<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 3, 1998
REGISTRATION NO. 333-59749
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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P.F. CHANG'S CHINA BISTRO, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<TABLE>
<S> <C> <C>
DELAWARE 5812 86-0815086
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
5090 NORTH 40TH STREET, SUITE 160
PHOENIX, AZ 85018
(602) 957-8986
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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ROBERT T. VIVIAN
CHIEF FINANCIAL OFFICER
P.F. CHANG'S CHINA BISTRO, INC.
5090 NORTH 40TH STREET, SUITE 160
PHOENIX, AZ 85018
(602) 957-8986
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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COPIES TO:
<TABLE>
<S> <C>
CAMERON JAY RAINS, ESQ. CECIL SCHENKER, P.C.
SCOTT M. STANTON, ESQ. J. PATRICK RYAN, ESQ.
CHRISTIAN WAAGE, ESQ. AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
GRAY CARY WARE & FREIDENRICH LLP 300 CONVENT STREET, SUITE 1500
4365 EXECUTIVE DRIVE, SUITE 1600 SAN ANTONIO, TX 78205
SAN DIEGO, CA 92121 (210) 281-7000
(619) 677-1400
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 3, 1998
PROSPECTUS
, 1998
SHARES
[P.F. CHANG'S LOGO]
P.F. CHANG'S CHINA BISTRO, INC.
COMMON STOCK
Of the shares of common stock offered hereby (the "Common
Stock"), shares are being offered by P.F. Chang's China Bistro, Inc.
("P.F. Chang's" or the "Company") and shares are being offered by the
Selling Stockholders. See "Principal and Selling Stockholders." The Company will
not receive any of the proceeds from the sale of the shares by the Selling
Stockholders.
Prior to this offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price will be
between $ and $ per share. See "Underwriting" for information
relating to the factors to be considered in determining the initial public
offering price.
Application has been made for the Common Stock to be approved for quotation
on the Nasdaq National Market under the symbol "PFCB."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share............................ $ $ $ $
Total(3)............................. $ $ $ $
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</TABLE>
(1) The Company and Selling Stockholders have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $650,000.
(3) The Company and the Selling Stockholders have granted to the Underwriters an
option, exercisable within 30 days after the date hereof to purchase up to
additional shares of Common Stock on the same terms and conditions
set forth above solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to the Public, Underwriting Discounts and
Commissions, Proceeds to the Company and Proceeds to the Selling
Stockholders will be $ , $ , $ and $ ,
respectively. See "Underwriting."
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, when, as and if delivered to and accepted by the Underwriters and
subject to certain prior conditions including the right of the Underwriters to
reject any order in whole or in part. It is expected that delivery of the
certificates representing the shares of Common Stock will be made in New York,
New York on or about , 1998.
DONALDSON, LUFKIN & JENRETTE
NATIONSBANC MONTGOMERY SECURITIES LLC
DAIN RAUSCHER WESSELS
a division of Dain Rauscher
Incorporated
<PAGE> 3
The inside front cover of the prospectus contains a map of the United
States which identifies the cities in which the Company has existing restaurants
and restaurants scheduled to be opened in 1998. Above the map is a photograph of
the exterior of the Scottsdale, Arizona restaurant. The inside cover folds out
to display photographs of the interiors of other P.F. Chang's China Bistro
restaurants set over the background of a mural depicting 12th century China.
[INSIDE FRONT COVER]
The Company has registered the servicemark "P.F. Chang's China Bistro." All
other brand names and trademarks appearing in this Prospectus are the property
of their respective holders.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. As used in this Prospectus, unless the context
otherwise requires, the terms "Company" and "P.F. Chang's" include P.F. Chang's
China Bistro, Inc. and all of its subsidiaries and affiliates and their
respective predecessors. Except as otherwise noted, all information in this
Prospectus assumes (i) no exercise of the Underwriters' over-allotment option,
(ii) no exercise of options or warrants to purchase shares of Common Stock and
(iii) the conversion into shares of Common Stock upon the closing of this
offering of all outstanding shares of Convertible Redeemable Preferred Stock and
the deferred purchase price liability representing the balance of the purchase
price from the acquisition of minority interests in three of the four original
restaurants (the "Deferred Purchase Price Liability"). Information in this
Prospectus also gives effect to a one-for-two reverse split of the Common Stock
effected in August 1998. See "Description of Capital Stock" and "Underwriting."
