s economy has struggled for some time now and we believe that these weak general economic conditions will continue through 2003. We are concerned that our customers may become more apprehensive about the economy and reduce their level of discretionary spending. We believe that a decrease in discretionary spending could impact the frequency with which our customers choose to dine out or the amount they spend on meals while dining out, thereby decreasing our revenues. Additionally, the military presence in Iraq, continued military responses to the terrorist attacks on the United States and possible future terrorist attacks may exacerbate current economic conditions and lead to further weakening in the economy. Adverse economic conditions and any related decrease in discretionary spending by our customers could have an adverse effect on our revenues and operating results.

Fluctuations in operating results may cause the market price of our common stock to decline.

Our operating results may fluctuate significantly as a result of a variety of factors, including:


	•	general economic conditions;

	•	consumer confidence in the economy;

	•	changes in consumer preferences;

	•	competitive factors, including the performance of restaurant stocks;

	•	weather conditions;

	•	timing of new restaurant openings and related expenses;

	•	revenues contributed by new restaurants; and

	•	increases or decreases in comparable restaurant revenues.

Historically, we have experienced variability in the amount and percentage of revenues attributable to preopening expenses. We typically incur the most significant portion of preopening expenses associated with a given restaurant within the two months immediately preceding and the month of the opening of the restaurant. Our experience to date has been that labor and operating costs associated with a newly opened restaurant for the first several months of operation are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Accordingly, the volume and timing of new restaurant openings has had, and is expected to continue to have, a meaningful impact on preopening expenses as well as labor and operating costs. Therefore, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for a full fiscal year, and, from time to time in the future, our results of operations may be below the expectations of public market analysts and investors. This discrepancy could

cause the market price of our common stock to decline. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Intense competition in the restaurant industry could prevent us from increasing or sustaining our revenues and profitability.

The restaurant industry is intensely competitive with respect to food quality, price-value relationships, ambiance, service and location, and many restaurants compete with us at each of our locations. Our competitors at the Bistro concept include mid-price, full service casual dining restaurants. For Pei Wei, our main competitors are other value-priced, quick-service concepts as well as locally owned and operated Chinese restaurants. There are many well-established competitors with substantially greater financial, marketing, personnel and other resources than ours, and many of our competitors are well established in the markets where we have restaurants, or in which we intend to locate restaurants. Additionally, other companies may develop restaurants that operate with similar concepts.

Any inability to successfully compete with the other restaurants in our markets will prevent us from increasing or sustaining our revenues and profitability and result in a material adverse effect on our business, financial condition, results of operations or cash flows. We may also need to modify or refine elements of our restaurant system to evolve our concept in order to compete with popular new restaurant formats or concepts that develop from time to time. We cannot assure you that we will be successful in implementing these modifications or that these modifications will not reduce our profitability.

Increases in the minimum wage may have a material adverse effect on our business and financial results.

A number of our employees are subject to various minimum wage requirements. The federal minimum wage has remained at $5.15 per hour since September 1, 1997. However, many of our employees work in restaurants located in California and receive compensation equal to the California minimum wage, which rose from $6.25 per hour effective January 1, 2001 to $6.75 per hour effective January 1, 2002. There may be similar increases implemented in other jurisdictions in which we operate or seek to operate. The possibility exists that the federal minimum wage will be increased in the near future. These minimum wage increases may have a material adverse effect on our business, financial condition, results of operations or cash flows.

Our inability to retain key personnel could negatively impact our business.

Our success will continue to be highly dependent on our key operating officers and employees. We must continue to attract, retain and motivate a sufficient number of qualified management and operating personnel, including regional managers (market and area partners), general managers (operating partners) and executive chefs (chef partners), to keep pace with an aggressive expansion schedule. Individuals of this caliber are historically in short supply and this shortage may limit our ability to effectively penetrate new market areas. Additionally, the ability of these key personnel to maintain consistency in the quality and atmosphere of our restaurants is a critical factor in our success. Any failure to do so may harm our reputation and result in a loss of business.

Changes in food costs could negatively impact our revenues and results of operations.

