UNITED STATES SECURITIES AND EXCHANGE COMMISSION
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
For the Fiscal Year Ended December 30, 2001
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
For the transition period from to .
Commission File Number: 0-25123
P.F. Changs China Bistro, Inc.
Delaware | 86-0815086 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
15210 N. Scottsdale Rd., Ste. 300 Scottsdale, AZ (Address of principal executive offices) |
85254 (Zip Code) |
Registrants 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:
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 registrants 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
Based on the closing sale price of $58.06 on February 1, 2002, the aggregate market value of the voting stock held by non-affiliates of the registrant was $645,452,033.
On February 1, 2002 there were outstanding 11,990,469 shares of the Registrants Common Stock.
Documents Incorporated by Reference
Registrants Proxy Statement (specified portions) with respect to the Annual Meeting of Stockholders to be held April 3, 2002.
TABLE OF CONTENTS
Item | Page | |||||||
PART I | ||||||||
1. | Business | 2 | ||||||
2. | Properties | 16 | ||||||
3. | Legal Proceedings | 18 | ||||||
4. | Submission of Matters to a Vote of Security Holders | 18 | ||||||
PART II | ||||||||
5. | Market for the Registrants Common Stock and Related Stockholder Matters | 19 | ||||||
6. | Selected Financial Data | 20 | ||||||
7. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 22 | ||||||
7A. | Quantitative and Qualitative Disclosures About Market Risks | 29 | ||||||
8. | Financial Statements and Supplementary Data | 30 | ||||||
9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 49 | ||||||
PART III | ||||||||
10. | Directors and Executive Officers of the Registrant | 49 | ||||||
11. | Executive Compensation | 49 | ||||||
12. | Security Ownership of Certain Beneficial Owners and Management | 49 | ||||||
13. | Certain Relationships and Related Transactions | 49 | ||||||
PART IV | ||||||||
14. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K | 49 |
1
PART I
Item 1. Business
General
P.F. Changs owned and operated 65 full service, or Bistro, restaurants as of December 30, 2001 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. Our menu is focused on select dishes created to capture the distinct flavors and styles of the five major culinary regions of China: Canton, Hunan, Mongolia, Shanghai and Szechwan. By adhering to the Chinese culinary precepts of fan and tsai, a balancing of rice, noodles and grains with meat, seafood and vegetables, the Bistros menu offers an array of taste, texture, color and aroma. The menu is highlighted by dishes such as Changs Spicy Chicken, Orange Peel Beef, Peking Ravioli, Chicken in Soothing Lettuce Wrap, Szechwan-Style Long Beans and Dan Dan Noodles. Our traditional cuisine 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 Xian warriors and narrative murals depicting 12th century China.
We also owned and operated five limited service, or Pei Wei, restaurants as of December 30, 2001. We believe that there is an opportunity to leverage our knowledge and expertise in Chinese and Asian cuisine. Accordingly, we have developed Pei Wei Asian Diner, a new concept that caters to a quicker, more casual dining experience as compared to P.F. Changs China Bistro. Pei Wei opened its first unit in July 2000 in the Phoenix, Arizona area and four additional units in 2001, three in the Phoenix, Arizona area and one in the Dallas, Texas area. We will continue to devote additional resources to this concept as we push forward with the development of Pei Wei units in 2002.
Concept and Strategy
P.F. Changs 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 the 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 believe we have demonstrated the viability of the P.F. Changs concept 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. Changs 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 principles of fan and tsai foods. Fan foods include rice, noodles, grains and dumplings, while vegetables, meat, poultry and seafood are tsai foods. Our chefs are trained to produce distinctive Chinese cuisine with traditional recipes from the five major culinary regions of China: Canton, Hunan, Mongolia, Shanghai and Szechwan. The intense heat of Mandarin-style wok cooking sears in the clarity and distinct flavor of fresh ingredients. Slow roasted Cantonese-style ducklings, chickens 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. We also offer several vegetarian dishes for our customers who enjoy true vegetarian items. MSG is not added to any ingredients at P.F. Changs.
2
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 changed two to three times a year. 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 China by our corporate executive chef, continually reinforce our commitment to training P.F. Changs chefs and enhancing our menu offerings.
The Bistros entrees range in price from $8.00 to $18.00, and our appetizers range in price from $4.00 to $8.00. The average check per guest, including alcoholic beverages, is approximately $17 to $18. Sales of alcoholic beverages, featuring an extensive selection of wines, all of which are offered by the glass, constitute approximately 18% of revenues. Lunch and dinner contribute approximately 30% and 70% 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 dishes as well. Our guests can enjoy some of their favorite Chinese dishes seen at the Bistro, such as Soothing Lettuce Wraps and Orange Peel Beef, while also sampling other items such as Vietnamese Chicken Salad Rolls and Pad Thai. Pei Wei entrees range in price from $6 to $9, with appetizers ranging from $3 to $5. We do offer beer and wine at Pei Wei and these purchases comprise approximately 3% of sales. Take-out sales comprise approximately 35% to 40% of total revenues. The average check per guest at Pei Wei, including take-out sales and beer and wine sales, is approximately $8 to $9.
Operations
We have implemented a partnership structure to facilitate the development, leadership and operation of our restaurants. We have entered into a series of partnership agreements with our regional managers (Market Partners and Area Partners), certain of our general managers (Operating Partners) and certain of our executive chefs (Chef Partners). Each partner is required to make a cash contribution to their respective partnership. We do not finance any partner capital contributions. For this capital contribution, the partner receives an ownership interest ranging from two to seven percent in a specific restaurant or region. Each partner shares in the pretax income or loss of the restaurant or region they oversee.
P.F. Changs 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, two or three managers, an executive chef, one or two sous chefs and approximately 125 hourly employees, many of whom work part-time. The staff of a typical Pei Wei consists of a general manager, one or two managers, an executive chef, and one sous chef, as well as approximately 35 hourly employees. 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. Changs requires our general managers and executive chefs to have significant experience in the full-service restaurant industry.
P.F. Changs has a comprehensive 8-week management development program. This program consists of four weeks of culinary training, including both culinary job functions and culinary management, with the remaining four 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.
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.
3
Marketing
P.F. Changs focuses its business strategy on providing high quality, traditional Chinese cuisine served by an attentive staff in a distinctive environment at an affordable price. 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 attract new customers, P.F. Changs has also implemented a local, regional and national marketing strategy through paid advertising, public relations efforts and community involvement to maintain and build awareness throughout each community in which we operate. In order to increase local awareness of our restaurants, we build relationships with local radio personalities who provide testimonials to their listening audiences. We select stations that are consistently among the highest rated stations in their markets. Likewise, the radio personalities are very well recognized in their communities, not only on their station, but also in the market as a whole.
P.F. Changs also undertakes specialty programs such as concierge and accommodation programs targeted to build relationships with the local hotel concierges, who offer personal recommendations to the guests of their establishments. Community involvement with local organizations, participation in non-profit benefits and auctions, chef demonstrations and cooking classes also increase consumer awareness.
We also advertise in in-flight magazines for airlines that carry a high level of traffic in our markets, in order to make frequent travelers aware of our locations across the country.
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. Changs 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 and locally-owned and operated Chinese restaurants. For Pei Wei, our main competitors are other value-priced, quick-service concepts as well as locally-owned and operated Chinese restaurants. There are many well-established competitors with substantially greater financial, marketing, personnel and other resources than ours. 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. Changs 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 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. Changs 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
4
Employees
At December 30, 2001, P.F. Changs employed approximately 9,500 persons, 97 of whom were executive office personnel, 629 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. Changs 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 set forth below.
Please note that the restaurant level return on invested capital is not a generally accepted accounting principle measure of performance and does not represent a return on an individual stockholders investment in P.F. Changs. Rather, it measures the return on the capital invested in the restaurants by P.F. Changs. The restaurant-level return on invested capital is calculated as the quotient of the restaurant income (loss) before minority interests, interest (income) expense, net, income taxes, rent expense and preopening adjustment divided by the total restaurant invested capital. Interest (income) expense, net, income taxes and rent expense are excluded from this calculation to provide for an evaluation of operational results of individual restaurants without the variability introduced by different forms of financing and ownership, such as purchased and financed versus leased.
5
Bistro units opened in | Total Restaurant | |||||||||||||||||||||||||||||||||||||||||||||||
Pre 1996 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | Bistro | Pei Wei | Corporate | Total | |||||||||||||||||||||||||||||||||||||
(dollars in thousands, except average weekly sales) | ||||||||||||||||||||||||||||||||||||||||||||||||
Fiscal 2001
|
||||||||||||||||||||||||||||||||||||||||||||||||
Units(1)
|
4 | 3 | 6 | 10 | 13 | 16 | 13 | 65 | 5 | 70 | ||||||||||||||||||||||||||||||||||||||
Sales weeks
|
208 | 156 | 312 | 520 | 676 | 832 | 265 | 2,969 | 101 | 3,070 | ||||||||||||||||||||||||||||||||||||||
Average weekly sales
|
$ | 122,532 | $ | 141,120 | $ | 105,979 | $ | 114,641 | $ | 100,136 | $ | 94,600 | $ | 99,186 | $ | 105,377 | $ | 58,535 | $ | 103,836 | ||||||||||||||||||||||||||||
Change in comparable store sales(2)
|
(2.3 | )% | 3.1 | % | 3.1 | % | 4.5 | % | 6.7 | % | 5.5 | % | 3.8 | % | ||||||||||||||||||||||||||||||||||
Restaurant-level operating margin
|
22.7 | % | 22.6 | % | 20.6 | % | 22.1 | % | 20.0 | % | 16.4 | % | 11.8 | % | 19.3 | % | 19.4 | % | 19.3 | % | ||||||||||||||||||||||||||||
Revenues
|
$ | 25,487 | $ | 22,015 | $ | 33,065 | $ | 59,613 | $ | 67,692 | $ | 78,708 | $ | 26,284 | $ | | $ | 312,864 | $ | 5,912 | $ | | $ | 318,776 | ||||||||||||||||||||||||
Total restaurant operating costs
|
19,694 | 17,032 | 26,263 | 46,446 | 54,146 | 65,776 | 23,174 | | 252,531 | 4,765 | | 257,296 | ||||||||||||||||||||||||||||||||||||
General and Administrative
|
| | | | | | | | | | 16,359 | 16,359 | ||||||||||||||||||||||||||||||||||||
Depreciation and Amortization
|
378 | 380 | 796 | 1,800 | 2,425 | 3,385 | 874 | | 10,038 | 190 | 836 | 11,064 | ||||||||||||||||||||||||||||||||||||
Preopening expense
|
| | | | | 46 | 4,298 | 133 | 4,477 | 622 | | 5,099 | ||||||||||||||||||||||||||||||||||||
Interest (income) expense, net
|
| 112 | | | | | | | 112 | | (1,012 | ) | (900 | ) | ||||||||||||||||||||||||||||||||||
Income (loss) before minority interest and
income taxes(3)
|
5,415 | 4,491 | 6,006 | 11,367 | 11,121 | 9,501 | (2,062 | ) | (133 | ) | 45,706 | 335 | $ | (16,183 | ) | $ | 29,858 | |||||||||||||||||||||||||||||||
Rent expense(4)
|
1,486 | 1,285 | 1,591 | 2,441 | 2,489 | 3,337 | 947 | 13,576 | 357 | |||||||||||||||||||||||||||||||||||||||
Interest expense, Net
|
| 112 | | | | | | | 112 | | ||||||||||||||||||||||||||||||||||||||
Preopening Adjustment(5)
|
| | | | | | (25 | ) | 133 | 108 | 155 | |||||||||||||||||||||||||||||||||||||
Restaurant income (loss), as adjusted
|
$ | 6,901 | $ | 5,888 | $ | 7,597 | $ | 13,808 | $ | 13,610 | $ | 12,838 | $ | (1,140 | ) | $ | | $ | 59,502 | $ | 847 | |||||||||||||||||||||||||||
Average restaurant assets employed(6)
|
$ | 1,424 | $ | 2,696 | $ | 5,639 | $ | 16,755 | $ | 23,466 | $ | 36,948 | $ | 10,773 | $ | 97,701 | $ | 1,261 | ||||||||||||||||||||||||||||||
Present value of remaining lease obligations(7)
|
3,200 | 3,977 | 6,962 | 12,787 | 13,763 | 19,794 | 6,695 | 67,178 | 817 | |||||||||||||||||||||||||||||||||||||||
Total restaurant invested capital
|
$ | 4,624 | $ | 6,673 | $ | 12,601 | $ | 29,542 | $ | 37,229 | $ | 56,742 | $ | 17,468 | $ | 164,879 | $ | 2,078 | ||||||||||||||||||||||||||||||
Restaurant-level return on invested capital
|
149.2 | % | 88.2 | % | 60.3 | % | 46.7 | % | 36.6 | % | 22.6 | % | (6.5 | )% | 36.1 | % | 40.8 | % |
6
Units opened in | Total Restaurant | |||||||||||||||||||||||||||||||||||||||||||
Pre 1996 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | Bistro | Pei Wei | Corporate | Total | ||||||||||||||||||||||||||||||||||
(dollars in thousands, except average weekly sales) | ||||||||||||||||||||||||||||||||||||||||||||
Fiscal 2000
|
||||||||||||||||||||||||||||||||||||||||||||
Units(1)
|
4 | 3 | 6 | 10 | 13 | 16 | 52 | 1 | 53 | |||||||||||||||||||||||||||||||||||
Sales weeks
|
208 | 156 | 312 | 520 | 676 | 380 | 2,252 | 23 | 2,275 | |||||||||||||||||||||||||||||||||||
