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 September 28, 2003, there were outstanding 25,464,790 shares of the registrant’s Common Stock.

As of September 28, 2003, P.F. Chang’s China Bistro, Inc. owned and operated 90 full service restaurants throughout the United States under the name of “P.F. Chang’s China Bistro.” We also owned and operated 27 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 nine month period ended September 28, 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. The weighted average number of options that were anti-dilutive for the three and nine months ended September 28, 2003 was 19,000 and 98,000, respectively. The weighted average number of options that were anti-dilutive for the three and nine months ended September 29, 2002 was 330,000 and 68,000, respectively. 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 September 28, 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 September 28, 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 between reportable segments.

At September 28, 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 nine months ended September 28, 2003, P.F. Chang’s recorded a $4.4 million increase to equity with a corresponding $4.4 million reduction to income tax liability. P.F. Chang’s recorded an $11.4 million increase to equity and reduction to income tax liability for the nine months ended September 29, 2002. 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 stockholder.

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 believes that the ultimate outcome of these actions will not have a material adverse effect on the results of operations, liquidity or financial position.

In April 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” which is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS No. 133, clarifies when a derivative contains a financing component, amends the definition of an “underlying” to conform it to the language used in FASB Interpretation No. 45, “Guarantor Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” and amends certain other existing pronouncements. The Company does not have any derivative financial instruments. The Company does not anticipate that the adoption of SFAS No. 149 will have an impact on its consolidated balance sheets or statements of operations, shareholders’ equity and cash flows.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” This Statement requires that certain instruments that were previously classified as equity on a company’s statement of financial position now be classified as liabilities. The Statement is effective for financial instruments entered into or modified after May 31, 2003, and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. The Company currently has no instruments impacted by the adoption of this statement and therefore the adoption did not have an effect on the Company’s consolidated financial position, results of operations or cash flows.

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 September 28, 2003, we owned and operated 90 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 September 28, 2003, we also owned and operated 27 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, Texas and Nevada.

We intend to open 18 new Bistros by the end of 2003, 11 of which were open by the end of the third 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 17 new Pei Wei restaurants by the end of 2003, 11 of which were open by the end of the third quarter of 2003. We will continue our development in the Phoenix, Dallas and Southern California markets and have entered three new markets thus far in 2003 (Houston, Texas; Denver, Colorado and 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 September 29, 2002 and September 28, 2003 and for the nine months ended September 29, 2002 and September 28, 2003, expressed as a percentage of revenues, except for revenues, which are expressed in thousands. This quarterly information has been prepared on a basis consistent 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.

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 nine 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 $32.7 million, or 30.5%, to $139.7 million in the three months ended September 28, 2003 from $107.1 million in the three months ended September 29, 2002. Each segment contributed as follows:

Bistro: Revenues increased by $24.6 million at our Bistro restaurants. This increase was attributable to revenues of $11.6 million generated by new restaurants opened in 2003, $7.4 million of revenues in 2003 for restaurants that opened subsequent to September 29, 2002 and a $5.6 million increase in revenues for restaurants that opened before September 29, 2002. Increased customer visits and a modest price increase implemented in the first quarter of 2003 produced comparable restaurant sales gains of 4.8% in the three months ended September 28, 2003. Restaurants are included in this comparable restaurant measure once they reach their eighteenth month of operation.


	Pei Wei: Revenues increased by $8.1 million at our Pei Wei restaurants. The increase was attributable to revenues of $5.4 million generated by new restaurants opened in 2003, $540,000 of revenues in 2003 for restaurants that opened subsequent to September 29, 2002 and a $2.2 million increase in revenues for restaurants that opened before September 29, 2002.

Cost of Sales. Cost of sales is composed of the cost of food and beverages. Consolidated cost of sales increased by $9.8 million, or 34.3%, to $38.5 million in the three months ended September 28, 2003 from $28.6 million in the three months ended September 29, 2002. Each segment contributed as follows:


	Bistro: Cost of sales at the Bistro increased as a percentage of revenues to 27.3% in the three months ended September 28, 2003 from 26.6% in the three months ended September 29, 2002. This increase was primarily the result of an increase in poultry prices.

	Pei Wei: Cost of sales at Pei Wei increased as a percentage of revenues to 29.4% in the three months ended September 28, 2003 from 29.1% in the three months ended September 29, 2002. This increase was primarily attributable to an increase in poultry prices, offset by an improvement in product management efficiencies.

