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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the Fiscal Year Ended January 2, 2005 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
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Commission File Number: 0-25123
P.F. Chang’s China Bistro, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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86-0815086 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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15210 N. Scottsdale Rd., Ste. 300
Scottsdale, AZ
(Address of principal executive offices) |
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85254
(Zip Code) |
Registrant’s telephone number, including area code:
(602) 957-8986
Securities registered pursuant to Section 12(b) of the
Act:
NONE
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $.001 par value
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 if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act).
Yes þ No o
The aggregate market value of the registrant’s common stock
as of the last day of the second fiscal quarter, June 27,
2004, is $607,524,070.
On March 14, 2005 there were outstanding
26,127,793 shares of the registrant’s Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
(to the extent indicated herein)
Specified portions of the registrant’s Proxy Statement with
respect to the Annual Meeting of Stockholders to be held
May 6, 2005 are incorporated by reference into
Part III of this Report.
Explanatory Note
On February 7, 2005, the Chief Accountant of the
U.S. Securities and Exchange Commission (“SEC”)
released a letter expressing the SEC’s views on certain
lease accounting matters. We have identified areas where our
historical accounting practices have differed from the
SEC’s views as to appropriate lease accounting under
U.S. generally accepted accounting principles
(“GAAP”). We have consistently accounted for leases in
accordance with our interpretation of GAAP and common industry
practice. However, we have restated our financial statements for
prior periods to correct these errors.
We have reviewed our operating leases and we have adjusted, for
purposes of calculating our total rental obligations, the
initial terms to include option renewals that are reasonably
assured of being exercised. We have also added to our terms the
rent holidays related to the period before the restaurant
opening date when we took possession of the premises. Using
these extended terms and in some cases greater rent obligations,
we have recorded straight-line rent from the time of possession
through the lease term. Straight-line rent recorded from the day
of possession through construction completion has been
capitalized and is included in property and equipment. The
capitalized rent is amortized through depreciation and
amortization expense over the useful life of the related asset
or the lease term, whichever is shorter. Straight-line rent
recorded during our pre-opening period (construction completion
through restaurant open date) has been recorded as a preopening
expense. Once a restaurant opens for business, we now record the
straight-line rent over the lease term plus
contingent rent to the extent it exceeded minimum rent per
the lease agreement. We have also reclassified tenant
improvement allowances from a contra asset in property and
equipment, net to long-term lease obligation in the consolidated
balance sheets. The impact of tenant improvement allowances has
also been reclassified from a reduction of depreciation and
amortization expense to a reduction of occupancy expense (or
pre-opening expense during the rent holiday period) in the
consolidated statements of income. Finally, we reflected the
tenant improvement allowance reclassification described above in
the consolidated statements of cash flows by increasing capital
expenditures and increasing cash provided by operating
activities.
See Note 1 to the Consolidated Financial Statements for a
summary of the effects of these changes on our Consolidated
Balance Sheets as of December 28, 2003, as well as on our
Consolidated Statements of Income and Cash Flows for fiscal
years 2003 and 2002.
We have not amended our previously filed Annual Reports on
Form 10-K or Quarterly Reports on Form 10-Q for the
restatement, and the financial statements and related financial
information contained in those reports should no longer be
relied upon. Throughout this Form 10-K all referenced
amounts for prior periods and prior period comparisons reflect
the balances and amounts on a restated basis.
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TABLE OF CONTENTS
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PART I
General
P.F. Chang’s China Bistro, Inc. (“P.F.
Chang’s”) was incorporated in January 1996 as a
Delaware corporation and conducted its initial public offering
in December 1998. We incorporated our subsidiary, Pei Wei Asian
Diner, Inc., in December 1999 as a Delaware corporation. We
report our financial and descriptive information according to
two reportable operating segments: Bistro and Pei Wei (see Notes
to Consolidated Financial Statements —
Note 14 — Segment Reporting).
As of January 2, 2005, P.F. Chang’s owned and operated
115 full service, or Bistro, restaurants that feature a blend of
high quality, traditional Chinese cuisine and American
hospitality in a sophisticated, contemporary bistro setting. Our
restaurants offer intensely flavored, highly memorable culinary
creations, prepared from fresh ingredients, including premium
herbs and spices imported directly from China. The menu features
traditional Chinese offerings and innovative dishes that
illustrate the emerging influence of Southeast Asia on modern
Chinese cuisine. Our menu is complemented by a full service bar
offering an extensive selection of wines, specialty drinks,
Asian beers, cappuccino and espresso. We offer superior customer
service in a high energy atmosphere featuring a display kitchen,
exhibition wok cooking and a decor that includes wood and slate
floors, mounted life-size terra cotta replicas of Xi’an
warriors and narrative murals depicting 12th century China.
We also owned and operated 53 limited service, or Pei Wei,
restaurants as of January 2, 2005. Pei Wei was developed to
maintain the same spirit of hospitality and commitment to
providing fresh, high quality Asian food, at a great value that
has made P.F. Chang’s successful. Pei Wei was also designed
to keep up with today’s lifestyles and served as a place
for comfortable, everyday eating. Pei Wei opened its first unit
in July 2000 in the Phoenix, Arizona area, and has expanded
significantly since then. Pei Wei restaurants are located in
Arizona, Colorado, California, Nevada, New Mexico, Oklahoma,
Utah and Texas.
Concept and Strategy
P.F. Chang’s objectives are to develop and operate a
nationwide system of restaurants that offer guests a
sophisticated dining experience, create a loyal customer base
that generates a high level of repeat business and provide
superior returns to our investors. To achieve our objectives, we
strive to offer high quality Chinese cuisine in a memorable
atmosphere while delivering superior customer service and an
excellent dining value. Key to our expansion strategy and
success at the restaurant level is our management philosophy
which allows regional managers, certain general managers and
certain executive chefs to become partners and participate in
the cash flows of the restaurants for which they have
responsibility. We have established Bistro and Pei Wei
restaurants in a wide variety of markets across the United
States. We intend to continue our expansion program and believe
the management equity participation provided by our partnership
programs should position us to continue this expansion without
sacrificing P.F. Chang’s restaurant-level operating
performance and return on investment.
Menu
The menu for our Bistro restaurants offers a harmony of taste,
texture, color and aroma by balancing the Chinese principles of
fan and t’sai. Fan foods include rice,
noodles, grains and dumplings, while vegetables, meat, poultry
and seafood are t’sai foods. Our chefs are trained
to produce distinctive Chinese cuisine using traditional recipes
from the major culinary regions of China. The intense heat of
Mandarin-style wok cooking sears in the clarity and distinct
flavor of fresh ingredients. Slow-roasted Cantonese-style
ducklings and BBQ spare ribs are prepared in vertical ovens,
while handmade shrimp, pork and vegetable dumplings, as well as
flavorful fish and vegetables, are prepared in custom-made
steamer cabinets. The menu is highlighted by dishes such as
Chang’s Spicy Chicken, Orange Peel Beef, Peking Dumplings,
Chicken in Soothing Lettuce Wrap, Szechwan-Style Long Beans and
Dan Dan Noodles. We also offer an array of vegetarian dishes and
are
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able to modify dishes to accommodate our customers with special
dietary needs. MSG is not added to any ingredients at P.F.
Chang’s.
In addition to the core menu, the Bistro menu also offers
special lunch and dinner selections. These special selections
are developed by our executive chefs around the country and are
modified several times a year to provide our guests with fresh,
new tastes. Individual items that are well received by guests
migrate to the core menu. Fresh produce, seafood, meat, poultry
and specialty items that are specific to a certain region of the
United States or to a specific season are featured on a daily
basis. Extensive research and development, including trips to
Asia by our culinary team, continually reinforce our commitment
to training P.F. Chang’s chefs and enhancing our menu
offerings.
The Bistro’s entrées range in price from $6.00 to
$19.00, and our appetizers range in price from $4.00 to $8.00.
The average check per guest, including alcoholic beverages, is
approximately $18.00 to $19.00. Sales of alcoholic beverages,
featuring an extensive selection of wines, all of which are
offered by the glass, constitute approximately 17% of revenues.
Lunch and dinner contribute approximately 33% and 67% of
revenues, respectively.
The menu for our limited service concept, Pei Wei, also offers a
variety of intensely flavored culinary creations; however, this
menu is more concise and includes not only Chinese cuisine but
other Asian fare as well. As with the Bistro, Pei Wei also has a
high energy exhibition kitchen featuring made-to-order items
using traditional Mandarin-style wok cooking. Along with our
handmade dim sum, our guests can order traditional favorites
such as Minced Chicken with Soothing Lettuce Wraps and Orange
Peel Beef, while sampling a variety of Asian dishes such as
Vietnamese Chicken Salad Rolls and Pei Wei Pad Thai.
Entrées range in price from $6.25 to $9.00, with appetizers
ranging from $2.95 to $6.95. We offer a limited selection of
beer and wine at Pei Wei which comprises approximately 2% of
total sales. Take-away sales comprise approximately 39% of total
revenues. The average check for a guest eating in at Pei Wei,
including beer and wine sales, ranges from $8.00 to $9.00. Lunch
and dinner contribute approximately 41% and 59% of revenues,
respectively.
Operations
We utilize a partnership structure to facilitate the
development, leadership and operation of our restaurants. We
have entered into a series of partnership agreements with all of
our regional managers (“Market Partners”), and with
those of our general managers (“Operating Partners”)
and executive chefs (“Chef Partners”) who choose to
invest. Each partner who wishes to participate in the
partnership structure is required to make a cash capital
contribution in exchange for their percentage interest in the
partnership. We do not finance any partner capital
contributions. For this capital contribution, the partner
receives an ownership interest generally ranging from two to
seven percent in a specific restaurant or region. Each partner
shares in the income or loss of the restaurant or region they
invest in based solely on their percentage interest purchased.
P.F. Chang’s strives to create a sophisticated dining
experience through the careful selection, training and
supervision of personnel. The staff of a typical Bistro
restaurant consists of a general manager, three or four
managers, an executive chef, one or two sous chefs and
approximately 125 hourly employees, many of whom work
part-time. The general manager of each restaurant is responsible
for the day-to-day operations of that restaurant, including
hiring, training and development of personnel, as well as
operating results. The executive chef is responsible for product
quality, purchasing, food costs and kitchen labor costs. P.F.
Chang’s requires our general managers and executive chefs
to have significant experience in the full service restaurant
industry.
P.F. Chang’s has a comprehensive 13 week management
development program. This program consists of four weeks of
culinary training, including both culinary job functions and
culinary management, with the remaining nine weeks focused on
service strategies, guest relations, office management and shift
management. All management and culinary personnel are required
to successfully complete all sections of this program. Upon the
completion of each four-week section, each trainee must
successfully complete a comprehensive certification.
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The general managers are responsible for selecting hourly
employees for their restaurants. The general managers and
regional managers are responsible for administering our hourly
staff training programs that are developed by the training and
culinary departments. The hourly employee development program
lasts between one and two weeks and focuses on both technical
and cultural knowledge.
A typical staff at Pei Wei consists of a general manager, one
kitchen manager, one or two managers, as well as approximately
45 hourly employees. Our general managers are responsible
for the day-to-day operations of the restaurant as well as the
hiring, training and development of personnel as well as the
operating results. The kitchen manager works collaboratively
with the general manager in regards to product quality,
purchasing, food cost and kitchen labor costs.
Pei Wei uses a comprehensive nine-week management training
program, which consists of six weeks of hands-on culinary
functions and culinary management; with the remaining three
weeks focusing on service strategies specific to dine-in and
take-away service, guest and employee relations and
administration. Upon completion of training, each new manager
must complete a comprehensive culinary and overall operations
certification.
Pei Wei hourly employees also go through a week long
comprehensive training program that focuses on the culinary
knowledge required for the specific position. After completion
of the program, each trainee is required to complete a position
certification prior to serving our guests.
Marketing
P.F. Chang’s focuses its business strategy on providing
high quality, Asian cuisine served by an attentive staff in a
distinctive environment at a great value. By focusing on the
food, service and ambiance of the restaurant, we have created an
environment that fosters repeat patronage and encourages
word-of-mouth recommendations. We believe that word-of-mouth
advertising is a key component in driving guests’ initial
trial and subsequent visits.
To retain and attract new customers, P.F. Chang’s utilizes
a mix of marketing strategies including paid advertising, public
relations and local community involvement. We use radio, print
and outdoor advertising campaigns to build national, regional
and local brand awareness. Our public and community relations
initiatives include: specialty programs such as concierge and
accommodation programs, participation and support of community
events and organizations, non-profit benefits and auctions, chef
demonstrations and cooking classes.
Competition
The restaurant business is intensely competitive with respect to
food quality, price-value relationships, ambiance, service and
location, and many existing restaurants compete with P.F.
Chang’s at each of our locations. Key competitive factors
in the industry include the quality and value of the food,
quality of service, price, dining experience, restaurant
location and the ambiance of the facilities. For the Bistro, our
primary competitors include mid-priced, 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 Asian restaurants. There are many well-established
competitors with substantially greater financial, marketing,
personnel and other resources than ours. In addition, many of
our competitors are well established in the markets where our
operations are, or in which they may be, located. While we
believe that our restaurants are distinctive in design and
operating concept, other companies may develop restaurants that
operate with similar concepts.
Management Information Systems
P.F. Chang’s utilizes an integrated information system to
manage the flow of information within each restaurant and
between the restaurants and the corporate office. This system
includes a point-of-sales local area network that helps
facilitate the operations of the restaurant by recording sales
transactions and printing orders in the appropriate locations
within the restaurant. Additionally, the point of sales system
is utilized to authorize, batch and transmit credit card
transactions, to record employee time clock information, to
schedule
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labor and to produce a variety of management reports. Select
information that is captured from this system is transmitted to
the corporate office on a daily basis, which enables senior
management to continually monitor operating results. We believe
that our current point of sales system will be an adequate
platform to support our continued expansion.
Purchasing
P.F. Chang’s purchasing programs provide our restaurants
with high quality ingredients at competitive prices from
reliable sources. Consistent menu specifications, as well as
purchasing and receiving guidelines, ensure freshness and
quality. Because we utilize only fresh ingredients in all of our
menu offerings, inventory is maintained at a modest level. We
negotiate short-term and long-term contracts depending on demand
for our products. These contracts generally average in duration
from two to twelve months. With the exception of a portion of
our produce, which is purchased locally, we utilize Distribution
Market Advantage as the primary distributor of product to all of
our restaurants. Distribution Market Advantage is a cooperative
of multiple food distributors located throughout the United
States. We have a non-exclusive contract with Distribution
Market Advantage on terms and conditions that we believe are
consistent with those made available to similarly situated
restaurant companies. We believe that competitively priced
alternative distribution sources are available should they
become necessary. Asian-specific ingredients are usually sourced
directly from Hong Kong, China, Taiwan and Thailand. We have
developed an extensive network of importers in order to maintain
an adequate supply of items that conform to our brand and
product specifications.
Employees
At January 2, 2005, P.F. Chang’s employed
approximately 18,600 persons, 200 of whom were executive office
personnel, 1,200 of whom were unit management personnel and the
remainder of whom were hourly restaurant personnel. Our
employees are not covered by a collective bargaining agreement.
We consider our employee relations to be good.
Unit Economics
P.F. Chang’s believes that unit economics are critical to
the long-term success of any restaurant concept. Accordingly, we
focus on unit-level returns, over time, as a key measurement of
our success or failure. For analysis purposes, we group our
restaurants by the year in which they opened. We then compare
each “class” to its peers over time as well as the
performance of the entire system. These unit economics are
available on our website.
Access to Information
Our Internet address is www.pfchangs.com. We make
available at this address, free of charge, our annual report on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
SEC.
Risk Factors
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Failure of our existing or new restaurants to achieve
predicted results could have a negative impact on our revenues
and performance results. |
We operated 115 full service, or Bistro, restaurants and 53
limited service, or Pei Wei, restaurants as of January 2,
2005, 38 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 cannot assure
you that any new restaurant that we open will have similar
operating results to those of prior restaurants. Our new
restaurants 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.
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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, general
managers and executive chefs, 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.
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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 168 restaurants as of January 2,
2005. We expect to open 18 Bistros and 26 Pei Wei restaurants in
2005. Our ability to expand successfully will depend on a number
of factors, including:
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identification and availability of suitable locations; |
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competition for restaurant sites; |
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negotiation of favorable lease arrangements; |
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timely development of commercial, residential, street or highway
construction near our restaurants; |
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management of the costs of construction and development of new
restaurants; |
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securing required governmental approvals and permits; |
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recruitment of qualified operating personnel, particularly
managers and chefs; |
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weather conditions; |
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competition in new markets; and |
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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 restaurants 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.
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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.
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The inability to develop and construct our restaurants
within projected budgets and time periods will adversely affect
our business and financial condition. |
Each P.F. Chang’s full service and limited service
restaurant is distinctively designed to accommodate particular
characteristics of each location and to blend local or regional
design themes with our principal trade
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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:
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labor disputes; |
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shortages of materials and skilled labor; |
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weather interference; |
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unforeseen engineering problems; |
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environmental problems; |
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construction or zoning problems; |
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local government regulations; |
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modifications in design to the size and scope of the
projects; and |
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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.
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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 wait staff, 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.
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Changes in general economic and political conditions
affect consumer spending and may harm our revenues and operating
results. |
Our country’s economic condition affects our
customers’ level of discretionary spending. 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 continued military responses to terrorist attacks on the
United States and possible future terrorist attacks may
exacerbate current economic conditions and lead to 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.
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Fluctuations in operating results may cause profitability
to decline. |
Our operating results may fluctuate significantly as a result of
a variety of factors, including:
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general economic conditions; |
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consumer confidence in the economy; |
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changes in consumer preferences; |
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competitive factors, including the performance of restaurant
stocks; |
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weather conditions; |
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timing of new restaurant openings and related expenses; |
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revenues contributed by new restaurants; and |
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increases or decreases in comparable restaurant revenues. |
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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.
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Future changes in financial accounting standards may cause
adverse unexpected operating results and affect our reported
results of operations. |
Changes 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, the recent change requiring that we record compensation
expense in the statement of operations for employee stock
options using the fair value method may likely 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 differing interpretations with respect to our current
practices may adversely affect our reported financial results.
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Our financial results may also fluctuate significantly as
a result of recent changes in how we account for certain aspects
of our partnership program. |
As more fully described in Note 1 to our consolidated
financial statements as of December 28, 2003, we revised
our accounting method for certain aspects of our partnership
program. The most significant change that affects future
operating results relates to non-cash charges to expense for the
excess of the imputed fair value of partner investments over the
amount paid by our partners. These amounts are now recorded as
the partnership interests are effective, which is typically when
new stores open. The timing and volume of restaurant openings,
the extent of eligible persons electing to invest and the
effective dates of their partnership interests, and the
determination of the related fair value for the investment will
create fluctuations in our operating results.
For the reasons noted above, 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.”
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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 Asian
restaurants. There are a number of 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
10
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.
|
|
|
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:
|
|
|
| |
• |
environmental; |
| |
| |
• |
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 and Immigration Service (“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.
Our business can be adversely affected by negative publicity
resulting from complaints or litigation alleging poor food
quality, food-borne illness, or other health concerns or
operating issues stemming from one or a limited number of
restaurants. Unfavorable publicity could taint public perception
of our brand.
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 and other regulations could
negatively impact our business and our reputation.
|
|
|
Increases in the minimum wage may have a material adverse
effect on our business and financial results. |
Many 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 2, 2002. There may be
similar
11
increases implemented in other jurisdictions in which we operate
or seek to operate. The possibility exists that the federal
minimum wage or the minimum wage subject to other jurisdictions
will be increased in the near future. These minimum wage
increases may have a material adverse effect on P.F.
Chang’s business, financial condition, results of
operations or cash flows.
|
|
|
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 a
portion of our produce, which is purchased locally by each
restaurant, we rely on Distribution Market Advantage as the
primary distributor of 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.
|
|
|
Rising insurance costs could negatively impact
profitability. |
The cost of insurance (workers compensation insurance, general
liability insurance, health insurance and directors and officers
liability insurance) has risen significantly over the past few
years and is expected to continue to increase in 2005. These
increases, as well as potential state legislation requirements
for employers to provide health insurance to employees, could
have a negative impact on our profitability if we are not able
to negate the effect of such increases by continuing to improve
our operating efficiencies. We self-insure a substantial portion
of our workers compensation, general liability and health care
costs and unfavorable changes in trends could also have a
negative impact on our profitability.
|
|
|
Litigation could have a material adverse effect on our
business. |
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.
Additionally, the costs and expense of defending ourselves
against lawsuits or claims, regardless of merit, could have an
adverse impact on our profitability (See Item 3 of this
Form 10-K).
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. 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.
12
Special Note Regarding Forward-Looking Statements
Some of the statements in this Form 10-K and the documents
we incorporate by reference constitute forward-looking
statements. In some cases, you can identify forward-looking
statements by terms such as may, will, should, expect, plan,
intend, forecast, anticipate, believe, estimate, predict,
potential, continue or the negative of these terms or other
comparable terminology. The forward-looking statements contained
in this document involve known and unknown risks, uncertainties
and situations that may cause our or our industry’s actual
results, level of activity, performance or achievements to be
materially different from any future results, levels of
activity, performance or achievements expressed or implied by
these statements. Factors that might cause actual events or
results to differ materially from those indicated by these
forward-looking statements may include the matters listed under
Risk Factors and elsewhere in this Form 10-K, including,
but not limited to, anticipated restaurant openings, anticipated
costs and sizes of future restaurants and the adequacy of
anticipated sources of cash to fund our future capital
requirements. Because we cannot guarantee future results, levels
of activity, performance or achievements, you should not place
undue reliance on these forward-looking statements.