Average weekly sales
|
$ | 125,427 | $ | 136,843 | $ | 102,782 | $ | 109,716 | $ | 93,878 | $ | 88,253 | $ | 103,710 | $ | 58,723 | $ | 103,255 | ||||||||||||||||||||||||||
Change in comparable store sales(2)
|
9.3 | % | 10.9 | % | 11.0 | % | 14.2 | % | 10.7 | % | 11.7 | % | ||||||||||||||||||||||||||||||||
Restaurant-level operating margin
|
23.5 | % | 24.3 | % | 21.3 | % | 21.8 | % | 18.0 | % | 9.5 | % | 19.4 | % | 16.3 | % | 19.3 | % | ||||||||||||||||||||||||||
Revenues
|
$ | 26,089 | $ | 21,348 | $ | 32,068 | $ | 57,052 | $ | 63,462 | $ | 33,535 | $ | | $ | 233,554 | $ | 1,351 | $ | | $ | 234,905 | ||||||||||||||||||||||
Total restaurant operating costs
|
19,960 | 16,169 | 25,240 | 44,624 | 52,009 | 30,336 | | 188,338 | 1,131 | | 189,469 | |||||||||||||||||||||||||||||||||
General and Administrative
|
| | | | | | | | | 12,290 | 12,290 | |||||||||||||||||||||||||||||||||
Depreciation and Amortization
|
359 | 360 | 762 | 1,865 | 2,514 | 1,293 | | 7,153 | 50 | 671 | 7,874 | |||||||||||||||||||||||||||||||||
Preopening expense
|
| | | | (5 | ) | 5,043 | 25 | 5,063 | 137 | | 5,200 | ||||||||||||||||||||||||||||||||
Interest (income) expense, net
|
4 | 115 | | | | | | 119 | | (80 | ) | 39 | ||||||||||||||||||||||||||||||||
Income (loss) before minority interest and
income taxes(3)
|
5,766 | 4,704 | 6,066 | 10,563 | 8,944 | (3,137 | ) | (25 | ) | 32,881 | 33 | $ | (12,881 | ) | $ | 20,033 | ||||||||||||||||||||||||||||
Rent expense(4)
|
1,514 | 1,235 | 1,597 | 2,246 | 2,349 | 1,378 | | 10,319 | 82 | |||||||||||||||||||||||||||||||||||
Interest expense, Net
|
4 | 115 | | | | | | 119 | | |||||||||||||||||||||||||||||||||||
Preopening adjustment(5)
|
| | | | | (551 | ) | 25 | (526 | ) | | |||||||||||||||||||||||||||||||||
Restaurant income (loss), as adjusted
|
$ | 7,284 | $ | 6,054 | $ | 7,663 | $ | 12,809 | $ | 11,293 | $ | (2,310 | ) | $ | | $ | 42,793 | $ | 115 | |||||||||||||||||||||||||
Average restaurant assets employed(6)
|
$ | 1,497 | $ | 3,013 | $ | 6,278 | $ | 18,321 | $ | 25,797 | $ | 9,805 | $ | 64,711 | $ | 240 | ||||||||||||||||||||||||||||
Present value of remaining lease obligations(7)
|
3,715 | 4,072 | 7,315 | 13,150 | 14,193 | 5,146 | 47,591 | 152 | ||||||||||||||||||||||||||||||||||||
Total restaurant invested capital
|
$ | 5,212 | $ | 7,085 | $ | 13,593 | $ | 31,471 | $ | 39,990 | $ | 14,951 | $ | 112,302 | $ | 392 | ||||||||||||||||||||||||||||
Restaurant-level return on invested capital
|
139.8 | % | 85.4 | % | 56.4 | % | 40.7 | % | 28.2 | % | (15.5 | )% | 38.1 | % | 29.3 | % |
7
Units opened in | Total Restaurant | |||||||||||||||||||||||||||||||||||||||||||
Pre 1996 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | Bistro | Pei Wei | Corporate | Total | ||||||||||||||||||||||||||||||||||
(dollars in thousands, except average weekly sales) | ||||||||||||||||||||||||||||||||||||||||||||
Fiscal 1999
|
||||||||||||||||||||||||||||||||||||||||||||
Units(1)
|
4 | 3 | 6 | 10 | 13 | 36 | 36 | |||||||||||||||||||||||||||||||||||||
Sales weeks
|
212 | 159 | 318 | 530 | 330 | 1,549 | 1,549 | |||||||||||||||||||||||||||||||||||||
Average weekly sales
|
$ | 115,119 | $ | 123,509 | $ | 92,685 | $ | 96,119 | $ | 87,378 | $ | 98,964 | $ | 98,964 | ||||||||||||||||||||||||||||||
Change in comparable store sales(2)
|
9.5 | % | 11.5 | % | 15.2 | % | 13.4 | % | 12.0 | % | 12.0 | % | ||||||||||||||||||||||||||||||||
Restaurant-level operating margin
|
23.8 | % | 23.4 | % | 20.8 | % | 19.6 | % | 11.5 | % | 19.5 | % | 19.5 | % | ||||||||||||||||||||||||||||||
Revenues
|
$ | 24,405 | $ | 19,638 | $ | 29,474 | $ | 50,943 | $ | 28,835 | $ | | $ | | $ | 153,295 | $ | | $ | | $ | 153,295 | ||||||||||||||||||||||
Total restaurant operating costs
|
18,605 | 15,044 | 23,344 | 40,972 | 25,512 | | | 123,477 | | | 123,477 | |||||||||||||||||||||||||||||||||
General and Administrative
|
| | | | | | | | | 9,648 | 9,648 | |||||||||||||||||||||||||||||||||
Depreciation and Amortization
|
347 | 369 | 827 | 1,852 | 1,020 | | | 4,415 | | 560 | 4,975 | |||||||||||||||||||||||||||||||||
Preopening expense
|
| | | (33 | ) | 3,826 | 551 | | 4,344 | | | 4,344 | ||||||||||||||||||||||||||||||||
Interest (income) expense, net
|
7 | 163 | | | | | | 170 | | (602 | ) | (432 | ) | |||||||||||||||||||||||||||||||
Income (loss) before minority interest and
income taxes(3)
|
5,446 | 4,062 | 5,303 | 8,152 | (1,523 | ) | (551 | ) | | 20,889 | | $ | (9,606 | ) | $ | 11,283 | ||||||||||||||||||||||||||||
Rent expense(4)
|
1,404 | 1,044 | 1,463 | 1,986 | 1,013 | | | 6,910 | | |||||||||||||||||||||||||||||||||||
Interest expense, net
|
7 | 163 | | | | | | 170 | | |||||||||||||||||||||||||||||||||||
Preopening adjustment(5)
|
| | | | (405 | ) | 551 | | 146 | | ||||||||||||||||||||||||||||||||||
Restaurant income (loss), as adjusted
|
$ | 6,857 | $ | 5,269 | $ | 6,766 | $ | 10,138 | $ | (915 | ) | $ | | $ | | $ | 28,115 | $ | | |||||||||||||||||||||||||
Average restaurant assets employed(6)
|
$ | 1,507 | $ | 3,342 | $ | 6,981 | $ | 19,729 | $ | 12,797 | $ | 44,356 | ||||||||||||||||||||||||||||||||
Present value of remaining lease obligations(7)
|
4,171 | 4,156 | 7,621 | 13,440 | 6,600 | 35,988 | ||||||||||||||||||||||||||||||||||||||
Total restaurant invested capital
|
$ | 5,678 | $ | 7,498 | $ | 14,602 | $ | 33,169 | $ | 19,397 | $ | 80,344 | ||||||||||||||||||||||||||||||||
Restaurant-level return on invested capital
|
120.8 | % | 70.3 | % | 46.3 | % | 30.6 | % | (4.7 | )% | 35.0 | % |
8
Units opened in | Total Restaurant | |||||||||||||||||||||||||||||||||||||||||||
Pre 1996 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | Bistro | Pei Wei | Corporate | Total | ||||||||||||||||||||||||||||||||||
(dollars in thousands, except average weekly sales) | ||||||||||||||||||||||||||||||||||||||||||||
Fiscal 1998
|
||||||||||||||||||||||||||||||||||||||||||||
Units(1)
|
4 | 3 | 6 | 10 | 23 | 23 | ||||||||||||||||||||||||||||||||||||||
Sales weeks
|
208 | 156 | 312 | 149 | 825 | 825 | ||||||||||||||||||||||||||||||||||||||
Average weekly sales
|
$ | 104,637 | $ | 110,374 | $ | 80,171 | $ | 94,207 | $ | 94,586 | $ | 94,586 | ||||||||||||||||||||||||||||||||
Change in comparable store sales(2)
|
10.6 | % | 17.7 | % | 7.8 | % | 12.8 | % | 12.8 | % | ||||||||||||||||||||||||||||||||||
Restaurant-level operating Margin
|
24.3 | % | 22.6 | % | 16.8 | % | 10.6 | % | 19.1 | % | 19.1 | % | ||||||||||||||||||||||||||||||||
Revenues
|
$ | 21,765 | $ | 17,218 | $ | 25,013 | $ | 14,037 | $ | | $ | | $ | | $ | 78,033 | $ | | $ | | $ | 78,033 | ||||||||||||||||||||||
Total restaurant operating costs
|
16,479 | 13,324 | 20,823 | 12,552 | | | | 63,178 | | | 63,178 | |||||||||||||||||||||||||||||||||
General and administrative
|
| | | | | | | | | 6,245 | 6,245 | |||||||||||||||||||||||||||||||||
Depreciation and amortization
|
301 | 393 | 798 | 383 | | | | 1,875 | | 509 | 2,384 | |||||||||||||||||||||||||||||||||
Preopening expense
|
| | 82 | 3,696 | 405 | | | 4,183 | | | 4,183 | |||||||||||||||||||||||||||||||||
Interest expense, net
|
12 | 207 | | | | | | 219 | | 958 | 1,177 | |||||||||||||||||||||||||||||||||
Income (loss) before minority interest and
income taxes(3)
|
4,973 | 3,294 | 3,310 | (2,594 | ) | (405 | ) | | | 8,578 | | $ | (7,712 | ) | $ | 866 | ||||||||||||||||||||||||||||
Rent expense(4)
|
1,241 | 872 | 1,297 | 604 | | | | 4,014 | | |||||||||||||||||||||||||||||||||||
Interest expense, net
|
12 | 207 | | | | | | 219 | | |||||||||||||||||||||||||||||||||||
Preopening adjustment(5)
|
| | 82 | (191 | ) | 405 | | | 296 | | ||||||||||||||||||||||||||||||||||
Restaurant income (loss), as adjusted
|
$ | 6,226 | $ | 4,373 | $ | 4,689 | $ | (2,181 | ) | $ | | $ | | $ | | $ | 13,107 | $ | | |||||||||||||||||||||||||
Average restaurant assets employed(6)
|
$ | 1,648 | $ | 3,681 | $ | 7,598 | $ | 5,642 | $ | 18,569 | ||||||||||||||||||||||||||||||||||
Present value of remaining lease obligations(7)
|
4,568 | 4,232 | 7,876 | 3,623 | 20,299 | |||||||||||||||||||||||||||||||||||||||
Total restaurant invested capital
|
$ | 6,216 | $ | 7,913 | $ | 15,474 | $ | 9,265 | $ | 38,868 | ||||||||||||||||||||||||||||||||||
Restaurant-level return on invested capital
|
100.2 | % | 55.3 | % | 30.3 | % | (23.5 | )% | 33.7 | % |
9
(1) | Units include all restaurants opened in the period indicated. |
(2) | A unit becomes comparable in the eighteenth month of operation. |
(3) | For purposes of this calculation, restaurant income (loss) before minority interest and income taxes represents restaurant revenues less all restaurant-specific operating costs, depreciation and amortization, preopening expenses and interest (income) expense, net. Preopening costs are aggregated in the month in which a restaurant opens. General and administrative expense, interest expense on general corporate debt, depreciation on general corporate assets and amortization of goodwill are excluded from the calculation. |
(4) | Rent expense consists of minimum contractual rents plus contingent percentage rents. |
(5) | Preopening adjustment represents preopening costs incurred in a fiscal year other than the fiscal year in which a restaurant opened. As noted in footnote (3) above, for purposes of this calculation, preopening costs are aggregated and expensed in the month in which a restaurant opens rather than in the fiscal year in which the costs were incurred and expensed for financial statement purposes. |
(6) | Average restaurant assets employed represents the 12 month average of all restaurant-specific long-term assets, net of any accumulated depreciation and amortization, determined on a prorated basis for restaurants opened within the period. |
(7) | Present value of remaining lease obligations represents the 12 month average discounted present value of restaurant lease payments to the date of lease expiration, using a 10 percent discount rate, determined on a prorated basis for restaurants opened within the period. |
10
Risk Factors
Failure of our existing or new restaurants to achieve predicted results could have a negative impact on our revenues and performance results. |
We operated 65 full service, or Bistro, restaurants and five limited service, or Pei Wei, restaurants as of December 30, 2001, 17 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 cant assure you that any new restaurant that we open will have similar operating results to those of prior restaurants. We anticipate that our new restaurants will commonly take several months to reach planned operating levels due to inefficiencies typically associated with new restaurants, including lack of market awareness, inability to hire sufficient staff and other factors. The failure of our existing or new restaurants to perform as predicted could negatively impact our revenues and results of operations.
If we do not expand our restaurant operations, our operating revenue could decline. |
Critical to our future success is our ability to successfully expand our operations. We have expanded from seven restaurants at the end of 1996 to 70 restaurants as of December 30, 2001. We expect to open 13 to 15 Bistros and 8 to 10 Pei Wei restaurants in 2002. Our ability to expand successfully will depend on a number of factors, including:
| identification and availability of suitable locations; | |
| competition for restaurant sites; | |
| negotiation of favorable lease arrangements; | |
| timely development of commercial, residential, street or highway construction near our restaurants; | |
| management of the costs of construction and development of new restaurants; | |
| securing required governmental approvals and permits; | |
| recruitment of qualified operating personnel, particularly managers and chefs; | |
| weather conditions | |
| competition in new markets; and | |
| general economic conditions. |
The opening of additional restaurants in the future will depend in part upon our ability to generate sufficient funds from operations or to obtain sufficient equity or debt financing on favorable terms to support our expansion. We may not be able to open our planned new 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.
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.
11
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. Changs 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 dress and other common design elements. This presents each location with its own development and construction risks. Many factors may affect the costs associated with the development and construction of our restaurants, including:
| labor disputes; | |
| shortages of materials and skilled labor; | |
| weather interference; | |
| unforeseen engineering problems; | |
| environmental problems; | |
| construction or zoning problems; | |
| local government regulations; | |
| modifications in design to the size and scope of the projects; and | |
| other unanticipated increases in costs, any of which could give rise to delays or cost overruns. |
If we are not able to develop additional P.F. Changs and Pei Wei restaurants within anticipated budgets or time periods, our business, financial condition, results of operations or cash flows will be adversely affected.
Potential labor shortages may delay planned openings or damage customer relations. |
Our success will continue to be dependent on our ability to attract and retain a sufficient number of qualified employees, including kitchen staff and waitstaff, to keep pace with our expansion schedule. Qualified individuals needed to fill these positions are in short supply in certain areas. Our inability to recruit and retain qualified individuals may delay the planned openings of new restaurants while high employee turnover in existing restaurants may negatively impact customer service and customer relations resulting in an adverse effect on our revenues or results of operations.
Changes in general economic and political conditions affect consumer spending and may harm our revenues and operating results. |
Our country currently is in a recession and we believe that these weak general economic conditions will continue through 2002. As the economy struggles we are concerned that our customers may become more apprehensive about the economy and reduce their level of discretionary spending. We believe that a decrease in discretionary spending could impact the frequency with which our customers choose to dine out or the amount they spend on meals while dining out, thereby decreasing our revenues. Additionally, the recent terrorist attacks on the United States, the continued military responses to the attacks and possible future terrorist attacks may exacerbate current economic conditions and lead to further weakening in the economy. Adverse economic conditions and any related decrease in discretionary spending by our customers could have an adverse effect on our revenues and operating results.