Labor. Labor expenses consist of restaurant management salaries, hourly staff payroll costs and other payroll-related items. Consolidated labor expenses increased by $9.5 million, or 27.9%, to $43.7 million in the three months ended September 28, 2003 from $34.2 million in the three months ended September 29, 2002. Each segment contributed as follows:


	Bistro: As a percentage of revenues, labor expenses at the Bistro decreased to 31.1% in the three months ended September 28, 2003 from 31.4% in the three months ended September 29, 2002. This decrease was primarily due to increased sales leverage on those labor costs that are fixed in nature.

	Pei Wei: As a percentage of revenues, labor expenses at Pei Wei decreased to 32.8% in the three months ended September 28, 2003 from 40.4% in the three months ended September 29, 2002. This decrease was primarily due to improvement in labor efficiencies as well as a lesser impact of opening four new stores in the three months ended September 28, 2003 on a store base of 27, as compared to opening seven new stores in the three months ended September 29, 2002 on a store base of 15.

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 nine 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 $5.1 million, or 28.2%, to $23.3 million in the three months ended September 28, 2003 from $18.2 million in the three months ended September 29, 2002. Each segment contributed as follows:


	Bistro: Operating expenses as a percentage of revenues at our Bistro restaurants decreased to 16.8% in the three months ended September 28, 2003 from 17.0% for the three months ended September 29, 2002 due to increased sales leverage achieved in the third quarter of 2003 on that portion of operating costs that are fixed in nature.

	Pei Wei: Operating expenses as a percentage of revenues decreased at our Pei Wei restaurants to 15.7% in the three months ended September 28, 2003 from 16.8% in the three months ended September 29, 2002. This decrease was primarily attributable to opening three fewer restaurants in the three months ended September 28, 2003 versus September 29, 2002 as well as the reduced impact of these new stores on our expanding revenue base in the current year.

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 $1.3 million, or 20.0%, to $7.7 million in the three months ended September 28, 2003 from $6.4 million in the three months ended September 29, 2002. Occupancy costs decreased as a percentage of revenues to 5.5% in the three


	Bistro: Occupancy costs at the Bistro decreased as a percentage of revenues to 5.4% for the three months ended September 28, 2003 from 5.9% for the three months ended September 29, 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 6.6% for the three months ended September 28, 2003 from 8.0% for the three months ended September 29, 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 $6.9 million in the three months ended September 28, 2003 from $5.3 million in the three months ended September 29, 2002. Consolidated general and administrative expenses as a percentage of revenues decreased to 4.9% in the three months ended September 28, 2003 from 5.0% in the three months ended September 29, 2002. Each segment contributed as follows:


	Bistro: General and administrative expenses at the Bistro increased by $1.3 million to $5.9 million in the three months ended September 28, 2003 from $4.6 million in the three months ended September 29, 2002. This increase was due primarily to the addition of corporate management personnel and higher health insurance costs, which resulted in approximately $670,000 of additional compensation and benefits expense, as well as additional travel and other costs to support a larger restaurant base. We also incurred additional costs of $450,000 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 $300,000 to $1.0 million in the three months ended September 28, 2003 from $700,000 in the three months ended September 29, 2002. This increase was due primarily to the addition of corporate management personnel, which resulted in approximately $300,000 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 31.4%, to $4.8 million in the three months ended September 28, 2003 from $3.7 million in the three months ended September 29, 2002. Depreciation and amortization as a percentage of revenues increased to 3.5% in the three months ended September 28, 2003 from 3.4% in the three months ended September 29, 2002. Each segment contributed as follows:


	Bistro: At our Bistro restaurants, depreciation and amortization increased by $900,000 to $4.3 million for the three months ended September 28, 2003 from $3.4 million for the three months ended September 29, 2002. This increase was primarily due to depreciation and amortization on restaurants opened subsequent to September 29, 2002 totaling $700,000 for the three months ended September 28, 2003; as well as a full quarter’s depreciation and amortization on fixed assets in restaurants opened during the third quarter of 2002.