THE COMPANY
P.F. Chang's owns and operates 17 full service restaurants that feature a
blend of high quality, traditional Chinese cuisine and American hospitality in a
sophisticated, contemporary bistro setting. The Company's restaurants offer
intensely flavored, highly memorable culinary creations, prepared from fresh
ingredients, including premium herbs and spices imported directly from China.
The 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
t'sai, a balancing of rice, noodles and grains with meat, seafood and
vegetables, the P.F. Chang's menu offers an array of taste, texture, color and
aroma. The menu is highlighted by dishes such as Chang's Spicy Chicken, Orange
Peel Beef, Peking Ravioli, Chicken in Soothing Lettuce Wrap, Szechwan-Style Long
Beans and Dan Dan Noodles. The traditional cuisine is complemented by a full
service bar offering an extensive selection of wines, specialty drinks, Asian
beers, cappuccino and espresso. The average check per customer, including
beverage, is approximately $17.00. The Company offers superior customer service
in a high energy atmosphere featuring a display kitchen, exhibition wok cooking
and a decor that includes wood and slate floors, mounted life-size terra cotta
replicas of Xi'an warriors and narrative murals depicting 12th century China.
The Company was formed in early 1996 with the acquisition of the four
original P.F. Chang's restaurants and the hiring of an experienced management
team, led by Richard Federico and Robert Vivian, the Company's Chief Executive
Officer and Chief Financial Officer, respectively, to support the Company's
founder, Paul Fleming. P.F. Chang's opened three additional restaurants in 1996,
six in 1997 and expects to open ten restaurants in 1998 (four of which are open)
and 13 in 1999. Key to the Company's expansion strategy and success at the
restaurant level is the Company's management philosophy pursuant to which
regional managers ("Market Partners"), certain general managers ("Operating
Partners") and certain executive chefs ("Culinary Partners") are allowed to
participate in the cash flows of the restaurants for which they have
responsibility. The Company has demonstrated the viability of the P.F. Chang's
concept in a wide variety of markets across the United States, including the
Southwest, southern California, Texas and southern Florida.
The P.F. Chang's concept was developed in 1993 by Paul Fleming, a
Phoenix-based restaurateur, in collaboration with Philip Chiang, the owner of
the Mandarin restaurant in Beverly Hills, California. The Company's objectives
are to (i) develop and operate a nationwide system of restaurants that offer
guests a sophisticated dining experience, (ii) create a loyal customer base that
generates a high level of repeat business and (iii) provide superior returns to
its investors. To achieve its objectives, the Company strives to offer high
quality Chinese cuisine in a memorable atmosphere while delivering superior
customer service and an excellent dining value. The Company intends to continue
its expansion program and believes the management incentives provided by its
Market, Operating and Culinary Partners programs should position the Company to
continue this expansion without sacrificing the Company's restaurant level
operating performance and return on investment.
------------------
The Company was incorporated in January 1996 as a Delaware corporation in
connection with the acquisition of the four original P.F. Chang's restaurants.
The Company's principal executive office is located at 5090 North 40th Street,
Suite 160, Phoenix, Arizona 85018. The Company's telephone number is (602) 957-
8986, and its facsimile number is (602) 957-8998.
3
<PAGE> 5
THE OFFERING
Common Stock offered by the Company........... shares
Common Stock offered by the Selling
Stockholders.................................. shares
Common Stock to be outstanding after the
offering...................................... shares(1)
Use of proceeds............................... Development of new restaurants,
repayment of certain indebtedness and general corporate purposes including
working capital. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol........ PFCB
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(1) Based on shares outstanding at June 28, 1998, which includes (i)
3,475,854 shares issuable on conversion of outstanding shares of Series A
Convertible Redeemable Preferred Stock (the "Series A Preferred Stock") and
outstanding shares of Series B Convertible Redeemable Preferred Stock (the
"Series B Preferred Stock" and together with the Series A Preferred Stock,
the "Preferred Stock"), (ii) 82,130 shares of Common Stock issuable upon
conversion of paid-in-kind dividends paid to holders of Series A Preferred
Stock of the Company prior to consummation of the offering and (iii)
shares issuable upon consummation of this offering upon conversion
of the Deferred Purchase Price Liability, assuming an initial public
offering price of $ . Excludes (i) 1,009,635 shares reserved as of
such date for issuance upon the exercise of outstanding stock options at a
weighted average exercise price of $3.87 per share, (ii) an aggregate of
680,000 shares reserved for future grant under the Company's stock option
and stock purchase plans and (iii) 62,190 shares reserved for issuance upon
the exercise of outstanding warrants at an exercise price of $4.00 per
share. See "Management--Benefit Plans" and "Description of Capital Stock."