Fluctuations in operating results may cause profitability to decline. |
Our operating results may fluctuate significantly as a result of a variety of factors, including:
| general economic conditions; | |
| consumer confidence in the economy; | |
| changes in consumer preferences; |
12
| competitive factors, including the performance of restaurant stocks; | |
| weather conditions; | |
| timing of new restaurant openings and related expenses | |
| revenues contributed by new restaurants; | |
| increases or decreases in comparable restaurant revenues. |
Historically, we have experienced variability in the amount and percentage of revenues attributable to preopening expenses. We typically incur the most significant portion of preopening expenses associated with a given restaurant within the two months immediately preceding and the month of the opening of the restaurant. Our experience to date has been that labor and operating costs associated with a newly opened restaurant for the first several months of operation are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Accordingly, the volume and timing of new restaurant openings has had, and is expected to continue to have, a meaningful impact on preopening expenses and labor and operating costs. Therefore, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for a full fiscal year, and, from time to time in the future, our results of operations may be below the expectations of public market analysts and investors. This discrepancy could cause the market price of our common stock to decline. See Managements Discussion and Analysis if Financial Condition and Results of Operations.
Intense competition in the restaurant industry could prevent us from increasing or sustaining our revenues and profitability. |
The restaurant industry is intensely competitive with respect to food quality, price-value relationships, ambiance, service and location, and many restaurants compete with us at each of our locations. Our competitors include mid-price, full-service casual dining restaurants and locally owned and operated Chinese restaurants. There are many well-established competitors with substantially greater financial, marketing, personnel and other resources than ours, and many of our competitors are well established in the markets where we have restaurants, or in which we intend to locate restaurants. Additionally, other companies may develop restaurants that operate with similar concepts.
Any inability to successfully compete with the other restaurants in our markets will prevent us from increasing or sustaining our revenues and profitability and result in a material adverse effect on our business, financial condition, results of operations or cash flows. We may also need to modify or refine elements of our restaurant system to evolve our concept in order to compete with popular new restaurant formats or concepts that develop from time to time. We cannot assure you that we will be successful in implementing these modifications.
Increases in the minimum wage may have a material adverse effect on our business and financial results. |
A number of our employees are subject to various minimum wage requirements. The federal minimum wage has remained at $5.15 per hour since September 1, 1997. However, many of our employees work in restaurants located in California and receive salaries equal to the California minimum wage, which rose from $6.25 per hour effective January 1, 2001 to $6.75 per hour effective January 1, 2002. There may be similar increases implemented in other jurisdictions in which we operate or seek to operate. The possibility exists that the federal minimum wage will be increased in the near future. These minimum wage increases may have a material adverse effect on the Companys business, financial condition, results of operations or cash flows.
Our inability to retain key personnel could negatively impact our business. |
Our success will continue to be highly dependent on our key operating officers and employees. We must continue to attract, retain and motivate a sufficient number of qualified management and operating personnel, including regional managers (market partners), general managers (operating partners) and executive chefs
13
Changes in food costs could negatively impact our revenues and results of operations. |
Our profitability is dependent in part on our ability to anticipate and react to changes in food costs. Other than for produce, which is purchased locally by each restaurant, we rely on Distribution Marketing Advantage as the primary distributor of our product. Distribution Marketing Advantage is a cooperative of multiple food distributors located throughout the nation. We have a non-exclusive short-term contract with Distribution Marketing Advantage on terms and conditions that 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 Marketing 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 energy costs in several of our significant markets may continue to affect profitability.
Our success depends in part on our ability to absorb increases in utility costs. Several regions of the United States in which we operate multiple restaurants, particularly California, have experienced significant increases in utility prices over the past year. If these increases continue it will have an adverse effect on our profitability.
Rising workers compensation and health insurance costs could negatively impact profitability. |
The cost of workers compensation insurance, general liability insurance and health insurance have risen significantly in the past year and are expected to continue to increase in 2002. These increases could have a negative impact on our profitability if we are not able to negate the effect of such increases by continuing to improve upon on operating efficiencies.
Failure to comply with governmental regulations could harm our business and our reputation. |
We are subject to regulation by federal agencies and to licensing and regulation by state and local health, sanitation, building, zoning, safety, fire and other departments relating to the development and operation of restaurants. These regulations include matters relating to:
| environmental; | |
| building construction; | |
| zoning requirements; and | |
| the preparation and sale of food and alcoholic beverages. |
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 INS. Given the location of many of our restaurants, even if we operate those restaurants in strict compliance with INS requirements, our employees may not all meet federal citizenship or residency requirements, which could lead to disruptions in our work force.
14
Approximately 18% of our revenues at the Bistro and 3% at Pei Wei are attributable to the sale of alcoholic beverages. We are required to comply with the alcohol licensing requirements of the federal government, states and municipalities where our restaurants are located. Alcoholic beverage control regulations require applications to state authorities and, in certain locations, county and municipal authorities for a license and permit to sell alcoholic beverages. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the restaurants, including minimum age of guests and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages. If we fail to comply with federal, state or local regulations our licenses may be revoked and we may be forced to terminate the sale of alcoholic beverages at one or more of our restaurants.
The federal Americans With Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment. We are required to comply with the Americans With Disabilities Act and regulations relating to accommodating the needs of the disabled in connection with the construction of new facilities and with significant renovations of existing facilities.
Failure to comply with these regulations could negatively impact our business and our reputation.
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 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 affect on our business.
We are subject to state dram shop laws and regulations, which generally provide that a person injured by an intoxicated person may seek to recover damages from an establishment that wrongfully served alcoholic beverages to such person. While we carry liquor liability coverage as part of our existing comprehensive general liability insurance, we may still be subject to a judgment in excess of our insurance coverage and we may not be able to obtain or continue to maintain such insurance coverage at reasonable costs, or at all.
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 industrys 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.
15
Item 2. Properties
The following table depicts existing Bistros as of the date of this 10-K.
Approximate | Interior | |||||||||||
Existing Locations | Opening Date | Square Footage | Seating* | |||||||||
Scottsdale, AZ (Fashion Square)
|
July 1993 | 6,050 | 177 | |||||||||
Newport Beach, CA (Fashion Island)
|
June 1994 | 5,050 | 155 | |||||||||
La Jolla, CA (UTC)
|
August 1995 | 7,400 | 257 | |||||||||
Irvine, CA (Spectrum Center)
|
November 1995 | 7,000 | 208 | |||||||||
Las Vegas, NV (Paradise & Flamingo)
|
October 1996 | 7,000 | 220 | |||||||||
Houston, TX (Highland Village)
|
December 1996 | 6,500 | 182 | |||||||||
Littleton, CO (Park Meadows)
|
December 1996 | 7,600 | 245 | |||||||||
Metarie, LA (Lakeside)
|
April 1997 | 5,850 | 201 | |||||||||
Miami, FL (The Falls)
|
September 1997 | 5,800 | 206 | |||||||||
Charlotte, NC (Phillips Place)
|
October 1997 | 6,900 | 211 | |||||||||
N. Miami, FL (Aventura)
|
October 1997 | 7,000 | 244 | |||||||||
Tempe, AZ (Centerpoint)
|
December 1997 | 6,600 | 228 | |||||||||
McLean, VA (Tysons Corner)
|
December 1997 | 6,500 | 204 | |||||||||
Dallas, TX (North Tollway)
|
March 1998 | 6,900 | 192 | |||||||||
El Segundo, CA (Manhattan Beach)
|
June 1998 | 6,950 | 220 | |||||||||
Austin, TX (Jollyville Road)
|
July 1998 | 7,000 | 196 | |||||||||
Dallas, TX (NorthPark)
|
August 1998 | 6,100 | 178 | |||||||||
Atlanta, GA (Ashwood & Perimeter)
|
October 1998 | 7,000 | 225 | |||||||||
Birmingham, AL (The Summit)
|
October 1998 | 7,150 | 230 | |||||||||
Denver, CO (LoDo)
|
October 1998 | 7,150 | 230 | |||||||||
Northbrook, IL (Northbrook Court)
|
November 1998 | 7,000 | 210 | |||||||||
Troy, MI (Somerset)
|
November 1998 | 7,000 | 217 | |||||||||
West Hollywood, CA (Beverly Center)
|
December 1998 | 6,600 | 212 | |||||||||
Boston, MA (CityPlace)
|
January 1999 | 5,750 | 182 | |||||||||
Winter Park, FL (Winter Park Village)
|
March 1999 | 6,900 | 212 | |||||||||
Westbury, NY (The Source)
|
April, 1999 | 7,600 | 239 | |||||||||
Raleigh, NC (Crabtree Valley)
|
June, 1999 | 6,700 | 174 | |||||||||
Scottsdale, AZ (Kierland Commons)
|
June, 1999 | 7,000 | 211 | |||||||||
Salt Lake City, UT (Bandaloops)
|
June, 1999 | 7,000 | 242 | |||||||||
Santa Monica, CA (Wilshire Blvd.)
|
July, 1999 | 6,700 | 200 | |||||||||
Las Vegas, NV (Summerlin)
|
July, 1999 | 7,000 | 211 | |||||||||
Walnut Creek, CA (Broadway Plaza)
|
August, 1999 | 6,400 | 197 | |||||||||
Columbus, OH (Easton Town Center)
|
September, 1999 | 7,300 | 232 | |||||||||
Alpharetta, GA (Mansell Road)
|
September, 1999 | 6,900 | 224 | |||||||||
Kansas City, MO (Country Club Plaza)
|
November, 1999 | 7,000 | 287 | |||||||||
Bethesda, MD (White Flint)
|
November, 1999 | 6,300 | 199 | |||||||||
Chicago, IL (Downtown)
|
January, 2000 | 9,500 | 220 | |||||||||
Buford, GA (Mall of Georgia)
|
January, 2000 | 5,600 | 142 | |||||||||
Tucson, AZ (Joesler Village)
|
February, 2000 | 6,600 | 197 | |||||||||
Memphis, TN (Park Place Centre)
|
May, 2000 | 7,200 | 163 | |||||||||
San Diego, CA (Fashion Valley)
|
June, 2000 | 7,000 | 189 |
16
Approximate | Interior | |||||||||||
Existing Locations | Opening Date | Square Footage | Seating* | |||||||||
Lombard, IL (Fountain Square)
|
June, 2000 | 7,500 | 217 | |||||||||
Woodland Hills, CA (Promenade)
|
July, 2000 | 7,000 | 197 | |||||||||
White Plains, NY (The Westchester)
|
July, 2000 | 6,700 | 213 | |||||||||
Broomfield, CO (Flatiron Crossing)
|
August, 2000 | 6,600 | 225 | |||||||||
Nashville, TN (West End)
|
September, 2000 | 7,000 | 192 | |||||||||
Norwood, OH (Rookwood Commons)
|
September, 2000 | 6,900 | 236 | |||||||||
Beachwood, OH (Enterprise Plaza)
|
September, 2000 | 7,000 | 239 | |||||||||
Roseville, CA (Creekside Town Center)
|
September, 2000 | 7,000 | 238 | |||||||||
Indianapolis, IN (Circle Centre Mall)
|
October, 2000 | 7,000 | 216 | |||||||||
Las Vegas, NV (Aladdin Casino and Resort)
|
November, 2000 | 15,200 | 345 | |||||||||
Mission Viejo, CA (Mission Viejo Mall)
|
December, 2000 | 6,700 | 179 | |||||||||
Bellevue, WA (Bellevue Square)
|
April, 2001 | 6,300 | 199 | |||||||||
Indianapolis, IN (Keystone Crossing)
|
April, 2001 | 7,000 | 155 | |||||||||
Columbia, MD (Columbia Mall)
|
May, 2001 | 7,200 | 219 | |||||||||
Boca Raton, FL (University Commons)
|
May, 2001 | 7,200 | 199 | |||||||||
Austin, TX (San Jacinto)
|
June, 2001 | 7,000 | 287 | |||||||||
Chandler, AZ (Chandler Fashion Square)
|
August, 2001 | 7,000 | 215 | |||||||||
Sunnyvale, CA (Olson Cherry Orchard)
|
September, 2001 | 6,800 | 205 | |||||||||
West Homestead, PA (The Stacks at the Waterfront)
|
September, 2001 | 7,200 | 207 | |||||||||
Pasadena, CA (Paseo Colorado)
|
September, 2001 | 6,100 | 148 | |||||||||
Houston, TX (Westchase)
|
September, 2001 | 6,800 | 215 | |||||||||
Edina, MN (Southdale Mall)
|
November, 2001 | 7,200 | 216 | |||||||||
Rancho Mirage, CA (The River)
|
November, 2001 | 6,900 | 213 | |||||||||
Marlton, NJ (The Promenade at Sagemore)
|
December, 2001 | 7,100 | 207 | |||||||||
Sherman Oaks (Sherman Oaks Galleria)
|
January, 2002 | 6,400 | 192 |
* | Many of our restaurants have outdoor seating in addition to interior seating. |
The following table depicts existing Pei Wei locations as of the date of this 10-K.
Approximate | Interior | |||||||||||
Existing Locations | Opening Date | Square Footage | Seating* | |||||||||
Chandler, AZ (Casa Paloma)
|
July, 2000 | 2,800 | 78 | |||||||||
Phoenix, AZ (Arcadia)
|
April, 2001 | 2,900 | 80 | |||||||||
Scottsdale, AZ (Gainey Ranch)
|
December, 2001 | 2,900 | 71 | |||||||||
Dallas, TX (The Arbors)
|
December, 2001 | 3,200 | 77 | |||||||||
Scottsdale, AZ (Grayhawk)
|
December, 2001 | 3,000 | 78 | |||||||||
Chandler, AZ (Ocotillo)
|
January, 2002 | 3,200 | 75 |
* | Some of our restaurants have outdoor seating in addition to interior seating. |
In 2002, P.F. Changs intends to open 13 to 15 Bistros (five in existing markets) and 8 to 10 Pei Weis.
Expansion Strategy and Site Selection
P.F. Changs is actively developing Bistro 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
17
We intend to continue to develop Bistros that typically range in size from 6,000 square feet to 7,000 square feet, and that require, on average, a total capitalized investment of approximately $3.4 million per restaurant. 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 $2.3 million. Preopening expenses are expected to average approximately $325,000 per restaurant. We currently lease the sites for all of our restaurants and do not intend to purchase real estate for our sites in the future.