	Pei Wei: At our Pei Wei restaurants, depreciation and amortization increased by $290,000 to $540,000 for the three months ended September 28, 2003 from $250,000 for the three months ended September 29, 2002. This increase was primarily due to depreciation and amortization on restaurants opened subsequent to September 29, 2002 totaling $200,000 for the three months ended September 28,


	2003; as well as a full quarter’s depreciation and amortization on fixed assets in restaurants opened during the third 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 September 28, 2003 increased to $2.6 million from $2.3 million in the three months ended September 29, 2002. Preopening expenses decreased as a percentage of revenues to 1.9% in the three months ended September 28, 2003 from 2.2% in the three months ended September 29, 2002. Each segment contributed as follows:


	Bistro: Preopening expenses increased by $400,000 to $2.0 million as of the three months ended September 28, 2003 from $1.6 million as of the three months ended September 29, 2002. This increase was primarily due to the opening of five Bistros in the third quarter of 2003 as compared to three Bistros in the third quarter of 2002, as well as higher costs incurred for training and management support at the new units opened in the third quarter of 2003 due to high opening unit volumes.

	Pei Wei: Preopening expenses decreased by $110,000 to $590,000 as of the three months ended September 28, 2003 from $700,000 as of the three months ended September 29, 2002. This decrease is primarily due to four Pei Wei openings in the three months ended September 28, 2003 as compared to seven Pei Wei openings in the three months ended September 29, 2002, partially offset by costs incurred for the planned opening of four Pei Wei units in the beginning of the fourth quarter of 2003 as compared to one opening in the fourth quarter of 2002.

Consolidated net interest income and other income (expense) was $(69,000) in the three months ended September 28, 2003 as compared to $33,000 in the three months ended September 29, 2002. As a percentage of revenues, consolidated net interest income and other income (expense) was the same for both periods.

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 stockholders in our Pei Wei Asian Diner, Inc. subsidiary. Consolidated minority interest for the three months ended September 28, 2003 increased to $2.3 million from $1.5 million for the three months ended September 29, 2002. As a percentage of revenues, minority interest increased to 1.6% of revenues for the three months ended September 28, 2003 from 1.4% of revenues for the three months ended September 29, 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 third quarter of 2003 as compared to the third quarter of 2002, offset by the impact of Pei Wei’s lower minority investor ownership on our total minority interest expense.

Our effective tax rate for the three months ended September 28, 2003 was 34%. For the three months ended September 29, 2002, the effective tax rate was 35%. The income tax rates for the three months ended September 28, 2003 and September 29, 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 $101.7 million, or 33.2%, to $407.9 million in the nine months ended September 28, 2003 from $306.2 million in the nine months ended September 29, 2002. Each segment contributed as follows:


	Bistro: Revenues increased by $77.8 million at our Bistro restaurants. This increase was attributable to revenues of $24.8 million generated by new restaurants opened in 2003, $23.1 million of revenues in 2003 for restaurants that opened subsequent to September 29, 2002 and a $29.9 million increase in revenues for restaurants that opened before September 29, 2002. Increased customer visits as well as a modest price increase implemented in the first quarter of 2003 produced comparable restaurant sales gains of 5.5% in the nine months ended September 28, 2003. Restaurants are included in this comparable restaurant measure once they reach their eighteenth month of operation.

	Pei Wei: Revenues increased by $23.9 million at our Pei Wei restaurants. The increase was attributable to revenues of $11.1 million generated by new restaurants opened in 2003, $1.5 million of revenues in 2003 for restaurants that opened subsequent to September 29, 2002 and a $11.3 million increase in revenues for restaurants that opened before September 29, 2002.

Cost of Sales. Consolidated cost of sales increased by $29.1 million, or 35.6%, to $110.9 million in the nine months ended September 28, 2003 from $81.8 million in the nine months ended September 29, 2002. Cost of sales increased as a percentage of revenues to 27.2% in the nine months ended September 28, 2003 from 26.7% in the nine months ended September 29, 2002. Each segment contributed as follows:


	Bistro: Cost of sales at the Bistro increased as a percentage of revenues to 27.0% in the nine months ended September 28, 2003 from 26.6% in the nine months ended September 29, 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 29.2% in the nine months ended September 28, 2003 from 28.4% in the nine months ended September 29, 2002. This increase was primarily attributable to an increase in poultry prices.

Labor. Consolidated labor expenses increased by $31.2 million, or 32.1%, to $128.2 million in the nine months ended September 28, 2003 from $97.0 million in the nine months ended September 29, 2002. Labor expenses decreased as a percentage of revenues to 31.4% in the nine months ended September 28, 2003 from 31.7% in the nine months ended September 29, 2002. Each segment contributed as follows:


	Bistro: As a percentage of revenues, labor expenses decreased at our Bistro restaurants to 31.3% in the nine months ended September 28, 2003 from 31.4% in the nine months ended September 29, 2002. The decrease was primarily a result of increased sales leverage on those labor costs that are fixed in nature, offset by higher insurance costs.