Our profitability is dependent in part on our ability to anticipate and react to changes in food costs. Other than for produce, which is purchased locally by each restaurant, we rely on Distribution Market Advantage as the primary source for our ingredients. Distribution Market Advantage is a cooperative of multiple food distributors located throughout the nation. We have a non-exclusive contract with Distribution Market Advantage on terms and conditions which we believe are consistent with those made available to similarly situated restaurant companies. Although we believe that alternative distribution sources are available, any increase in distribution prices or failure to perform by the Distribution Market Advantage could cause our food costs to fluctuate. Additional factors beyond our control, including adverse weather conditions and governmental regulation, may affect our food costs. We may not be able to anticipate and react to changing food costs

through our purchasing practices and menu price adjustments in the future, and failure to do so could negatively impact our revenues and results of operations.

The cost of insurance (workers compensation insurance, general liability insurance, health insurance and directors and officers liability insurance) has risen significantly in the past year and is expected to continue to increase in 2003. These increases could have a negative impact on our profitability if we are not able to negate the effect of such increases by continuing to improve upon operating efficiencies.

Failure to comply with governmental regulations could harm our business and our reputation.

We are subject to regulation by federal agencies and to licensing and regulation by state and local health, sanitation, building, zoning, safety, fire and other departments relating to the development and operation of restaurants. These regulations include matters relating to:


	•	environment;

	•	building construction;

	•	zoning requirements;

	•	the preparation and sale of food and alcoholic beverages; and

	•	employment.

Our facilities are licensed and subject to regulation under state and local fire, health and safety codes. The development and construction of additional restaurants will be subject to compliance with applicable zoning, land use and environmental regulations. We may not be able to obtain necessary licenses or other approvals on a cost-effective and timely basis in order to construct and develop restaurants in the future. Various federal and state labor laws govern our operations and our relationship with our employees, including minimum wage, overtime, working conditions, fringe benefit and citizenship requirements. In particular, we are subject to the regulations of the Bureau of Citizenship & Immigration Services (BCIS). Given the location of many of our restaurants, even if we operate those restaurants in strict compliance with BCIS requirements, our employees may not all meet federal citizenship or residency requirements, which could lead to disruptions in our work force.

Approximately 17% of our revenues at the Bistro and 2% at Pei Wei are attributable to the sale of alcoholic beverages. We are required to comply with the alcohol licensing requirements of the federal government, states and municipalities where our restaurants are located. Alcoholic beverage control regulations require applications to state authorities and, in certain locations, county and municipal authorities for a license and permit to sell alcoholic beverages. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the restaurants, including minimum age of guests and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages. If we fail to comply with federal, state or local regulations our licenses may be revoked and we may be forced to terminate the sale of alcoholic beverages at one or more of our restaurants.

The federal Americans with Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment. We are required to comply with the Americans with Disabilities Act and regulations relating to accommodating the needs of the disabled in connection with the construction of new facilities and with significant renovations of existing facilities.

Failure to comply with these regulations could negatively impact our business and our reputation.

We are from time to time the subject of complaints or litigation from guests alleging food borne illness, injury or other food quality, health or operational concerns. We may be adversely affected by publicity

resulting from such allegations, regardless of whether such allegations are valid or whether we are liable. We are also subject to complaints or allegations from former or prospective employees from time to time. A lawsuit or claim could result in an adverse decision against us that could have a materially adverse effect on our business.

We are subject to state “dram shop” laws and regulations, which generally provide that a person injured by an intoxicated person may seek to recover damages from an establishment that wrongfully served alcoholic beverages to such person. While we carry liquor liability coverage as part of our existing comprehensive general liability insurance, we may still be subject to a judgment in excess of our insurance coverage and we may not be able to obtain or continue to maintain such insurance coverage at reasonable costs, or at all.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

Keeping abreast of, and in compliance with, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq Stock Market rules, has required an increased amount of management attention and external resources. We remain committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to comply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

Future changes in financial accounting standards may cause adverse unexpected operating results and affect our reported results of operations.

A change in accounting standards can have a significant effect on our reported results and may affect our reporting of transactions completed before the change is effective. As an example, any changes requiring that we record compensation expense in the statement of operations for employee stock options using the fair value method could have a significant negative effect on our reported results. New pronouncements and varying interpretations of pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results.

We believe that the market risk associated with our market risk sensitive instruments as of June 29, 2003 is not material, and therefore, disclosure is not required.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), within the 90 day period prior to the filing date of this report. Based on their evaluation, our principal executive officer and principal accounting officer concluded that our disclosure controls and procedures were effective as of that date.