We intend to initially develop our Pei Wei restaurants in markets in which the Bistro has a strong presence in an effort to leverage the Bistros established brand identity. The restaurants will be approximately 2,800 to 3,200 square feet in size and will require, on average, a total capitalized investment of approximately $1.3 million per restaurant. 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 $750,000 per restaurant. Preopening expenses for our Pei Wei restaurants are expected to total approximately $110,000 per restaurant. We currently lease the sites for all of our restaurants and do not intend to purchase real estate for our sites in the future.
Current restaurant leases have expiration dates ranging from 2004 to 2022, 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 lessors operating costs. We do not anticipate any difficulties renewing existing leases as they expire.
P.F. Changs executive offices are currently located in approximately 16,000 square feet of leased space in Scottsdale, Arizona.
Item 3. Legal Proceedings
P.F. Changs was not involved in any material legal proceedings as of December 30, 2001.
Item 4. Submission of Matters to a Vote of Security Holders
P.F. Changs Annual Meeting of Stockholders was held on April 25, 2001. There were two proposals up for approval. The results of the voting are as follows:
1) The election of the entire Board of Directors: |
Total | ||||||||
Votes For | Abstain | |||||||
Richard L. Federico
|
7,879,777 | 1,157,270 | ||||||
Paul M. Fleming
|
9,030,411 | 6,636 | ||||||
Kenneth J. Wessels
|
9,029,236 | 7,811 | ||||||
R. Michael Welborn
|
9,030,411 | 6,636 | ||||||
James G. Shennan, Jr.
|
9,030,336 | 6,711 | ||||||
F. Lane Cardwell, Jr.
|
9,030,411 | 6,636 |
2) The ratification of the appointment of Ernst & Young LLP as the Companys independent auditors: |
Total Votes | Total Votes | |||||||||
For | Against | Abstain | ||||||||
8,057,072 | 979,785 | 190 |
18
PART II
Item 5. Market for the Registrants Common Stock and Related Stockholder Matters
P.F. Changs 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.
High | Low | |||||||
Quarter Ended April 2, 2000
|
35.06 | 23.13 | ||||||
Quarter Ended July 2, 2000
|
38.50 | 26.88 | ||||||
Quarter Ended October 1, 2000
|
34.56 | 27.69 | ||||||
Quarter Ended December 31, 2000
|
45.75 | 28.69 | ||||||
Quarter Ended April 1, 2001
|
40.00 | 30.06 | ||||||
Quarter Ended July 1, 2001
|
40.93 | 32.25 | ||||||
Quarter Ended September 30, 2001
|
44.91 | 32.92 | ||||||
Quarter Ended December 30, 2001
|
49.49 | 35.90 |
P.F. Changs intends 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 February 15, 2002, there were 70 holders of record of P.F. Changs common stock.
In January 2001, we sold 1.25 million shares of our common stock to two institutional buyers for an aggregate purchase price of approximately $40.8 million in cash. We relied on the exemption from registration for the sale provided in Section 4(2) of the Securities Act of 1933, as amended, based on the financial status of the buyers. We subsequently registered the shares sold on a Form S-3 filed in March 2001. We used $15 million of the proceeds of the sale to repay outstanding borrowings under our credit facility and will continue to use the remainder for restaurant expansion and general corporate purposes.
19
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, Managements Discussion and Analysis of Financial Condition and Results of Operations.
SELECTED CONSOLIDATED FINANCIAL DATA
Company | |||||||||||||||||||||||
Fiscal | Fiscal | Fiscal | Fiscal | Fiscal | |||||||||||||||||||
Year | Year | Year | Year | Year | |||||||||||||||||||
1997 | 1998 | 1999 | 2000 | 2001 | |||||||||||||||||||
(In thousands, except per share data) | |||||||||||||||||||||||
Statements of Operations Data:
|
|||||||||||||||||||||||
Revenues
|
$ | 39,768 | $ | 78,033 | $ | 153,295 | $ | 234,905 | $ | 318,776 | |||||||||||||
Costs and expenses:
|
|||||||||||||||||||||||
Restaurant operating costs:
|
|||||||||||||||||||||||
Cost of sales
|
11,317 | 21,709 | 42,136 | 64,720 | 86,368 | ||||||||||||||||||
Labor
|
11,683 | 22,721 | 45,569 | 69,685 | 97,094 | ||||||||||||||||||
Operating
|
6,727 | 13,319 | 25,907 | 40,312 | 53,932 | ||||||||||||||||||
Occupancy
|
2,743 | 5,429 | 9,865 | 14,752 | 19,902 | ||||||||||||||||||
Total restaurant operating costs
|
32,470 | 63,178 | 123,477 | 189,469 | 257,296 | ||||||||||||||||||
General and administrative
|
4,276 | 6,245 | 9,648 | 12,290 | 16,359 | ||||||||||||||||||
Depreciation and amortization
|
1,102 | 2,384 | 4,975 | 7,874 | 11,064 | ||||||||||||||||||
Preopening expense
|
1,922 | 4,183 | 4,344 | 5,200 | 5,099 | ||||||||||||||||||
Income (loss) from operations
|
(2 | ) | 2,043 | 10,851 | 20,072 | 28,958 | |||||||||||||||||
Interest income (expense), net
|
(317 | ) | (1,177 | ) | 432 | (39 | ) | 900 | |||||||||||||||
Income (loss) before elimination of minority
interests and provision for income taxes
|
(319 | ) | 866 | 11,283 | 20,033 | 29,858 | |||||||||||||||||
Elimination of minority interests
|
(1,308 | ) | (669 | ) | (2,469 | ) | (4,317 | ) | (5,550 | ) | |||||||||||||
Income (loss) before provision for income
taxes
|
(1,627 | ) | 197 | 8,814 | 15,716 | 24,308 | |||||||||||||||||
Provision for income taxes
|
(69 | ) | (48 | ) | (2,778 | ) | (5,987 | ) | (8,689 | ) | |||||||||||||
Net income (loss)
|
(1,696 | ) | 149 | 6,036 | 9,729 | 15,619 | |||||||||||||||||
Convertible redeemable preferred stock accretion
|
(876 | ) | (888 | ) | | | | ||||||||||||||||
Net income (loss) available to common
stockholders
|
$ | (2,572 | ) | $ | (739 | ) | $ | 6,036 | $ | 9,729 | $ | 15,619 | |||||||||||
Basic net income (loss) per share
|
$ | (1.03 | ) | $ | (0.25 | ) | $ | 0.59 | $ | 0.94 | $ | 1.32 | |||||||||||
Diluted net income (loss) per share
|
$ | (1.03 | ) | $ | (0.25 | ) | $ | 0.54 | $ | 0.86 | $ | 1.23 | |||||||||||
Shares used in calculation of basic net income
(loss) per share
|
2,500 | 2,986 | 10,217 | 10,376 | 11,864 | ||||||||||||||||||
Shares used in calculation of diluted net income
(loss) per share
|
2,500 | 2,986 | 11,155 | 11,354 | 12,735 | ||||||||||||||||||
20
As of | As of | As of | As of | As of | ||||||||||||||||
December 28, | December 27, | January 2, | December 31, | December 30, | ||||||||||||||||
1997 | 1998 | 2000 | 2000 | 2001 | ||||||||||||||||
Balance Sheet Data:
|
||||||||||||||||||||
Cash and cash equivalents
|
$ | 2,739 | $ | 18,857 | $ | 5,333 | $ | 6,390 | $ | 20,799 | ||||||||||
Total assets
|
28,489 | 69,187 | 81,707 | 115,926 | 173,030 | |||||||||||||||
Short- and long-term debt
|
8,372 | 2,352 | 1,829 | 16,692 | 2,092 | |||||||||||||||
Deferred purchase price liability
|
2,426 | | | | | |||||||||||||||
Convertible redeemable preferred stock
|
17,808 | | | | | |||||||||||||||
Common stockholders equity (deficit)
|
(4,446 | ) | 58,229 | 64,790 | 77,342 | 136,835 |
Year | Year | Year | Year | Year | ||||||||||||||||
Ended | Ended | Ended | Ended | Ended | ||||||||||||||||
December 28, | December 27, | January 2, | December 31, | December 30, | ||||||||||||||||
1997 | 1998 | 2000 | 2000 | 2001 | ||||||||||||||||
Consolidated Financial Ratios:
|
||||||||||||||||||||
Return on Total Average Assets
|
(8.17 | )% | 0.31 | % | 8.00 | % | 9.85 | % | 10.81 | % | ||||||||||
Return on Average Stockholders Equity
|
N/A | 0.55 | % | 9.81 | % | 13.69 | % | 14.59 | % |
See Notes 1, 5 and 8 of Notes to Consolidated Financial Statements.
21
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
As of December 30, 2001, we owned and operated 65 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. Changs was formed in early 1996 with the acquisition of the four original P.F. Changs restaurants and the hiring of an experienced management team, led by Richard Federico and Robert Vivian, P.F. Changs Chief Executive Officer and President, respectively, to support P.F. Changs founder, Paul Fleming. Utilizing a partnership management philosophy, we embarked on a strategic expansion of the concept targeted at major metropolitan areas throughout the United States.
We also owned and operated five limited service restaurants as of December 30, 2001. We believe that there is an opportunity to leverage our knowledge and expertise in Chinese and Asian cuisine. Accordingly, we have developed Pei Wei Asian Diner, or Pei Wei, a new concept that will cater to a quicker, more casual dining experience as compared to P.F. Changs China Bistro. Pei Wei opened its first unit in July 2000 in the Phoenix, Arizona area and four additional units in 2001, three in the Phoenix, Arizona area and one in the Dallas, Texas area. We will continue to commit additional resources to this concept as we push forward with the development of the additional Pei Wei units in 2002.
We intend to open 13 to 15 new Bistros in 2002. The majority of full service units that we intend to develop in 2002 will be located in new markets across the United States. We have signed lease agreements or letters of intent for all of our development planned for fiscal 2002. We intend to continue to develop full service restaurants that typically range in size from 6,000 square feet to 7,000 square feet, and that require, on average, a total cash investment of approximately $2.3 million and total invested capital of approximately $3.4 million per restaurant. Preopening expenses are expected to average approximately $325,000 per restaurant. This total capitalized investment includes the capitalized lease value of the property, which can vary greatly depending on the specific trade area. See Risk Factors Development and Construction Risks.
We also intend to develop 8 to 10 Pei Wei restaurants in 2002. The Pei Wei units that we intend to develop in 2002 will primarily be in the Phoenix, Dallas and Southern California markets. Our Pei Wei sites are generally around 2,800 to 3,200 square feet in size and require an average total cash investment of approximately $750,000 and total invested capital of approximately $1.3 million per restaurant. Preopening expenses at Pei Wei are expected to total approximately $110,000 per restaurant.
22
Results of Operations
The operating results of P.F. Changs for the fiscal years ended January 2, 2000 (fiscal year 1999), December 31, 2000 (fiscal year 2000) and December 30, 2001 (fiscal year 2001), expressed as a percentage of revenues, were as follows:
Fiscal Year | Fiscal Year | Fiscal Year | |||||||||||||
1999 | 2000 | 2001 | |||||||||||||
Statements of Operations Data:
|
|||||||||||||||
Revenues
|
100.0 | % | 100.0 | % | 100.0 | % | |||||||||
Costs and expenses:
|
|||||||||||||||
Restaurant operating costs:
|
|||||||||||||||
Cost of sales
|
27.5 | 27.6 | 27.1 | ||||||||||||
Labor
|
29.7 | 29.7 | 30.5 | ||||||||||||
Operating
|
16.9 | 17.2 | 16.9 | ||||||||||||
Occupancy
|
6.4 | 6.3 | 6.2 | ||||||||||||
Total restaurant operating costs
|
80.5 | 80.8 | 80.7 | ||||||||||||
General and administrative
|
6.3 | 5.2 | 5.1 | ||||||||||||
Depreciation and amortization
|
3.3 | 3.4 | 3.5 | ||||||||||||
Preopening expense
|
2.8 | 2.2 | 1.6 | ||||||||||||
Income from operations
|
7.1 | 8.4 | 9.1 | ||||||||||||
Interest income (expense), net
|
0.3 | 0.0 | 0.2 | ||||||||||||
Elimination of minority interests
|
(1.6 | ) | (1.8 | ) | (1.7 | ) | |||||||||
Income before provision for income taxes
|
5.8 | 6.6 | 7.6 | ||||||||||||
Provision for income taxes
|
(1.8 | ) | (2.5 | ) | (2.7 | ) | |||||||||
Net income
|
4.0 | % | 4.1 | % | 4.9 | % | |||||||||
P.F. Changs operates on a 52/53 week year, with the fiscal year ending on the Sunday closest to December 31. Fiscal year 1999 includes 53 weeks and fiscal years 2000 and 2001 include 52 weeks.
Year Ended December 30, 2001 Compared to Year Ended December 31, 2000
Revenues
P.F. Changs revenues are derived entirely from food and beverage sales. Revenues increased by $83.9 million, or 35.7%, to $318.8 million in the year ended December 30, 2001 from $234.9 million in the year ended December 31, 2000. The increase was primarily attributable to revenues of $28.7 million generated by new restaurants opened in 2001, a $47.3 million increase in revenues in 2001 for restaurants that opened in 2000 and a $7.9 million increase in revenues for restaurants opened prior to 2000. Increased customer visits as well as a modest price increase in the fourth quarter of 2000 and the last half of the second quarter of 2001 produced comparable restaurant sales gains of 3.8% in 2001.
Costs and Expenses
Cost of sales. Cost of sales is composed of the cost of food and beverages. Cost of sales decreased as a percentage of revenues to 27.1% in the year ended December 30, 2001 from 27.6% in the year ended December 31, 2000. This decrease was primarily the result of lower commodity prices in seafood, offset by a slight increase in beef prices.
Labor. Labor expenses consist of restaurant management salaries, hourly staff payroll costs and other payroll-related items. Labor expenses as a percentage of revenues increased to 30.5% in the year ended
23
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. Operating expenses decreased as a percentage of revenues to 16.9% in the year ended December 30, 2001 from 17.2% in the year ended December 31, 2000. The decrease was primarily attributable to efficiencies in operating expense purchasing as well as radio advertising efficiencies, offset by higher utility costs across our system, particularly in the California market.
Occupancy. Occupancy costs include both fixed and variable portions of rent, common area maintenance charges, property insurance and property taxes. Occupancy costs decreased nominally as a percentage of revenues to 6.2% in the year ended December 30, 2001 from 6.3% in the year ended December 31, 2000. The decrease in occupancy was primarily the result of the increased revenue base 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. General and administrative expenses increased to $16.4 million, or 5.1% of revenues, in the year ended December 30, 2001 from $12.3 million, or 5.2% of revenues, in the year ended December 30, 2000, due primarily to the addition of corporate management personnel, which resulted in approximately $2.3 million of additional compensation and benefits expense, as well as additional costs to support a larger restaurant base, including an additional $440,000 in legal, occupancy and insurance costs. The decrease as a percentage of revenues was due primarily to our expanding revenue base and our ability to leverage the duties and responsibilities of our regional manager partners. Also, of the total increase, approximately $900,000 related to additional infrastructure for the Pei Wei concept.