	Pei Wei: As a percentage of revenues, labor expenses at Pei Wei decreased to 32.8% in the nine months ended September 28, 2003 from 37.5% in the nine months ended September 29, 2002. This decrease was primarily due to improvement in labor efficiencies in newer units as well as the reduced impact of newer restaurants on our expanding revenue base.

Operating. Consolidated operating expenses increased by $16.4 million, or 32.1%, to $67.7 million in the nine months ended September 28, 2003 from $51.2 million in the nine months ended September 29, 2002. Operating expenses decreased as a percentage of revenues to 16.6% in the nine months ended September 28, 2003 from 16.7% in the nine months ended September 29, 2002. Each segment contributed as follows:


	Bistro: Operating expenses as a percentage of revenues decreased at our Bistro restaurants to 16.7% in the nine months ended September 28, 2003 from 16.8% in the nine months ended September 29, 2002. This decrease was primarily a result of increased sales leverage achieved in the first three 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 decreased at our Pei Wei restaurants to 15.5% in the nine months ended September 28, 2003 from 15.6% in the nine months ended September 29, 2002. This decrease was primarily attributable to the reduced impact of newer restaurants on our expanding revenue base.

Occupancy. Consolidated occupancy costs increased by $4.0 million, or 21.2%, to $22.7 million in the nine months ended September 28, 2003 from $18.8 million in the nine months ended September 29, 2002. Occupancy costs decreased as a percentage of revenues to 5.6% in the nine months ended September 28, 2003 from 6.1% in the nine months ended September 29, 2002. Each segment contributed as follows:


	Bistro: Occupancy costs at the Bistro decreased as a percentage of revenues to 5.5% for the nine months ended September 28, 2003 from 6.1% for the nine months ended September 29, 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 6.6% for the nine months ended September 28, 2003 from 7.8% for the nine months ended September 29, 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 $21.0 million in the nine months ended September 28, 2003 from $15.7 million in the nine months ended September 29, 2002. Consolidated general and administrative expenses increased as a percentage of revenues to 5.2% for the nine months ended September 28, 2003 from 5.1% for the nine months ended September 29, 2002. Each segment contributed as follows:


	Bistro: General and administrative expenses at the Bistro increased by $4.5 million to $18.2 million in the nine months ended September 28, 2003 from $13.8 million in the nine months ended September 29, 2002. This increase was due primarily to the addition of corporate management personnel and higher health insurance costs, which resulted in approximately $3.1 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 $825,000 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 $800,000 to $2.8 million in the nine months ended September 28, 2003 from $2.0 million in the nine months ended September 29, 2002. This increase was due primarily to the addition of corporate management personnel, which resulted in approximately $730,000 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 $3.3 million, or 31.1%, to $13.8 million in the nine months ended September 28, 2003 from $10.5 million in the nine months ended September 29, 2002. Consolidated depreciation and amortization as a percentage of revenues were at 3.4% for both the nine months ended September 28, 2003 and September 29, 2002. Each segment contributed as follows:


	Bistro: At our Bistro restaurants, depreciation and amortization increased by $2.4 million to $12.3 million for the nine months ended September 28, 2003 from $9.9 million for the nine months ended September 29, 2002. This increase was primarily due to depreciation and amortization on restaurants opened subsequent to September 29, 2002 totaling $1.7 million for the nine months ended September 28, 2003; as well as a full nine months of depreciation and amortization on fixed assets in restaurants opened during the first three quarters of 2002.

	Pei Wei: At our Pei Wei restaurants, depreciation and amortization increased by $800,000 to $1.4 million for the nine months ended September 28, 2003 from $600,000 for the nine months ended September 29, 2002. This increase was primarily due to depreciation and amortization on restaurants opened subsequent to September 29, 2002 totaling $380,000 for the nine months ended September 29, 2002; as well as a full nine months of depreciation and amortization on fixed assets in restaurants opened during the first three quarters of 2002.