The following table depicts existing Bistros as of the date of
this 10-K.
| |
|
|
|
|
|
|
|
|
| |
|
Number of | |
|
Average Square | |
| State |
|
Locations | |
|
Footage | |
| |
|
| |
|
| |
|
Alabama
|
|
|
1 |
|
|
|
6,650 |
|
|
Arizona
|
|
|
6 |
|
|
|
6,500 |
|
|
California
|
|
|
22 |
|
|
|
6,750 |
|
|
Colorado
|
|
|
5 |
|
|
|
7,050 |
|
|
Florida
|
|
|
9 |
|
|
|
6,550 |
|
|
Georgia
|
|
|
3 |
|
|
|
5,950 |
|
|
Illinois
|
|
|
3 |
|
|
|
7,800 |
|
|
Indiana
|
|
|
2 |
|
|
|
7,050 |
|
|
Iowa
|
|
|
1 |
|
|
|
7,100 |
|
|
Kansas
|
|
|
1 |
|
|
|
6,500 |
|
|
Louisiana
|
|
|
1 |
|
|
|
5,850 |
|
|
Massachusetts
|
|
|
1 |
|
|
|
5,750 |
|
|
Maryland
|
|
|
2 |
|
|
|
6,750 |
|
|
Michigan
|
|
|
3 |
|
|
|
6,750 |
|
|
Minnesota
|
|
|
2 |
|
|
|
7,150 |
|
|
Missouri
|
|
|
2 |
|
|
|
7,050 |
|
|
North Carolina
|
|
|
3 |
|
|
|
6,850 |
|
|
Nebraska
|
|
|
1 |
|
|
|
7,100 |
|
|
New Jersey
|
|
|
2 |
|
|
|
7,650 |
|
|
New Mexico
|
|
|
1 |
|
|
|
7,450 |
|
|
Nevada
|
|
|
5 |
|
|
|
8,600 |
|
|
New York
|
|
|
4 |
|
|
|
7,200 |
|
|
Ohio
|
|
|
5 |
|
|
|
6,900 |
|
|
Oklahoma
|
|
|
2 |
|
|
|
7,500 |
|
|
Oregon
|
|
|
2 |
|
|
|
6,300 |
|
|
Pennsylvania
|
|
|
2 |
|
|
|
7,200 |
|
|
Tennessee
|
|
|
4 |
|
|
|
6,750 |
|
|
Texas
|
|
|
12 |
|
|
|
6,800 |
|
13
| |
|
|
|
|
|
|
|
|
| |
|
Number of | |
|
Average Square | |
| State |
|
Locations | |
|
Footage | |
| |
|
| |
|
| |
|
Utah
|
|
|
2 |
|
|
|
5,300 |
|
|
Virginia
|
|
|
4 |
|
|
|
6,750 |
|
|
Washington
|
|
|
3 |
|
|
|
6,750 |
|
|
Wisconsin
|
|
|
1 |
|
|
|
6,450 |
|
The following table depicts existing Pei Wei locations as of the
date of this 10-K.
| |
|
|
|
|
|
|
|
|
| |
|
Number of | |
|
Average Square | |
| State |
|
Locations | |
|
Footage | |
| |
|
| |
|
| |
|
Arizona
|
|
|
13 |
|
|
|
3,050 |
|
|
California
|
|
|
7 |
|
|
|
3,250 |
|
|
Colorado
|
|
|
4 |
|
|
|
3,100 |
|
|
Nevada
|
|
|
1 |
|
|
|
3,250 |
|
|
New Mexico
|
|
|
1 |
|
|
|
3,350 |
|
|
Oklahoma
|
|
|
2 |
|
|
|
3,250 |
|
|
Texas
|
|
|
24 |
|
|
|
3,300 |
|
|
Utah
|
|
|
2 |
|
|
|
3,250 |
|
In 2005, P.F. Chang’s intends to open 18 Bistros (most in
existing markets with six in new markets) and 26 Pei Weis (most
in existing markets with five in new markets). As of the date of
this 10-K, two of the 18 planned new Bistros and one of the
26 planned new Pei Weis were open.
Expansion Strategy and Site Selection
P.F. Chang’s is actively developing Bistro and Pei Wei
restaurants in both new and existing markets and has planned an
expansion strategy targeted at major metropolitan areas
throughout the United States. Within each targeted metropolitan
area, we identify specific trade areas with high traffic
patterns and suitable demographic characteristics, including
population density, consumer attitudes and affluence. Within an
appropriate trade area, we evaluate specific sites that provide
visibility, accessibility and exposure to traffic volume. Our
site criteria are flexible, as is evidenced by the variety of
environments and facilities in which we currently operate. These
facilities include freestanding buildings, regional malls, urban
properties and entertainment and strip centers.
We intend to continue to develop Bistros that typically range in
size from 6,000 to 7,500 square feet, and that require, on
average, a total capitalized investment of approximately
$3.9 million per restaurant (which has been reduced by an
estimate of landlord reimbursements). This total investment
includes the capitalized lease value of the property, which can
vary greatly depending on the specific trade area. We expect
that our planned future restaurants will require, on average, a
total cash investment per restaurant of approximately
$2.7 million (which has been reduced by an estimate of
landlord reimbursements). Preopening expenses are expected to
average approximately $365,000 per restaurant. We currently
lease the sites for all of our Bistro restaurants and do not
intend to purchase real estate for our sites in the future.
We intend to continue to develop our Pei Wei restaurants in
markets in which the Bistro has a strong presence in an effort
to leverage the Bistro’s established brand identity. The
restaurants will be approximately 3,000 to 3,300 square
feet in size and will require, on average, a total capitalized
investment of approximately $1.4 million per restaurant
(which has been reduced by an estimate of landlord
reimbursements). This total investment cost includes the
capitalized lease value of the property, which can vary greatly
depending on the specific trade area. We expect the cash
investment to approximate $780,000 per restaurant (which
has been reduced by an estimate of landlord reimbursements).
Preopening expenses for our Pei Wei restaurants are expected to
average approximately $115,000 per restaurant. We currently
lease the sites for all of our Pei Wei restaurants and do not
intend to purchase real estate for our sites in the future.
14
We also expect that for each new restaurant opened in 2005 that
we will incur charges relating to our partnership program
totaling approximately $235,000 for each Bistro unit depending
on the total percentage interests purchased by minority partners
and approximately $65,000 for each Pei Wei unit if all eligible
employees elect to invest as minority partners.
Current restaurant leases have expiration dates ranging from
2005 to 2024, with the majority of the leases providing for
five-year options to renew for at least one additional term.
Generally, our leases provide for a minimum annual rent, and
most leases require additional percentage rent based on sales
volume in excess of minimum levels at the particular location.
Most of the leases require us to pay the costs of insurance,
taxes, and a portion of the lessor’s operating costs. We do
not anticipate any difficulties renewing existing leases as they
expire.
P.F. Chang’s executive offices are currently located in
approximately 30,000 square feet of leased space in
Scottsdale, Arizona. This lease expires in mid to late summer
2005. In September 2004, we purchased a 50,000 square foot
office building located in Scottsdale, Arizona for
$9.2 million. We will house our home office in this
building beginning mid to late summer 2005.
|
|
| Item 3. |
Legal Proceedings |
We are engaged in 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.
|
|
| Item 4. |
Submission of Matters to a Vote of Security Holders |
None.
PART II
|
|
| Item 5. |
Market for the Registrant’s Common Stock and Related
Stockholder Matters |
P.F. Chang’s common stock is traded on the Nasdaq Stock
Market under the symbol “PFCB”.
The following table sets forth the high and low price per share
of our common stock on the Nasdaq Stock Market for each
quarterly period for our two most recent fiscal years.
| |
|
|
|
|
|
|
|
|
| Quarter Ended |
|
High | |
|
Low | |
| |
|
| |
|
| |
|
March 30, 2003
|
|
|
39.89 |
|
|
|
30.25 |
|
|
June 29, 2003
|
|
|
49.80 |
|
|
|
36.28 |
|
|
September 28, 2003
|
|
|
51.22 |
|
|
|
44.01 |
|
|
December 28, 2003
|
|
|
54.59 |
|
|
|
42.55 |
|
|
March 28, 2004
|
|
|
52.24 |
|
|
|
46.27 |
|
|
June 27, 2004
|
|
|
51.93 |
|
|
|
41.87 |
|
|
September 26, 2004
|
|
|
46.07 |
|
|
|
39.50 |
|
|
January 2, 2005
|
|
|
57.87 |
|
|
|
44.80 |
|
P.F. Chang’s has not historically paid any cash dividends
and intends to continue to retain earnings for use in the
operation and expansion of its business and therefore does not
anticipate paying any cash dividends in the foreseeable future.
On March 14, 2005, there were 133 holders of record of P.F.
Chang’s common stock.
15
|
|
| Item 6. |
Selected Financial Data |
The following selected consolidated financial data should be
read in conjunction with the consolidated financial statements
and notes thereto and Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
Selected Consolidated Financial Data
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year | |
|
Fiscal Year | |
|
Fiscal Year | |
|
Fiscal Year | |
|
Fiscal Year | |
| |
|
2000(1)(2) | |
|
2001(1)(2) | |
|
2002(1)(2) | |
|
2003(1)(2) | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
| |
|
(Restated) | |
|
(Restated) | |
|
(Restated) | |
|
(Restated) | |
|
|
|
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
225,435 |
|
|
$ |
306,441 |
|
|
$ |
406,609 |
|
|
$ |
539,917 |
|
|
$ |
706,941 |
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Restaurant operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cost of sales
|
|
|
64,720 |
|
|
|
86,368 |
|
|
|
112,571 |
|
|
|
152,788 |
|
|
|
200,736 |
|
| |
|
Labor
|
|
|
69,685 |
|
|
|
97,094 |
|
|
|
133,536 |
|
|
|
174,989 |
|
|
|
231,575 |
|
| |
|
Partner bonus expense, imputed
|
|
|
761 |
|
|
|
992 |
|
|
|
1,192 |
|
|
|
1,439 |
|
|
|
1,750 |
|
| |
|
Operating
|
|
|
30,842 |
|
|
|
41,597 |
|
|
|
55,293 |
|
|
|
73,660 |
|
|
|
99,528 |
|
| |
|
Occupancy
|
|
|
13,904 |
|
|
|
18,716 |
|
|
|
24,129 |
|
|
|
28,914 |
|
|
|
37,693 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Total restaurant operating costs
|
|
|
179,912 |
|
|
|
244,767 |
|
|
|
326,721 |
|
|
|
431,790 |
|
|
|
571,282 |
|
| |
General and administrative
|
|
|
12,265 |
|
|
|
16,316 |
|
|
|
20,513 |
|
|
|
28,692 |
|
|
|
34,662 |
|
| |
Depreciation and amortization
|
|
|
8,902 |
|
|
|
12,476 |
|
|
|
15,847 |
|
|
|
21,817 |
|
|
|
29,155 |
|
| |
Preopening expense
|
|
|
5,280 |
|
|
|
5,180 |
|
|
|
6,428 |
|
|
|
8,790 |
|
|
|
7,995 |
|
| |
Partner investment expense(3)
|
|
|
1,385 |
|
|
|
2,744 |
|
|
|
5,798 |
|
|
|
4,196 |
|
|
|
17,671 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
17,691 |
|
|
|
24,958 |
|
|
|
31,302 |
|
|
|
44,632 |
|
|
|
46,176 |
|
|
Interest income (expense) and other income, net
|
|
|
(39 |
) |
|
|
900 |
|
|
|
41 |
|
|
|
466 |
|
|
|
612 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and provision for income taxes
|
|
|
17,652 |
|
|
|
25,858 |
|
|
|
31,343 |
|
|
|
45,098 |
|
|
|
46,788 |
|
|
Minority interest
|
|
|
(3,556 |
) |
|
|
(4,558 |
) |
|
|
(5,243 |
) |
|
|
(7,887 |
) |
|
|
(10,078 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
14,096 |
|
|
|
21,300 |
|
|
|
26,100 |
|
|
|
37,211 |
|
|
|
36,710 |
|
|
Provision for income taxes
|
|
|
(5,365 |
) |
|
|
(7,530 |
) |
|
|
(8,875 |
) |
|
|
(12,424 |
) |
|
|
(10,656 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
8,731 |
|
|
$ |
13,770 |
|
|
$ |
17,225 |
|
|
$ |
24,787 |
|
|
$ |
26,054 |
|
|
Basic net income per share
|
|
$ |
0.42 |
|
|
$ |
0.58 |
|
|
$ |
0.70 |
|
|
$ |
0.98 |
|
|
$ |
1.01 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$ |
0.38 |
|
|
$ |
0.54 |
|
|
$ |
0.66 |
|
|
$ |
0.94 |
|
|
$ |
0.98 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculation of basic net income per share
|
|
|
20,752 |
|
|
|
23,728 |
|
|
|
24,688 |
|
|
|
25,345 |
|
|
|
25,727 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculation of diluted net income per share
|
|
|
22,708 |
|
|
|
25,470 |
|
|
|
25,924 |
|
|
|
26,250 |
|
|
|
26,575 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of | |
|
As of | |
|
As of | |
|
As of | |
|
As of | |
| |
|
December 31, | |
|
December 30, | |
|
December 29, | |
|
December 28, | |
|
January 2, | |
| |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
| |
|
(Restated) | |
|
(Restated) | |
|
(Restated) | |
|
(Restated) | |
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
6,390 |
|
|
$ |
20,799 |
|
|
$ |
39,089 |
|
|
$ |
45,478 |
|
|
$ |
66,409 |
|
|
Total assets
|
|
|
133,066 |
|
|
|
191,338 |
|
|
|
238,850 |
|
|
|
303,821 |
|
|
|
383,515 |
|
|
Long-term debt
|
|
|
1,485 |
|
|
|
1,644 |
|
|
|
1,441 |
|
|
|
136 |
|
|
|
545 |
|
|
Common stockholders’ equity
|
|
|
75,652 |
|
|
|
133,296 |
|
|
|
168,019 |
|
|
|
204,332 |
|
|
|
244,957 |
|
16
|
|
| (1) |
P.F. Chang’s has restated its previously reported
consolidated financial statements for changes in Occupancy,
General and Administrative, Preopening and Depreciation expenses
for all previous years presented due to the treatment of lease
accounting. See Note 1 to our consolidated financial
statements. |
| |
| (2) |
P.F. Chang’s has reclassified certain of our restaurants
costs relating to complimentary and employee meals from
operating expenses to contra-revenue accounts as discussed in
Note 2 to our consolidated financial statements. This
reclassification has no effect on net income. The total amount
reclassified is reflected as a reduction of operating expenses
and a corresponding reduction of revenues in the same amount in
each year affected. The reclassification resulted in a reduction
of revenues and a reduction of operating expenses of
$19.3 million, $15.5 million, $12.3 million and
$9.5 million in fiscal years 2003, 2002, 2001 and 2000,
respectively. |
| |
| (3) |
Partner investment expense increased during 2004 as a result of
a $12.5 million modification of certain partnership
agreements as discussed in Note 2 to our consolidated
financial statements. |
No cash dividends were paid during any of the five previous
years.
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
Overview
As of January 2, 2005, we owned and operated 115 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 Bistro 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 January 2, 2005, we also owned and operated 53
limited service restaurants, or Pei Weis, serving Asian cuisine
that cater to a quicker, more casual dining experience as
compared to P.F. Chang’s China Bistro. These restaurants
are located in Arizona, Colorado, California, Nevada, New
Mexico, Oklahoma, Utah and Texas.
We intend to open 18 new Bistros in 2005. We will continue our
development in existing markets and plan to enter six new
markets in 2005. We have signed lease agreements for all of our
development planned for fiscal 2005. We intend to continue to
develop full service restaurants that typically range in size
from 6,000 to 7,500 square feet, and that require, on
average, a total cash investment of approximately
$2.7 million and total invested capital of approximately
$3.9 million per restaurant (which have been reduced by an
estimate of landlord reimbursements). Preopening expenses are
expected to average approximately $365,000 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 26 Pei Wei restaurants in 2005. We
will continue our development in existing markets and plan to
enter five new markets in 2005. Our Pei Wei restaurants are
generally around 3,000 to 3,300 square feet in size and
require an average total cash investment of approximately
$780,000 and total invested capital of approximately
$1.4 million per restaurant (which have been reduced by an
estimate of landlord reimbursements). Preopening expenses at Pei
Wei are expected to average approximately $115,000 per
restaurant.
17
Results of Operations
The operating results of P.F. Chang’s for the fiscal years
ended December 28, 2003 (fiscal year 2003) and
January 2, 2005 (fiscal year 2004), expressed as a
percentage of revenues, were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year 2003(1)(2) | |
|
Fiscal Year 2004 | |
| |
|
| |
|
| |
| |
|
Consolidated | |
|
Bistro | |
|
Pei Wei | |
|
Consolidated | |
|
Bistro | |
|
Pei Wei | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Restated) | |
|
(Restated) | |
|
(Restated) | |
|
|
|
|
|
|
|
Statements of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Restaurant operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cost of sales
|
|
|
28.3 |
|
|
|
28.2 |
|
|
|
29.6 |
|
|
|
28.4 |
|
|
|
28.3 |
|
|
|
28.9 |
|
| |
|
Labor
|
|
|
32.4 |
|
|
|
32.3 |
|
|
|
33.5 |
|
|
|
32.8 |
|
|
|
32.7 |
|
|
|
33.4 |
|
| |
|
Partner bonus expense, imputed
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.1 |
|
| |
|
Operating
|
|
|
13.6 |
|
|
|
13.6 |
|
|
|
14.3 |
|
|
|
14.1 |
|
|
|
13.9 |
|
|
|
15.1 |
|
| |
|
Occupancy
|
|
|
5.4 |
|
|
|
5.2 |
|
|
|
6.3 |
|
|
|
5.3 |
|
|
|
5.2 |
|
|
|
6.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Total restaurant operating costs
|
|
|
80.0 |
|
|
|
79.5 |
|
|
|
83.9 |
|
|
|
80.8 |
|
|
|
80.4 |
|
|
|
83.6 |
|
| |
General and administrative
|
|
|
5.3 |
|
|
|
5.1 |
|
|
|
7.4 |
|
|
|
4.9 |
|
|
|
4.7 |
|
|
|
6.4 |
|
| |
Depreciation and amortization
|
|
|
4.0 |
|
|
|
4.0 |
|
|
|
4.5 |
|
|
|
4.1 |
|
|
|
4.1 |
|
|
|
4.6 |
|
| |
Preopening expense
|
|
|
1.6 |
|
|
|
1.4 |
|
|
|
3.3 |
|
|
|
1.1 |
|
|
|
1.0 |
|
|
|
2.2 |
|
| |
Partner investment expense
|
|
|
0.8 |
|
|
|
0.8 |
|
|
|
0.5 |
|
|
|
2.5 |
|
|
|
2.5 |
|
|
|
2.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
8.3 |
|
|
|
9.1 |
|
|
|
0.4 |
|
|
|
6.5 |
|
|
|
7.5 |
|
|
|
0.4 |
|
|
Interest and other income (expense), net
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.0 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.0 |
|
|
Minority interest
|
|
|
(1.5 |
) |
|
|
(1.5 |
) |
|
|
(1.0 |
) |
|
|
(1.4 |
) |
|
|
(1.5 |
) |
|
|
(0.9 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
6.9 |
|
|
|
7.7 |
% |
|
|
(0.6 |
)% |
|
|
5.2 |
|
|
|
6.1 |
% |
|
|
(0.5 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
(2.3 |
) |
|
|
|
|
|
|
|
|
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
4.6 |
% |
|
|
|
|
|
|
|
|
|
|
3.7 |
% |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain percentage amounts do not sum to total due to rounding.
P.F. Chang’s operates on a 52/53-week year, with the fiscal
year ending on the Sunday closest to December 31. Fiscal
year 2003 was comprised of 52 weeks, and fiscal year 2004
was comprised of 53 weeks.
(1) P.F. Chang’s has restated its previously reported
consolidated financial statements for changes in Occupancy,
General and administrative, Preopening and Depreciation expenses
for all previous years presented due to changes in its lease
accounting. See Note 1 to our consolidated financial
statements.
(2) P.F. Chang’s has reclassified certain of its
restaurants costs relating to complimentary and employee meals
from operating expenses to contra-revenue accounts as discussed
in Note 2 to our consolidated financial statements.
18
|
|
|
Year Ended January 2, 2005 Compared to Year Ended
December 28, 2003 |
P.F. Chang’s revenues are derived entirely from food and
beverage sales. Consolidated revenues increased by
$167.0 million, or 30.9%, to $706.9 million for the
year ended January 2, 2005 from $539.9 million for the
year ended December 28, 2003. Each segment contributed as
follows:
|
|
| |
Bistro: Revenues increased by $124.9 million at our
Bistro restaurants. This increase was attributable to revenues
of $44.1 million generated by new restaurants opened in
2004, a $55.6 million increase in revenues in 2004 for
restaurants that opened in 2003 and a $25.2 million
increase in revenues for restaurants opened prior to 2003. The
increase in revenues, excluding new stores, is attributable to a
1% price increase in the second quarter of 2004 as well as
increased customer traffic growth. |
| |
| |
Pei Wei: Revenues increased by $42.1 million at our
Pei Wei restaurants. The increase was primarily attributable to
revenues of $23.6 million generated by our 20 new
restaurants opened in 2004, a $17.1 million increase in
revenues in 2004 for the 17 restaurants that opened in 2003 and
an approximate $1.4 million increase in revenues for
restaurants opened prior to 2003. The increase in revenues for
restaurants opened prior to 2003 was due to a price increase of
approximately 1.5% implemented during the second quarter of 2004. |
Cost of Sales. Cost of sales is composed of the cost of
food and beverages. Consolidated cost of sales increased by
$47.9 million, or 31.4%, to $200.7 million for the
year ended January 2, 2005 from $152.8 million for the
year ended December 28, 2003. Cost of sales increased as a
percentage of revenues to 28.4% for the year ended
January 2, 2005 from 28.3% for the year ended
December 28, 2003. Each segment contributed as follows:
|
|
| |
Bistro: Cost of sales at the Bistro increased as a
percentage of revenues to 28.3% for the year ended
January 2, 2005 from 28.2% for the year ended
December 28, 2003. This increase was primarily the result
of higher meat, oil and rice prices, which is partially offset
by lower seafood and produce prices. |
| |
| |
Pei Wei: Cost of sales at Pei Wei decreased as a
percentage of revenues to 28.9% for the year ended
January 2, 2005 from 29.6% for the year ended
December 28, 2003. This decrease was primarily attributable
to improved purchasing efficiencies associated with a more
mature store base as well as a decrease in seafood and produce
prices slightly offset by higher meat, oil and rice prices. |
Labor. Labor expenses consist of restaurant management
salaries, hourly staff payroll costs and other payroll-related
items. Consolidated labor expenses increased by
$56.6 million, or 32.3%, to $231.6 million for the
year ended January 2, 2005 from $175.0 million for the
year ended December 28, 2003. Labor expenses as a
percentage of revenues increased to 32.8% for the year ended
January 2, 2005 from 32.4% for the year ended
December 28, 2003. Each segment contributed as follows:
|
|
| |
Bistro: As a percentage of revenues, labor expenses at
the Bistro increased to 32.7% for the year ended January 2,
2005 from 32.3% for the year ended December 28, 2003. This
increase was a result of increased insurance costs due to
additional employees enrolled in medical and dental plans as
well as an increase in the company’s contribution towards
hourly employee health insurance costs. |
| |
| |
Pei Wei: As a percentage of revenues, labor expenses at
Pei Wei decreased to 33.4% for the year ended January 2,
2005 from 33.5% for the year ended December 28, 2003. This
decrease was a result of improvement in efficiencies given a
more mature restaurant base offset by increased insurance costs
as well as an increase in the company’s contribution
towards hourly employee health insurance costs. |
Partner Bonus Expense, Imputed. Imputed partner bonus
expense consists of a charge for the portion of our
partners’ allocated profits (minority interests) which our
partners would have earned under our management bonus plan had
those partners not chosen to become equity owners in their
restaurants. Consolidated partner bonus expense, imputed
increased by $0.4 million, or 21.6%, to $1.8 million
for the year
19
ended January 2, 2005 from $1.4 million for the year
ended December 28, 2003. Partner bonus expense, imputed as
a percentage of revenues decreased nominally to 0.2% for the
year ended January 2, 2005 from 0.3% for the year ended
December 28, 2003. Each segment contributed as follows:
|
|
| |
Bistro: Partner bonus expense, imputed at the Bistro
remained flat at 0.3% of sales for both years ended
January 2, 2005 and December 28, 2003 as expected. |
| |
| |
Pei Wei: Partner bonus expense, imputed at Pei Wei
decreased nominally to 0.1% of sales for the year ended
January 2, 2005 from 0.2% for the year ended
December 28, 2003 as expected. |
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
$25.8 million, or 35.1%, to $99.5 million for the year
ended January 2, 2005 from $73.7 million for the year
ended December 28, 2003. Operating expenses increased as a
percentage of revenues to 14.1% for the year ended
January 2, 2005 from 13.6% for the year ended
December 28, 2003. Each segment contributed as follows:
|
|
| |
Bistro: Operating expenses as a percentage of revenues
increased at our Bistro restaurants to 13.9% for the year ended
January 2, 2005 from 13.6% for the year ended
December 28, 2003. This increase was primarily the result
of higher utility costs and fuel surcharges from distributors. |
| |
| |
Pei Wei: Operating expenses as a percentage of revenues
increased at our Pei Wei restaurants to 15.1% for the year ended
January 2, 2005 from 14.3% for the year ended
December 28, 2003. This increase was primarily the result
of higher utility costs and fuel surcharges from distributors. |
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 $8.8 million, or 30.4%, to
$37.7 million for the year ended January 2, 2005 from
$28.9 million for the year ended December 28, 2003.