Depreciation and amortization. Depreciation and amortization expenses include the depreciation of fixed assets and the amortization of intangibles associated with the acquisition of ownership interests in our restaurants. Depreciation and amortization increased to $11.1 million in the year ended December 30, 2001 from $7.9 million in the year ended December 31, 2000. This increase was primarily due to depreciation and amortization on restaurants opened in 2001 totaling $916,000 as well as a full years depreciation and amortization on restaurants opened in 2000.
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. Preopening expenses in the year ended December 30, 2001 decreased to $5.1 million from $5.2 million in the year ended December 31, 2000 due primarily to the fact that we opened 16 Bistros in 2000 as compared to 13 in 2001, offset by additional preopening costs incurred at four new Pei Wei restaurants.
Interest income (expense), net. Net interest income (expense) was $900,000 in the year ended December 30, 2001 as compared to $(39,000) in the year ended December 31, 2000. The increase was due to the interest earned on cash proceeds from the private equity placement that occurred in January of 2001. In addition, part of this cash was used to pay off the borrowings under our credit facility, thereby decreasing our interest expense.
24
Elimination of Minority Interests
Elimination of minority interests represents the portion of our net earnings (losses) which are attributable to the collective ownership interests of our partners. P.F. Changs has provided a partnership management structure in which we have entered into a series of partnership agreements with our regional managers, certain of its general managers, and certain of our executive chefs. Elimination of minority interests for the year ended December 30, 2001 increased to $5.5 million from $4.3 million for the year ended December 31, 2000, due primarily to the addition of new restaurants and an increase in the operating profit of many of our existing restaurants.
Provision for Income Taxes
The provision for income taxes increased to $8.7 million for the year ended December 30, 2001 from $6.0 million for the year ended December 31, 2000 due primarily to the fact that our taxable income in fiscal 2001 increased substantially from the prior period. The income tax provision for 2000 and 2001 differs from the expected provision for income taxes, derived by applying the statutory income tax rate, primarily as a result of FICA tip credits.
Year Ended December 31, 2000 Compared to Year Ended January 2, 2000
Revenues
Revenues increased by $81.6 million, or 53.2%, to $234.9 million in the year ended December 31, 2000 from $153.3 million in the year ended January 2, 2000. The increase was primarily attributable to revenues of $34.9 million generated by new restaurants opened in 2000, a $34.6 million increase in revenues in 2000 for restaurants that opened in 1999 and a $12.1 million increase in revenues for restaurants opened prior to 1999. Additionally, the prior fiscal year included one additional week of sales (a 53-week year in 1999 versus a 52-week year in 2000). Increased customer visits produced comparable restaurant sales gains of 11.7% in 2000. We implemented a modest price increase in the fourth quarter of 2000 of approximately 1% of sales. There were no price increases implemented in fiscal 1999.
Costs and Expenses
Cost of sales. Cost of sales increased nominally as a percentage of revenues to 27.6% in the year ended December 31, 2000 from 27.5% in the year ended January 2, 2000. This increase was primarily the result of slightly higher commodity prices offset by cost efficiencies achieved through the improved management of product purchasing, food preparation and waitstaff performance as our restaurants mature.
Labor. Labor expenses as a percentage of revenues remained consistent at 29.7% in the years ended December 31, 2000 and January 2, 2000. Our experience to date has been that labor 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. Additionally as a result of tightening labor markets around the country, and increases in certain state minimum wages, such as California, we continue to experience an increase on labor costs across the system. We expect that tighter labor markets and higher wage rates will continue to exert upward pressure on our labor costs on a year-over-year basis in 2001.
Operating. Operating expenses increased as a percentage of revenues to 17.2% in the year ended December 31, 2000 from 16.9% in the year ended January 2, 2000. The increase was primarily attributable to higher utility costs across our system, particularly in the California market.
Occupancy. Occupancy costs decreased nominally as a percentage of revenues to 6.3% in the year ended December 31, 2000 from 6.4% in the year ended January 2, 2000. The decrease in occupancy was primarily the result of the increased revenue base and, to a lesser extent, more favorable lease terms associated with new restaurants.
25
General and administrative. General and administrative expenses increased to $12.3 million, or 5.2% of revenues, in the year ended December 31, 2000 from $9.6 million, or 6.3% of revenues, in the year ended January 2, 2000, due primarily to the addition of corporate management personnel, which resulted in approximately $2.2 million of additional compensation and benefits expense, as well as additional costs to support a larger restaurant base, including an additional $470,000 in travel and consulting fees. The decrease as a percentage of revenues was due primarily to our expanding revenue base and our ability to leverage the duties and responsibilities of our regional manager partners.
Depreciation and amortization. Depreciation and amortization increased to $7.9 million in the year ended December 31, 2000 from $5.0 million in the year ended January 2, 2000. This increase was primarily due to depreciation and amortization on restaurants opened in 2000 totaling $1.3 million as well as a full years depreciation and amortization on restaurants opened in 1999.
Preopening expense. Preopening expenses in the year ended December 31, 2000 increased to $5.2 million from $4.3 million in the year ended January 2, 2000 due to the greater number of restaurants opened or under development during the 2000 period and to higher than anticipated costs on a per unit basis resulting from construction delays and budget overruns.
Interest income (expense), net. Net interest income (expense) was $(39,000) in the year ended December 31, 2000 as compared to $432,000 in the year ended January 2, 2000. The shift from interest income in fiscal 1999 to interest expense in fiscal 2000 was principally due to borrowings in 2000 on our credit facility (we did not have borrowings in 1999) and lower cash balances throughout the year as compared to fiscal 1999.
Elimination of Minority Interests
Elimination of minority interests represents the portion of our net earnings (losses) which are attributable to the collective ownership interests of our partners. P.F. Changs has provided a partnership management structure in which we have entered into a series of partnership agreements with our regional managers, certain of its general managers, and certain of our executive chefs. Elimination of minority interests for the year ended December 31, 2000 increased to $4.3 million from $2.5 million for the year ended January 2, 2000, due primarily to the addition of new restaurants and an increase in the operating profit of those restaurants.
Provision for Income Taxes
The provision for income taxes increased to $6.0 million for the year ended December 31, 2000 from $2.8 million for the year ended January 2, 2000 due primarily to the fact that our taxable income in fiscal 2000 increased substantially from the prior period. Additionally, in fiscal 1999 we were able to utilize our net operating loss carryforward, which was fully utilized by the end of 1999. The income tax provision for 2000 differs from the expected provision for income taxes, derived by applying the statutory income tax rate, primarily as a result of FICA tip credits. The income tax provision for 1999 differs from the expected provision for income taxes, derived by applying the statutory income tax rate, as a result of our expected utilization in 1999 of its net operating loss carryforward and the resulting decrease in the related deferred income tax valuation allowance.
Quarterly Results
The following tables set forth certain unaudited quarterly information for each of the eight fiscal quarters in the two year period ended December 30, 2001, expressed as a percentage of revenues, except for revenues which are expressed in thousands. This quarterly information has been prepared on a consistent basis with the audited financial statements and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented.
26
The operating results of P.F. Changs for such eight fiscal quarters expressed as a percentage of revenues, except for revenues which are expressed in thousands, were as follows:
Fiscal 2000 | Fiscal 2001 | |||||||||||||||||||||||||||||||||
First | Second | Third | Fourth | First | Second | Third | Fourth | |||||||||||||||||||||||||||
Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | |||||||||||||||||||||||||||
Revenues
|
$ | 51,414 | $ | 53,496 | $ | 61,179 | $ | 68,816 | $ | 72,420 | $ | 76,457 | $ | 80,555 | $ | 89,344 | ||||||||||||||||||
Costs and expenses:
|
||||||||||||||||||||||||||||||||||
Restaurant operating costs:
|
||||||||||||||||||||||||||||||||||
Cost of sales
|
27.4 | % | 27.5 | % | 27.8 | % | 27.5 | % | 27.7 | % | 27.2 | % | 27.0 | % | 26.5 | % | ||||||||||||||||||
Labor
|
29.7 | 29.2 | 29.6 | 30.1 | 30.0 | 30.6 | 30.4 | 30.8 | ||||||||||||||||||||||||||
Operating
|
17.1 | 17.1 | 17.5 | 17.0 | 16.9 | 17.0 | 17.2 | 16.6 | ||||||||||||||||||||||||||
Occupancy
|
6.3 | 6.3 | 6.2 | 6.3 | 6.2 | 6.3 | 6.4 | 6.1 | ||||||||||||||||||||||||||
Total restaurant operating costs
|
80.5 | 80.1 | 81.1 | 80.9 | 80.8 | 81.1 | 81.0 | 80.0 | ||||||||||||||||||||||||||
General and administrative
|
5.4 | 5.7 | 5.0 | 4.9 | 5.1 | 5.3 | 5.1 | 5.0 | ||||||||||||||||||||||||||
Depreciation and amortization
|
3.3 | 3.3 | 3.3 | 3.5 | 3.5 | 3.5 | 3.5 | 3.5 | ||||||||||||||||||||||||||
Preopening expense
|
1.5 | 2.6 | 3.3 | 1.5 | 0.9 | 1.8 | 2.1 | 1.6 | ||||||||||||||||||||||||||
Income from operations
|
9.3 | 8.3 | 7.3 | 9.2 | 9.7 | 8.3 | 8.3 | 9.9 | ||||||||||||||||||||||||||
Interest income (expense), net
|
0.0 | 0.0 | 0.0 | (0.2 | ) | 0.5 | 0.4 | 0.2 | 0.0 | |||||||||||||||||||||||||
Income before elimination of minority interests
and provision for income taxes
|
9.3 | 8.3 | 7.3 | 9.0 | 10.2 | 8.7 | 8.5 | 9.9 | ||||||||||||||||||||||||||
Elimination of minority interests
|
(1.8 | ) | (1.9 | ) | (1.8 | ) | (1.8 | ) | (1.8 | ) | (1.7 | ) | (1.7 | ) | (1.7 | ) | ||||||||||||||||||
Income before provision for income taxes
|
7.5 | 6.4 | 5.5 | 7.2 | 8.4 | 7.0 | 6.8 | 8.2 | ||||||||||||||||||||||||||
Provision for income taxes
|
(2.9 | ) | (2.4 | ) | (2.1 | ) | (2.7 | ) | (3.1 | ) | (2.5 | ) | (2.4 | ) | (2.9 | ) | ||||||||||||||||||
Net income
|
4.6 | % | 4.0 | % | 3.4 | % | 4.5 | % | 5.3 | % | 4.5 | % | 4.4 | % | 5.3 | % | ||||||||||||||||||
Historically, P.F. Changs 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.
In addition, our experience to date has been that labor and operating costs associated with a newly opened restaurant, for approximately its first four to six months of operation, are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Accordingly, the volume and timing of new restaurant openings has had and is expected to continue to have a meaningful impact on preopening expenses, labor and operating costs until such time as a larger base of restaurants in operation mitigates such impact.
Liquidity and Capital Resources
P.F. Changs 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 $18.8 million, $25.6 million and $43.3 million for fiscal years 1999, 2000 and 2001, 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.
27
We use cash primarily to fund the development and construction of new restaurants. Net cash used in investing activities in fiscal years 1999, 2000 and 2001 was $30.2 million, $36.9 million, and $51.9 million, respectively. Investment activities consisted of capital expenditures of $30.3 million, $37.4 million and $35.9 million in fiscal years 1999, 2000 and 2001, respectively, as well as investments in short-term instruments of $13.3 million and in long-term instruments of $1.7 million in fiscal 2001. We intend to open 13-15 new Bistro restaurants and 8-10 new Pei Wei restaurants in fiscal year 2002. We expect that our planned future Bistro restaurants will require, on average, a total cash investment per restaurant of approximately $2.3 million. Preopening expenses are expected to average approximately $325,000 per restaurant. Total cash investment per each Pei Wei restaurant is expected to average $750,000 with preopening expenses estimated at $110,000 per location.
Net cash provided by (used in) financing activities in fiscal years 1999, 2000 and 2001 was ($2.2 million), $12.4 million and $23.0 million, respectively. Financing activities in fiscal year 1999 consisted principally of distributions to our partners. Financing activities in fiscal year 2000 consisted primarily of borrowings under our credit facility offset by distributions to our partners. Financing activities in fiscal year 2001 consisted principally of the proceeds from our private equity placement, offset by the subsequent repayment of the borrowings under our credit facility and distributions to our partners.
In January of 2001, P.F. Changs 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. We used $15 million of the proceeds to repay outstanding borrowings under our credit facility and will continue to use the remainder for purposes of expanding our two restaurant concepts.
In December of 1999, P.F. Changs entered into a revolving credit facility with a commercial lending institution. The credit facility allowed for borrowings up to $15 million at an interest rate ranging from 150 to 225 basis points over the applicable London Interbank Offered Rate. In June of 2000, the credit facility was amended to allow for borrowings up to a total of $45 million at an interest rate ranging from 100 to 225 basis points over the applicable London Interbank Offered Rate. The revolving credit facility expires on November 30, 2002 and contains certain restrictions and conditions which require us to: maintain tangible net worth, a leverage ratio at a maximum of 3.75: 1.00, and a fixed-charge ratio no less than 1.25: 1.00. A portion of the assets of P.F. Changs serves as collateral for the credit facility. We had no borrowings under the credit facility as of December 30, 2001.
Our capital requirements, including development costs related to the opening of additional restaurants, have been and will continue to be significant. Our future capital requirements and the adequacy of its available funds will depend on many factors, including the pace of 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 and borrowings available under our credit facility will be sufficient to fund our capital requirements through 2002. In the event that additional capital is required, we may seek to raise such capital through public or private equity or debt financings. Future capital funding transactions may result in dilution to current shareholders. We can not assure you that such capital will be available on favorable terms, if at all.
Partnership Agreements
P.F. Changs has implemented 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 a specified 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. Changs has the right, but not the obligation, to purchase the minority partners interest in the partners 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 discounted cash flows of the subject restaurants/ regions financial results. We have 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.