Preopening Expense. Consolidated preopening expenses in the nine months ended September 28, 2003 increased to $5.8 million from $4.4 million in the nine months ended September 29, 2002. Consolidated preopening expenses as a percentage of revenues were at 1.4% for both the nine months ended September 28, 2003 and September 29, 2002. Each segment contributed as follows:

Bistro: Preopening expenses increased by $1.3 million to $4.6 million as of the nine months ended September 28, 2003 from $3.3 million as of the nine months ended September 29, 2002. This increase was primarily due to the opening of eleven Bistros in the first three quarters of 2003 as compared to eight Bistros in the first three quarters of 2002, as well as higher costs incurred for training and management support at the new units opened in the first three quarters of 2003 due to their high opening unit volumes.


	Pei Wei: Preopening expenses totaled $1.2 million for both the nine months ended September 28, 2003 and September 29, 2002 and remained consistent in both periods due to the opening of approximately the same number of restaurants.

Consolidated net interest income and other income (expense) was $(31,000) in the nine months ended September 28, 2003 as compared to $6,000 in the nine months ended September 29, 2002. As a percentage of revenues, consolidated net interest income and other income (expense) was the same for both periods.

Consolidated minority interest for the nine months ended September 28, 2003 increased to $7.0 million from $4.6 million for the nine months ended September 29, 2002. As a percentage of revenues, consolidated minority interest increased to 1.7% of revenues for the nine months ended September 28, 2003 from 1.5% of revenues for the nine months ended September 29, 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 three quarters of 2003 as compared to the first three quarters of 2002, offset by the impact of Pei Wei’s lower minority investor ownership on our total minority interest expense.

Our effective tax rate for the nine months ended September 28, 2003 was 34%. For the nine months ended September 29, 2002, the effective tax rate was 35%. The income tax rates for the nine months ended September 28, 2003 and September 29, 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 $53.0 million and $37.3 million for the nine months ended September 28, 2003 and September 29, 2002, respectively. Net cash provided by operating activities exceeded net income for the nine months ended September 28, 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 nine months ended September 29, 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 nine months ended September 28, 2003 and September 29, 2002 was $46.9 million and $35.7 million, respectively. Capital expenditures made up the majority of our investing activities in both periods. In the nine months ended September 29, 2002, investing activities also included a purchase of short-term investments. We intend to open 18 new Bistros in 2003, 11 of which were open as of September 28, 2003. We also intend to open 17 new Pei Wei restaurants in 2003, 11 of which were open as of September 28, 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 nine months ended September 28, 2003 and September 29, 2002 was $2.7 million and $800,000, respectively. Financing activities for both the nine months ended

September 28, 2003 and September 29, 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 September 28, 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 September 28, 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 cannot assure you that such capital will be available on favorable terms, if at all.

As of September 28, 2003, there were 144 partners within the P.F. Chang’s China Bistro, Inc. system. By the end of 2003, we will have had the opportunity to purchase eleven partners’ interests which have reached their five year threshold period during the year as well as one additional partner’s interest. During the nine months ended September 28, 2003, of the opportunities that have arisen, we have purchased two interests in their entirety, three partial interests and have passed on two opportunities. These purchases have totaled $1.3 million, 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. Approximately $900,000 of the total purchase price was paid in cash while the majority of the remaining balance has been recorded as amounts due to related parties on the balance sheet at September 28, 2003. During the remainder of 2003, we will have the opportunity to purchase five additional partnership interests. If all of these interests are fully purchased in their entirety, the total purchase price would approximate $1.0 to $2.0 million based upon the estimated fair value of the respective interests at September 28, 2003. Such amounts are subject to change based upon changes in the estimated fair value of the respective interests from September 28, 2003 through the date of purchase. If all of these interests are purchased by the Company in 2003, there would be minimal estimated financial impact on earnings per share (i.e. less than $0.01 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. An 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.

As of September 28, 2003, we operated 90 full service, or Bistro, restaurants and 27 limited service, or Pei Wei, restaurants, 29 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 117 restaurants as of September 28, 2003. We expect to open 18 Bistros and 17 Pei Wei restaurants in fiscal 2003 and 16 to 18 new Bistros and 19 to 21 new Pei Wei restaurants in fiscal 2004. Our ability to expand successfully will depend on a number of factors, including:


	•	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. 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:


	•	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 September 28, 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 evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and principal accounting officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

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.


(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 July 3, 2003 containing a press release announcing P.F. Chang’s revenues for its second fiscal quarter of 2003.