Occupancy costs as a percentage of revenues was 5.3% for the
year ended January 2, 2005 and 5.4% for the year ended
December 28, 2003. Each segment contributed as follows:
|
|
| |
Bistro: Occupancy costs at the Bistro remained consistent
as a percentage of revenues at 5.2% for both years ended
January 2, 2005 and December 28, 2003. The decrease
resulting from more favorable lease terms associated with new
restaurants was offset by higher insurance costs. |
| |
| |
Pei Wei: Occupancy costs at Pei Wei decreased as a
percentage of revenues to 6.1% for the year ended
January 2, 2005 from 6.3% for the year ended
December 28, 2003. This decrease was primarily the result
of increased sales leverage achieved on those occupancy costs
that are fixed in nature, slightly offset by higher insurance
costs. |
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 an 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 by $6.0 million, or 20.8%, to
$34.7 million for the year ended January 2, 2005 from
$28.7 million for the year ended December 28, 2003.
Consolidated general and administrative expenses decreased as a
percentage of revenues to 4.9% for the year ended
January 2, 2005 from 5.3% for the year ended
December 28, 2003. Each segment contributed as follows:
|
|
| |
Bistro: General and administrative expenses at the Bistro
increased by $3.8 million to $28.6 million for the
year ended January 2, 2005 from $24.8 million for the
year ended December 28, 2003. This increase was due
primarily to the addition of corporate management personnel and
increased incentive accruals, which resulted in approximately
$2.2 million of additional compensation. The increase was
also due to $0.8 million in legal fees associated with the
settlement of our California litigation in the first quarter of
2004, $0.3 million in increased costs related to our
voluntary SEC review and related restatement in the first
quarter of 2004, $0.6 million relating to Sarbanes-Oxley
404 consulting and |
20
|
|
| |
accounting services as well as an increase in occupancy as a
result of growth of our restaurant base and infrastructure.
These increases were partially offset by lower health insurance
costs due to changes in our health insurance plan, resulting
from higher contribution levels from our salaried employees.
General and administrative expenses decreased as a percentage of
revenues from 5.1% for the year ended December 28, 2003 to
4.7% for the year ended January 2, 2005. |
| |
| |
Pei Wei: General and administrative expenses at Pei Wei
increased by $2.2 million to $6.1 million for the year
ended January 2, 2005 from $3.9 million for the year
ended December 28, 2003. This increase was due primarily to
the addition of corporate management personnel including
additional development team resources to support continued
expansion, and higher health insurance costs due to changes in
our health insurance plan resulting from lower contribution
levels from our salaried employees, which resulted in
approximately $1.8 million of additional compensation and
benefits expense. General and administrative expenses decreased
as a percentage of revenues from 7.4% for the year ended
December 28, 2003 to 6.4% for the year ended
January 2, 2005 as a result of our increasing revenue base
associated with our new store openings. |
Depreciation and Amortization. Depreciation and
amortization expenses include the depreciation and amortization
of fixed assets as well as the amortization of intangible
assets. Consolidated depreciation and amortization increased by
$7.4 million, or 33.6%, to $29.2 million for the year
ended January 2, 2005 from $21.8 million for the year
ended December 28, 2003. Depreciation and amortization as a
percentage of revenues was 4.1% for the year ended
January 2, 2005 and 4.0% for the year ended
December 28, 2003. Each segment contributed as follows:
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Bistro: At our Bistro restaurants, depreciation and
amortization increased by $5.4 million to
$24.8 million for the year ended January 2, 2005 from
$19.4 million for the year ended December 28, 2003.
This increase was primarily due to depreciation and amortization
on restaurants opened in 2004 totaling $2.0 million as well
as a full year’s depreciation and amortization on
restaurants opened in 2003, which resulted in an increase of
$2.5 million. |
| |
| |
Pei Wei: At our Pei Wei restaurants, depreciation and
amortization increased by $2.0 million to $4.4 million
for the year ended January 2, 2005 from $2.4 million
for the year ended December 28, 2003. This increase was
primarily due to depreciation and amortization on restaurants
opened in 2004 totaling $1.0 million as well as a full
year’s depreciation and amortization on restaurants opened
in 2003, which resulted in an increase of $0.9 million. |
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. Also
included in preopening expense is the accrual for straight-line
rent recorded for the period between construction completion and
the restaurant opening date, which generally approximates two
weeks. Consolidated preopening expenses for the year ended
January 2, 2005 decreased by $0.8 million, or 9.0%, to
$8.0 million from $8.8 million for the year ended
December 28, 2003. Preopening expenses as a percentage of
revenues were 1.1% for the year ended January 2, 2005 and
1.6% for the year ended December 28, 2003. Each segment
contributed as follows:
|
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| |
Bistro: Preopening expenses decreased by
$1.1 million to $5.9 million for the year ended
January 2, 2005 from $7.0 million for the year ended
December 28, 2003. The decrease is primarily due to lower
than average preopening costs for our 2004 openings as compared
to 2003 openings. There were 18 Bistros opened in both 2004 and
2003. |
| |
| |
Pei Wei: Preopening expenses increased by
$0.3 million to $2.1 million for the year ended
January 2, 2005 from $1.8 million for the year ended
December 28, 2003. This increase was primarily due to
opening 20 Pei Weis in 2004 as compared to 17 Pei Weis in 2003. |
Partner Investment Expense. Prior to the date of
modification of our operating agreements which occurred on
March 28, 2004, partner investment expense consisted of two
components: (i) unearned compensation calculated as the
difference between the imputed fair value of our partners’
ownership interests at the time the partners invest in their
restaurants and our partners’ cash contributions for those
ownership
21
interests recognized over a five year period and (ii) the
excess, if any, of the purchase price at the time we repurchase
a partner’s interest over the imputed fair value of that
interest. As of the date of modification, we have expensed all
remaining unearned compensation, which totaled
$12.5 million. Consequently, consolidated partner
investment expense for the year ended January 2, 2005
increased by $13.5 million to $17.7 million from
$4.2 million for the year ended December 28, 2003.
Partner investment expense increased as a percentage of revenues
to 2.5% for the year ended January 2, 2005 from 0.8% for
the year ended December 28, 2003. Each segment contributed
as follows:
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Bistro: Partner investment expense at the Bistro
increased by $11.2 million to $15.1 million for the
year ended January 2, 2005 from $3.9 million for the
year ended December 28, 2003. This increase was primarily
the result of the recognition of $10.9 million investment
expense relating to the remaining unamortized portion of the
unearned compensation recognized as of the date of modification
of our operating agreements, which occurred during the first
quarter of 2004, as well as the impact on investment expense of
18 stores’ partnership interests being effective during
2004. |
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| |
Pei Wei: Partner investment expense at Pei Wei increased
by $2.3 million to $2.6 million for the year ended
January 2, 2005 from $0.3 million for the year ended
December 28, 2003. This increase was primarily the result
of the recognition of $1.6 million of investment expense
relating to the remaining unamortized portion of the unearned
compensation recognized as of the date of modification of our
operating agreements, which occurred during the first quarter of
2004, as well as the impact on investment expense of 20
stores’ partnership interests being effective during 2004. |
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Interest and Other Income (Expense), Net |
Consolidated interest and other income (expense), net increased
by $0.1 million to $0.6 million for the year ended
January 2, 2005 from $0.5 million for the year ended
December 28, 2003. Consolidated interest and other income
(expense), net as a percentage of revenues was 0.1% for both
years ended January 2, 2005 and December 28, 2003.
Minority interest represents the portion of our net earnings
(losses) which is attributable to the collective ownership
interests of our minority investors. P.F. Chang’s employs a
partnership management structure in connection with 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 year ended January 2, 2005 increased by
$2.2 million, or 27.8%, to $10.1 million from
$7.9 million for the year ended December 28, 2003. As
a percentage of revenues, minority interest was 1.4% for the
year ended January 2, 2005 and 1.5% for the year ended
December 28, 2003. Each segment contributed as follows:
|
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| |
Bistro: Minority interest at the Bistro as a percentage
of revenues was 1.5% for both years ended January 2, 2005
and December 28, 2003. |
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Pei Wei: Minority interest at Pei Wei as a percentage of
revenues was 0.9% for the year ended January 2, 2005 and
1.0% for the year ended December 28, 2003. |
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Provision for Income Taxes |
Our effective tax rate for 2004 was 31.5%. In accordance with
APB 28 Interim Financial Reporting, we estimate our
effective tax rate for the entire year and apply it to our
interim operating results. When significant unusual charges
occur, such as the $12.5 million charge during the first
quarter of 2004 relating to the modification of our partnership
agreements and the $750,000 charge relating to a legal
settlement, the income tax effect for such charges is computed
separately and not included in the estimated annual effective
tax rate. For 2003, the effective tax rate was 33.5%. The income
tax provision for 2003 and 2004 differs from the expected
provision for income taxes, derived by applying the statutory
income tax rate, primarily as a result of FICA tip credits.
22
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|
Year Ended December 28, 2003 Compared to Year Ended
December 29, 2002 |
The operating results of P.F. Chang’s for the fiscal years
ended December 29, 2002 (fiscal year 2002) and
December 28, 2003 (fiscal year 2003), expressed as a
percentage of revenues, were as follows:
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Fiscal Year 2002(1)(2) | |
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Fiscal Year 2003(1)(2) | |
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Consolidated | |
|
Bistro | |
|
Pei Wei | |
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Consolidated | |
|
Bistro | |
|
Pei Wei | |
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(Restated) | |
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(Restated) | |
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(Restated) | |
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(Restated) | |
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(Restated) | |
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(Restated) | |
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Statements of Income Data:
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Revenues
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100.0 |
% |
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100.0 |
% |
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|
100.0 |
% |
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|
100.0 |
% |
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|
100.0 |
% |
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|
100.0 |
% |
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Costs and expenses:
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Restaurant operating costs:
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Cost of sales
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27.7 |
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27.6 |
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28.8 |
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28.3 |
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28.2 |
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29.6 |
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Labor
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32.8 |
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32.6 |
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37.7 |
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32.4 |
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32.3 |
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33.5 |
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Partner bonus expense, imputed
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0.3 |
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0.3 |
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0.1 |
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0.3 |
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0.3 |
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0.2 |
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Operating
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13.6 |
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13.5 |
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14.8 |
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13.6 |
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13.6 |
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14.3 |
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Occupancy
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5.9 |
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5.9 |
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7.1 |
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5.4 |
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5.2 |
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6.3 |
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Total restaurant operating costs
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80.4 |
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79.9 |
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88.5 |
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80.0 |
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79.5 |
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83.9 |
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General and administrative
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5.0 |
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4.6 |
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12.3 |
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5.3 |
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5.1 |
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7.4 |
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Depreciation and amortization
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3.9 |
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3.8 |
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5.1 |
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4.0 |
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4.0 |
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4.5 |
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Preopening expense
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1.6 |
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1.3 |
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6.3 |
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1.6 |
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1.4 |
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3.3 |
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Partner investment expense
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1.4 |
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1.5 |
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0.4 |
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0.8 |
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0.8 |
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0.5 |
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Income (loss) from operations
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7.7 |
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8.8 |
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(12.6 |
) |
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8.3 |
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9.1 |
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0.4 |
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Interest and other income (expense), net
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0.0 |
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0.0 |
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(0.1 |
) |
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0.1 |
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0.1 |
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0.0 |
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Minority interest
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(1.3 |
) |
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(1.4 |
) |
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0.0 |
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(1.5 |
) |
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(1.5 |
) |
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(1.0 |
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Income (loss) before provision for income taxes
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6.4 |
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7.5 |
% |
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(12.7 |
)% |
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6.9 |
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7.7 |
% |
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(0.6 |
)% |
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Provision for income taxes
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(2.2 |
) |
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(2.3 |
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Net income
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4.2 |
% |
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4.6 |
% |
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Certain percentage amounts do not sum to total due to rounding.
P.F. Chang’s operates on a 52/53-week year, with the fiscal
year ending on the Sunday closest to December 31. Fiscal
years 2002 and 2003 each were comprised of 52 weeks.
(1) P.F. Chang’s has restated its previously reported
consolidated financial statements for changes in Occupancy,
General and administrative, Preopening and Depreciation expense
for all previous years presented due to changes in its lease
accounting. See Note 1 to our consolidated financial
statements.
(2) P.F. Chang’s has reclassified certain of its
restaurants costs relating to complimentary and employee meals
from operating expenses to contra-revenue accounts as discussed
in Note 2 to our consolidated financial statements.
Consolidated revenues increased by $133.3 million, or
32.8%, to $539.9 million for the year ended
December 28, 2003 from $406.6 million for the year
ended December 29, 2002. Each segment contributed as
follows:
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Bistro: Revenues increased by $101.6 million at our
Bistro restaurants. This increase was attributable to revenues
of $43.2 million generated by new restaurants opened in
2003, a $39.9 million increase in revenues in 2003 for
restaurants that opened in 2002 and a $18.5 million
increase in revenues for |
23
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restaurants opened prior to 2002. The increase in revenues for
restaurants opened prior to 2003 was due to increased customer
visits as well as a modest price increase in the first quarter
of 2003. |
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Pei Wei: Revenues increased by $31.7 million at our
Pei Wei restaurants. The increase was primarily attributable to
revenues of $18.9 million generated by our seventeen new
restaurants opened in 2003, a $12.7 million increase in
revenues in 2003 for the eleven restaurants that opened in 2002
and an approximate $0.1 million increase in revenues for
restaurants opened prior to 2002. |
Cost of Sales. Consolidated cost of sales increased by
$40.2 million, or 35.7%, to $152.8 million for the
year ended December 28, 2003 from $112.6 million for
the year ended December 29, 2002. Cost of sales increased
as a percentage of revenues to 28.3% for the year ended
December 28, 2003 from 27.7% for the year ended
December 29, 2002. Each segment contributed as follows:
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Bistro: Cost of sales at the Bistro increased as a
percentage of revenues to 28.2% for the year ended
December 28, 2003 from 27.6% for the year ended
December 29, 2002. This increase was primarily the result
of higher poultry, produce and dry food prices. |
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Pei Wei: Cost of sales at Pei Wei increased as a
percentage of revenues to 29.6% for the year ended
December 28, 2003 from 28.8% for the year ended
December 29, 2002. This increase was primarily the result
of higher poultry, produce and dry food prices. |
Labor. Consolidated labor expenses increased by
$41.5 million, or 31.0%, to $175.0 million for the
year ended December 28, 2003 from $133.5 million for
the year ended December 29, 2002. Labor expenses as a
percentage of revenues decreased to 32.4% for the year ended
December 28, 2003 from 32.8% for the year ended
December 29, 2002. Each segment contributed as follows:
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Bistro: As a percentage of revenues, labor expenses at
the Bistro decreased to 32.3% for the year ended
December 28, 2003 from 32.6% for the year ended
December 29, 2002. This decrease was a result of increased
sales leverage on those labor costs that are fixed in nature, as
well as lower workers compensation expense given an improvement
in claims trends, partially offset by higher payroll taxes and
health insurance costs. |
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Pei Wei: As a percentage of revenues, labor expenses at
Pei Wei decreased to 33.5% for the year ended December 28,
2003 from 37.7% for the year ended December 29, 2002. This
decrease was primarily due to improvement in labor efficiencies
in our newer units as well as the reduced impact of newer
restaurants on our expanding revenue base. |
Partner Bonus Expense, Imputed. Consolidated partner
bonus expense, imputed increased by $0.2 million, or 20.7%,
to $1.4 million for the year ended December 28, 2003
from $1.2 million for the year ended December 29,
2002. Partner bonus expense, imputed remained consistent at 0.3%
of revenues for both years ended December 28, 2003 and
December 29, 2002. Each segment contributed as follows:
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Bistro: Partner bonus expense, imputed at the Bistro was
0.3% of revenues for both years ended December 28, 2003 and
December 29, 2002. |
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Pei Wei: Partner bonus expense, imputed at Pei Wei
increased nominally to 0.2% of sales for the year ended
December 28, 2003 from 0.1% for the year ended
December 29, 2002. |
Operating. Consolidated operating expenses increased by
$18.4 million, or 33.2%, to $73.7 million for the year
ended December 28, 2003 from $55.3 million for the
year ended December 29, 2002. Operating expenses remained
consistent as a percentage of revenues at 13.6% for both years
ended December 28, 2003 and December 29, 2002. Each
segment contributed as follows:
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Bistro: Operating expenses as a percentage of revenues
increased at our Bistro restaurants to 13.6% for the year ended
December 28, 2003 from 13.5% for the year ended
December 29, 2002. This increase was primarily attributable
to slightly higher utility and repairs and maintenance expenses. |
24
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Pei Wei: Operating expenses as a percentage of revenues
decreased at our Pei Wei restaurants to 14.3% for the year ended
December 28, 2003 from 14.8% for the year ended
December 29, 2002. This decrease was primarily attributable
to the reduced impact of new restaurants on our expanding
revenue base. |
Occupancy. Consolidated occupancy costs increased by
$4.8 million, or 19.8%, to $28.9 million for the year
ended December 28, 2003 from $24.1 million for the
year ended December 29, 2002. Occupancy costs decreased as
a percentage of revenues to 5.4% for the year ended
December 28, 2003 from 5.9% for the year ended
December 29, 2002. Each segment contributed as follows:
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Bistro: Occupancy costs at the Bistro decreased as a
percentage of revenues to 5.2% for the year ended
December 28, 2003 from 5.9% for the year ended
December 29, 2002. This decrease was primarily the result
of the increased sales leverage achieved on occupancy costs that
are fixed in nature, more favorable lease terms associated with
new restaurants and lower property tax expense. |
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Pei Wei: Occupancy costs at Pei Wei decreased as a
percentage of revenues to 6.3% for the year ended
December 28, 2003 from 7.1% for the year ended
December 29, 2002. This decrease was primarily the result
of increased sales leverage achieved on those occupancy costs
that are fixed in nature, more favorable lease terms associated
with new restaurants and lower property tax expense. |
General and Administrative. Consolidated general and
administrative expenses increased by $8.2 million to
$28.7 million for the year ended December 28, 2003
from $20.5 million for the year ended December 29,
2002. Consolidated general and administrative expenses increased
as a percentage of revenues to 5.3% for the year ended
December 28, 2003 from 5.0% for the year ended
December 29, 2002. Each segment contributed as follows:
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Bistro: General and administrative expenses at the Bistro
increased by $6.9 million to $24.8 million for the
year ended December 28, 2003 from $17.9 million for
the year ended December 29, 2002. This increase was due
primarily to the addition of corporate management personnel and
higher health insurance costs, which resulted in approximately
$4.3 million of additional compensation and benefits
expense. In addition to increased travel costs to support a
larger restaurant base, we also spent an additional
$1.4 million in accounting, consulting and legal fees in
our efforts to maintain high standards of corporate governance,
compliance with the Sarbanes-Oxley Act and new SEC regulations,
litigation defense and other corporate matters. General and
administrative expenses increased as a percentage of revenues
from 5.1% for the year ended December 28, 2003 to 4.6% for
the year ended December 29, 2002. |
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Pei Wei: General and administrative expenses at Pei Wei
increased by $1.3 million to $3.9 million for the year
ended December 28, 2003 from $2.6 million for the year
ended December 29, 2002. This increase was due primarily to
the addition of corporate management personnel, which resulted
in approximately $1.1 million of additional compensation
and benefits expense, as we continue to expand the concept and
add infrastructure to support our operations. Pei Wei also
experienced significant increases in general and administrative
expenses in the following areas: travel expenses associated with
new store openings, accounting, legal and occupancy costs.