28
As of December 30, 2001, there were 90 partners within the P.F. Changs China Bistro, Inc. system. During 2001, we purchased the interests of 11 of our minority partners for a total of approximately $1.9 million, of which the majority was recorded as intangibles in accordance with accounting principles generally accepted in the United States. Approximately $924,000 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 December 30, 2001. In 2002, we will have the opportunity to purchase five additional partnership interests. If all of these interests were fully purchased, the total purchase price would approximate $5.0 to $6.0 million based upon the estimated fair value of the respective interests at December 30, 2001. Such amounts are subject to change based upon changes in the estimated fair value of the respective interests from December 30, 2001 through the date of purchase.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. For fiscal 2001, the amortization provisions of SFAS No. 142 apply to goodwill and other intangible assets acquired after June 30, 2001. For fiscal 2002, the provision will apply to all goodwill and other intangible assets. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002, including the required impairment tests. The Company recorded approximately $503,000 in amortization of its intangible assets during 2001 that is being evaluated by management to determine which portion will be subject to no future amortization under FAS 142.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a segment of a business. SFAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company expects to adopt SFAS 144 as of December 31, 2001 and it does not expect that the adoption of the Statement will have a significant impact on the Companys financial position and results of operations.
Inflation
The primary inflationary factors affecting our operations are food, labor, insurance and utility costs. 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. Additionally, further increases in workers compensation and health insurance costs could also affect our labor costs.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
Management believes that the market risk associated with P.F. Changs market risk sensitive instruments as of December 30, 2001 is not material, and therefore, disclosure is not required.
29
Item 8. Financial Statements and Supplementary Data
P.F. CHANGS CHINA BISTRO, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||||
Report of Independent Auditors
|
31 | |||
Consolidated Financial Statements:
|
||||
Consolidated Balance Sheets at December 31,
2000 and December 30, 2001
|
32 | |||
Consolidated Statements of Operations for the
Years Ended January 2, 2000, December 31, 2000 and
December 30, 2001
|
33 | |||
Consolidated Statements of Common
Stockholders Equity for the Years Ended January 2,
2000, December 31, 2000 and December 30, 2001
|
34 | |||
Consolidated Statements of Cash Flows for the
Years Ended January 2, 2000, December 31, 2000 and
December 30, 2001
|
35 | |||
Notes to Consolidated Financial Statements
|
36 |
30
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
We have audited the accompanying consolidated balance sheets of P.F. Changs China Bistro, Inc. (the Company) as of December 31, 2000 and December 30, 2001, and the related consolidated statements of operations, common stockholders equity, and cash flows for each of the three years in the period ended December 30, 2001. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the 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. Changs China Bistro, Inc. at December 31, 2000 and December 30, 2001 and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2001, in conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP |
Phoenix, Arizona
31
P.F. CHANGS CHINA BISTRO, INC.
CONSOLIDATED BALANCE SHEETS
December 31, | December 30, | ||||||||
2000 | 2001 | ||||||||
(In thousands) | |||||||||
ASSETS
|
|||||||||
Current assets:
|
|||||||||
Cash and cash equivalents
|
$ | 6,390 | $ | 20,799 | |||||
Short-term investments
|
| 13,300 | |||||||
Receivables
|
1,671 | 1,960 | |||||||
Inventories
|
1,683 | 2,066 | |||||||
Current portion of notes receivable from related
parties
|
72 | 145 | |||||||
Prepaids and other current assets
|
2,161 | 1,346 | |||||||
Total current assets
|
11,977 | 39,616 | |||||||
Construction-in-progress
|
2,213 | 6,137 | |||||||
Property and equipment, net
|
92,284 | 114,020 | |||||||
Intangibles, net of accumulated amortization of
$1,712,000 and $2,215,000 at December 31, 2000 and
December 30, 2001, respectively
|
7,386 | 8,592 | |||||||
Notes receivable from related parties, less
current portion
|
20 | 100 | |||||||
Other assets
|
2,046 | 4,565 | |||||||
Total assets
|
$ | 115,926 | $ | 173,030 | |||||
LIABILITIES AND STOCKHOLDERS
EQUITY
|
|||||||||
Current liabilities:
|
|||||||||
Accounts payable
|
$ | 3,128 | $ | 5,764 | |||||
Construction payable
|
2,356 | 2,656 | |||||||
Accrued payroll
|
3,269 | 4,396 | |||||||
Sales and use tax payable
|
1,792 | 2,244 | |||||||
Property tax payable
|
1,474 | 2,157 | |||||||
Accrued insurance
|
807 | 2,023 | |||||||
Accrued rent
|
1,350 | 2,171 | |||||||
Other accrued expenses
|
1,554 | 2,101 | |||||||
Unearned revenue
|
2,793 | 4,150 | |||||||
Current portion of long-term debt, including
$72,000 and $264,000 due to related parties at December 31,
2000 and December 30, 2001, respectively
|
207 | 448 | |||||||
Income tax payable
|
| 1,190 | |||||||
Total current liabilities
|
18,730 | 29,300 | |||||||
Long-term debt, including $72,000 and $458,000
due to related parties at December 31, 2000 and
December 30, 2001, respectively
|
1,485 | 1,644 | |||||||
Short-term credit facility expected to be
refinanced
|
15,000 | | |||||||
Deferred income tax liability
|
2,318 | 3,360 | |||||||
Interests of minority partners in consolidated
partnerships
|
1,051 | 1,891 | |||||||
Commitments and contingencies
|
|||||||||
Stockholders equity:
|
|||||||||
Common stock, $0.001 par value,
20,000,000 shares authorized: 10,453,144 and
11,947,783 shares issued and outstanding at
December 31, 2000 and December 30, 2001, respectively
|
10 | 12 | |||||||
Additional paid-in capital
|
66,757 | 110,629 | |||||||
Retained earnings
|
10,575 | 26,194 | |||||||
Total stockholders equity
|
77,342 | 136,835 | |||||||
Total liabilities and stockholders equity
|
$ | 115,926 | $ | 173,030 | |||||
See accompanying notes.
32
P.F. CHANGS CHINA BISTRO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended | Year Ended | Year Ended | |||||||||||||
January 2, | December 31, | December 30, | |||||||||||||
2000 | 2000 | 2001 | |||||||||||||
(In thousands, except per share amounts) | |||||||||||||||
Revenues
|
$ | 153,295 | $ | 234,905 | $ | 318,776 | |||||||||
Costs and expenses:
|
|||||||||||||||
Restaurant operating costs:
|
|||||||||||||||
Cost of sales
|
42,136 | 64,720 | 86,368 | ||||||||||||
Labor
|
45,569 | 69,685 | 97,094 | ||||||||||||
Operating
|
25,907 | 40,312 | 53,932 | ||||||||||||
Occupancy
|
9,865 | 14,752 | 19,902 | ||||||||||||
Total restaurant operating costs
|
123,477 | 189,469 | 257,296 | ||||||||||||
General and administrative
|
9,648 | 12,290 | 16,359 | ||||||||||||
Depreciation and amortization
|
4,975 | 7,874 | 11,064 | ||||||||||||
Preopening expense
|
4,344 | 5,200 | 5,099 | ||||||||||||
Income from operations
|
10,851 | 20,072 | 28,958 | ||||||||||||
Interest income (expense):
|
|||||||||||||||
Interest expense
|
(228 | ) | (399 | ) | (302 | ) | |||||||||
Interest income
|
660 | 360 | 1,202 | ||||||||||||
Income before elimination of minority interests
and provision for income taxes
|
11,283 | 20,033 | 29,858 | ||||||||||||
Elimination of minority interests
|
(2,469 | ) | (4,317 | ) | (5,550 | ) | |||||||||
Income before provision for income taxes
|
8,814 | 15,716 | 24,308 | ||||||||||||
Provision for income taxes
|
(2,778 | ) | (5,987 | ) | (8,689 | ) | |||||||||
Net income
|
$ | 6,036 | $ | 9,729 | $ | 15,619 | |||||||||
Net income per share:
|
|||||||||||||||
Basic
|
$ | 0.59 | $ | 0.94 | $ | 1.32 | |||||||||
Diluted
|
$ | 0.54 | $ | 0.86 | $ | 1.23 | |||||||||
Weighted average shares used in computation:
|
|||||||||||||||
Basic
|
10,217 | 10,376 | 11,864 | ||||||||||||
Diluted
|
11,155 | 11,354 | 12,735 | ||||||||||||
See accompanying notes.
33
P.F. CHANGS CHINA BISTRO, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS EQUITY
Common Stockholders Equity | ||||||||||||||||||||
Common Stock | Additional | Retained | ||||||||||||||||||
Paid-In | Earnings | |||||||||||||||||||
Shares | Amount | Capital | (Deficit) | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Balances, December 27, 1998
|
10,193 | $ | 10 | $ | 63,409 | $ | (5,190 | ) | $ | 58,229 | ||||||||||
Issuance of common stock under stock option plan
|
37 | | 266 | | 266 | |||||||||||||||
Issuance of common stock under employee stock
purchase plan
|
25 | | 259 | | 259 | |||||||||||||||
Net income
|
| | | 6,036 | 6,036 | |||||||||||||||
Balances, January 2, 2000
|
10,255 | 10 | 63,934 | 846 | 64,790 | |||||||||||||||
Issuance of common stock under stock option plan
|
177 | | 1,203 | | 1,203 | |||||||||||||||
Issuance of common stock under employee stock
purchase plan
|
21 | | 411 | | 411 | |||||||||||||||
Benefit from disqualifying stock option
dispositions
|
| | 1,209 | | 1,209 | |||||||||||||||
Net income
|
| | | 9,729 | 9,729 | |||||||||||||||
Balances, December 31, 2000
|
10,453 | 10 | 66,757 | 10,575 | 77,342 | |||||||||||||||
Issuance of common stock, net of issuance costs
of $66,000
|
1,250 | 2 | 40,766 | | 40,768 | |||||||||||||||
Issuance of common stock under stock option plan
|
171 | | 1,333 | | 1,333 | |||||||||||||||
Issuance of common stock under employee stock
purchase plan
|
19 | | 537 | | 537 | |||||||||||||||
Issuance of common stock through exercise of
outstanding warrant
|
55 | | | | | |||||||||||||||
Benefit from disqualifying stock option
dispositions
|
| | 1,236 | | 1,236 | |||||||||||||||
Net income
|
| | | 15,619 | 15,619 | |||||||||||||||
Balances, December 30, 2001
|
11,948 | $ | 12 | $ | 110,629 | $ | 26,194 | $ | 136,835 | |||||||||||
See accompanying notes.
34
P.F. CHANGS CHINA BISTRO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended | Year Ended | Year Ended | ||||||||||||
January 2, | December 31, | December 30, | ||||||||||||
2000 | 2000 | 2001 | ||||||||||||
(In thousands) | ||||||||||||||
Operating Activities:
|
||||||||||||||
Net income
|
$ | 6,036 | $ | 9,729 | $ | 15,619 | ||||||||
Adjustments to reconcile net income to net cash
provided by operating activities:
|
||||||||||||||
Depreciation and amortization
|
4,539 | 7,432 | 10,561 | |||||||||||
Amortization of intangibles
|
436 | 442 | 503 | |||||||||||
Deferred income taxes
|
601 | 1,717 | 1,042 | |||||||||||
Minority interests
|
2,469 | 4,317 | 5,549 | |||||||||||
Changes in operating assets and liabilities:
|
||||||||||||||
Receivables
|
1,517 | (396 | ) | (289 | ) | |||||||||
Inventories
|
(412 | ) | (598 | ) | (383 | ) | ||||||||
Prepaids and other current assets
|
(573 | ) | (957 | ) | (188 | ) | ||||||||
Other assets
|
(582 | ) | (747 | ) | (819 | ) | ||||||||
Accounts payable
|
68 | 583 | 2,636 | |||||||||||
Accrued payroll
|
205 | 1,121 | 1,127 | |||||||||||
Sales and use tax payable
|
698 | 475 | 452 | |||||||||||
Property tax payable
|
487 | 833 | 683 | |||||||||||
Accrued insurance
|
338 | 214 | 1,216 | |||||||||||
Accrued rent
|
326 | 571 | 821 | |||||||||||
Other accrued expenses
|
46 | 191 | 481 | |||||||||||
Unearned revenue
|
932 | 1,117 | 1,357 | |||||||||||
Income tax payable
|
1,687 | (478 | ) | 3,429 | ||||||||||
Net cash provided by operating activities
|
18,818 | 25,566 | 43,797 | |||||||||||
Investing Activities:
|
||||||||||||||
Capital expenditures
|
(30,319 | ) | (37,381 | ) | (35,921 | ) | ||||||||
Purchases of investments
|
| | (15,000 | ) | ||||||||||
Decrease (increase) in notes receivable from
related parties
|
133 | 545 | (93 | ) | ||||||||||
Purchase of minority interests
|
| (63 | ) | (924 | ) | |||||||||
Net cash used in investing activities
|
(30,186 | ) | (36,899 | ) | (51,938 | ) | ||||||||
Financing Activities:
|
||||||||||||||
Proceeds from revolving credit facility, net of
repayments
|
| 15,000 | (15,000 | ) | ||||||||||
Repayments of long-term debt
|
(523 | ) | (281 | ) | (250 | ) | ||||||||
Proceeds from issuance of common stock
|
| | 40,768 | |||||||||||
Proceeds from stock options exercised and
employee stock purchases
|
525 | 1,614 | 1,870 | |||||||||||
Proceeds from minority interest contributions
|
455 | 442 | 555 | |||||||||||
Distributions to minority interests
|
(2,613 | ) | (4,385 | ) | (5,393 | ) | ||||||||
Net cash provided by (used in) financing
activities
|
(2,156 | ) | 12,390 | 22,550 | ||||||||||
Net increase (decrease) in cash and cash
equivalents
|
(13,524 | ) | 1,057 | 14,409 | ||||||||||
Cash and cash equivalents at the beginning of the
year
|
18,857 | 5,333 | 6,390 | |||||||||||
Cash and cash equivalents at the end of the year
|
$ | 5,333 | $ | 6,390 | $ | 20,799 | ||||||||
Supplemental Disclosures of Cash Flow
Information:
|
||||||||||||||
Cash paid for interest
|
$ | 231 | $ | 896 | $ | 358 | ||||||||
Cash paid for income taxes
|
490 | 6,960 | 4,223 | |||||||||||
Purchase of minority interests through issuance
of long-term debt and conversion to members capital
|
| 346 | 778 | |||||||||||
Benefit from disqualifying stock option
dispositions credited to equity
|
| 1,209 | 1,236 |
See accompanying notes.
35
P.F. CHANGS CHINA BISTRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization and Nature of Operations
P.F. Changs China Bistro, Inc. (the Company) operates two restaurant concepts in a single segment consisting of restaurants throughout the United States under the name of P.F. Changs China Bistro and Pei Wei Asian Diner. The Company successfully completed an initial public offering (the Offering) on December 9, 1998, in which 3,922,500 new shares of common stock were issued at a price of $12 per share. Proceeds from the offering were $42,675,100, net of issuance costs totaling $4,394,900.