	Report on Form 8-K filed on July 28, 2003 containing a press release announcing P.F. Chang’s earnings for its second 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)	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 September 28, 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		85254 (Zip Code)
(Address of principal executive offices)


		Note 1
		December 29,		September 28,
		2002		2003

				(Unaudited)

		(In thousands)
ASSETS
Current assets:
	Cash and cash equivalents	$	39,089	$	42,524
	Short-term investments		3,800		3,800
	Inventories		2,319		2,651
	Prepaids and other current assets		6,176		4,037

Total current assets			51,384		53,012
Construction-in-progress			13,557		18,625
Property and equipment, net			137,055		163,174
Goodwill			6,819		6,819
Intangibles, net			5,773		6,692
Other assets			3,862		4,935

	Total assets	$	218,450	$	253,257

LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable	$	7,051	$	5,878
	Construction payable		3,600		2,199
	Accrued expenses		15,497		26,098
	Unearned revenue		6,894		5,119
	Current portion of long-term debt, including $1,021,000 and $1,518,000 due to related parties at December 29, 2002 and September 28, 2003, respectively		1,633		1,518

Total current liabilities			34,675		40,812
Long-term debt, including $828,000 and $136,000 due to related parties at December 29, 2002 and September 28, 2003, respectively			1,441		136
Deferred income tax liability			4,261		3,365
Minority interests			2,848		3,696
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 25,464,790 at September 28, 2003.		25		27
	Additional paid-in capital		128,114		137,784
	Retained earnings		47,086		67,437

Total common stockholders’ equity			175,225		205,248

Total liabilities and common stockholders’ equity		$	218,450	$	253,257



				Three Months Ended						Nine Months Ended

				September 29,			September 28,			September 29,			September 28,
				2002			2003			2002			2003


				(Unaudited)
				(In thousands, except per share)
Revenues				$	107,052		$	139,729		$	306,202		$	407,929
Costs and expenses:
	Restaurant operating costs:
		Cost of sales			28,631			38,460			81,784			110,916
		Labor			34,187			43,726			96,992			128,170
		Operating			18,191			23,316			51,249			67,696
		Occupancy			6,426			7,711			18,769			22,747

			Total restaurant operating costs		87,435			113,213			248,794			329,529
	General and administrative				5,304			6,897			15,720			21,024
	Depreciation and amortization				3,673			4,827			10,495			13,761
	Preopening expense				2,340			2,627			4,438			5,787

Income from operations					8,300			12,165			26,755			37,828
Interest and other income (expense), net					33			(69	)		6			(31	)

Income before minority interest and provision for income taxes					8,333			12,096			26,761			37,797
Minority interest					(1,547	)		(2,305	)		(4,602	)		(6,985	)

Income before provision for income taxes					6,786			9,791			22,159			30,812
Provision for income taxes					(2,369	)		(3,314	)		(7,749	)		(10,461	)

Net income				$	4,417		$	6,477		$	14,410		$	20,351

Net income per share:
	Basic			$	0.18		$	0.25		$	0.59		$	0.80

	Diluted			$	0.17		$	0.25		$	0.56		$	0.78

Weighted average shares used in computation:
	Basic				24,944			25,414			24,583			25,296

	Diluted				25,841			26,331			25,914			26,199



			Nine Months Ended

			September 29,			September 28,
			2002			2003


			(Unaudited)
			(In thousands)
Operating Activities:
Net income			$	14,410		$	20,351
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			10,188			13,447
	Amortization of intangibles			307			314
	Deferred income taxes (benefit)			(840	)		(896	)
	Tax benefit from disqualifying stock option dispositions credited to equity			11,374			4,408
	Minority interest			4,602			6,985
	Changes in operating assets and liabilities:
		Inventories		(122	)		(332	)
		Prepaids and other current assets		(4,689	)		2,139
		Other assets		1,366			(1,073	)
		Accounts payable		748			(1,173	)
		Accrued expenses		875			10,601
		Unearned revenue		(874	)		(1,775	)

Net cash provided by operating activities				37,345			52,996
Investing Activities:
Capital expenditures				(32,203	)		(46,035	)
Purchase of investments				(2,000	)		—
Purchase of minority interests				(1,457	)		(863	)

Net cash used in investing activities				(35,660	)		(46,898	)
Financing Activities:
Repayments of long-term debt				(1,836	)		(1,692	)
Proceeds from stock options exercised and employee stock purchases				5,222			5,264
Proceeds from minority investors’ contributions				708			750
Distributions to minority members and partners				(4,895	)		(6,985	)