General and administrative expenses decreased as a percentage of
revenues to 7.4% for the year ended December 28, 2003 from
12.3% for the year ended December 29, 2002 as a result of
our increasing revenue base associated with our new store
openings. |
Depreciation and Amortization. Consolidated depreciation
and amortization increased by $6.0 million, or 37.7%, to
$21.8 million for the year ended December 28, 2003
from $15.8 million for the year ended December 29,
2002. Depreciation and amortization as a percentage of revenues
was 4.0% for the year ended December 28, 2003 and 3.9% for
the year ended December 29, 2002. Each segment contributed
as follows:
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Bistro: At our Bistro restaurants, depreciation and
amortization increased by $4.7 million to
$19.4 million for the year ended December 28, 2003
from $14.7 million for the year ended December 29,
2002. This increase was primarily due to depreciation and
amortization on restaurants opened in 2003 totaling
$1.9 million as well as a full year’s depreciation and
amortization on restaurants opened in 2002. |
25
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Pei Wei: At our Pei Wei restaurants, depreciation and
amortization increased by $1.3 million to $2.4 million
for the year ended December 28, 2003 from $1.1 million
for the year ended December 29, 2002. This increase was
primarily due to depreciation and amortization on restaurants
opened in 2003 totaling $0.7 million as well as a full
year’s depreciation and amortization on restaurants opened
in 2002. |
Preopening Expense. Consolidated preopening expenses for
the year ended December 28, 2003 increased by
$2.4 million to $8.8 million from $6.4 million
for the year ended December 29, 2002. Preopening expenses
as a percentage of revenues were 1.6% for both years ended
December 28, 2003 and December 29, 2002. Each segment
contributed as follows:
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Bistro: Preopening expenses increased by
$2.0 million to $7.0 million for the year ended
December 28, 2003 from $5.0 million for the year ended
December 29, 2002. This increase was due to the opening of
18 Bistros in 2003 as compared to 14 Bistros in 2002, the
expenses associated with the opening of three Bistros in January
2004 compared to two in January 2003 and higher than anticipated
average expenses for our 2003 new unit openings. |
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Pei Wei: Preopening expenses increased by
$0.4 million to $1.8 million for the year ended
December 28, 2003 from $1.4 million for the year ended
December 29, 2002. This increase was primarily due to our
opening 17 Pei Weis in 2003 as compared to 11 Pei Weis in 2002,
partially offset by lower than anticipated average expenses for
our 2003 new unit openings. |
Partner Investment Expense. Partner investment expense
consists of two components: i) the difference between the
imputed fair value of our partners’ ownership interest at
the time the partner invested in their restaurant and our
partners’ cash capital contribution for that ownership
interest recognized over a five-year period and ii) the excess,
if any, of the purchase price at the time we repurchase a
partner’s interest over the imputed fair value of that
interest. Consolidated partner investment expense decreased by
$1.6 million to $4.2 million for the year ended
December 28, 2003 from $5.8 million for the year ended
December 28, 2002. Consolidated partner investment expense
decreased as a percentage of revenues to 0.8% for the year ended
December 28, 2003 from 1.4% for the year ended
December 29, 2002. Each segment contributed as follows:
|
|
| |
Bistro: Partner investment expense at the Bistro
decreased to $3.9 million for the year ended
December 28, 2003 from $5.7 million for the year ended
December 29, 2002. This decrease was primarily the result
of an additional $2.5 million recorded in fiscal 2002 as
compared to fiscal 2003 for the excess of the purchase price of
partner repurchases over the imputed fair value for those
partner purchases, offset by a $0.7 million increase in the
accrual of the excess of our partner’s imputed fair value
of their ownership interest over their actual cash contribution. |
| |
| |
Pei Wei: Partner investment expense at Pei Wei increased
to $0.3 million for the year ended December 28, 2003
from $0.1 million for the year ended December 29,
2002. This increase was the result of an increase in the accrual
of the excess of our partner’s imputed fair value of their
ownership interest over their actual cash contribution. |
|
|
|
Interest and Other Income (Expense), Net |
Consolidated net interest and other income (expense), net was
$0.5 million for the year ended December 28, 2003 as
compared to approximately $41,000 for the year ended
December 29, 2002. Consolidated net interest and other
income (expense), net increased as a percentage of revenues to
0.1% for the year ended December 28, 2003 from 0.0% for the
year ended December 29, 2002.
Consolidated minority interest for the year ended
December 28, 2003 increased to $7.9 million from
$5.2 million for the year ended December 29, 2002. As
a percentage of revenues, minority interest was 1.5% for the
year ended December 28, 2003 and 1.3% for the year ended
December 29, 2002. The impact of an increase in the
operating profit at many of our existing restaurants in 2003
compared to 2002 was slightly offset by the impact of Pei
Wei’s lower minority investor ownership on our total
minority interest expense.
26
|
|
|
Provision for Income Taxes |
Our effective tax rate for 2003 was 33.5%. For 2002, the
effective tax rate was 34.1%. The income tax provision for 2002
and 2003 differs from the expected provision for income taxes,
derived by applying the statutory income tax rate, primarily as
a result of FICA tip credits.
Quarterly Results
The following tables set forth certain unaudited quarterly
information for each of the eight fiscal quarters in the
two-year period ended January 2, 2005, 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.
Our 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.
The operating results of P.F. Chang’s for such eight fiscal
quarters expressed as a percentage of revenues, except for
revenues which are expressed in thousands, were as follows:
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Fiscal 2003 | |
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Fiscal 2004 | |
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First | |
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Second | |
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Third | |
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Fourth | |
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First | |
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Second | |
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Third | |
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Fourth | |
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Quarter | |
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Quarter | |
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Quarter | |
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Quarter | |
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Quarter | |
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Quarter | |
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Quarter | |
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Quarter | |
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(1)(2) | |
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(1)(2) | |
|
(1)(2)) | |
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(1)(2) | |
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(1)(2) | |
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(1)(2) | |
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(2) | |
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(Restated) | |
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(Restated) | |
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(Restated) | |
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(Restated) | |
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(Restated) | |
|
(Restated) | |
|
(Restated) | |
|
(Restated) | |
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Revenues
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|
$ |
126,953 |
|
|
$ |
131,905 |
|
|
$ |
134,926 |
|
|
$ |
146,133 |
|
|
$ |
164,056 |
|
|
$ |
169,602 |
|
|
$ |
174,013 |
|
|
$ |
199,270 |
|
|
Costs and expenses:
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|
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|
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Restaurant operating costs:
|
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|
|
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|
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|
|
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|
|
|
|
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|
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Cost of sales
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|
|
27.8 |
% |
|
|
28.2 |
% |
|
|
28.5 |
% |
|
|
28.7 |
% |
|
|
28.6 |
% |
|
|
28.2 |
% |
|
|
28.1 |
% |
|
|
28.7 |
% |
| |
|
Labor
|
|
|
32.8 |
|
|
|
32.4 |
|
|
|
32.4 |
|
|
|
32.0 |
|
|
|
33.3 |
|
|
|
33.3 |
|
|
|
32.3 |
|
|
|
32.2 |
|
| |
|
Partner bonus expense, imputed
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.3 |
|
| |
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Operating
|
|
|
13.4 |
|
|
|
13.7 |
|
|
|
13.7 |
|
|
|
13.8 |
|
|
|
13.8 |
|
|
|
14.0 |
|
|
|
14.2 |
|
|
|
14.3 |
|
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|
Occupancy
|
|
|
5.4 |
|
|
|
5.4 |
|
|
|
5.4 |
|
|
|
5.2 |
|
|
|
5.2 |
|
|
|
5.3 |
|
|
|
5.4 |
|
|
|
5.4 |
|
| |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Total restaurant operating costs
|
|
|
79.7 |
|
|
|
80.0 |
|
|
|
80.3 |
|
|
|
79.9 |
|
|
|
81.1 |
|
|
|
81.1 |
|
|
|
80.3 |
|
|
|
80.9 |
|
| |
General and administrative
|
|
|
5.3 |
|
|
|
5.6 |
|
|
|
5.1 |
|
|
|
5.3 |
|
|
|
5.3 |
|
|
|
4.9 |
|
|
|
5.1 |
|
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|
4.4 |
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Depreciation and amortization
|
|
|
3.8 |
|
|
|
4.0 |
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|
4.1 |
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4.2 |
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4.0 |
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|
4.1 |
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4.2 |
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|
4.2 |
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| |
Preopening expense
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|
|
1.6 |
|
|
|
0.9 |
|
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|
2.0 |
|
|
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2.0 |
|
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|
1.4 |
|
|
|
0.8 |
|
|
|
1.2 |
|
|
|
1.1 |
|
| |
Partner investment expense(3)
|
|
|
0.6 |
|
|
|
0.7 |
|
|
|
1.2 |
|
|
|
0.6 |
|
|
|
8.2 |
|
|
|
0.5 |
|
|
|
1.0 |
|
|
|
0.8 |
|
| |
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|
|
|
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Income from operations
|
|
|
9.0 |
|
|
|
8.9 |
|
|
|
7.3 |
|
|
|
8.0 |
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|
(0.0 |
) |
|
|
8.6 |
|
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|
8.3 |
|
|
|
8.6 |
|
|
Interest income (expense), net
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.0 |
|
|
|
0.1 |
|
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|
0.2 |
|
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Income before minority interest and provision for income taxes
|
|
|
9.1 |
|
|
|
8.9 |
|
|
|
7.4 |
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|
|
8.1 |
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|
|
0.1 |
|
|
|
8.6 |
|
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|
8.3 |
|
|
|
8.8 |
|
|
Minority interest
|
|
|
(1.6 |
) |
|
|
(1.5 |
) |
|
|
(1.4 |
) |
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|
(1.3 |
) |
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|
(1.4 |
) |
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|
(1.4 |
) |
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|
(1.5 |
) |
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|
(1.4 |
) |
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Income before provision for income taxes
|
|
|
7.5 |
|
|
|
7.4 |
|
|
|
5.9 |
|
|
|
6.7 |
|
|
|
(1.3 |
) |
|
|
7.2 |
|
|
|
6.8 |
|
|
|
7.4 |
|
|
Provision for income taxes
|
|
|
(2.5 |
) |
|
|
(2.5 |
) |
|
|
(1.9 |
) |
|
|
(2.3 |
) |
|
|
0.9 |
|
|
|
(2.3 |
) |
|
|
(2.1 |
) |
|
|
(2.3 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
5.0 |
% |
|
|
4.9 |
% |
|
|
4.0 |
% |
|
|
4.5 |
% |
|
|
(0.4 |
)% |
|
|
5.0 |
% |
|
|
4.7 |
% |
|
|
5.1 |
% |
| |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain percentage amounts do not sum to total due to rounding.
27
(1) P.F. Chang’s has reclassified certain of its
restaurant costs relating to complimentary and employee meals
from operating expenses to contra-revenue accounts as discussed
in Note 2 to our consolidated financial statements. This
reclassification has no effect on net income. The total amount
reclassified is reflected as a reduction of operating expenses
and a corresponding reduction of revenues in the same amount in
each quarter affected. The reclassification totaled
$4.6 million, $4.7 million, $4.8 million and
$5.2 million for the first, second, third and fourth
quarter of fiscal 2003 and $5.7 million and
$5.7 million for the first and second quarter of fiscal
2004, respectively.
(2) P.F. Chang’s has restated its previously reported
consolidated financial statements for changes in Occupancy,
General and administrative, Preopening and Depreciation expenses
for all previous years presented due to changes in its lease
accounting. See Note 1 to our consolidated financial
statements.
(3) Partner investment expense increased during first
quarter of 2004 as a result of a $12.5 million modification
of certain partnership agreements as discussed in Note 2 to
our consolidated financial statements.
Historically, P.F. Chang’s has 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. Additionally, there may be
variability in the amount and percentage of revenues
attributable to partner investment expense as a result of the
timing of opening new restaurants and the timing of purchasing
partner interests. Partner investment expense represents the
difference between the imputed fair value of our partners’
ownership interests and our partners’ cash capital
contribution for these interests, as well as the excess, if any,
of the purchase price at the time we repurchase a partner’s
interest over the imputed fair value of that interest.
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, operating and partner investment
costs until such time as a larger base of restaurants in
operation mitigates such impact.
Liquidity and Capital Resources
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 $61.6 million, $81.7 million and
$110.0 million for fiscal years 2002, 2003 and 2004,
respectively. Net cash provided by operating activities exceeded
the net income for the periods due principally to the effect of
depreciation and amortization, an increase in operating
liabilities and the effect of minority interest and partnership
related non-cash expenses.
We use cash primarily to fund the development and construction
of new restaurants. Net cash used in investing activities in
fiscal years 2002, 2003 and 2004 was $41.7 million,
$72.1 million and $85.2 million, respectively.
Investment activities primarily related to capital expenditures
of $51.2 million, $70.8 million and $84.1 million
in fiscal years 2002, 2003 and 2004, respectively, as well as
sales of short-term instruments of $9.5 million in fiscal
2002, investments in short-term instruments of $1.2 million
in 2003 and purchase of minority interests of $1.1 million
in 2004. During 2004, capital expenditures included the purchase
for $9.2 million of land and a building in Scottsdale,
Arizona. Build-out costs of the building are estimated at
$4.0 million. The building will house our corporate offices
beginning the summer of 2005, at which point our current office
lease obligation will end. We intend to open 18 new Bistro
restaurants and 26 new Pei Wei restaurants in fiscal year 2005.
We expect that our planned future Bistro restaurants will
require, on average, a total cash investment per restaurant of
approximately $2.7 million. We expect to spend
approximately $360,000 per restaurant for preopening costs,
which excludes non-cash rent expense. Total cash investment per
each Pei Wei restaurant is expected to average
$780,000 million and we expect to spend $110,000 per
restaurant for preopening costs, which excludes non-cash rent
expense. The anticipated total cash investment per restaurant
includes anticipated increases in construction related costs of
steel, aluminum and lumber.
28
Net cash used in financing activities in fiscal years 2002, 2003
and 2004 was $1.6 million, $3.2 million and
$3.8 million, respectively. Financing activities in fiscal
years 2002, 2003 and 2004 consisted primarily of repayments on
long term debt, distributions to minority partners and the
proceeds from the exercise of stock options.
In December of 2002, P.F. Chang’s 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, we have
the right to increase the credit facility up to the maximum
aggregate principal amount of $50 million provided that 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
January 2, 2005. Shares of our subsidiary, Pei Wei Asian
Diner, Inc., serve as collateral for the credit facility. P.F.
Chang’s had no borrowings outstanding under the credit
facility as of January 2, 2005, although $5.6 million
is committed for the issuance of a letter of credit which is
required by insurance companies for our workers compensation and
general liability insurance claims.
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 our available funds will depend on many factors,
including the pace of expansion, real estate markets, site
locations and the nature of the arrangements negotiated with
landlords. We believe that our cash flow from operations
together with our current cash reserves will be sufficient to
fund our projected capital requirements through 2005. In the
event that additional capital is required, we will first access
our existing credit facility. In the unlikely event that
additional capital is required, we may seek to raise such
capital through public or private equity or debt financing.
Future capital funding transactions may result in dilution to
current shareholders. We can not assure you that such capital
will be available on favorable terms, if at all.
As of January 2, 2005, there were 195 partners within the
P.F. Chang’s China Bistro, Inc. partnership system. During
2004, we had the opportunity to purchase 22 partners’
interests, which had reached their five-year threshold period
during the year, as well as three additional partners’
interests. Of these, we purchased nine interests in their
entirety, one partial interest and have passed on the remaining
opportunities. These purchases totaled approximately
$2.0 million. Of the total purchase price, approximately
$1.0 million 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 January 2, 2005. During the
first fiscal month of 2005, we purchased ten partnership
interests, which became available for purchase prior to 2005,
for a total purchase price of $10.8 million. In 2005, we
will also have the opportunity to purchase 20 additional
partnership interests. If all of these interests are purchased,
the total purchase price will approximate $5 million to
$7 million based upon the estimated fair value of the
respective interests at January 2, 2005. These amounts are
subject to change based upon changes in the estimated fair value
of the respective interests from January 2, 2005 through
the date of purchase. If we purchase all of these interests in
2005, the estimated financial impact would be an increase to
earnings per share of $0.01 based upon the elimination of the
related minority interest charge in our income statement,
partially offset by the anticipated intangible amortization
expense relating to the purchase, both net of related income
taxes.
Critical Accounting Policies
Our significant accounting policies are disclosed in Note 2
to our consolidated financial statements. The following
discussion addresses our most critical accounting policies,
which are those that require significant judgment.
29
P.F. Chang’s leases all of its restaurant properties. At
the inception of the lease, each property is evaluated to
determine whether the lease will be accounted for as an
operating or capital lease. The term used for this evaluation
includes renewal option periods only in instances in which the
exercise of the renewal option can be reasonably assured and
failure to exercise such option would result in an economic
penalty.
Our lease term used for straight-line rent expense is calculated
from the date we took possession of the leased premises through
the lease termination date. There is potential for variability
in our “rent holiday” period which begins on the
possession date and ends on the store open date. Factors that
may affect the length of the rent holiday period generally
include construction related delays. Extension of the rent
holiday period due to delays in store opening will result in
greater rent expense recognized during the rent holiday period.
P.F. Chang’s utilizes a partnership structure to facilitate
the development, leadership and operation of its restaurants.
Each partner who wishes to participate in the partnership
structure is required to make a cash capital contribution in
exchange for a specified interest in the partnership. The
ownership interest purchased by each partner generally ranges
between two and seven percent of the restaurant or region the
partner oversees. We perform an assessment of what the imputed
fair value of these interests might be for a passive equity
investor (i.e. not someone actually working in the restaurant)
utilizing a discounted cash flow model and updated assumptions
based on the results of a annual valuation analysis performed by
a third party. This methodology involves the use of various
estimates relating to future cash flow projections and discount
rates for which significant judgments are required. Any excess
of the imputed fair value of these interests, determined by
using the discounted cash flow model, over the cash contribution
paid by our partners is currently recognized as expense upon
purchase of the respective interest.
At the end of a specific term (generally five years), P.F.
Chang’s has the right, but not the obligation, to purchase
the minority partner’s interest in the partner’s
respective restaurant or region at fair value. The estimated
fair value for such purchases and sales is determined by
reference to current industry purchase metrics as well as the
historical cash flows of the subject restaurant’s or
region’s financial results. We have the option to pay the
agreed upon purchase price in cash or common stock of P.F.
Chang’s over a period of time not to exceed five years.
Given that there is no public market for these interests, the
fair value determinations are subjective and require the use of
various estimates for which significant judgments are required.
If and when we repurchase our partners’ interests, the
excess, if any, of the purchase price over the imputed fair
value of these interests has been recognized as expense in the
month the repurchase occurs for all fiscal years prior to and
including 2003. Now that the modifications to our agreements (as
discussed in Risk Factors) have been in effect for six months,
the excess, if any, will be recorded as Intangibles which are
amortized over approximately 10 years for Bistros and five
years for Pei Weis. There is also the possibility of additional
charges relating to the modification if, within the initial
five-year period of the respective interest, we repurchase that
interest at a value greater than required by the agreements
prior to modification.
|
|
|
Impairment of Long-Lived Assets |
We review property and equipment (which includes leasehold
improvements) and intangibles with finite lives (those assets
resulting from the acquisition of minority interests in the
operating rights of certain of our restaurants) for impairment
when events or circumstances indicate these assets might be
impaired, but at least quarterly. We test impairment using
historical cash flows and other relevant facts and circumstances
as the primary basis for our estimates of future cash flows. The
analysis is performed at the restaurant, or partnership level
for indicators of permanent impairment. Judgments and estimates
made related to long-lived assets are affected by factors such
as economic conditions, changes in historical resale values and
changes in operating performance. This process requires the use
of estimates and assumptions, which are subject to a high degree
of judgment. If these assumptions change in the future, we may
be required to record impairment charges for these assets.
30
We are self-insured for a significant portion of our current and
prior years’ exposures related to our workers compensation,
general liability, medical and dental programs. In estimating
our self insurance reserves, we have contracted with two
third-party actuaries who assist us in determining the
appropriate reserve amounts. These third parties utilize
estimates of expected losses, based on statistical analyses of
historical industry data as well as our own estimates based on
P.F. Chang’s actual historical trends to arrive at their
reserve amounts. These assumptions are closely monitored and
adjusted when warranted by changing circumstances. We currently
accrue insurance expense within the actuarial range of expected
future liability. Should a greater amount of claims occur
compared to what was estimated, or medical costs increase beyond
what was expected, reserves might not be sufficient and
additional expense may be recorded. Actual experience could also
be more favorable than these estimates, resulting in expense
reductions.
We provide for income taxes based on our estimate of federal and
state liabilities. These estimates include, among other items,
effective rates for state and local income taxes, allowable tax
credits for items such as taxes paid on reported tip income,
estimates related to depreciation and amortization expense
allowable for tax purposes, and the tax deductibility of certain
other items.
Our estimates are based on the information available to us at
the time that we prepare the income tax provision. We generally
file our annual income tax returns several months after our
fiscal year-end. Income tax returns are subject to audit by
federal, state, and local governments, generally years after the
returns are filed. These returns could be subject to material
adjustments or differing interpretations of the tax laws.
Tax contingency reserves result from our estimates of potential
liabilities resulting from differences between actual and
audited results. Changes in the tax contingency reserve result
from resolution of audits of prior year filings, the expiration
of the statute of limitations, changes in tax laws and current
year estimates for asserted and unasserted items. Inherent
uncertainties exist in estimates of tax contingencies due to
changes in tax law, both legislated and concluded through the
various jurisdictions’ tax court systems. Significant
changes in our estimates could adversely affect our reported
results.
New Accounting Standards
On December 16, 2004, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
(“SFAS”) No. 123 (revised 2004)
(“SFAS 123(R)”), Share-Based Payment,
which is a revision of SFAS No. 123
(“SFAS 123”), Accounting for Stock-Based
Compensation. SFAS 123(R) supersedes Accounting
Principles Board Opinion No. 25 (“APB 25”),
Accounting for Stock Issued to Employees, and amends
SFAS No. 95, Statement of Cash Flows.
Generally, the approach in SFAS 123(R) requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on
their fair values. Pro forma disclosure is no longer an
alternative. SFAS 123(R) must be adopted no later than
July 1, 2005. Early adoption will be permitted in periods
in which financial statements have not yet been issued. We
expect to adopt SFAS 123(R) on July 1, 2005.
As permitted by SFAS 123, we currently account for
share-based payments to employees using APB 25’s
intrinsic value method and, as such, generally recognize no
compensation cost for employee stock options. Accordingly, the
adoption of SFAS 123(R)’s fair value method will have
a significant impact on our result of operations, although it
will have no impact on our overall financial position. The
impact of adoption of SFAS 123(R) cannot be predicted at
this time, because it will depend on levels of share-based
payments granted in the future as well as outstanding options
not vested as of July 1, 2005. However, had we adopted
SFAS 123(R) in prior periods, the impact of that standard
would have approximated the impact of SFAS 123 as described
in the disclosure of pro forma net income and earnings per share
in Note 1 to our consolidated financial statements.
SFAS 123(R) also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement will reduce
net operating cash flows and increase net financing cash flows
in the periods after adoption. While we cannot estimate what
those amounts will be in the future
31
(because they depend on, among other things, when employees
exercise stock options), the amount of operating cash flows
recognized in prior periods for such excess tax deductions were
$7.0 million, $5.0 million and $11.7 million in
2004, 2003 and 2002, respectively.