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
FISCAL YEAR TOTAL YEAR FISCAL YEAR JUNE 29, JUNE 28,
1995(2) 1996(3) 1997 1997 1998
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues..................................... $10,465 $18,445 $39,768 $17,703 $32,937
Total restaurant operating costs............. 8,891 15,835 32,470 14,334 26,296
Income (loss) from operations................ 660 9 (2) 696 1,658
Net income (loss)............................ $ 647 $(1,145) $(1,696) $ (241) $ 847
Diluted net income (loss) per share.......... -- -- $ (1.03) $ (0.25) $ 0.13
Shares used in calculation of diluted net
income (loss) per share(4)................. -- -- 2,500 2,500 6,655
PRO FORMA DATA:(5)
Pro forma diluted net income (loss) per
share...................................... -- $ $ $ $
Shares used in calculation of pro forma
diluted net income (loss) per share........ --
OPERATING DATA:
Comparable restaurant sales increase(6)...... 25.1% 13.0% 13.8% 12.6% 11.7%
Average weekly restaurant sales.............. $81,122 $81,976 $90,383 $91,250 $93,839
Return on investment(7)...................... 25.2% 34.4% 34.9% -- --
Restaurants open at end of period............ 4 7 13 8 14
</TABLE>
<TABLE>
<CAPTION>
JUNE 28, 1998
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(8) AS ADJUSTED(9)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 1,802 $ 1,802 $
Total assets................................................ 34,265 34,265
Short- and long-term debt................................... 11,600 11,600 2,600
Deferred Purchase Price Liability........................... 2,426 -- --
Convertible Redeemable Preferred Stock...................... 18,285 -- --
Common stockholders' equity (deficit)....................... (4,076) 16,635
</TABLE>
4
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(1) The Company's fiscal quarters typically consist of thirteen week periods
ending on the Sunday closest to the last day of the calendar quarter, and
its fiscal year ends on the Sunday closest to December 31 in each year.
(2) Fiscal year 1995 information reflects the combined results of operations of
the Predecessors. Accordingly, net income (loss) per share for fiscal year
1995 is not presented because it is not meaningful. See "Certain
Transactions" and Note 1 of Notes to Consolidated Financial Statements.
(3) Prior to February 29, 1996, the Company's business was conducted by four
business entities controlled by Paul Fleming: Fleming Chinese Restaurants,
Inc. (Scottsdale), P.F. Chang's II, Inc. (Newport Beach), P.F. Chang's III,
L.L.C. (La Jolla) and P.F. Chang's IV, L.L.C. (Irvine) (collectively, the
"Predecessors"). Total year 1996 information reflects the combined results
of the Predecessors for the period beginning January 1, 1996 and ending
February 28, 1996 and the results of the Company for the period beginning
February 29, 1996 and ending December 29, 1996. Accordingly, net income
(loss) per share for total year 1996 is not presented because it is not
meaningful. The allocation of the purchase price in connection with the
purchase of minority interests resulted in no material adjustment to the
historical recorded basis in the assets and liabilities except for goodwill.
Therefore, the effect to the statement of operations is primarily
amortization of goodwill subsequent to the date of acquisition. See
"Selected Consolidated Financial and Operating Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Certain Transactions" and Note 1 of Notes to Consolidated Financial
Statements.
(4) See Notes 2, 6 and 8 of Notes to Consolidated Financial Statements.