There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in the paragraph above.

A review of our current litigation is disclosed in the Notes to Unaudited Financial Statements. See “Notes to Unaudited Financial Statements — Note 8 — Commitments and Contingencies.” We are also

engaged in other legal actions arising in the ordinary course of our business and believe that the ultimate outcome of these actions will not have a material adverse effect on our results of operations, liquidity or financial position.

Our Annual Meeting of Stockholders was held on April 9, 2003. There were two proposals up for approval. The results of voting are as follows:


	2) The ratification of the appointment of Ernst & Young as the Company’s independent auditors:


(1)	Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q dated April 25, 2002.

(2)	Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q dated October 24, 2001.

(3)	Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-59749).

(4)	Incorporated by reference to the Registrant’s Form 10-K dated March 3, 2000.

(5)	Incorporated by reference to the Registrant’s Annual Report on Form 10-K dated March 6, 2001.

(6)	Incorporated by reference to the Registrant’s Annual Report on Form 10-K dated February 19, 2002.

(7)	Incorporated by reference to the Registrant’s Form 10-Q, dated April 1, 2001.

(8)	Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q dated October 23, 2002.

(9)	Incorporated by reference to the Registrant’s Annual Report on Form 10-K dated February 12, 2003.


	Report on Form 8-K filed on April 9, 2003 containing a press release announcing P.F. Chang’s revenues for its first fiscal quarter of 2003.

	Report on Form 8-K filed on April 23, 2003 containing a press release announcing P.F. Chang’s earnings for its first fiscal quarter of 2003.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	By:	/s/ RICHARD L. FEDERICO



	Richard L. Federico
	Chairman and Chief Executive Officer
	Principal Executive Officer


	By:	/s/ KRISTINA K. CASHMAN



	Kristina K. Cashman
	Chief Financial Officer and Secretary
	Principal Financial and Accounting Officer

1. I have reviewed this quarterly report on Form 10-Q of P.F. Chang’s China Bistro, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):


	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

1. I have reviewed this quarterly report on Form 10-Q of P.F. Chang’s China Bistro, Inc.;


	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


(1)	Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q dated April 25, 2002.

(2)	Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q dated October 24, 2001.

(3)	Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-59749).

(4)	Incorporated by reference to the Registrant’s Form 10-K dated March 3, 2000.

(5)	Incorporated by reference to the Registrant’s Annual Report on Form 10-K dated March 6, 2001.

(6)	Incorporated by reference to the Registrant’s Annual Report on Form 10-K dated February 19, 2002.

(7)	Incorporated by reference to the Registrant’s Form 10-Q, dated April 1, 2001.

(8)	Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q dated October 23, 2002.

(9)	Incorporated by reference to the Registrant’s Annual Report on Form 10-K dated February 12, 2003.


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended June 29, 2003

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to .


Delaware		86-0815086
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

15210 N. Scottsdale Rd., Ste. 300, Scottsdale, Arizona (Address of principal executive offices)		85254 (Zip Code)


CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO UNAUDITED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
PART II OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Exhibit 99.1
Exhibit 99.2


		Note 1
		December 29,		June 29,
		2002		2003

				(Unaudited)

		(In thousands)
ASSETS
Current assets:
	Cash and cash equivalents	$	39,089	$	47,053
	Short-term investments		3,800		5,000
	Inventories		2,319		2,561
	Prepaids and other current assets		6,176		3,799

Total current assets			51,384		58,413
Construction-in-progress			13,557		15,818
Property and equipment, net			137,055		149,920
Goodwill			6,819		6,819
Intangibles, net			5,773		5,704
Other assets			3,862		4,303

	Total assets	$	218,450	$	240,977

LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable	$	7,051	$	5,159
	Construction payable		3,600		3,108
	Accrued expenses		15,497		22,824
	Unearned revenue		6,894		5,340
	Current portion of long-term debt, including $1,021,000 and $759,000 due to related parties at December 29, 2002 and June 29, 2003, respectively		1,633		1,382