Inflation
The primary areas of our operations affected by inflation are
food, labor, insurance and utility costs. Additionally, a large
number of our restaurant personnel are paid at rates based on
the applicable minimum wage, and increases in the minimum wage
can affect our labor costs. Increases in workers compensation
and health insurance costs also affect our labor costs.
Purchase Commitments
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period | |
| |
|
| |
| |
|
|
|
Less | |
|
|
|
More | |
| |
|
|
|
Than | |
|
1-3 | |
|
3-5 | |
|
Than | |
| Contractual Obligations |
|
Total | |
|
1 Year | |
|
Years | |
|
Years | |
|
5 Years | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
|
|
(In thousands) | |
|
|
|
Long-Term Debt
|
|
$ |
1,158 |
|
|
$ |
613 |
|
|
$ |
479 |
|
|
$ |
6 |
|
|
$ |
60 |
|
|
Operating Leases
|
|
|
278,055 |
|
|
|
26,118 |
|
|
|
53,078 |
|
|
|
51,509 |
|
|
|
147,350 |
|
|
Purchase Obligations
|
|
|
71,823 |
|
|
|
71,666 |
|
|
|
111 |
|
|
|
46 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
351,036 |
|
|
$ |
98,397 |
|
|
$ |
53,668 |
|
|
$ |
51,561 |
|
|
$ |
147,410 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table above does not include obligations related to lease
renewal option periods even if it is reasonably assured that we
will exercise the related option.
In determining purchase obligations for this table we used our
interpretation of the definition set forth in the SEC Final
Rule, Disclosure in Management’s Discussion and Analysis
about Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations, which states, “a ‘purchase
obligation’ is defined as an agreement to purchase goods or
services that is enforceable and legally binding on the
registrant and that specifies all significant terms, including:
fixed minimum quantities to be purchased; fixed, minimum or
variable/price provisions, and the approximate timing of the
transaction.” In applying this definition, we have only
included purchase obligations to the extent the failure to
perform would result in formal recourse against P.F.
Chang’s. Accordingly, certain procurement arrangements that
indicate we are to purchase future items are included, but only
to the extent they include a recourse provision for our failure
to purchase.
|
|
| Item 7A. |
Quantitative and Qualitative Disclosures about Market
Risks |
Management believes that the market risk associated with P.F.
Chang’s market risk sensitive instruments as of
January 2, 2005 is not material, and therefore, disclosure
is not required.
32
|
|
| Item 8. |
Financial Statements and Supplementary Data |
P.F. CHANG’S CHINA BISTRO, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| |
|
|
|
|
|
| |
|
Page | |
| |
|
| |
|
Consolidated Financial Statements:
|
|
|
|
|
| |
|
|
|
34 |
|
| |
|
|
|
35 |
|
| |
|
|
|
36 |
|
| |
|
|
|
37 |
|
| |
|
|
|
38 |
|
| |
|
|
|
39 |
|
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
P.F. Chang’s China Bistro, Inc.
We have audited the accompanying consolidated balance sheets of
P.F. Chang’s China Bistro, Inc. (the “Company”)
as of January 2, 2005 and December 28, 2003, and the
related consolidated statements of income, common
stockholders’ equity and cash flows for each of the three
years in the period ended January 2, 2005. These financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of P.F. Chang’s China Bistro, Inc. at
January 2, 2005 and December 28, 2003 and the results
of their operations and their cash flows for each of the three
years in the period ended January 2, 2005, in conformity
with U.S. generally accepted accounting principles.
As described in Note 1, “Restatement of Previously
Issued Financial Statements”, the Company has restated
previously issued financial statements as of December 28,
2003 and for the years ended December 28, 2003 and
December 29, 2002 and the beginning retained earnings as of
December 30, 2001.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Company’s internal control over
financial reporting as of January 2, 2005, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 25,
2005, expressed an unqualified opinion on management’s
assessment and an adverse opinion on the effectiveness of
internal control over financial reporting.
Phoenix, Arizona
March 25, 2005
34
P.F. CHANG’S CHINA BISTRO, INC.
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 28, | |
|
January 2, | |
| |
|
2003 | |
|
2005 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
| |
|
(Restated) | |
|
|
|
ASSETS |
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
45,478 |
|
|
$ |
66,409 |
|
| |
Short-term investments
|
|
|
5,000 |
|
|
|
5,000 |
|
| |
Inventories
|
|
|
2,911 |
|
|
|
2,951 |
|
| |
Prepaids and other current assets
|
|
|
6,313 |
|
|
|
9,874 |
|
| |
|
|
|
|
|
|
|
Total current assets
|
|
|
59,702 |
|
|
|
84,234 |
|
|
Property and equipment, net
|
|
|
228,170 |
|
|
|
280,641 |
|
|
Deferred income tax assets
|
|
|
3,560 |
|
|
|
3,755 |
|
|
Goodwill
|
|
|
6,819 |
|
|
|
6,819 |
|
|
Other assets
|
|
|
5,570 |
|
|
|
8,066 |
|
| |
|
|
|
|
|
|
|
Total assets
|
|
$ |
303,821 |
|
|
$ |
383,515 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Accounts payable
|
|
$ |
8,367 |
|
|
$ |
14,013 |
|
| |
Construction payable
|
|
|
6,459 |
|
|
|
3,899 |
|
| |
Accrued expenses
|
|
|
27,918 |
|
|
|
32,298 |
|
| |
Unearned revenue
|
|
|
9,851 |
|
|
|
12,459 |
|
| |
Current portion of long-term debt, including $1,454,000 and
$198,000 due to related parties at December 28, 2003 and
January 2, 2005, respectively
|
|
|
1,454 |
|
|
|
613 |
|
| |
|
|
|
|
|
|
|
Total current liabilities
|
|
|
54,049 |
|
|
|
63,282 |
|
|
Long-term debt, including $136,000 and $62,000 due to related
parties at December 28, 2003 and January 2, 2005,
respectively
|
|
|
136 |
|
|
|
545 |
|
|
Lease obligations
|
|
|
33,427 |
|
|
|
43,936 |
|
|
Minority interests
|
|
|
11,877 |
|
|
|
30,795 |
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Common stockholders’ equity:
|
|
|
|
|
|
|
|
|
| |
|
Common stock, $0.001 par value, 40,000,000 shares
authorized: 25,518,039 shares issued and outstanding at
December 28, 2003 and 26,067,507 at January 2, 2005
|
|
|
26 |
|
|
|
26 |
|
| |
Additional paid-in capital
|
|
|
139,639 |
|
|
|
154,210 |
|
| |
Retained earnings
|
|
|
64,667 |
|
|
|
90,721 |
|
| |
|
|
|
|
|
|
|
Total common stockholders’ equity
|
|
|
204,332 |
|
|
|
244,957 |
|
| |
|
|
|
|
|
|
|
Total liabilities and common stockholders’ equity
|
|
$ |
303,821 |
|
|
$ |
383,515 |
|
| |
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
35
P.F. CHANG’S CHINA BISTRO, INC.
CONSOLIDATED STATEMENTS OF INCOME
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
| |
|
December 29, | |
|
December 28, | |
|
January 2, | |
| |
|
2002 | |
|
2003 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share amounts) | |
| |
|
(Restated) | |
|
(Restated) | |
|
|
|
Revenues
|
|
$ |
406,609 |
|
|
$ |
539,917 |
|
|
$ |
706,941 |
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Restaurant operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cost of sales
|
|
|
112,571 |
|
|
|
152,788 |
|
|
|
200,736 |
|
| |
|
Labor
|
|
|
133,536 |
|
|
|
174,989 |
|
|
|
231,575 |
|
| |
|
Partner bonus expense, imputed
|
|
|
1,192 |
|
|
|
1,439 |
|
|
|
1,750 |
|
| |
|
Operating
|
|
|
55,293 |
|
|
|
73,660 |
|
|
|
99,528 |
|
| |
|
Occupancy
|
|
|
24,129 |
|
|
|
28,914 |
|
|
|
37,693 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total restaurant operating costs
|
|
|
326,721 |
|
|
|
431,790 |
|
|
|
571,282 |
|
| |
General and administrative
|
|
|
20,513 |
|
|
|
28,692 |
|
|
|
34,662 |
|
| |
Depreciation and amortization
|
|
|
15,847 |
|
|
|
21,817 |
|
|
|
29,155 |
|
| |
Preopening expense
|
|
|
6,428 |
|
|
|
8,790 |
|
|
|
7,995 |
|
| |
Partner investment expense
|
|
|
5,798 |
|
|
|
4,196 |
|
|
|
17,671 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
31,302 |
|
|
|
44,632 |
|
|
|
46,176 |
|
|
Interest and other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest expense
|
|
|
(263 |
) |
|
|
(11 |
) |
|
|
(3 |
) |
| |
Interest and other income
|
|
|
304 |
|
|
|
477 |
|
|
|
615 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income before minority interest and provision for income taxes
|
|
|
31,343 |
|
|
|
45,098 |
|
|
|
46,788 |
|
|
Minority interest
|
|
|
(5,243 |
) |
|
|
(7,887 |
) |
|
|
(10,078 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
26,100 |
|
|
|
37,211 |
|
|
|
36,710 |
|
|
Provision for income taxes
|
|
|
(8,875 |
) |
|
|
(12,424 |
) |
|
|
(10,656 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
17,225 |
|
|
$ |
24,787 |
|
|
$ |
26,054 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.70 |
|
|
$ |
0.98 |
|
|
$ |
1.01 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
$ |
0.66 |
|
|
$ |
0.94 |
|
|
$ |
0.98 |
|
| |
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
24,688 |
|
|
|
25,345 |
|
|
|
25,727 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
|
25,924 |
|
|
|
26,250 |
|
|
|
26,575 |
|
| |
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
36
P.F. CHANG’S CHINA BISTRO, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS’
EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Common Stockholders’ Equity | |
| |
|
| |
| |
|
Common Stock | |
|
Additional | |
|
|
| |
|
| |
|
Paid-In | |
|
Retained | |
|
|
| |
|
Shares | |
|
Amount | |
|
Capital | |
|
Earnings | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balances, December 30, 2001, as restated
|
|
|
23,896 |
|
|
$ |
24 |
|
|
$ |
110,617 |
|
|
$ |
22,655 |
|
|
$ |
133,296 |
|
|
Issuance of common stock under stock option plans
|
|
|
1,066 |
|
|
|
1 |
|
|
|
4,885 |
|
|
|
— |
|
|
|
4,886 |
|
|
Issuance of common stock under employee stock purchase plan
|
|
|
40 |
|
|
|
— |
|
|
|
825 |
|
|
|
— |
|
|
|
825 |
|
|
Issuance of common stock of Pei Wei subsidiary under stock
option plan
|
|
|
— |
|
|
|
— |
|
|
|
111 |
|
|
|
— |
|
|
|
111 |
|
|
Tax benefit from disqualifying stock option dispositions
|
|
|
— |
|
|
|
— |
|
|
|
11,676 |
|
|
|
— |
|
|
|
11,676 |
|
|
Net income, as restated
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
17,225 |
|
|
|
17,225 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 29, 2002, as restated
|
|
|
25,002 |
|
|
|
25 |
|
|
|
128,114 |
|
|
|
39,880 |
|
|
|
168,019 |
|
|
Issuance of common stock under stock option plans
|
|
|
473 |
|
|
|
1 |
|
|
|
5,289 |
|
|
|
— |
|
|
|
5,290 |
|
|
Issuance of common stock under employee stock purchase plan
|
|
|
43 |
|
|
|
— |
|
|
|
1,123 |
|
|
|
— |
|
|
|
1,123 |
|
|
Issuance of common stock of Pei Wei subsidiary under stock
option plan
|
|
|
— |
|
|
|
— |
|
|
|
138 |
|
|
|
— |
|
|
|
138 |
|
|
Tax benefit from disqualifying stock option dispositions
|
|
|
— |
|
|
|
— |
|
|
|
4,975 |
|
|
|
— |
|
|
|
4,975 |
|
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
24,787 |
|
|
|
24,787 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 28, 2003, as restated
|
|
|
25,518 |
|
|
|
26 |
|
|
|
139,639 |
|
|
|
64,667 |
|
|
|
204,332 |
|
|
Issuance of common stock under stock option plans
|
|
|
510 |
|
|
|
— |
|
|
|
5,911 |
|
|
|
— |
|
|
|
5,911 |
|
|
Issuance of common stock under employee stock purchase plan
|
|
|
40 |
|
|
|
— |
|
|
|
1,548 |
|
|
|
— |
|
|
|
1,548 |
|
|
Issuance of common stock of Pei Wei subsidiary under stock
option plan
|
|
|
— |
|
|
|
— |
|
|
|
76 |
|
|
|
— |
|
|
|
76 |
|
|
Tax benefit from disqualifying stock option dispositions
|
|
|
— |
|
|
|
— |
|
|
|
7,036 |
|
|
|
— |
|
|
|
7,036 |
|
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
26,054 |
|
|
|
26,054 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 2, 2005
|
|
|
26,068 |
|
|
$ |
26 |
|
|
$ |
154,210 |
|
|
$ |
90,721 |
|
|
$ |
244,957 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
37
P.F. CHANG’S CHINA BISTRO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
| |
|
December 29, | |
|
December 28, | |
|
January 2, | |
| |
|
2002 | |
|
2003 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
| |
|
(Restated) | |
|
(Restated) | |
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
17,225 |
|
|
$ |
24,787 |
|
|
$ |
26,054 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Depreciation and amortization
|
|
|
15,847 |
|
|
|
21,817 |
|
|
|
29,155 |
|
| |
Partner investment expense
|
|
|
4,294 |
|
|
|
3,355 |
|
|
|
17,195 |
|
| |
Partner bonus expense, imputed
|
|
|
1,192 |
|
|
|
1,439 |
|
|
|
1,750 |
|
| |
Deferred income taxes
|
|
|
(1,395 |
) |
|
|
(3,308 |
) |
|
|
(195 |
) |
| |
Tax benefit from disqualifying stock option dispositions
credited to equity
|
|
|
11,676 |
|
|
|
4,975 |
|
|
|
7,036 |
|
| |
Minority interest
|
|
|
5,243 |
|
|
|
7,887 |
|
|
|
10,078 |
|
| |
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Inventories
|
|
|
(253 |
) |
|
|
(592 |
) |
|
|
(40 |
) |
| |
|
Prepaids and other current assets
|
|
|
(2,725 |
) |
|
|
(137 |
) |
|
|
(3,561 |
) |
| |
|
Other assets
|
|
|
803 |
|
|
|
(1,708 |
) |
|
|
(1,110 |
) |
| |
|
Accounts payable
|
|
|
1,287 |
|
|
|
1,316 |
|
|
|
5,646 |
|
| |
|
Accrued expenses
|
|
|
(785 |
) |
|
|
12,421 |
|
|
|
4,380 |
|
| |
|
Lease obligations
|
|
|
6,447 |
|
|
|
6,476 |
|
|
|
10,509 |
|
| |
|
Unearned revenue
|
|
|
2,744 |
|
|
|
2,957 |
|
|
|
2,608 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
61,600 |
|
|
|
81,685 |
|
|
|
109,505 |
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(51,229 |
) |
|
|
(70,832 |
) |
|
|
(84,146 |
) |
|
Sales (purchases) of investments
|
|
|
9,500 |
|
|
|
(1,200 |
) |
|
|
— |
|
|
Proceeds (purchases) of minority interests
|
|
|
47 |
|
|
|
(22 |
) |
|
|
(595 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(41,682 |
) |
|
|
(72,054 |
) |
|
|
(84,741 |
) |
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of long-term debt
|
|
|
(1,901 |
) |
|
|
(1,756 |
) |
|
|
(1,456 |
) |
|
Proceeds from promissory note
|
|
|
— |
|
|
|
— |
|
|
|
74 |
|
|
Proceeds from sale of subsidiary common stock
|
|
|
111 |
|
|
|
138 |
|
|
|
76 |
|
|
Proceeds from stock options exercised and employee stock
purchases
|
|
|
5,711 |
|
|
|
6,413 |
|
|
|
7,459 |
|
|
Proceeds from minority investors’ contributions
|
|
|
934 |
|
|
|
1,074 |
|
|
|
1,175 |
|
|
Distributions to minority members and partners
|
|
|
(6,483 |
) |
|
|
(9,111 |
) |
|
|
(11,161 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(1,628 |
) |
|
|
(3,242 |
) |
|
|
(3,833 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
18,290 |
|
|
|
6,389 |
|
|
|
20,931 |
|
|
Cash and cash equivalents at the beginning of the year
|
|
|
20,799 |
|
|
|
39,089 |
|
|
|
45,478 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the year
|
|
$ |
39,089 |
|
|
$ |
45,478 |
|
|
$ |
66,409 |
|
| |
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
195 |
|
|
$ |
146 |
|
|
$ |
104 |
|
|
Cash paid for income taxes, net of refunds
|
|
|
2,019 |
|
|
|
1,791 |
|
|
|
11,144 |
|
|
Supplemental Disclosures of Non-Cash Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of minority interests through issuance of long-term
debt and conversion to members’ capital
|
|
|
2,955 |
|
|
|
370 |
|
|
|
355 |
|
See accompanying notes to consolidated financial statements.
38
P.F. CHANG’S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 2, 2005
|
|
| 1. |
Restatement of Previously Issued Consolidated Financial
Statements |
Following a review of the Company’s lease accounting, the
Company has adjusted, for purposes of calculating the total
rental obligations, the initial lease terms of operating leases
to include option renewals that are reasonably assured of being
exercised. The Company has also included the rent holidays
related to the period before restaurant opening date to the
lease term based on possession of the premises. Using these
extended terms and in some cases greater rent obligations, the
Company has recorded straight-line rent from the time of
possession through lease term. Straight-line rent recorded from
the date of possession through construction completion has been
capitalized and included in property and equipment. The
capitalized rent is amortized through depreciation and
amortization expense over the useful life of the related asset
or the lease term, whichever is shorter. Straight-line rent
recorded during our preopening period (construction completion
through restaurant open date) has been recorded to preopening
expense. Once a restaurant opens for business, the Company
records the straight-line rent over the lease term
plus contingent rent to the extent it exceeded
minimum rent per the lease agreement. The Company has
reclassified tenant improvement allowances from a contra asset
in property and equipment, net to long-term lease obligation in
the consolidated balance sheets. The impact of tenant
improvement allowances has also been reclassified from a
reduction of depreciation and amortization expense to a
reduction of occupancy expense (or pre-opening expense during
the last few weeks of the rent holiday period) in the
consolidated statements of income. Finally, tenant improvement
allowance has been reclassified in the consolidated statements
of cash flows by increasing capital expenditures and increasing
cash provided by operating activities
The cumulative effect of the restatement relating to fiscal
years 1993 to 2003 is an increase in the leasehold improvement
asset of $29.9 million, an increase in depreciation expense
of $8.3 million, an increase in the lease obligation
liability of $32.1 million, an increase in preopening
expense of $0.6 million, a decrease in occupancy expense of
$6.4 million and an increase in deferred income tax assets
of $0.9 million. As a result, retained earnings at the end
of 2003 decreased by $1.4 million, net of taxes. Preopening
expense for both years ended December 29, 2002 and
December 28, 2003 increased by $0.1 million. Occupancy
expense for the years ended December 29, 2002 and
December 28, 2003 decreased by $1.3 million and
$1.6 million, respectively. Depreciation expense increased
by $1.9 million and $2.6 million for the years ended
December 29, 2002 and December 28, 2003, respectively.
The restatement decreased reported diluted net income per share
by $0.02 and $0.03 for the years ended December 29, 2002
and December 28, 2003, respectively. The cumulative effect
of the restatement for all years prior to 2002 was
$0.4 million, net of taxes, which was recorded as an
adjustment to opening stockholders’ equity at
December 31, 2001.
39
P.F. CHANG’S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The following table reflects the effect of the restatement on
the Consolidated Statements of Income (in thousands, except per
share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 30, | |
|
Year Ended December 29, | |
| |
|
2002 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
As Previously | |
|
As | |
|
As Previously | |
|
As | |
| |
|
Reported | |
|
Restated | |
|
Reported | |
|
Restated | |
| |
|
| |
|
| |
|
| |
|
| |
|
Selected Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy
|
|
$ |
25,457 |
|
|
$ |
24,129 |
|
|
$ |
30,559 |
|
|
$ |
28,914 |
|
|
Total restaurant operating costs
|
|
|
328,049 |
|
|
|
326,721 |
|
|
|
433,435 |
|
|
|
431,790 |
|
|
General and administrative
|
|
|
20,590 |
|
|
|
20,513 |
|
|
|
28,768 |
|
|
|
28,692 |
|
|
Depreciation and amortization
|
|
|
13,959 |
|
|
|
15,847 |
|
|
|
19,255 |
|
|
|
21,817 |
|
|
Preopening expense
|
|
|
6,334 |
|
|
|
6,428 |
|
|
|
8,654 |
|
|
|
8,790 |
|
|
Income from operations
|
|
|
31,879 |
|
|
|
31,302 |
|
|
|
45,609 |
|
|
|
44,632 |
|
|
Income before provision for income taxes
|
|
|
26,677 |
|
|
|
26,100 |
|
|
|
38,188 |
|
|
|
37,211 |
|
|
Provision for income taxes
|
|
|
(9,097 |
) |
|
|
(8,875 |
) |
|
|
(12,800 |
) |
|
|
(12,424 |
) |
|
Net income
|
|
|
17,580 |
|
|
|
17,225 |
|
|
|
25,388 |
|
|
|
24,787 |
|
|
Basic net income per share
|
|
$ |
0.71 |
|
|
$ |
0.70 |
|
|
$ |
1.00 |
|
|
$ |
0.98 |
|
|
Diluted net income per share
|
|
$ |
0.68 |
|
|
$ |
0.66 |
|
|
$ |
0.97 |
|
|
$ |
0.94 |
|
The following table reflects the effect of the restatement on
the Consolidated Balance Sheet (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
December 29, 2003 | |
| |
|
| |
| |
|
As Previously | |
|
As | |
| |
|
Reported | |
|
Restated | |
| |
|
| |
|
| |
|
Selected Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$ |
198,291 |
|
|
$ |
228,170 |
|
|
Deferred income tax assets
|
|
|
2,695 |
|
|
|
3,560 |
|
|
Total assets
|
|
|
273,077 |
|
|
|
303,821 |
|
|
Accrued expenses
|
|
|
29,222 |
|
|
|
27,918 |
|
|
Lease obligations
|
|
|
— |
|
|
|
33,427 |
|
|
Retained earnings
|
|
|
66,046 |
|
|
|
64,667 |
|
|
Total common stockholders’ equity
|
|
|
205,711 |
|
|
|
204,332 |
|
|
Total liabilities and common stockholders’ equity
|
|
|
273,077 |
|
|
|
303,821 |
|
The following table reflects the effect of the restatement on
the Consolidated Statements of Cash Flows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 30, | |
|
Year Ended December 29, | |
| |
|
2002 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
As Previously | |
|
As | |
|
As Previously | |
|
As | |
| |
|
Reported | |
|
Restated | |
|
Reported | |
|
Restated | |
| |
|
| |
|
| |
|
| |
|
| |
|
Selected Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
17,580 |
|
|
$ |
17,225 |
|
|
$ |
25,388 |
|
|
$ |
24,787 |
|
|
Depreciation and amortization
|
|
|
13,959 |
|
|
|
15,847 |
|
|
|
19,255 |
|
|
|
21,817 |
|
|
Deferred income taxes
|
|
|
(1,173 |
) |
|
|
(1,395 |
) |
|
|
(2,932 |
) |
|
|
(3,308 |
) |
|
Accrued expenses
|
|
|
(785 |
) |
|
|
(785 |
) |
|
|
13,725 |
|
|
|
12,421 |
|
|
Lease obligations
|
|
|
— |
|
|
|
6,447 |
|
|
|
— |
|
|
|
6,476 |
|
|
Net cash provided by operating activities
|
|
|
53,842 |
|
|
|
61,600 |
|
|
|
74,928 |
|
|
|
81,685 |
|
|
Capital expenditures
|
|
|
(43,471 |
) |
|
|
(51,229 |
) |
|
|
(64,075 |
) |
|
$ |
(70,832 |
) |
|
Net cash used in investing activities
|
|
|
(33,924 |
) |
|
|
(41,682 |
) |
|
|
(65,297 |
) |
|
$ |
(72,054 |
) |
40
P.F. CHANG’S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
|
|
| 2. |
Summary of Significant Accounting Policies |
|
|
|
Organization and Nature of Operations |
P.F. Chang’s China Bistro, Inc. (the “Company”)
operates two restaurant concepts consisting of restaurants
throughout the United States under the name of “P.F.