Upon completion of the Offering, all outstanding shares of preferred stock were converted to shares of common stock at a ratio of one share of common stock for each two shares of preferred stock. Additionally, the deferred purchase price liability, resulting from the Companys acquisition of substantially all of the remaining minority interests in the three original restaurants in 1997, was converted into common stock. The number of shares issued relating to the deferred purchase price liability was determined by dividing the remaining purchase price liability by the price per share of the common stock sold.
Fiscal Year
The Companys fiscal year ends on the Sunday closest to the end of December and includes 52 weeks in 2000 and 2001 and 53 weeks in 1999.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States 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.
Principles of Consolidation
The Companys 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.
Cash and Cash Equivalents
The Companys cash balances are not pledged or restricted. The Companys 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. Cash equivalents at December 30, 2001 consist primarily of money market funds.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investments
The Company accounts for investments in accordance with Financial Accounting Standard No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Companys investments are classified as available for sale. At December 30, 2001, $13.3 million, recorded as Short-term Investments, 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 to maintain a rating for the DREAMS at a grade of AAA by Moodys. At December 30, 2001, the Company also had a $1.7 million investment, recorded in Other Assets, in a municipal bond maturing in 2031. Both instruments have a cost which equals fair market value at December 30, 2001.
Receivables
Receivables consist primarily of amounts due from landlords or other parties for the reimbursement of leasehold improvements paid by the Company.
Inventories
Inventories consist of food and beverages and are stated at the lower of cost or market using the first-in, first-out method.
Notes Receivable From Related Parties
Notes receivable from related parties represent amounts due the Company from employees, none of which are officers, directors or affiliates of the Company. A significant portion of these amounts is due from an employee of Pei Wei Asian Diner, Inc. All notes receivable outstanding as of December 30, 2001 will become due within the next two years.
Property and Equipment
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. During the years ended January 2, 2000, December 31, 2000 and December 30, 2001, the Company capitalized $0, $533,000 and $77,000, respectively, of interest costs.
The Company follows Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of, which requires impairment losses to be recorded 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 are less than the assets carrying amount. The Companys policy is to evaluate long-lived assets for impairment at a store level.
Intangibles
Intangibles consist primarily of goodwill relating to the excess of cost over net assets acquired in the purchase of interests in various restaurants at the formation of the Company and the subsequent acquisition of certain minority partnership interests in the operating rights of certain of the Companys partnerships and/or
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
operating restaurants. The initial goodwill was recorded at $8.7 million and the subsequently-acquired interests in partnerships and/or operating restaurants is $2.1 million. Intangibles are amortized over 20 years on a straight-line basis. In accordance with the provisions of SFAS 142, the Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Also during 2002, the Company will perform the required impairment tests of goodwill and indefinite lived intangible assets. The Company currently anticipates that its goodwill will no longer be amortized under SFAS 142 but will be subjected to periodic impairment assessments as defined in that Standard. The Company is currently assessing the treatment of the subsequently-acquired minority interests in partnerships and/or operating restaurants.
Unearned Revenue
Unearned revenue represents gift certificates sold but not yet redeemed. Revenues are recognized upon redemption of the gift certificates.
Revenue Recognition
Revenues from food, beverage and alcohol sales are recognized as products are sold.
Advertising
The Company expenses advertising as incurred. Advertising expense for the years ended January 2, 2000, December 31, 2000 and December 30, 2001 was approximately $2,004,000, $2,442,000 and $2,304,000 respectively.
Preopening Expense
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.
Income Taxes
The Company utilizes the liability method of accounting for income taxes as set forth in SFAS No. 109, 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 partners interests in 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 partners.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to certain employees with an exercise price equal to or greater than the fair value of the shares at the date of grant. The Company accounts for stock option grants to employees in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and, accordingly, recognizes no compensation expense for the stock option grants.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net Income Per Share
Net income per share is computed in accordance with SFAS No. 128, Earnings per Share.
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.
Segment Reporting
The Company accounts for its segments in accordance with SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information. SFAS No. 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. SFAS No. 131 allows aggregation of similar operating segments into a single operating segment if the businesses are considered similar under the criteria established by SFAS No. 131. The Company operates restaurants under the P.F. Changs China Bistro and Pei Wei brands. These two brands have similar investment criteria, customer demographics and economic and operating characteristics. Therefore, the Company has one reportable operating segment.
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 Companys investment strategy. Concentrations of credit risk with respect to receivables are limited as the Companys receivables are primarily with its landlords for the reimbursement of tenant improvements.
Reclassifications
Certain amounts shown in the prior periods consolidated financial statements have been reclassified to conform to the current year consolidated financial statements presentation.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. For fiscal 2001, the amortization provisions of SFAS No. 142 apply to goodwill and other intangible assets acquired after June 30, 2001. For fiscal 2002, the provision will apply to all goodwill and other intangible assets. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002, including the required impairment tests. The Company recorded approximately $503,000 in amortization of its intangible assets during 2001 that is being evaluated by management to determine which portion will be subject to no future amortization under FAS 142.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), which addresses financial accounting and
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a segment of a business. SFAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company expects to adopt SFAS 144 as of December 31, 2001 and it does not expect that the adoption of the Statement will have a significant impact on the Companys financial position and results of operations.
2. Property and Equipment
Property and equipment consists of the following:
December 31, | December 30, | |||||||
2000 | 2001 | |||||||
(In thousands) | ||||||||
Leasehold improvements
|
$ | 81,173 | $ | 105,166 | ||||
Furniture, fixtures and equipment
|
23,770 | 30,994 | ||||||
China and smallwares
|
2,672 | 3,454 | ||||||
107,615 | 139,614 | |||||||
Less accumulated depreciation and amortization
|
15,331 | 25,594 | ||||||
$ | 92,284 | $ | 114,020 | |||||
3. Credit Facility
In December of 1999, the Company entered into a revolving credit facility with a commercial lending institution. The credit facility allows for borrowings up to $15 million at an interest rate ranging from 150 to 225 basis points over the applicable London Interbank Offered Rate (LIBOR). In June of 2000 the Company amended its credit facility to allow for borrowings up to a total of $45 million with an interest rate ranging from 100 to 225 basis points over LIBOR. The revolving credit facility expires on November 30, 2002 and contains certain restrictions and conditions which require the Company to: maintain a minimum tangible net worth, a leverage ratio at a maximum of 3.75: 1, and a fixed-charge ratio no less than 1.25: 1. A portion of the assets of the Company serves as collateral for the credit facility. The Company had no borrowings outstanding under the credit facility as of December 30, 2001. The Company used proceeds from the private equity placement that occurred early in 2001 to repay the $15 million in borrowings that was outstanding as of December 31, 2000.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Long-Term Debt
Long-term debt consists of the following:
December 31, | December 30, | ||||||||
2000 | 2001 | ||||||||
(In thousands) | |||||||||
$1,100,000 promissory note, collateralized by
leasehold improvements, payable in monthly installments of
$11,354 including interest at 11.0 percent, until
March 1, 2017, when all remaining principal and interest is
due and payable. Additional payments may be required under the
promissory note based on a percentage of gross sales
|
$ | 1,030 | $ | 1,005 | |||||
$500,000 promissory note, collateralized by
equipment, payable in monthly installments of $8,561 including
interest at 11.0 percent until March 1, 2004 when all
remaining principal and interest is due and payable
|
280 | 204 | |||||||
$421,000 equipment loan, collateralized by
furniture, fixtures and equipment, payable in monthly
installments of $7,202 including interest at 11.0 percent,
until January 1, 2004, when all remaining principal and
interest is due and payable
|
225 | 160 | |||||||
$200,000 unsecured promissory note, payable in
monthly installments of $3,333 plus interest at prime plus one
percent, until April 2001, when all remaining principal and
interest is due and payable. The note is guaranteed by a
stockholder of the Company
|
13 | 0 | |||||||
$795,000 in unsecured promissory notes, payable
to related parties in annual installments of $530,000 plus
interest, with rates ranging from 225 basis points over LIBOR to
8%, until April 2004
|
144 | 723 | |||||||
1,692 | 2,092 | ||||||||
Less current portion
|
207 | 448 | |||||||
$ | 1,485 | $ | 1,644 | ||||||
The aggregate annual payments of long-term debt outstanding at December 30, 2001, for the next five years and thereafter, are summarized as follows: 2002 $448,000; 2003 $397,000; 2004 $332,000; 2005 $37,000; 2006 $42,000 and thereafter $836,000.
5. Preferred Stock and Common Stockholders Equity
Preferred Stock
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 is no outstanding preferred stock as of December 31, 2000 and December 30, 2001.
In connection with the original capitalization of the Company, a warrant to purchase 124,380 shares of preferred stock, convertible into 62,190 shares of common stock, was issued to an investment bank with an exercise price of $4.00 per common share. This warrant was exercised in the first quarter of 2001 in accordance with the cashless exercise provision contained therein for an aggregate of 55,545 shares of common stock.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Common Stock
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.
Stock Option Plans
The Company has elected to follow APB No. 25 and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, Accounting for Stock-Based Compensation, requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, because the exercise price of the Companys employee stock options equals or exceeds the fair value of the underlying stock on the date of grant, no compensation expense is recognized.
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 Companys 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 Companys restaurants to purchase the Companys 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 December 30, 2001 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 1,086,500 shares of common stock for issuance under the 1996 and 1997 Plans.
During 1998, the Companys 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 Companys employees, including officers, directors, consultants, advisors, and other independent contractors. A total of 606,885 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 85 percent of the fair market value of a share of common stock on the grant date. The Companys 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 15,000 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 7,500 immediately fully vested shares on the day following each annual meeting of stockholders.
During 1999, the Companys Board of Directors approved the 1999 Nonstatutory Stock Option Plan (1999 Plan), which provides for discretionary grants of nonqualified stock options to the Companys employees. The 1999 Plan prohibits grants to officers or directors. A total of 400,000 shares of common stock have been reserved for issuance under the 1999 Plan. The option price per share may not be less than 85 percent of the fair market value of a share of common stock on the grant date. The Companys Compensation Committee has the authority to, among other things, determine the vesting schedule for each option granted. All options expire within 10 years.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pro forma information regarding net income is required by SFAS No. 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. 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 for 1999 and 2000 and 2001: risk-free interest rate of 5.5 percent; a dividend yield of -0- percent; volatility factors of the expected market price of the Companys common stock of .497, .559 and .433 respectively; and a weighted-average expected life of the option of five years.
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 managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting period. The Companys pro forma information follows:
Year Ended | Year Ended | Year Ended | |||||||||||
January 2, | December 31, | December 30, | |||||||||||
2000 | 2000 | 2001 | |||||||||||
(In thousands, except | |||||||||||||
per share amounts) | |||||||||||||
Net income, as reported
|
$ | 6,036 | $ | 9,729 | $ | 15,619 | |||||||
Pro forma compensation expense for stock options
|
697 | 806 | 1,275 | ||||||||||
Pro forma net income
|
$ | 5,339 | $ | 8,923 | $ | 14,344 | |||||||
Pro forma net income per share:
|
|||||||||||||
Basic
|
$ | 0.52 | $ | 0.86 | $ | 1.21 | |||||||
Diluted
|
$ | 0.48 | $ | 0.79 | $ | 1.13 | |||||||
Weighted average shares used in computation:
|
|||||||||||||
Basic
|
10,217 | 10,376 | 11,864 | ||||||||||
Diluted
|
11,155 | 11,354 | 12,735 | ||||||||||
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 27, 1998
|
157,750 | 1,135,635 | $ | 4.71 | |||||||||
Authorized
|
100,000 | | | ||||||||||
Granted
|
(257,000 | ) | 257,000 | 22.31 | |||||||||
Exercised
|
| (36,653 | ) | 7.17 | |||||||||
Forfeited (canceled)
|
18,225 | (18,225 | ) | 9.18 | |||||||||
Outstanding at January 2, 2000
|
18,975 | 1,337,757 | 7.97 | ||||||||||
Authorized
|
400,000 | | | ||||||||||
Granted
|
(269,000 | ) | 269,000 | 31.11 | |||||||||
Exercised
|
| (182,182 | ) | 6.24 | |||||||||
Forfeited (canceled)
|
11,104 | (11,104 | ) | 18.94 | |||||||||
Outstanding at December 31, 2000
|
161,079 | 1,413,471 | 12.50 | ||||||||||
Authorized
|
300,000 | | | ||||||||||
Granted
|
(321,750 | ) | 321,750 | 37.60 | |||||||||
Exercised
|
| (175,720 | ) | 7.87 | |||||||||
Forfeited (canceled)
|
38,631 | (38,631 | ) | 30.20 | |||||||||
Outstanding at December 30, 2001
|
177,960 | 1,520,870 | $ | 17.83 | |||||||||
Information regarding options outstanding and exercisable at December 30, 2001 is as follows:
Options Outstanding | Options Exercisable | |||||||||||||||||||||
Weighted- | ||||||||||||||||||||||
Average | Weighted- | Weighted- | ||||||||||||||||||||
Range of | Number | Remaining | Average | Number | Average | |||||||||||||||||
Exercise Prices | Outstanding | Contractual Life | Exercise Price | Exercisable | Exercise Price | |||||||||||||||||
$ 2.40 $10.0 | 0 672,985 | 4.6 years | $ | 3.59 | 657,416 | $ | 3.53 | |||||||||||||||
$10.01 $20.00 | 117,138 | 6.9 years | 14.07 | 49,449 | 14.05 | |||||||||||||||||
$20.01 $30.00 | 348,830 | 7.8 years | 25.69 | 136,044 | 24.82 | |||||||||||||||||
$30.01 $40.00 | 381,917 | 9.2 years | 36.89 | 70,094 | 35.31 |
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. The weighted-average fair value of options granted for the years ended January 2, 2000, December 31, 2000 and December 30, 2001 was $11.16, $16.91 and $17.14, respectively. The fair value is estimated using the Black-Scholes option-pricing model.
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. A total of 169 shares of common stock have been reserved for issuance under the 2001 Pei Wei Plan. As of December 30, 2001, 93 options have been granted and none have been exercised. The Company holds 960 shares of common stock of Pei Wei Asian Diner, which at December 30, 2001 represents the only issued and outstanding shares.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Employee Stock Purchase Plan |
During 1998, the Companys Board of Directors approved the 1998 Employee Stock Purchase Plan (Purchase Plan) and reserved 400,000 shares for issuance thereunder. The Purchase Plan permits eligible 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 6-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 purchase period.