Total current liabilities			34,675		37,813
Long-term debt, including $828,000 and $100,000 due to related parties at December 29, 2002 and June 29, 2003, respectively			1,441		100
Deferred income tax liability			4,261		3,928
Minority interests			2,848		3,410
Commitments and contingencies
Common stockholders’ equity:
	Common stock, $0.001 par value, 40,000,000 shares authorized: 25,001,775 shares issued and outstanding at December 29, 2002 and 25,359,144 at June 29, 2003		25		25
	Additional paid-in capital		128,114		134,741
	Retained earnings		47,086		60,960

Total common stockholders’ equity			175,225		195,726

Total liabilities and common stockholders’ equity		$	218,450	$	240,977



				Three Months Ended						Six Months Ended

				June 30,			June 29,			June 30,			June 29,
				2002			2003			2002			2003


				(Unaudited)

				(In thousands, except per share)
Revenues				$	101,650		$	136,605		$	199,150		$	268,200
Costs and expenses:
	Restaurant operating costs:
		Cost of sales			26,704			37,207			53,153			72,456
		Labor			32,122			42,776			62,805			84,444
		Operating			17,032			22,772			33,058			44,380
		Occupancy			6,223			7,617			12,343			15,036

			Total restaurant operating costs		82,081			110,372			161,359			216,316
	General and administrative				5,480			7,345			10,415			14,127
	Depreciation and amortization				3,485			4,646			6,821			8,934
	Preopening expense				1,479			1,176			2,099			3,160

Income from operations					9,125			13,066			18,456			25,663
Interest and other income (expense), net					(18	)		(3	)		(27	)		38

Income before minority interest and provision for income taxes					9,107			13,063			18,429			25,701
Minority interest					(1,613	)		(2,340	)		(3,056	)		(4,680	)

Income before provision for income taxes					7,494			10,723			15,373			21,021
Provision for income taxes					(2,623	)		(3,646	)		(5,380	)		(7,147	)

Net income				$	4,871		$	7,077		$	9,993		$	13,874

Net income per share:
	Basic			$	0.20		$	0.28		$	0.41		$	0.55

	Diluted			$	0.19		$	0.27		$	0.39		$	0.53

Weighted average shares used in computation:
	Basic				24,727			25,338			24,407			25,237

	Diluted				26,008			26,228			25,951			26,133

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Item		Page

PART I FINANCIAL INFORMATION
1.	Unaudited Financial Statements		2
	Consolidated Balance Sheets as of December 29, 2002 and June 29, 2003		2
	Consolidated Statements of Income for the Three Months Ended June 30, 2002 and June 29, 2003 and for the Six Months Ended June 30, 2002 and June 29, 2003		3
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and June 29, 2003		4
	Notes to Unaudited Financial Statements		5
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
3.	Quantitative and Qualitative Disclosures About Market Risk		23
4.	Controls and Procedures		23
PART II OTHER INFORMATION
1.	Legal Proceedings		23
2.	Changes in Securities and Use of Proceeds		24
3.	Defaults upon Senior Securities		24
4.	Submission of Matters to a Vote of Security Holders		24
5.	Other Information		24
6.	Exhibits and Reports on Form 8-K		25


		Total		Bistro		Pei Wei


		(In thousands)
As of and for the Three Months Ended June 29, 2003:
	Revenues	$	136,605	$	123,919	$	12,686
	Income before income taxes		10,723		10,511		212
	Capital expenditures		14,455		11,639		2,816
	Total assets		240,977		223,222		17,755
As of and for the Three Months Ended June 30, 2002:
	Revenues	$	101,650	$	97,589	$	4,061
	Income (loss) before income taxes		7,494		8,141		(647	)
	Capital expenditures		10,523		7,976		2,547
	Total assets		193,686		187,378		6,308
As of and for the Six Months Ended June 29, 2003:
	Revenues	$	268,200	$	244,659	$	23,541
	Income before income taxes		21,021		20,758		263
	Capital expenditures		24,341		19,451		4,890
	Total assets		240,977		223,222		17,755
As of and for the Six Months Ended June 30, 2002:
	Revenues	$	199,150	$	191,429	$	7,721
	Income (loss) before income taxes		15,373		16,316		(943	)
	Capital expenditures		18,346		13,660		4,686
	Total assets		193,686		187,378		6,308