Chang’s China Bistro” and “Pei Wei Asian
Diner.” The Company was formed in 1996 and became publicly
traded in 1998.
The Company has reclassified certain of its restaurants costs
relating to complimentary and employee meals from operating
expenses to contra-revenue accounts. This reclassification has
no effect on net income. The total amount reclassified is
reflected as a reduction of operating expenses and a
corresponding reduction of revenues in the same amount in each
year affected. The reclassification totaled $19.3 million
and $15.5 million in fiscal years 2003 and 2002,
respectively.
Effective March 28, 2004, the Company executed a
modification to all of its partnership agreements that contained
a provision permitting the Company to repurchase the
partner’s interest at the capital account balance in
certain circumstances. The modification changes the repurchase
portion of the partnership agreements to indicate that fair
value is to be used for all repurchases regardless of
circumstance.
In accordance with Financial Accounting Standards Board
(“FASB”) Interpretation No. 44
(“FIN 44”), Accounting for Certain
Transactions Involving Stock Compensation and Interpretation of
APB Opinion No. 25, this results in a modification of
the original arrangement for accounting purposes. As a result of
this modification, all existing unearned compensation is
immediately expensed. This resulted in a first quarter charge of
$12.5 million which consisted of the unamortized portion of
the $11.5 million of unearned compensation existing at
December 28, 2003 and the unamortized portion of unearned
compensation generated in the first quarter of 2004 for partners
investing in new stores prior to the modification. This charge
is included in Partner Investment Expense along with the
amortization of previously existing unearned compensation prior
to the date of the modification.
In addition, under FIN 44 the estimated fair value of each
partnership interest modified will have to be determined at the
date of the modification and the Company has completed this
valuation. To the extent the fair value at the date of
modification is greater than that partner’s related
minority interest obligation in the consolidated financial
statements, that incremental value could be charged to expense
in a future period if a buy-out occurs prior to the 5-year date
at which the partner would have otherwise earned the right to
have their investment interest purchased at fair value.
The Company’s fiscal year ends on the Sunday closest to the
end of December and included 52 weeks in each of 2002 and
2003 and 53 weeks in 2004.
The preparation of the consolidated financial statements in
conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ
from those estimates.
41
P.F. CHANG’S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
|
|
|
Principles of Consolidation and Presentation |
The Company’s consolidated financial statements include the
accounts and operations of the Company and its subsidiaries and
partnerships in which it owns more than a 50 percent
interest. All material balances and transactions between the
consolidated entities have been eliminated. Minority interest is
recorded as a reduction of the reported income or expense unless
the amount would result in a reduction of expense for which the
minority partner would not be responsible.
Certain amounts shown in the prior period’s consolidated
financial statements have been reclassified to conform to the
current year consolidated financial statements’
presentation.
|
|
|
Cash and Cash Equivalents |
The Company’s cash and cash equivalent balances are not
pledged or restricted. The Company’s policy is to invest
cash in excess of operating requirements in income-producing
investments. Income-producing investments with maturities of
three months or less at the time of investment are reflected as
cash equivalents. Amounts receivable from credit card processors
are also considered cash equivalents because they are both
short-term and highly liquid in nature and are typically
converted to cash within three days of the sales transaction.
Cash equivalents at January 2, 2005 consist primarily of
money market funds.
The Company’s investments are classified as available for
sale, and have been recorded at fair value which approximates
cost. At both January 2, 2005 and December 28, 2003,
$5.0 million was recorded as Short-term investments, which
consisted of preferred stock investments in Dividends Received
Eligible Auction Market Stock (DREAMS) offered under
private placements by a subsidiary of Bank of America. Under the
terms of the investment arrangement, the Company participates in
periodic auctions that are generally held every 49 days and
that determine the dividend rate. The Company has the
opportunity to offer to sell its investment during such periodic
auctions subject to availability of buying bidders. The Company
may also sell the investment to certain accredited investors.
Under the prospectus it is the intention of the issuer to
maintain a rating for the DREAMS at a grade of Aa3 by
Moody’s.
Receivables, which the Company classified in “Prepaid and
other current assets,” consist primarily of amounts due
from landlords or other parties for the reimbursement of
leasehold improvements paid by the Company.
Inventories consist of food and beverages and are stated at the
lower of cost or market using the first-in, first-out method.
Property and equipment are stated at cost, which includes
capitalized interest during the construction and development
period. Furniture, fixtures and equipment are depreciated on a
straight-line basis over the estimated useful service lives of
the related assets, which approximates seven years. Leasehold
improvements are amortized over the shorter of the useful life
of the asset or the length of the related lease term. China and
smallwares are depreciated over two years up to 50 percent
of their original cost, and subsequent additions are expensed as
purchased. Depreciation and amortization expense associated with
property and equipment amounted to $15.4 million,
$21.4 million and $29.1 million, for the years ended
December 29, 2002, December 28, 2003 and
January 2, 2005, respectively.
42
P.F. CHANG’S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
During the years ended December 29, 2002, December 28,
2003 and January 2, 2005, the Company incurred gross
interest expense of approximately $263,000, $117,000 and
$61,000, respectively. Approximately $106,000 and $58,000,
respectively, of interest costs were capitalized during the
years ended December 28, 2003 and January 2, 2005.
There were no interest costs capitalized during the year ended
December 29, 2002.
The Company evaluates impairment losses on long-lived assets
used in operations when indicators of impairment are present and
the undiscounted cash flow estimated to be generated by those
assets is less than the assets’ carrying amount. The
Company’s policy is to evaluate long-lived assets for
impairment at the restaurant level. As of January 2, 2005,
no impairment on long-lived assets has been recognized. There
can be no assurance that future impairment tests will not result
in a charge to earnings.
Goodwill represents the residual purchase price after allocation
of the purchase price of assets acquired. Goodwill and
intangible assets deemed to have indefinite lives are not
amortized, but are subject to annual impairment tests.
Intangible assets deemed to have definite lives will continue to
be amortized over their useful lives.
Intangible assets, which the Company classified as “Other
assets,” consist of the excess of the purchase price at the
time the Company repurchases a partner’s interest over the
imputed fair value of that interest at the time of the original
investment, these assets are amortized over their useful lives.
As of January 2, 2005, the intangible asset balance was
$1.4 million, There was no intangible asset balance as of
December 28, 2003.
Impairment tests are performed with respect to goodwill at the
segment level of reporting. On an annual basis, the Company
reviews the recoverability of goodwill based primarily on a
multiple of earnings analysis comparing the fair value of the
reporting segment to the carrying value. Generally, the Company
performs its annual assessment for impairment during the fourth
quarter of its fiscal year, and will perform the analysis more
frequently under certain circumstances. As of January 2,
2005, no impairment of goodwill has been recognized. There can
be no assurance that future goodwill impairment tests will not
result in a charge to earnings.
The Company is self-insured for certain exposures, principally
general liability, workers’ compensation, medical and
dental for the first $100,000, $250,000 or $500,000 of
individual claims, depending on the type of claim. The Company
has paid amounts to its insurance carrier that are in excess of
the claims known to date and has provided additional accrued
liabilities for its estimate of ultimate claims. In developing
these estimates, the Company uses historical experience factors
to estimate the ultimate claim exposure. In estimating self
insurance reserves, the Company contracted with two third-party
actuaries who utilize estimates of expected losses, based on
statistical analyses of historical industry data as well as the
Company’s own estimates based on the Company’s actual
historical trends. It is reasonably possible that future
adjustments to these estimates will be required. Based upon the
information known at January 2, 2005, management believes
it has provided adequate reserves for its self-insured exposure.
The Company leases all of its restaurant properties. At the
inception of the lease, each property is evaluated to determine
whether the lease will be accounted as an operating or capital
lease. The term of the lease used for this evaluation includes
renewal option periods only in instances in which the exercise
of the renewal option can be reasonably assured and failure to
exercise such option would result in an economic penalty.
43
P.F. CHANG’S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
For leases that contain rent escalations, the Company records
the total rent payable during the lease term, as determined
above, on a straight-line basis over the term of the lease
(including a “rent holiday” period beginning upon
possession of the premises), and records the difference between
the minimum rents paid and the straight-line rent as a lease
obligation.
Certain leases contain provisions that require additional rental
payments based upon restaurant sales volume (“contingent
rentals”). Contingent rentals are accrued each period as
the liabilities are incurred.
It is the Company’s policy to capitalize rent expense from
possession date through construction completion. This asset is
included in property and equipment. Capitalized rent is
amortized through depreciation and amortization expense over the
useful life of the related assets. Straight-line rent recorded
during the preopening period (construction completion through
restaurant open date) has been recorded to preopening expense.
Once a restaurant opens for business, the Company records the
straight-line rent over the lease term plus contingent rent to
the extent it exceeded minimum rent per the lease agreement.
Unearned revenue represents gift cards sold for which revenue
recognition criteria, generally redemption, has not been met.
Prior to the date of modification of the operating agreements
which occurred on March 28, 2004, unearned compensation was
calculated as the difference between the imputed fair value of
partners’ ownership interest at the time the partners
invest in their restaurants and the partners’ cash
contributions for those ownership interests, recognized over a
five year period. As of the date of modification, the Company
has expensed all remaining unearned compensation. At
December 28, 2003 the unamortized deferred compensation
balance was $11.5 million and is presented in the balance
sheet as a reduction to the related minority interest balance.
There was no unearned compensation as of January 2, 2005.
Revenues from food, beverage and alcohol sales are recognized as
products are sold.
The Company expenses advertising as incurred. Advertising
expense for the years ended December 29, 2002,
December 28, 2003 and January 2, 2005 was
approximately $2.5 million, $2.8 million and
$3.7 million, respectively.
|
|
|
Partner Bonus Expense, Imputed |
Partner bonus expense represents the portion of restaurant level
operating results that are allocable to minority partners, but
are presented as bonus expense for accounting purposes. Given
that employees who choose to invest as partners are not eligible
to participate in the restaurant-level bonus program, a portion
of their partnership earnings that would otherwise be presented
as minority interest expense are deemed to be a bonus expense
for financial reporting purposes. The amounts so imputed are
based on the existing programs used by the Company for
non-investing employees based on individual restaurant
level-operating results.
Preopening expenses, consisting primarily of manager salaries
and relocation expense, employee payroll and related training
costs incurred prior to the opening of a restaurant, are
expensed as incurred. Also included
44
P.F. CHANG’S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
in preopening expense is the accrual for straight-line rent
recorded for the period between construction completion and the
restaurant opening date, which generally approximates two weeks.
|
|
|
Partner Investment Expense |
Prior to the date of modification of certain operating
agreements which occurred on March 28, 2004, partner
investment expense consisted of two components:
(i) unearned compensation calculated as the difference
between the imputed fair value of partners’ ownership
interests at the time the partners invest in their restaurants
and the partners’ cash contributions for those ownership
interests, recognized over a five year period and (ii) the
excess, if any, of the purchase price at the time the Company
repurchased a partner’s interest over the imputed fair
value of that interest. Partner investment expense was
$5.8 million and $4.2 million for the years ended
December 29, 2002 and December 28, 2003, respectively.
Partner investment expense includes amortization of unearned
compensation expense of $2.4 million and $3.3 million
and buy-out expense of $3.4 million and $0.9 million
for the years ended December 29, 2002 and December 28,
2003, respectively.
Partner investment expense for the year ended January 2,
2005 was $17.7 million, which included $12.5 million
in unearned compensation expense related to the modification of
partner interests during the first quarter of 2004 along with
$5.2 million in unearned compensation expense related to
stores opened subsequent to the modification.
The Company utilizes the liability method of accounting for
income taxes. Under the liability method, deferred taxes are
determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted
tax rates in effect in the years in which the differences are
expected to reverse. Recognition of deferred tax assets is
limited to amounts considered by management to be more likely
than not of realization in future periods.
Minority interests relating to the income or loss of
consolidated partnerships includes no provision for income taxes
as any tax liability related thereto is the responsibility of
the individual minority investors.
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 uses the intrinsic value method to account
for stock option grants and, accordingly, recognizes no
compensation expense for the stock option grants.
45
P.F. CHANG’S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The following table represents the effect on net income and
earnings per share if the Company had applied the fair value
based method to stock-based employee compensation:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
| |
|
December 29, | |
|
December 28, | |
|
January 2, | |
| |
|
2002 | |
|
2003 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share amounts) | |
| |
|
(Restated) | |
|
(Restated) | |
|
|
|
Net income, as reported
|
|
$ |
17,225 |
|
|
$ |
24,787 |
|
|
$ |
26,054 |
|
| |
Deduct: Total stock-based employee compensation expense
determined under fair value methods for all awards, net of
related tax effects
|
|
|
2,232 |
|
|
|
3,482 |
|
|
|
5,074 |
|
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
14,993 |
|
|
$ |
21,305 |
|
|
$ |
20,980 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic, as reported
|
|
$ |
0.70 |
|
|
$ |
0.98 |
|
|
$ |
1.01 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Basic, pro forma
|
|
$ |
0.61 |
|
|
$ |
0.84 |
|
|
$ |
0.82 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Diluted, as reported
|
|
$ |
0.66 |
|
|
$ |
0.94 |
|
|
$ |
0.98 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Diluted, pro forma
|
|
$ |
0.58 |
|
|
$ |
0.81 |
|
|
$ |
0.79 |
|
| |
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
24,688 |
|
|
|
25,345 |
|
|
|
25,727 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
|
25,924 |
|
|
|
26,250 |
|
|
|
26,575 |
|
| |
|
|
|
|
|
|
|
|
|
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. See Note 6
for further discussion of the Company’s stock-based
employee compensation and related assumptions used in computing
fair value.
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 the Company’s stock option plans
and outstanding warrants. For the years ended December 29,
2002, December 28, 2003 and January 2, 2005, there
were 71,000, 179,500 and 115,000, respectively, of the
Company’s shares excluded from the calculation due to their
anti-dilutive effect. In addition to the potentially dilutive
shares of the Company’s stock addressed above, there is an
additional 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.
46
P.F. CHANG’S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The following table sets forth the computation of basic and
diluted net income per share:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
| |
|
December 29, | |
|
December 28, | |
|
January 2, | |
| |
|
2002 | |
|
2003 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share amounts) | |
| |
|
(Restated) | |
|
(Restated) | |
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Numerator for basic and diluted net income per share —
net income available to common stockholders
|
|
$ |
17,225 |
|
|
$ |
24,787 |
|
|
$ |
26,054 |
|
| |
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Denominator for basic net income per share —
weighted-average shares
|
|
|
24,688 |
|
|
|
25,345 |
|
|
|
25,727 |
|
| |
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Employee and director stock options
|
|
|
1,236 |
|
|
|
905 |
|
|
|
848 |
|
| |
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income per share —
adjusted for weighted average shares and assumed conversions
|
|
|
25,924 |
|
|
|
26,250 |
|
|
|
26,575 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.70 |
|
|
$ |
0.98 |
|
|
$ |
1.01 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
$ |
0.66 |
|
|
$ |
0.94 |
|
|
$ |
0.98 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Financial Instruments |
The carrying amount of cash and cash equivalents, investments,
receivables, accounts payable, and accrued expenses approximate
fair value because of the immediate or short-term maturity of
these financial instruments. The fair value of long-term debt is
determined using current applicable rates for similar
instruments and collateral as of the balance sheet date and
approximates the carrying value of such debt.
The Company accounts for its segments in accordance with
SFAS No. 131 (“SFAS 131”),
Disclosure about Segments of an Enterprise and Related
Information. SFAS 131 requires that a public company
report annual and interim financial and descriptive information
about its reportable operating segments. Operating segments, as
defined, are components of an enterprise about which separate
financial information is available that is evaluated regularly
by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Based on the
Company’s methods of internal reporting and management
structure, P.F. Chang’s has two reportable segments, that
of the Bistro and that of Pei Wei.
|
|
|
Concentrations of Credit Risk |
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist primarily of
cash investments and receivables. The Company maintains cash and
cash equivalents, funds on deposit and certain other financial
instruments with financial institutions that are considered in
the Company’s investment strategy. Concentrations of credit
risk with respect to receivables are limited as the
Company’s receivables are primarily with its landlords for
the reimbursement of tenant improvements.
47
P.F. CHANG’S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
|
|
|
Recent Accounting Pronouncements |
On December 16, 2004, the FASB issued
SFAS No. 123 (revised 2004)
(“SFAS 123(R)”), Share-Based Payment,
which is a revision of SFAS 123. SFAS 123(R)
supersedes APB 25, and amends SFAS No. 95,
Statement of Cash Flows. Generally, the approach in
SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in
the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. SFAS 123(R) must be
adopted no later than July 1, 2005. Early adoption will be
permitted in periods in which financial statements have not yet
been issued. The Company expects to adopt SFAS 123(R) on
July 1, 2005.
As permitted by SFAS 123, the Company currently accounts
for share-based payments to employees using the intrinsic value
method and, as such, generally recognize no compensation cost
for employee stock options. Accordingly, the adoption of
SFAS 123(R)’s fair value method will have a
significant impact on the Company’s result of operations,
although it will have no impact on the Company’s overall
financial position. The impact of adoption of SFAS 123(R)
cannot be predicted at this time, because it will depend on
levels of share-based payments granted in the future as well as
outstanding options not vested as of July 1, 2005. However,
had the Company adopted SFAS 123(R) in prior periods, the
impact of that standard would have approximated the impact of
SFAS 123 as described in the disclosure of pro forma net
income and earnings per share in this Note. SFAS 123(R)
also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash
flow, rather than as an operation cash flow as required under
current literature. This requirement will reduce net operating
cash flows and increase net financing cash flows in the periods
after adoption. While the Company cannot estimate what those
amounts will be in the future (because they depend on, among
other things, when employees exercise stock options), the amount
of operating cash flows recognized in prior periods for such
excess tax deductions were $7.0 million, $5.0 million
and $11.7 million in 2004, 2003 and 2002, respectively.
|
|
| 3. |
Property and Equipment |
Property and equipment consists of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 28, | |
|
January 2, | |
| |
|
2003 | |
|
2005 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
| |
|
(Restated) | |
|
|
|
Leasehold improvements
|
|
$ |
212,224 |
|
|
$ |
268,548 |
|
|
Furniture, fixtures and equipment
|
|
|
57,397 |
|
|
|
74,568 |
|
|
China and smallwares
|
|
|
5,761 |
|
|
|
7,184 |
|
| |
|
|
|
|
|
|
| |
|
|
275,382 |
|
|
|
350,300 |
|
|
Less accumulated depreciation and amortization
|
|
|
63,657 |
|
|
|
89,104 |
|
| |
|
|
|
|
|
|
| |
|
|
211,725 |
|
|
|
261,196 |
|
|
Construction in progress
|
|
|
16,445 |
|
|
|
19,445 |
|
| |
|
|
|
|
|
|
| |
|
$ |
228,170 |
|
|
$ |
280,641 |
|
| |
|
|
|
|
|
|
Construction in progress at January 2, 2005 includes the
$9.2 million purchase of land and building in Scottsdale,
Arizona. The building will house the corporate office beginning
the summer of 2005. Related land and building will be
reclassified from construction in progress to land and building
during 2005 at which time depreciation on the building will
begin.
48
P.F. CHANG’S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Accrued expenses consists of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 28, | |
|
January 2, | |
| |
|
2003 | |
|
2005 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Accrued payroll
|
|
$ |
7,220 |
|
|
$ |
11,064 |
|
|
Sales and use tax payable
|
|
|
3,233 |
|
|
|
4,787 |
|
|
Property tax payable
|
|
|
2,389 |
|
|
|
1,850 |
|
|
Accrued insurance
|
|
|
4,184 |
|
|
|
8,536 |
|
|
Accrued rent
|
|
|
1,718 |
|
|
|
2,475 |
|
|
Income taxes payable
|
|
|
6,731 |
|
|
|
— |
|
|
Other accrued expenses
|
|
|
2,443 |
|
|
|
3,586 |
|
| |
|
|
|
|
|
|
| |
|
$ |
27,918 |
|
|
$ |
32,298 |
|
| |
|
|
|
|
|
|
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. 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
January 2, 2005, although $5.6 million is committed
for the issuance of a letter of credit which is required by
insurance companies for workers compensation and general
liability insurance claims. Available borrowings under the line
of credit is $14.4 million as of January 2, 2005.