Net cash used in financing activities				(801	)		(2,663	)

Net increase in cash and cash equivalents				884			3,435
Cash and cash equivalents at the beginning of the period				20,799			39,089

Cash and cash equivalents at the end of the period			$	21,683		$	42,524

Supplemental disclosure of cash flow information:
Cash paid for interest				153			138
Cash paid for income taxes				2,703			1,565
Purchase of minority interests through issuance of long-term-debt and conversion to members’ capital				2,955			370


Item		Page

PART I
FINANCIAL INFORMATION
1.	Unaudited Financial Statements		2
	Consolidated Balance Sheets as of December 29, 2002 and September 28, 2003		2
	Consolidated Statements of Income for the Three Months Ended September 29, 2002 and September 28, 2003 and for the Nine Months Ended September 29, 2002 and September 28, 2003		3
	Consolidated Statements of Cash Flows for the Nine Months Ended September 29, 2002 and September 28, 2003		4
	Notes to Unaudited Financial Statements		5
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		8
3.	Quantitative and Qualitative Disclosures About Market Risk		24
4.	Controls and Procedures		24
PART II
OTHER INFORMATION
1.	Legal Proceedings		24
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 September 28, 2003:
	Revenues	$	139,729	$	125,745	$	13,984
	Income (loss) before income taxes		9,791		9,953		(162	)
	Capital expenditures		21,694		17,575		4,119
	Total assets		253,257		231,942		21,315
As of and for the Three Months Ended September 29, 2002:
	Revenues	$	107,052	$	101,190	$	5,862
	Income (loss) before income taxes		6,786		8,058		(1,272	)
	Capital expenditures		13,857		11,069		2,788
	Total assets		205,091		194,218		10,873
As of and for the Nine Months Ended September 28, 2003:
	Revenues	$	407,929	$	370,404	$	37,525
	Income before income taxes		30,812		30,711		101
	Capital expenditures		46,035		37,026		9,009
	Total assets		253,257		231,942		21,315
As of and for the Nine Months Ended September 29, 2002:
	Revenues	$	306,202	$	292,619	$	13,583
	Income (loss) before income taxes		22,159		24,377		(2,218	)
	Capital expenditures		32,203		24,729		7,474
	Total assets		205,091		194,218		10,873


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


	*Results for the Three Months Ended September 29, 2002 and September 28, 2003*



				Three Months Ended


				September 29, 2002									September 28, 2003

				Consolidated			Bistro			Pei Wei			Consolidated			Bistro			Pei Wei

Statements of Income Data:
Revenues (in thousands)				$	107,052		$	101,190		$	5,862		$	139,729		$	125,745		$	13,984
	Costs and expenses:
	Restaurant operating costs:
		Cost of sales			26.7	%		26.6	%		29.1	%		27.5	%		27.3	%		29.4	%
		Labor			31.9			31.4			40.4			31.3			31.1			32.8
		Operating			17.0			17.0			16.8			16.7			16.8			15.7
		Occupancy			6.0			5.9			8.0			5.5			5.4			6.6

			Total restaurant operating costs		81.7			80.9			94.3			81.0			80.6			84.5
	General and administrative				5.0			4.5			12.1			4.9			4.7			7.4
	Depreciation and amortization				3.4			3.4			4.3			3.5			3.4			3.9
	Preopening expense				2.2			1.6			11.9			1.9			1.6			4.2

Income (loss) from operations					7.8			9.5			(22.6	)		8.7			9.7			0.0
Interest income (expense), net					0.0			0.0			0.0			0.0			(0.1	)		0.0
Minority interest					(1.4	)		(1.6	)		1.0			(1.6	)		(1.7	)		(1.1	)

Income (loss) before provision for income taxes					6.3			8.0	%		(21.7	)%		7.0			7.9	%		(1.2	)%

Provision for income taxes					(2.2	)								(2.4	)

Net income					4.1	%								4.6	%


	*Results for the Nine Months Ended September 29, 2002 and September 28, 2003*


	•	environment;

	•	building construction;

	•	zoning requirements;


Item 3.	*Quantitative and Qualitative Disclosures about Market Risk*


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.
	31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Richard L. Federico.
	31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Kristina K. Cashman.
	32.1	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.
	32.2	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.


1.	Basis of Presentation


2.	Stock-Based Compensation


3.	Net Income Per Share


4.	Credit Facility