6. Partnership Agreements
P.F. Changs has implemented 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 a specified 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. Changs has the right, but not the obligation, to purchase the minority partners interest in the partners 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 discounted cash flows of the subject restaurants/ regions 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 December 30, 2001, there were 90 partners within the P.F. Changs China Bistro, Inc. system. During 2001, we purchased the interests of 11 of our minority partners for a total of approximately $1.9 million, of which the majority was recorded as intangibles in accordance with accounting principles generally accepted in the United States. Approximately $924,000 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 December 30, 2001. In 2002, we will have the opportunity to purchase five additional partnership interests. If all of these interests were fully purchased, the total purchase price would approximate $5.0 to $6.0 million based upon the estimated fair value of the respective interests at December 30, 2001. Such amounts are subject to change based upon changes in the estimated fair value of the respective interests from December 30, 2001 through the date of purchase.
7. Income Taxes
Income tax expense consisted of the following:
Year Ended | Year Ended | Year Ended | |||||||||||
January 2, | December 31, | December 30, | |||||||||||
2000 | 2000 | 2001 | |||||||||||
(In thousands) | |||||||||||||
Federal:
|
|||||||||||||
Current
|
$ | 1,795 | $ | 3,676 | $ | 6,398 | |||||||
Deferred
|
511 | 1,460 | 886 | ||||||||||
2,306 | 5,136 | 7,284 | |||||||||||
State:
|
|||||||||||||
Current
|
382 | 594 | 1,249 | ||||||||||
Deferred
|
90 | 257 | 156 | ||||||||||
472 | 851 | 1,405 | |||||||||||
$ | 2,778 | $ | 5,987 | $ | 8,689 | ||||||||
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Companys effective tax rate differs from the federal statutory rate for the following reasons:
Year Ended | Year Ended | Year Ended | ||||||||||
January 2, | December 31, | December 30, | ||||||||||
2000 | 2000 | 2001 | ||||||||||
(In thousands) | ||||||||||||
Income tax expense at federal statutory rate
|
$ | 2,996 | $ | 5,500 | $ | 8,508 | ||||||
State taxes, net of federal expense
|
311 | 678 | 913 | |||||||||
FICA tip credit
|
| (1,744 | ) | (411 | ) | |||||||
Increase (decrease) in valuation allowance
|
(605 | ) | 1,516 | (359 | ) | |||||||
Other, net
|
76 | 37 | 38 | |||||||||
$ | 2,778 | $ | 5,987 | $ | 8,689 | |||||||
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 | As of | |||||||||||
January 2, | December 31, | December 30, | |||||||||||
2000 | 2000 | 2001 | |||||||||||
(In thousands) | |||||||||||||
Deferred tax assets:
|
|||||||||||||
Preopening expenses
|
$ | 745 | $ | 572 | $ | 644 | |||||||
FICA tip and AMT credit carryforward
|
| 1,516 | 1,158 | ||||||||||
Other
|
134 | 100 | 264 | ||||||||||
879 | 2,188 | 2,066 | |||||||||||
Deferred tax liabilities:
|
|||||||||||||
Depreciation on property and equipment
|
1,228 | 2,688 | 3,902 | ||||||||||
Goodwill amortization
|
252 | 302 | 366 | ||||||||||
1,480 | 2,990 | 4,268 | |||||||||||
Valuation allowance
|
| (1,516 | ) | (1,158 | ) | ||||||||
Net deferred tax liabilities
|
$ | 601 | $ | 2,318 | $ | 3,360 | |||||||
The FICA tip credit carryforward begins to expire in 2018. For the years ended January 2, 2000, December 31, 2000 and December 30, 2001 the valuation allowance increased (decreased) $(605,000), $1,516,000 and $(358,000), respectively.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Net Income Per Share
The following table sets forth the computation of basic and diluted net income per share:
Year Ended | Year Ended | Year Ended | ||||||||||||
January 2, | December 31, | December 30, | ||||||||||||
2000 | 2000 | 2001 | ||||||||||||
(In thousands, except per share amounts) | ||||||||||||||
Numerator:
|
||||||||||||||
Numerator for basic and diluted net income per
share net income available to common stockholders
|
$ | 6,036 | $ | 9,729 | $ | 15,619 | ||||||||
Denominator:
|
||||||||||||||
Denominator for basic net income per
share weighted-average shares
|
10,217 | 10,376 | 11,864 | |||||||||||
Effect of dilutive securities:
|
||||||||||||||
Employee and director stock options
|
887 | 922 | 865 | |||||||||||
Warrants
|
51 | 56 | 6 | |||||||||||
Denominator for diluted net income per
share adjusted for weighted average shares and
assumed conversions
|
11,155 | 11,354 | 12,735 | |||||||||||
Net income per share:
|
||||||||||||||
Basic
|
$ | 0.59 | $ | 0.94 | $ | 1.32 | ||||||||
Diluted
|
$ | 0.54 | $ | 0.86 | $ | 1.23 | ||||||||
Options to purchase 1,520,870 shares of common stock ranging from $2.40 to $38.47 per share were outstanding at December 30, 2001, all of which were included in dilutive securities given that none were antidilutive.
9. Commitments and Contingencies
Operating Leases
The Company leases restaurant and office facilities and equipment and certain real property under operating leases having terms expiring between 2001 and 2022. The restaurant facility and real property leases primarily have renewal clauses of five to 15 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 for the years ended January 2, 2000, December 31, 2000 and December 30, 2001 was approximately $7,006,000, $10,629,000 and $14,249,000, respectively. Contingent rent included in rent expense for the years ended January 2, 2000, December 31, 2000 and December 30, 2001 was approximately $1,959,000, $3,225,000 and $4,246,000, respectively.
At December 30, 2001, 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. Future minimum lease
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
payments under operating leases (including restaurants to be opened after December 30, 2001) are as follows (in thousands):
2002
|
$ | 12,762 | |||
2003
|
13,373 | ||||
2004
|
13,176 | ||||
2005
|
12,588 | ||||
2006
|
12,287 | ||||
Thereafter
|
104,120 | ||||
Total minimum lease payments
|
$ | 168,306 | |||
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.
10. Benefit Plan
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 January 2, 2000, December 31, 2000 and December 30, 2001, the Company did not make any contributions to the Plan.
11. Interim Financial Results (Unaudited)
The following tables set forth certain unaudited consolidated financial information for each of the four quarters in fiscal 2000 and 2001. In managements 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 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 31, 2000 | Year Ended December 30, 2001 | |||||||||||||||||||||||||||||||
First | Second | Third | Fourth | First | Second | Third | Fourth | |||||||||||||||||||||||||
Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | |||||||||||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||||||||||||||
Revenues
|
$ | 51,414 | $ | 53,496 | $ | 61,179 | $ | 68,816 | $ | 72,420 | $ | 76,457 | $ | 80,555 | $ | 89,344 | ||||||||||||||||
Restaurant operating profit
|
10,035 | 10,663 | 11,571 | 13,167 | 13,877 | 14,397 | 15,296 | 17,910 | ||||||||||||||||||||||||
Income before provision for income taxes
|
3,892 | 3,416 | 3,425 | 4,983 | 6,124 | 5,295 | 5,532 | 7,357 | ||||||||||||||||||||||||
Net income
|
2,391 | 2,128 | 2,120 | 3,090 | 3,890 | 3,390 | 3,568 | 4,771 | ||||||||||||||||||||||||
Basic net income per share
|
0.23 | 0.21 | 0.20 | 0.30 | 0.33 | 0.29 | 0.30 | 0.40 | ||||||||||||||||||||||||
Diluted net income per share
|
0.21 | 0.19 | 0.19 | 0.27 | 0.31 | 0.27 | 0.28 | 0.37 | ||||||||||||||||||||||||
Basic weighted average shares outstanding
|
10,303 | 10,365 | 10,400 | 10,435 | 11,669 | 11,906 | 11,930 | 11,952 | ||||||||||||||||||||||||
Diluted weighted average shares outstanding
|
11,279 | 11,348 | 11,344 | 11,444 | 12,554 | 12,729 | 12,805 | 12,853 |
48
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
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 Director Nominees and Executive Officers, respectively, contained in the Companys definitive proxy statement in connection with the solicitation of proxies for the Companys 2001 Annual Meeting of Stockholders to be held on April 3, 2002 (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 contained in the Proxy Statement.
Item 12. | Security Ownership of Certain Beneficial Owners and Management |
The information required by this item is incorporated by reference from the information under the caption Security Ownership of Certain Beneficial Owners and Management contained in the Proxy Statement.
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.
PART IV
Item 14. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K |
(a) 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 Auditors; | |
Consolidated Balance Sheets at December 31, 2000 and December 30, 2001; | |
Consolidated Statements of Operations for the Years Ended January 2, 2000, December 31, 2000 and December 30, 2001; | |
Consolidated Statements of Common Stockholders Equity for the Years Ended January 2, 2000, December 31, 2000 and December 30, 2001; | |
Consolidated Statements of Cash Flows for the Years Ended January 2, 2000, December 31, 2000 and December 30, 2001; | |
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 Companys Consolidated Financial Statements and Notes thereto, included in Part II, Item 8 of this Annual Report on Form 10-K. |
49
3. Index to Exhibits |
Exhibit | ||||
Number | Description Document | |||
3.1* | Certificate of Incorporation of the Company. | |||
3.2* | By-laws. | |||
4.1* | Specimen Common Stock Certificate. | |||
4.2* | Amended and Restated Registration Rights Agreement dated May 1, 1997. | |||
10.1* | Form of Indemnification Agreement for directors and executive officers. | |||
10.2* | 1998 Stock Option Plan and forms of agreement thereunder. | |||
10.3* | 1997 Restaurant Manager Stock Option Plan and forms of Agreement thereunder. | |||
10.4* | 1996 Stock Option Plan and forms of Agreement thereunder. | |||
10.5* | 1998 Employee Stock Purchase Plan. | |||
10.6* | Employment Agreement between Paul M. Fleming and the Company dated January 1, 1996, as amended September 2, 1998. | |||
10.10* | Office Lease Between the Company and U.S. West Business Resources, Inc., dated February 15, 1997. | |||
10.11** | Office Lease Between the Company and PHXAZ-Kierland Commons, LLC, dated September 17, 1999. | |||
10.12** | Line of Credit Agreement between the Company and Bank of America dated December 6, 1999. | |||
10.13**** | 1999 Nonstatutory Stock Option Plan. | |||
10.14*** | Amendment to Credit Agreement, dated June 26, 2000, between the Company and Bank of America, N.A. | |||
10.15 | First Amendment to Office Lease between the Company and PHXAZ-Kierland Commons, LLC, dated August 22, 2001. | |||
10.16# | Common Stock Purchase Agreement dated January 11, 2001. | |||
10.17 | Pei Wei Asian Diner, Inc. 2001 Stock Option Plan. | |||
21.1 | List of Subsidiaries. | |||
23.1 | Consent of Independent Auditors. |
* | Incorporated by reference to the Registrants Registration Statement on Form S-1 (File No. 333-59749). |
| Management Contract or Compensatory Plan |
** | Incorporated by reference to the Registrants Form 10-K dated March 3, 2000. |
*** | Incorporated by reference to the Registrants Form 10-Q dated August 9, 2000. |
**** | Incorporated by reference to the Registrants Form 10-K dated March 6, 2001. |
# | Incorporated by reference to the Registrants Form 10-Q, dated April 1, 2001, Exhibit 10.1. |
(b) Reports on Form 8-K:
None.
50
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 February 15, 2002.
P.F. CHANGS CHINA BISTRO, INC. |
By: | /s/ RICHARD FEDERICO |
|
|
Richard Federico | |
Chairman and Chief Executive Officer |
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) | February 15, 2002 | ||
By: /s/ ROBERT T. VIVIAN
Robert T. Vivian |
President | February 15, 2002 | ||
By: /s/ KRISTINA K. CASHMAN
Kristina Cashman |
Secretary and Chief Financial Officer | February 15, 2002 | ||
By: /s/ PAUL M. FLEMING
Paul M. Fleming |
Director | February 15, 2002 | ||
By: /s/ KENNETH J. WESSELS
Kenneth J. Wessels |
Director | February 15, 2002 | ||
By: /s/ R. MICHAEL WELBORN
R. Michael Welborn |
Director | February 15, 2002 | ||
By: /s/ JAMES G. SHENNAN, JR.
James G. Shennan, Jr. |
Director | February 15, 2002 | ||
By: /s/ F. LANE CARDWELL, JR.
F. Lane Cardwell, Jr. |
Director | February 15, 2002 |
51
INDEX TO EXHIBITS
Exhibit | ||||
Number | Description Document | |||
3.1* | Certificate of Incorporation of the Company. | |||
3.2* | By-laws. | |||
4.1* | Specimen Common Stock Certificate. | |||
4.2* | Amended and Restated Registration Rights Agreement dated May 1, 1997. | |||
10.1* | Form of Indemnification Agreement for directors and executive officers. | |||
10.2* | 1998 Stock Option Plan and forms of agreement thereunder. | |||
10.3* | 1997 Restaurant Manager Stock Option Plan and forms of Agreement thereunder. | |||
10.4* | 1996 Stock Option Plan and forms of Agreement thereunder. | |||
10.5* | 1998 Employee Stock Purchase Plan. | |||
10.6* | Employment Agreement between Paul M. Fleming and the Company dated January 1, 1996, as amended September 2, 1998. | |||
10.10* | Office Lease Between the Company and U.S. West Business Resources, Inc., dated February 15, 1997. | |||
10.11** | Office Lease Between the Company and PHXAZ-Kierland Commons, LLC, dated September 17, 1999. | |||
10.12** | Line of Credit Agreement between the Company and Bank of America dated December 6, 1999. | |||
10.13**** | 1999 Nonstatutory Stock Option Plan. | |||
10.14*** | Amendment to Credit Agreement, dated June 26, 2000, between the Company and Bank of America, N.A. | |||
10.15 | First Amendment to Office Lease between the Company and PHXAZ-Kierland Commons, LLC, dated August 22, 2001. | |||
10.16# | Common Stock Purchase Agreement dated January 11, 2001. | |||
10.17 | Pei Wei Asian Diner, Inc. 2001 Stock Option Plan. | |||
21.1 | List of Subsidiaries. | |||
23.1 | Consent of Independent Auditors. |
* | Incorporated by reference to the Registrants Registration Statement on Form S-1 (File No. 333-59749). |
| Management Contract or Compensatory Plan |
** | Incorporated by reference to the Registrants Form 10-K dated March 3, 2000. |
*** | Incorporated by reference to the Registrants Form 10-Q dated August 9, 2000. |
**** | Incorporated by reference to the Registrants Form 10-K dated March 6, 2001. |
# | Incorporated by reference to the Registrants Form 10-Q, dated April 1, 2001, Exhibit 10.1. |
(b) Reports on Form 8-K:
None.
52