Long-term debt consists of the following:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 28, | |
|
January 2, | |
| |
|
2003 | |
|
2005 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
$3.0 million in unsecured promissory notes, payable to
related parties from the sale of minority partner interests, in
annual installments of $1.5 million plus interest, with a
rate of 225 basis points over LIBOR, until August 2005
|
|
$ |
1,590 |
|
|
$ |
136 |
|
|
$0.1 million in unsecured promissory notes, payable to
related parties from the sale of minority partner interests, in
annual installments of $60,000 plus interest, with a rate of
200 basis points over LIBOR, until October 2006
|
|
|
— |
|
|
|
123 |
|
|
$0.8 million in unsecured promissory notes, payable to
non-related parties from the sale of minority partner interests,
in annual installments of $0.4 million plus interest, with
a rate of 200 basis points over LIBOR, until October 2006
|
|
|
— |
|
|
|
827 |
|
|
Other
|
|
|
— |
|
|
|
72 |
|
| |
|
|
|
|
|
|
| |
|
|
1,590 |
|
|
|
1,158 |
|
| |
Less current portion
|
|
|
1,454 |
|
|
|
613 |
|
| |
|
|
|
|
|
|
| |
|
$ |
136 |
|
|
$ |
545 |
|
| |
|
|
|
|
|
|
49
P.F. CHANG’S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The aggregate annual payments of long-term debt outstanding at
January 2, 2005, are summarized as follows (in thousands):
| |
|
|
|
|
|
2005
|
|
$ |
613 |
|
|
2006
|
|
|
477 |
|
|
2007
|
|
|
2 |
|
|
2008
|
|
|
3 |
|
|
2009
|
|
|
3 |
|
|
Thereafter
|
|
|
60 |
|
| |
|
|
|
| |
|
$ |
1,158 |
|
| |
|
|
|
The related party debt is due to current minority investors in
operating partnerships of the Company who are also employed at
the restaurants included in such partnerships.
The Company leases restaurant and office facilities and
equipment and certain real property under operating leases
having terms expiring between 2005 and 2024. The restaurant
facility and real property leases primarily have renewal clauses
of five to 20 years exercisable at the option of the
Company with rent escalation clauses stipulating specific rent
increases, some of which are based on the consumer price index.
Certain of these leases require the payment of contingent
rentals based on a percentage of gross revenues, as defined.
Rent expense included in the accompanying consolidated
statements of income for operating leases are summarized as
follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 29, | |
|
December 28, | |
|
January 2, | |
| |
|
2002 | |
|
2003 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
| |
|
(Restated) | |
|
(Restated) | |
|
|
|
Minimum rentals
|
|
$ |
11,372 |
|
|
$ |
14,657 |
|
|
$ |
19,227 |
|
|
Contingent rentals
|
|
|
5,348 |
|
|
|
6,380 |
|
|
|
7,723 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
16,720 |
|
|
$ |
21,037 |
|
|
$ |
26,950 |
|
| |
|
|
|
|
|
|
|
|
|
At January 2, 2005, the Company had entered into other
lease agreements for restaurant facilities currently under
construction or yet to be constructed. In addition, the leases
also contain provisions for additional contingent rent based
upon gross revenues, as defined in the leases. The following
table does not include obligations related to renewal option
periods even if it is reasonably assured that we will exercise
the related option. Future minimum lease payments under
operating leases (including restaurants to be opened after
January 2, 2005) are as follows (in thousands):
| |
|
|
|
|
|
|
2005
|
|
$ |
26,118 |
|
|
2006
|
|
|
26,764 |
|
|
2007
|
|
|
26,314 |
|
|
2008
|
|
|
25,902 |
|
|
2009
|
|
|
25,607 |
|
|
Thereafter
|
|
|
147,350 |
|
| |
|
|
|
| |
Total minimum lease payments
|
|
$ |
278,055 |
|
| |
|
|
|
50
P.F. CHANG’S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The Company leases a building and certain furniture and
equipment from a partnership in which the Company owns an
approximate six percent interest. Annual rent payments are
contingent based on a percentage of gross revenues. The
respective period rent expense is included in the
above-disclosed amounts.
|
|
| 8. |
Preferred Stock and Common Stockholders’ Equity |
The board of directors is authorized to issue up to
10,000,000 shares of preferred stock and to determine the
powers, preferences, privileges, rights, including voting
rights, qualifications, limitations and restrictions of those
shares without any further vote or act by the common
stockholders. There was no outstanding preferred stock as of
December 28, 2003 and January 2, 2005.
In January of 2001, the Company raised $40.8 million in
cash through a private equity placement of 1.25 million
shares of common stock with two large mutual fund companies. The
Company used $15 million of the proceeds to repay
outstanding borrowings under its credit facility. In April 2002,
the Company amended the Certificate of Incorporation to increase
the number of authorized shares of common stock from
20 million to 40 million.
In August 1996, the Company adopted the 1996 Stock Option Plan
(“1996 Plan”), and in July 1997, the Company adopted
the 1997 Restaurant Management Stock Option Plan (“1997
Plan”). Options under the 1996 Plan may be granted to
employees, consultants and directors to purchase the
Company’s common stock at an exercise price that equals or
exceeds the fair value of such shares on the date such option is
granted. Options under the 1997 Plan may be granted to key
employees of the Company who are actively engaged in the
management and operation of the Company’s restaurants to
purchase the Company’s common stock at an exercise price
that equals or exceeds the fair value of such shares on the date
such option is granted. Vesting periods are determined at the
discretion of the board of directors, and options currently
outstanding at January 2, 2005 vest over five years.
Options may be exercised immediately upon grant, subject to a
right by the Company to repurchase any unvested shares at the
exercise price. Any options granted shall not be exercisable
after ten years. Upon certain changes in control of the Company,
the 1996 and 1997 Plans provide for two additional years of
immediate vesting. The Company has reserved a total of
2,173,000 shares of common stock for issuance under the
1996 and 1997 Plans, all of which have been granted as of
January 2, 2005.
During 1998, the Company’s Board of Directors approved the
1998 Stock Option Plan (“1998 Plan”) which provides
for discretionary grants of incentive stock options and
nonqualified stock options to the Company’s employees,
including officers, directors, consultants, advisors, and other
independent contractors. A total of 3,213,770 additional shares
of common stock have been reserved for issuance under the 1998
Plan. The option price per share for an incentive stock option
may not be less than 100 percent of the fair market value
of a share of common stock on the grant date. The option price
per share for a nonstatutory stock option may not be less than
100 percent of the fair market value of a share of common
stock on the grant date. The Company’s Compensation
Committee has the authority to, among other things: determine
the vesting schedule for each option granted. All options expire
within 10 years. The 1998 Plan includes an automatic grant
program for outside directors. Pursuant to this program, each
outside director will be granted an option to
purchase 30,000 shares of common stock at the time he
or she is first elected or appointed a director of the Company.
In addition, each outside director remaining in office will be
granted an option to purchase 15,000 immediately fully
vested shares on the day following each annual meeting of
stockholders.
51
P.F. CHANG’S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
During 1999, the Company’s Board of Directors approved the
1999 Nonstatutory Stock Option Plan (“1999 Plan”),
which provides for discretionary grants of nonqualified stock
options to the Company’s employees. The 1999 Plan prohibits
grants to officers or directors. A total of 800,000 shares
of common stock have been reserved for issuance under the 1999
Plan. The option price per share may not be less than
100 percent of the fair market value of a share of common
stock on the grant date. The Company’s Compensation
Committee has the authority to, among other things: determine
the vesting schedule for each option granted. All options expire
within 10 years.
Pro forma information regarding net income and net income per
share, as disclosed in Note 2, has been determined as if
the Company had accounted for its employee stock-based
compensation plans and other stock options under the fair value
method of SFAS 123. The fair value for these options was
estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions
used for grants under the option plans:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Weighted average risk-free interest rate
|
|
|
4.0 |
% |
|
|
3.3 |
% |
|
|
3.6 |
% |
|
Expected life of options (years)
|
|
|
5.00 |
|
|
|
5.00 |
|
|
|
5.00 |
|
|
Expected stock volatility
|
|
|
49.3 |
% |
|
|
46.4 |
% |
|
|
43.7 |
% |
|
Expected dividend yield
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility.
Because changes in the subjective input assumptions can
materially affect the fair value estimate, in management’s
opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options. The weighted-average fair value of options granted for
the years ended December 29, 2002, December 28, 2003
and January 2, 2005 was $14.55, $19.06 and $19.59,
respectively.
Information regarding activity for stock options outstanding
under the Plans is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Outstanding Options | |
| |
|
| |
| |
|
|
|
Weighted- | |
| |
|
Shares | |
|
|
|
Average | |
| |
|
Available | |
|
|
|
Exercise | |
| |
|
for Options | |
|
Shares | |
|
Price | |
| |
|
| |
|
| |
|
| |
|
Outstanding at December 30, 2001
|
|
|
355,920 |
|
|
|
3,041,740 |
|
|
$ |
8.92 |
|
| |
Authorized
|
|
|
1,000,000 |
|
|
|
— |
|
|
|
— |
|
| |
Granted
|
|
|
(485,750 |
) |
|
|
485,750 |
|
|
|
30.55 |
|
| |
Exercised
|
|
|
— |
|
|
|
(1,055,371 |
) |
|
|
4.60 |
|
| |
Forfeited (canceled)
|
|
|
85,192 |
|
|
|
(85,192 |
) |
|
|
19.44 |
|
| |
|
|
|
|
|
|
|
|
|
|
Outstanding at December 29, 2002
|
|
|
955,362 |
|
|
|
2,386,927 |
|
|
|
14.88 |
|
| |
Authorized
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Granted
|
|
|
(602,000 |
) |
|
|
602,000 |
|
|
|
43.34 |
|
| |
Exercised
|
|
|
— |
|
|
|
(464,535 |
) |
|
|
11.38 |
|
| |
Forfeited (canceled)
|
|
|
96,198 |
|
|
|
(96,198 |
) |
|
|
18.92 |
|
| |
|
|
|
|
|
|
|
|
|
|
Outstanding at December 28, 2003
|
|
|
449,560 |
|
|
|
2,428,194 |
|
|
|
22.46 |
|
| |
Authorized
|
|
|
1,000,000 |
|
|
|
— |
|
|
|
— |
|
| |
Granted
|
|
|
(602,200 |
) |
|
|
602,200 |
|
|
|
45.33 |
|
| |
Exercised
|
|
|
— |
|
|
|
(509,833 |
) |
|
|
11.59 |
|
| |
Forfeited (canceled)
|
|
|
49,331 |
|
|
|
(49,331 |
) |
|
|
36.52 |
|
| |
|
|
|
|
|
|
|
|
|
|
Outstanding at January 2, 2005
|
|
|
896,691 |
|
|
|
2,471,230 |
|
|
$ |
29.92 |
|
| |
|
|
|
|
|
|
|
|
|
|
Options exercisable at January 2, 2005
|
|
|
|
|
|
|
1,268,214 |
|
|
$ |
21.90 |
|
| |
|
|
|
|
|
|
|
|
|
52
P.F. CHANG’S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Information regarding options outstanding and exercisable at
January 2, 2005 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding | |
|
|
| |
|
| |
|
Options Exercisable | |
| |
|
|
|
Weighted- | |
|
|
|
| |
| |
|
|
|
Average | |
|
Weighted- | |
|
|
|
Weighted- | |
| |
|
|
|
Remaining | |
|
Average | |
|
|
|
Average | |
| |
|
Number | |
|
Contractual | |
|
Exercise | |
|
Number | |
|
Exercise | |
| Range of Exercise Prices |
|
Outstanding | |
|
Life | |
|
Price | |
|
Exercisable | |
|
Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$ 1.20 — $ 5.00
|
|
|
198,746 |
|
|
|
2.1 years |
|
|
$ |
2.34 |
|
|
|
198,746 |
|
|
$ |
2.34 |
|
|
$ 5.01 — $10.00
|
|
|
59,659 |
|
|
|
4.5 years |
|
|
|
8.92 |
|
|
|
59,659 |
|
|
|
8.92 |
|
|
$10.01 — $15.00
|
|
|
296,110 |
|
|
|
5.0 years |
|
|
|
13.12 |
|
|
|
272,276 |
|
|
|
12.96 |
|
|
$15.01 — $20.00
|
|
|
427,402 |
|
|
|
6.3 years |
|
|
|
18.60 |
|
|
|
282,638 |
|
|
|
18.48 |
|
|
$20.01 — $25.00
|
|
|
13,645 |
|
|
|
7.0 years |
|
|
|
24.39 |
|
|
|
5,637 |
|
|
|
24.39 |
|
|
$25.01 — $30.00
|
|
|
38,019 |
|
|
|
7.7 years |
|
|
|
29.21 |
|
|
|
10,318 |
|
|
|
29.17 |
|
|
$30.01 — $35.00
|
|
|
367,904 |
|
|
|
7.6 years |
|
|
|
31.40 |
|
|
|
176,030 |
|
|
|
31.75 |
|
|
$35.01 — $40.00
|
|
|
95,774 |
|
|
|
8.2 years |
|
|
|
38.39 |
|
|
|
71,749 |
|
|
|
39.04 |
|
|
$40.01 — $45.00
|
|
|
467,639 |
|
|
|
9.5 years |
|
|
|
43.93 |
|
|
|
3,869 |
|
|
|
44.86 |
|
|
$45.01 — $51.45
|
|
|
506,332 |
|
|
|
8.8 years |
|
|
|
47.18 |
|
|
|
187,292 |
|
|
|
48.14 |
|
Since options are generally exercisable upon date of grant,
options exercisable, included in the above table, represent
vested options that are not subject to repurchase by the Company.
During 2001, Pei Wei Asian Diner, Inc.’s Board of Directors
approved the Pei Wei Asian Diner, Inc. 2001 Stock Option Plan
(“2001 Pei Wei Plan”), which provides for
discretionary grants of incentive stock options and nonqualified
stock options to employees, consultants and directors of Pei Wei
Asian Diner, Inc. After factoring in a 1000 for 1 stock split
that occurred in 2003, a total of 169,000 shares of common
stock have been reserved for issuance under the 2001 Pei Wei
Plan. As of January 2, 2005, 155,000 options have been
granted at prices ranging from $7.40 to $46.77, 45,900 options
have been exercised at $7.40 and 6,000 options with an exercise
price ranging from $7.40 to $46.77 have been canceled. The
Company holds 960,000 shares of common stock of Pei Wei
Asian Diner.
|
|
|
Key Employee Stock Purchase Plan |
On December 8, 2004 the Company’s Board of Directors
approved the Key Employee Stock Purchase Plan (The “Key
Employee Plan”) and reserved 50,000 shares there
under. Although adopted in 2004, no actual rights to purchase
stock were issued under the Key Employee Plan until 2005. The
Key Employee Plan was adopted to provide a convenient way for
eligible participants, specifically key operators, supervisors,
managers and chefs, to purchase a specified dollar value of
Company stock, which may be required for them to participate in
the Company’s Management Incentive Compensation Plan. No
executive officer, including specifically any Named Executive
Officer, is eligible to participate in either the Key Employee
Plan or the corresponding Management Incentive Compensation
Plan. The stock purchase rights are issued at the Company’s
current fair market value and the stock is purchased on the open
market. The exercise of any stock purchase right granted under
the Key Employee Plan, and continued ownership of such stock,
may be required as a condition of continued participation in the
Management Incentive Compensation Plan (which is a cash
incentive plan designed to focus eligible participants on the
achievement of increased performance and profit objectives).
|
|
|
Employee Stock Purchase Plan |
During 1998, the Company’s Board of Directors approved the
1998 Employee Stock Purchase Plan (“Purchase Plan”)
and reserved 800,000 shares for issuance thereunder. The
Purchase Plan permits eligible
53
P.F. CHANG’S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
employees to purchase common stock at a discount, but only
through payroll deductions, during concurrent 24 month
offering periods. Each offering period will be divided into four
consecutive six-month purchase periods. The price at which stock
is purchased under the Purchase Plan is equal to 85 percent
of the lower of the fair market value of the common stock on the
first day of the offering period and the fair market value of
the common stock on the last day of the offering period.
Effective July 1, 1997, the Company adopted a 401(k)
Defined Contribution Benefit Plan (“the Plan”), which
covers substantially all employees of the Company that have
completed one year of service and have attained the age of
21 years old. The Plan permits participants to contribute
to the Plan, subject to Internal Revenue Code restrictions, and
the Plan also permits the Company to make discretionary matching
contributions. During the years ended December 29, 2002,
December 28, 2003 and January 2, 2005, the Company did
not make any contributions to the Plan.
|
|
| 10. |
Employment Agreements |
In August 2002, P.F. Chang’s executed employment agreements
with its Chief Executive Officer and also its President; and the
President of Pei Wei Asian Diner, Inc., its majority owned
subsidiary. The term for these agreements is three years and the
agreements prohibit these officers from competing with P.F.
Chang’s China Bistro and Pei Wei Asian Diner in the area of
Chinese and Asian food concepts during the term of the
agreements and for one year after termination.
The agreements with the Chief Executive Officer and the
President of the Company provide for immediate vesting of
unvested stock options, and the extension of the expiration date
to three years, after the occurrence of certain events. These
events include a change in control of the Company, termination
of the executive’s employment by the Company without cause
or separation of employment by the executive for “good
reason” (as defined in the agreements). These provisions in
the employment agreements resulted in a modification under
FIN 44 to APB 25. Should any of these events occur,
the Company may be required to record an expense based upon the
difference between the original grant price and the fair value
at the modification date for the number of shares ultimately
affected by the modification. As of January 2, 2005,
approximately 773,000 shares were affected by these
agreements of which approximately 238,000 shares were
unvested.
The agreement with the President of Pei Wei Asian Diner, Inc.
contains similar provisions with respect to a change in control
for Pei Wei Asian Diner, Inc. and termination without cause but
also includes a provision whereby the Company could be required
to repurchase his shares of common stock in this subsidiary at
fair value should a termination without cause or for “good
reason” (as defined in the agreement) occur. The agreement
covers 36,400 shares of Pei Wei Asian Diner, Inc. common
stock issued as of January 2, 2005, and options to
purchase 19,600 shares of which 16,800 were unvested
as of January 2, 2005. The agreement also covers options to
purchase 20,000 shares of P.F. Chang’s China
Bistro stock, of which 17,167 were unvested as of
January 2, 2005.
|
|
| 11. |
Partnership Structure |
P.F. Chang’s utilizes a partnership structure to facilitate
the development, leadership and operation of its restaurants.
Each partner is required to make a capital contribution in
exchange for their percentage interest in the restaurant or
region the partner is employed to manage. The ownership interest
purchased by each partner generally ranges between two and seven
percent of the restaurant or region the partner oversees. At the
end of a specific term (generally five years), P.F. Chang’s
has the right, but not the obligation, to purchase the minority
partner’s interest in the partner’s respective
restaurant or region at fair market value. An estimated fair
value is determined by reference to current industry purchase
metrics as well as the average cash flows of
54
P.F. CHANG’S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
the subject restaurant’s or region’s financial
results. The Company has the option to pay the agreed upon
purchase price in cash or common stock of the Company over a
period of time not to exceed five years.
As of January 2, 2005, there were 195 partners within the
P.F. Chang’s China Bistro, Inc. system. During 2004, the
Company purchased interests held by 10 minority partners for a
total of approximately $2.0 million. Approximately
$1.0 million of the total purchase price was paid in cash
while the remaining balance has been recorded as amounts due to
related parties on the balance sheet at January 2, 2005.
Subsequent to year-end, the Company purchased ten partnership
interests, which became available for purchase prior to 2005,
for a total purchase price of $10.8 million. In 2005, the
Company will have the opportunity to purchase an additional 20
partnership interests.
Income tax expense (benefit) consisted of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
| |
|
December 29, | |
|
December 28, | |
|
January 2, | |
| |
|
2002 | |
|
2003 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
| |
|
(Restated) | |
|
(Restated) | |
|
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
$ |
8,094 |
|
|
$ |
12,987 |
|
|
$ |
8,539 |
|
| |
Deferred
|
|
|
(1,186 |
) |
|
|
(2,800 |
) |
|
|
(165 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
6,908 |
|
|
|
10,187 |
|
|
|
8,374 |
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
|
2,176 |
|
|
|
2,745 |
|
|
|
2,312 |
|
| |
Deferred
|
|
|
(209 |
) |
|
|
(508 |
) |
|
|
(30 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
1,967 |
|
|
|
2,237 |
|
|
|
2,282 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
8,875 |
|
|
$ |
12,424 |
|
|
$ |
10,656 |
|
| |
|
|
|
|
|
|
|
|
|
The Company’s effective tax rate differs from the federal
statutory rate for the following reasons:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
| |
|
December 29, | |
|
December 28, | |
|
January 2, | |
| |
|
2002 | |
|
2003 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
| |
|
(Restated) | |
|
(Restated) | |
|
|
|
Income tax expense at federal statutory rate
|
|
$ |
9,135 |
|
|
$ |
13,024 |
|
|
$ |
12,849 |
|
|
State taxes, net of federal expense
|
|
|
945 |
|
|
|
1,454 |
|
|
|
1,483 |
|
|
FICA tip credit
|
|
|
(967 |
) |
|
|
(2,816 |
) |
|
|
(3,702 |
) |
|
Increase (decrease) in valuation allowance
|
|
|
(1,158 |
) |
|
|
— |
|
|
|
— |
|
|
Other, net
|
|
|
920 |
|
|
|
762 |
|
|
|
26 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
8,875 |
|
|
$ |
12,424 |
|
|
$ |
10,656 |
|
| |
|
|
|
|
|
|
|
|
|
55
P.F. CHANG’S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The income tax effects of temporary differences that give rise
to significant portions of deferred tax assets and liabilities
are as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
As of | |
|
As of | |
| |
|
December 28, | |
|
January 2, | |
| |
|
2003 | |
|
2005 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
| |
|
(Restated) | |
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
| |
Preopening expenses
|
|
$ |
1,333 |
|
|
$ |
1,218 |
|
| |
FICA tip and AMT credit carryforward
|
|
|
5,184 |
|
|
|
8,503 |
|
| |
Buyout intangible
|
|
|
2,529 |
|
|
|
7,786 |
|
| |
Unearned compensation
|
|
|
2,942 |
|
|
|
2,367 |
|
| |
Other
|
|
|
1,052 |
|
|
|
2,324 |
|
| |
Straight line rent
|
|
|
124 |
|
|
|
405 |
|
| |
|
|
|
|
|
|
| |
|
|
13,164 |
|
|
|
22,603 |
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
| |
Depreciation on property and equipment
|
|
|
8,810 |
|
|
|
20,330 |
|
| |
Goodwill amortization
|
|
|
794 |
|
|
|
(1,482 |
) |
| |
|
|
|
|
|
|
| |
|
|
9,604 |
|
|
|
18,848 |
|
|
Net deferred tax liabilities (assets)
|
|
$ |
(3,560 |
) |
|
$ |
(3,755 |
) |
| |
|
|
|
|
|
|
The FICA tip credit carryforward begins to expire in 2023. For
the year ended January 2, 2005 the tip credits were
assessed as probable of utilization prior to their expiration.