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*



				Three Months Ended


				June 30, 2002									June 29, 2003

				Consolidated			Bistro			Pei Wei			Consolidated			Bistro			Pei Wei

Statements of Income
	Data:
Revenues (in thousands)				$	101,650		$	97,589		$	4,061		$	136,605		$	123,919		$	12,686
	Costs and expenses:
	Restaurant operating costs:
		Cost of sales			26.3	%		26.2	%		27.5	%		27.2	%		27.0	%		29.4	%
		Labor			31.6			31.5			35.2			31.3			31.2			32.4
		Operating			16.7			16.8			14.8			16.7			16.8			15.4
		Occupancy			6.1			6.1			7.7			5.6			5.5			6.5

			Total restaurant operating costs		80.7			80.6			85.2			80.8			80.5			83.6
	General and administrative				5.4			4.9			16.5			5.4			5.2			7.2
	Depreciation and amortization				3.4			3.4			4.7			3.4			3.4			3.7
	Preopening expense				1.5			1.1			9.1			0.9			0.7			2.5

Income (loss) from operations					9.0			10.0			(15.5	)		9.6			10.2			2.9
Interest income (expense), net					0.0			0.0			(0.1	)		0.0			0.0			0.0
Minority interest					(1.6	)		(1.7	)		(0.3	)		(1.7	)		(1.8	)		(1.3	)

Income (loss) before provision for income taxes					7.4			8.3	%		(15.9	)%		7.8			8.5	%		1.7	%

Provision for income taxes					(2.6	)								(2.7	)

Net income					4.8	%								5.2	%


Item 4.	*Submission of Matters to a Vote of Security Holders*


	Total Votes
	For		Abstain

Richard L. Federico		19,887,889		48,360
Kenneth J. Wessels		19,697,740		238,509
R. Michael Welborn		19,698,000		238,249
James G. Shennan, Jr.		19,906,561		29,688
F. Lane Cardwell, Jr.		19,698,110		238,139
M. Ann Rhoades		19,904,661		31,588
Lesley H. Howe		19,905,031		31,218


	Total
Total	Votes
Votes For	Against		Abstain

18,886,832		1,047,527		1,890


Exhibit
Number			Description Document

	3	.1(1)	Amended and Restated Certificate of Incorporation.
	3	.1(2)	Amended and Restated By-laws.
	4	.1(3)	Specimen Common Stock Certificate.
	4	.2(3)	Amended and Restated Registration Rights Agreement dated May 1, 1997.
	†10	.1(3)	Form of Indemnification Agreement for directors and executive officers.
	†10	.2(3)	1998 Stock Option Plan and forms of agreement thereunder.
	†10	.3(3)	1997 Restaurant Manager Stock Option Plan and forms of Agreement thereunder.
	†10	.4(3)	1996 Stock Option Plan and forms of Agreement thereunder.
	†10	.5(3)	1998 Employee Stock Purchase Plan.
	†10	.6(3)	Employment Agreement between Paul M. Fleming and the Company dated January 1, 1996, as amended September 2, 1998.
	10	.11(4)	Office Lease between the Company and PHXAZ-Kierland Commons, LLC, dated September 17, 1999.
	†10	.13(5)	1999 Nonstatutory Stock Option Plan.
	10	.15(6)	First Amendment to Office Lease between the Company and PHXAZ-Kierland Commons, LLC, dated August 22, 2001.
	10	.16(7)	Common Stock Purchase Agreement dated January 11, 2001.
	†10	.17(6)	Pei Wei Asian Diner, Inc. 2001 Stock Option Plan.
	†10	.18(8)	Employment Agreement between Richard L. Federico and the Company dated August 3, 2002.
	†10	.19(8)	Employment Agreement between Robert T. Vivian and the Company dated August 2, 2002.
	†10	.20(8)	Employment Agreement by and among Russell Owens, Pei Wei Asian Diner, Inc. and the Company dated August 6, 2002.
	10	.21(9)	Second Amendment to office lease between the Company and PHXAZ-Kierland Commons, LLC, dated November 12, 2002.
	10	.22(9)	Line of Credit Agreement between the Company and Bank of America dated December 20, 2002.
	99	.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Richard L. Federico.
	99	.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Kristina K. Cashman.


Item 1.	*Legal Proceedings*


Item 3.	*Defaults Upon Senior Securities*