At January 2, 2005, the Company 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 years ended
December 29. 2002, December 28, 2003 and January 2,
2005, the Company recorded a $11.7 million,
$5.0 million and $7.0 million, respectively, increase
to equity with a corresponding 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.
The reserve for tax contingencies related to issues was
$2.6 million at January 2, 2005 and $3.1 million
at December 28, 2003. This balance is the Company’s
best estimate of the potential liability for tax contingencies.
The decline in the tax contingency reserve was primarily due to
the closure of audits and the expiration of the statute of
limitations, partially offset by additions due to changes in tax
laws and current year requirements for asserted and unasserted
items. Inherent uncertainties exist in estimates of tax
contingencies due to changes in tax law, both legislated and
concluded through the various jurisdictions’ tax court
systems.
|
|
| 13. |
Commitments and Contingencies |
The Company enters into various purchase obligations in the
ordinary course of its business. Those that are binding relate
primarily to certain commodities contracts and construction for
restaurants planed to open in the near future. At
January 2, 2005, such purchase obligations approximated
$71.7 million and were due within the following 12-month
period.
56
P.F. CHANG’S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The Company is engaged in 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.
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.
The table below presents information about reportable segments:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total | |
|
Bistro | |
|
Pei Wei | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Fiscal Year 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Revenues
|
|
$ |
706,941 |
|
|
$ |
611,468 |
|
|
$ |
95,473 |
|
| |
Income (loss) before income taxes
|
|
|
36,710 |
|
|
|
37,194 |
|
|
|
(484 |
) |
| |
Capital expenditures
|
|
|
84,146 |
|
|
|
67,533 |
|
|
|
16,613 |
|
| |
Total assets
|
|
|
383,515 |
|
|
|
341,374 |
|
|
|
42,141 |
|
| |
Goodwill
|
|
|
6,819 |
|
|
|
6,566 |
|
|
|
253 |
|
| |
Depreciation and amortization
|
|
|
29,155 |
|
|
|
24,778 |
|
|
|
4,377 |
|
|
Fiscal Year 2003, as restated:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Revenues
|
|
$ |
539,917 |
|
|
$ |
486,609 |
|
|
$ |
53,308 |
|
| |
Income (loss) before income taxes
|
|
|
37,211 |
|
|
|
37,505 |
|
|
|
(294 |
) |
| |
Capital expenditures
|
|
|
70,832 |
|
|
|
56,945 |
|
|
|
13,887 |
|
| |
Total assets
|
|
|
303,821 |
|
|
|
275,021 |
|
|
|
28,800 |
|
| |
Goodwill
|
|
|
6,819 |
|
|
|
6,566 |
|
|
|
253 |
|
| |
Depreciation and amortization
|
|
|
21,817 |
|
|
|
19,414 |
|
|
|
2,403 |
|
|
Fiscal Year 2002, as restated:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Revenues
|
|
$ |
406,609 |
|
|
$ |
385,036 |
|
|
$ |
21,573 |
|
| |
Income (loss) before income taxes
|
|
|
26,100 |
|
|
|
28,847 |
|
|
|
(2,747 |
) |
| |
Capital expenditures
|
|
|
51,229 |
|
|
|
39,509 |
|
|
|
11,720 |
|
| |
Total assets
|
|
|
238,850 |
|
|
|
223,840 |
|
|
|
15,010 |
|
| |
Goodwill
|
|
|
6,819 |
|
|
|
6,566 |
|
|
|
253 |
|
| |
Depreciation and amortization
|
|
|
15,847 |
|
|
|
14,755 |
|
|
|
1,092 |
|
|
|
| 15. |
Interim Financial Results (Unaudited) |
The following tables set forth certain unaudited consolidated
financial information for each of the four quarters in fiscal
2003 and 2004. In management’s opinion, this unaudited
quarterly information has been prepared on the same basis as the
audited consolidated financial statements and includes all
necessary adjustments, consisting only of normal recurring
adjustments, that management considers necessary for a fair
presentation of the unaudited quarterly results when read in
conjunction with the Consolidated Financial
57
P.F. CHANG’S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Statements and Notes. The Company believes that
quarter-to-quarter comparisons of its financial results are not
necessarily indicative of future performance.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 28, 2003 | |
|
Year Ended January 2, 2005 | |
| |
|
| |
|
| |
| |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
First | |
|
Second | |
|
Third | |
|
|
| |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Fourth | |
| |
|
(1)(2) | |
|
(1)(2) | |
|
(1)(2) | |
|
(1)(2) | |
|
(1)(2)(3) | |
|
(1)(2) | |
|
(2) | |
|
Quarter | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Restated) | |
|
(Restated) | |
|
(Restated) | |
|
(Restated) | |
|
(Restated) | |
|
(Restated) | |
|
(Restated) | |
|
|
| |
|
(In thousands, except per share data) | |
|
Revenues
|
|
$ |
126,953 |
|
|
$ |
131,905 |
|
|
$ |
134,926 |
|
|
$ |
146,133 |
|
|
$ |
164,056 |
|
|
$ |
169,602 |
|
|
$ |
174,013 |
|
|
$ |
199,270 |
|
|
Restaurant operating profit
|
|
|
25,821 |
|
|
|
26,384 |
|
|
|
26,559 |
|
|
|
29,363 |
|
|
|
31,062 |
|
|
|
32,133 |
|
|
|
34,340 |
|
|
|
38,124 |
|
|
Income (loss) before provision for income taxes
|
|
|
9,567 |
|
|
|
9,801 |
|
|
|
7,992 |
|
|
|
9,851 |
|
|
|
(2,185 |
) |
|
|
12,240 |
|
|
|
11,903 |
|
|
|
14,752 |
|
|
Net income (loss)
|
|
|
6,348 |
|
|
|
6,510 |
|
|
|
5,370 |
|
|
|
6,559 |
|
|
|
(678 |
) |
|
|
8,396 |
|
|
|
8,171 |
|
|
|
10,165 |
|
|
Basic net income (loss) per share
|
|
|
0.25 |
|
|
|
0.26 |
|
|
|
0.21 |
|
|
|
0.26 |
|
|
|
(0.03 |
) |
|
|
0.33 |
|
|
|
0.32 |
|
|
|
0.39 |
|
|
Diluted net income (loss) per share
|
|
|
0.24 |
|
|
|
0.25 |
|
|
|
0.20 |
|
|
|
0.25 |
|
|
|
(0.03 |
) |
|
|
0.32 |
|
|
|
0.31 |
|
|
|
0.38 |
|
|
Basic weighted average shares outstanding
|
|
|
25,137 |
|
|
|
25,338 |
|
|
|
25,414 |
|
|
|
25,491 |
|
|
|
25,559 |
|
|
|
25,605 |
|
|
|
25,768 |
|
|
|
25,977 |
|
|
Diluted weighted average shares outstanding
|
|
|
26,038 |
|
|
|
26,228 |
|
|
|
26,331 |
|
|
|
26,402 |
|
|
|
25,559 |
|
|
|
26,475 |
|
|
|
26,589 |
|
|
|
26,786 |
|
|
|
| (1) |
The Company has reclassified certain of its restaurant costs
relating to complimentary and employee meals from operating
expenses to contra-revenue accounts as discussed in Note 2.
This reclassification has no effect on net income. The total
amount reclassified is reflected as a reduction of operating
expenses and a corresponding reduction of revenues in the same
amount in each quarter affected. The reclassification totaled
$4.6 million, $4.7 million, $4.8 million and
$5.2 million for the first, second, third and fourth
quarter of fiscal 2003 and $5.7 million and
$5.7 million for the first and second quarter of fiscal
2004, respectively. |
| |
| (2) |
The Company has restated its previously reported consolidated
financial statements for changes in Occupancy, General and
administrative, Preopening and Depreciation expenses for all
previous years presented due to the treatment of lease
accounting as discussed in Note 1. The effect of the
restatement on net income (loss) is a decrease of approximately
$50,000, approximately $77,000, $0.2 million and
$0.3 million for the first, second, third and fourth
quarter of fiscal 2003 and $0.1 million, $0.1 million
and $0.2 million for the first, second and third quarter of
fiscal 2004, respectively. The effect on reported quarterly
basic net income (loss) per share is a decrease of $0.01 for
both the third and fourth quarter of fiscal 2003 and $0.01 for
the first quarter of fiscal 2004. There was no effect on our
reported quarterly basic net income (loss) per share for first
and second quarter of fiscal 2003 and second and third quarter
of fiscal 2004. The effect on reported quarterly diluted net
income (loss) per share is a decrease of $0.01 for the first,
third and fourth quarter of fiscal 2003 and $0.01 for the first
quarter of fiscal 2004, respectively. There was no effect on our
reported quarterly diluted net income (loss) per share for
second quarter of fiscal 2003 and second and third quarter of
fiscal 2004. |
| |
| (3) |
Partner investment expense increased during first quarter of
2004 as a result of a $12.5 million modification of certain
partnership agreements as discussed in Note 2. |
58
|
|
| Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
None.
|
|
| Item 9A. |
Controls and Procedures |
Disclosure Controls and Procedures — We
maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the
Company’s reports under the Securities Exchange Act of
1934, as amended (the “Exchange Act”), is recorded,
processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to management,
including our Chief Executive Officer (“CEO”) and
Chief Financial Officer (“CFO”), as appropriate, to
allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no
matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control
objectives, as the Company’s are designed to do, and
management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls
and procedures.
In connection with the preparation of this Annual Report on
Form 10-K, as of January 2, 2005, an evaluation was
performed under the supervision and with the participation of
our management, including the CEO and CFO, of the effectiveness
of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange
Act). In performing this evaluation, management reviewed our
lease accounting practices in light of recent guidance from the
SEC on such accounting practices. As a result of this review, we
concluded that our previously established lease accounting
practices were not appropriate and determined that our occupancy
expense, depreciation and amortization expense, property and
equipment, and lease obligations over the last several years had
been misstaked. Accordingly, as described below, we have decided
to restate certain of our previously issued financial statements
to reflect the correction in our lease accounting practices.
Based on that evaluation, our CEO and CFO concluded that our
disclosure controls and procedures were not effective as of
January 2, 2005.
Management’s Annual Report on Internal Control over
Financial Reporting — Our management is
responsible for establishing and maintaining adequate internal
control over financial reporting as defined in
Rule 13a-15(f) under the Exchange Act. Our internal control
system is designed to provide reasonable assurance to the
Company’s management and Board of Directors regarding the
preparation and fair presentation of published financial
statements. All internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and
presentation.
Our management has assessed the effectiveness of our internal
control over financial reporting as of January 2, 2005. In
making its assessment of internal control over financial
reporting, management used the criteria set forth by the
Committee of Sponsoring Organizations (“COSO”) of the
Treadway Commission in Internal Control —
Integrated Framework.
In performing this assessment, management reviewed the
Company’s lease accounting practices in light of recent
guidance from the SEC on such accounting practices. As a result
of this review, management concluded that our controls over the
selection and monitoring of appropriate assumptions and factors
affecting lease accounting practices were insufficient, and, as
a result, management has determined that our occupancy expense,
depreciation and amortization expense, property and equipment,
and lease obligations over the last several years had been
misstaked. On March 15, 2005, the Audit Committee of the
Board of Directors (the “Committee”) and management
determined to restate certain of our previously issued financial
statements to reflect the correction in our lease accounting
practices.
Management evaluated the impact of this restatement on its
assessment of our internal control over financial reporting and
has concluded that the control deficiency that resulted in the
incorrect lease accounting practices represented a material
weakness. A material weakness in internal control over financial
reporting is a control deficiency (within the meaning of the
Public Company Accounting Oversight Board (“PCAOB”)
Auditing Standard No. 2), or combination of control
deficiencies, that results in there being
59
more than a remote likelihood that a material misstatement of
the annual or interim financial statements will not be prevented
or detected. PCAOB Auditing Standard No. 2 identifies a
number of circumstances that, because of their likely
significant negative effect on internal control over financial
reporting, are to be regarded as at least significant
deficiencies as well as strong indicators that a material
weakness exists, including the restatement of previously issued
financial statements to reflect the correction of a
misstatement. As a result of this material weakness, management
has concluded that, as of January 2, 2005, our internal
control over financial reporting was not effective based on the
criteria set forth by COSO in Internal Control —
Integrated Framework.
Our independent registered public accounting firm,
Ernst & Young LLP, has issued an attestation report on
management’s assessment of our internal control over
financial reporting. This report appears below.
Remediation Steps to Address Material
Weakness — To remediate the material weakness in
our internal control over financial reporting, we have
implemented additional review procedures over the selection and
monitoring of appropriate assumptions and factors affecting
lease accounting practices.
Change in Internal Control Over Financial
Reporting — There were no changes in our internal
control over financial reporting that occurred during our last
fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
60
Report of Independent Registered Public Accounting Firm on
Internal Control over Financial Reporting
The Board of Directors and Shareholders of
P.F. Chang’s China Bistro, Inc.
We have audited management’s assessment, included in the
accompanying Management’s Annual Report on Internal Control
over Financial Reporting, that P.F. Chang’s China Bistro,
Inc. (the “Company”) did not maintain effective
internal control over financial reporting as of January 2,
2005, based on criteria established in Internal
Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the
“COSO criteria”). The Company’s management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on management’s assessment and an
opinion on the effectiveness of the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The
following material weakness has been identified and included in
management’s assessment. As of January 2, 2005,
management identified deficiencies in the Company’s
internal control over financial reporting regarding the
selection, monitoring, and review of assumptions and factors
affecting lease accounting practices, due to an error in the
Company’s interpretation of U.S. generally accepted
accounting principles. As a result of this material weakness in
internal control over financial reporting, the Company
determined its previously reported occupancy expense,
depreciation and amortization expense, property and equipment,
and lease obligations had been misstaked and that previously
issued financial statements should be restated. This material
weakness was considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2004
consolidated financial statements, and this report does not
affect our report dated March 25, 2005 on those financial
statements.
61
In our opinion, management’s assessment that P.F.
Chang’s China Bistro, Inc. did not maintain effective
internal control over financial reporting as of January 2,
2005 is fairly stated, in all material respects, based on the
COSO control criteria. Also, in our opinion, because of the
effect of the material weakness described above on the
achievement of the objectives of the control criteria, P.F.
Chang’s China Bistro, Inc. has not maintained effective
internal control over financial reporting as of January 2,
2005, based on the COSO control criteria.
Phoenix, Arizona
March 31, 2005
62
PART III
|
|
| Item 10. |
Directors and Executive Officers of the Registrant |
The information required by Item 10 with respect to
Directors and Executive Officers is incorporated by reference
from the information under the captions “Directors and
Executive Officers,” “Board Meetings and
Committees,” “Section 16(a) Beneficial Ownership
Reporting Compliance,” and “Code of Ethics,”
contained in the Company’s definitive proxy statement in
connection with the solicitation of proxies for the
Company’s 2004 Annual Meeting of Stockholders to be held on
May 6, 2005 (the “Proxy Statement”).
|
|
| Item 11. |
Executive Compensation |
The information required by this item is incorporated by
reference from the information under the caption “Executive
Compensation and Other Matters” contained in the Proxy
Statement.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
Securities Authorized for Issuance Under Equity Compensation
Plans. Information about P.F. Chang’s China Bistro,
Inc. equity compensation plans at January 2, 2005 was as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Number of | |
| |
|
Number of Shares | |
|
Weighted | |
|
Shares | |
| |
|
to be Issued | |
|
Average Exercise | |
|
Remaining | |
| |
|
Upon Exercise of | |
|
Price of | |
|
Available for | |
| |
|
Outstanding | |
|
Outstanding | |
|
Future | |
| Plan Category |
|
Options | |
|
Options | |
|
Issuance | |
| |
|
| |
|
| |
|
| |
|
Equity compensation plans approved by shareholders(a)
|
|
|
2,022,901 |
|
|
$ |
30.74 |
|
|
|
1,612,184 |
(c) |
|
Equity compensation plans not approved by shareholders(b)
|
|
|
448,329 |
|
|
$ |
26.23 |
|
|
|
204,218 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,471,230 |
|
|
|
|
|
|
|
1,816,402 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
Consists of four P.F. Chang’s stock plans: 1996 Stock
Option Plan, 1997 Restaurant Management Stock Option Plan, 1998
Stock Option Plan and 1998 Employee Stock Purchase Plan. |
|
|
|
|
(b) |
|
Consists of P.F. Chang’s China Bistro 1999 Nonstatutory
Stock Option Plan. See “Notes to Consolidated Financial
Statements, Note 6 — Stock Option Plans.” |
| |
|
(c) |
|
Includes 548,188 shares reserved for issuance under the
1998 Employee Stock Purchase Plan. |
Information about employee and executive stock option grants at
January 2, 2005 was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net grants during the period as % of outstanding shares
|
|
|
2.1 |
% |
|
|
2.0 |
% |
|
|
1.6 |
% |
|
Grants to named executive officers* as % of total options granted
|
|
|
23.2 |
% |
|
|
24.9 |
% |
|
|
23.7 |
% |
|
Grants to named executive officers* as % of outstanding shares
|
|
|
0.5 |
% |
|
|
0.6 |
% |
|
|
0.5 |
% |
|
Cumulative options held by named executive officers* as % of
total options outstanding
|
|
|
37.9 |
% |
|
|
44.8 |
% |
|
|
47.1 |
% |
|
|
| * |
Named executive officers are defined by the SEC for inclusion in
the Proxy Statement as the Chief Executive Officer and each of
the four other most highly compensated executive officers. |
The information required by Item 403 of Regulation S-K
in this item is incorporated by reference from information under
the caption “Security Ownership of Certain Beneficial
Owners and Management” contained in the Proxy Statement.
63
|
|
| Item 13. |
Certain Relationships and Related Transactions |
The information required by this item is incorporated by
reference from the information under the caption “Certain
Relationships and Related Transactions” contained in the
Proxy Statement.
|
|
| Item 14. |
Principal Accountant Fees and Services |
The response to this item is contained in our Proxy Statement
under the caption “Independent Auditors Fees and Other
Matters,” and is incorporated herein by reference.
PART IV
|
|
| Item 15. |
Exhibits, Financial Statement Schedules |
Documents filed as part of this report:
1. The following Financial Statements of the Company are
included in Part II, Item 8 of this Annual Report on
Form 10-K:
|
|
| |
Report of Independent Registered Public Accounting Firm; |
| |
Consolidated Balance Sheets at December 28, 2003 and
January 2, 2005; |
| |
Consolidated Statements of Income for the Years Ended
December 29, 2002, December 28, 2003 and
January 2, 2005; |
| |
Consolidated Statements of Common Stockholders’ Equity for
the Years Ended December 29, 2002, December 28, 2003
and January 2, 2005; |
| |
Consolidated Statements of Cash Flows for the Years Ended
December 29, 2002, December 28, 2003 and
January 2, 2005; |
| |
Notes to Consolidated Financial Statements. |
2. Schedules to Financial Statements:
|
|
| |
All financial statement schedules have been omitted because they
are either inapplicable or the information required is provided
in the Company’s Consolidated Financial Statements and
Notes thereto, included in Part II, Item 8 of this
Annual Report on Form 10-K. |
3. Index to Exhibits
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description Document |
| |
|
|
| |
3 |
.1(1) |
|
Amended and Restated Certificate of Incorporation. |
| |
| |
3 |
.2(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. |
64
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description Document |
| | |
|
|
| |
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. |
| |
| |
†10 |
.23(10) |
|
Key Employee Stock Purchase Plan and forms of Agreement
thereunder. |
| |
| |
21 |
.1 |
|
List of Subsidiaries. |
| |
| |
23 |
.1 |
|
Consent of Ernst & Young, LLP, Independent Registered
Public Accounting Firm. |
| |
| |
31 |
.1 |
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 for Richard L. Federico. |
| |
| |
31 |
.2 |
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted 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. |
|
|
|
| |
† |
Management Contract or Compensatory Plan |
|
|
| (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. |
|
|
| (10) |
Incorporated by reference to the Registrant’s Form S-8
dated January 31, 2005 |
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on April 1, 2005.
|
|
| |
P.F. CHANG’S CHINA
BISTRO, INC.
|
|
|
|
| |
By: |
/s/ RICHARD L. FEDERICO
|
|
|
| |
|
| |
Richard L. Federico |
| |
Chairman and Chief Executive Officer |
POWER OF ATTORNEY
Know all persons by these presents, that each person whose
signature appears below constitutes and appoints Richard L.
Federico and Kristina Cashman, and each of them, as his or her
true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him or her and in his or
her name, place, and stead, in any and all capacities, to sign
any and all amendments to this Report, and to file the same,
with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming
that all said attorneys-in-fact and agents, or any of them or
their substitute or substituted, may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirement of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
| |
|
|
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
| |
|
By: |
|
/s/ RICHARD L. FEDERICO
Richard
L. Federico |
|
Chairman, Chief Executive Officer and Director (Principal
Executive Officer) |
|
April 1, 2005 |
| |
|
By: |
|
/s/ KRISTINA CASHMAN
Kristina
Cashman |
|
Chief Financial Officer and Secretary
(Principal Accounting Officer) |
|
April 1, 2005 |
| |
|
By: |
|
/s/ KENNETH J. WESSELS
Kenneth
J. Wessels |
|
Director |
|
April 1, 2005 |
| |
|
By: |
|
/s/ R. MICHAEL WELBORN
R.
Michael Welborn |
|
Director |
|
April 1, 2005 |
| |
|
By: |
|
/s/ JAMES G. SHENNAN, JR.
James
G. Shennan, Jr. |
|
Director |
|
April 1, 2005 |
| |
|
By: |
|
/s/ F. LANE CARDWELL, JR.
F.
Lane Cardwell, Jr. |
|
Director |
|
April 1, 2005 |
66
| |
|
|
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
| |
|
By: |
|
/s/ M. ANN RHOADES
M.
Ann Rhoades |
|
Director |
|
April 1, 2005 |
| |
|
By: |
|
/s/ LESLEY H. HOWE
Lesley
H. Howe |
|
Director |
|
April 1, 2005 |
67
EXHIBIT INDEX
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description Document |
| |
|
|
| |
3 |
.1(1) |
|
Amended and Restated Certificate of Incorporation. |
| |
| |
3 |
.2(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 |
| |
| |
21 |
.1 |
|
List of Subsidiaries. |
| |
| |
23 |
.1 |
|
Consent of Ernst & Young, LLP, Independent Registered
Public Accounting Firm. |
| |
| |
31 |
.1 |
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 for Richard L. Federico. |
| |
| |
31 |
.2 |
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted 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. |
|
|
|
| |
† |
Management Contract or Compensatory Plan |
|
|
| (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. |
68