(5) Pro forma information gives effect as of the beginning of each period to (i)
the purchase of substantially all of the minority interests in the
Predecessors, (ii) the repayment of the Company's revolving line of credit
through the application of the net proceeds from the sale of a sufficient
number of shares of Common Stock at the assumed initial public offering
price of $ per share, and (iii) the conversion into Common Stock of
the Preferred Stock and the Deferred Purchase Price Liability, assuming an
initial public offering price of $ per share.
(6) A new restaurant is included in the calculation of the change in comparable
restaurant sales in the eighteenth month of that restaurant's operation.
(7) Return on investment for each restaurant is determined as the quotient of
earnings of such restaurant before interest, taxes and rent divided by the
Company's total investment in restaurant assets. The information presented
in the table is the aggregate return on investment for all restaurants open
during the respective periods. The computation of return on investment
excludes rents, interest and taxes to provide for an evaluation of
operational results of individual restaurants without the variability
introduced by different forms of financing and ownership (i.e., purchased
and financed versus leased). See "Business--Unit Economics."
(8) Adjusted to give effect to the conversion into Common Stock of the Preferred
Stock and the Deferred Purchase Price Liability.
(9) Adjusted to give effect as of June 28, 1998 to (i) the receipt by the
Company of the estimated net proceeds of $ from the sale of
shares of Common Stock offered hereby by the Company at an assumed initial
public offering price of $ per share, (ii) application of a portion of
the net proceeds of this offering to repay the Company's revolving line of
credit, and (iii) the conversion into Common Stock of the Preferred Stock
and the Deferred Purchase Price Liability, assuming an initial public
offering price of $ per share.
5
<PAGE> 7
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should carefully consider the following risk factors in evaluating an
investment in the Company before purchasing any shares of Common Stock offered
hereby. This Prospectus contains forward-looking statements which involve risks
and uncertainties. Such forward-looking statements may be deemed to include
anticipated restaurant openings, anticipated costs and sizes of future
restaurants and the adequacy of anticipated sources of cash, including the
proceeds from this offering, to fund the Company's future capital requirements.
Words such as "believes," "anticipates," "expects," "intends," "plans" and
similar expressions are intended to identify forward-looking statements, but are
not the exclusive means of identifying such statements. Prospective investors
are cautioned that actual events or results may differ materially from those
discussed in the forward-looking statements. Factors that might cause actual
events or results to differ materially from those indicated by such forward-
looking statements may include the matters set forth below and elsewhere in this
Prospectus.
HISTORY OF NET LOSSES
Although the Company has achieved positive cash flow from its restaurant
operations since inception, the significant investment of resources in acquiring
and opening its restaurants resulted in the Company incurring net losses in each
fiscal period from inception through December 28, 1997. As of June 28, 1998, the
Company had an accumulated deficit of approximately $4.1 million. Although the
Company achieved net income in the first two quarters of fiscal 1998, there can
be no assurance that the Company will be able to sustain profitable operations
in the future. See "Management's Discussion and Analysis of Financial Condition
and Results of Operation."
UNCERTAINTIES ASSOCIATED WITH EXPANDING OPERATIONS
Because the Company currently operates only 17 restaurants, several of
which have been opened within the last twelve months, the results achieved to
date by the Company's relatively small number of restaurants may not be
indicative of those restaurants' long-term performance or the potential market
acceptance of restaurants in other locations. Further, there can be no assurance
that any new restaurant which the Company opens will obtain similar operating
results to those of prior restaurants. The Company anticipates that its new
restaurants will commonly take several months to reach planned operating levels
due to certain inefficiencies typically associated with new restaurants,
including lack of market awareness, inability to hire sufficient staff and other
factors.
A critical factor in the Company's future success is its ability to
successfully expand its operations. The Company expanded from seven restaurants
at the end of 1996 to 17 restaurants as of August 1998. The Company expects to
open a total of ten restaurants during 1998 (four of which are open) and an
additional 13 in 1999. The Company's ability to expand successfully will depend
on a number of factors, including the identification and availability of
suitable locations, competition for restaurant sites, the negotiation of
favorable lease arrangements, timely development in certain cases of commercial,
residential, street or highway construction near the Company's 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), the competition in new
markets, general economic conditions and other factors, some of which are beyond
the control of the Company. The opening of additional restaurants in the future
will depend in part upon the Company's ability to generate sufficient funds from
operations or to obtain sufficient equity or debt financing on favorable terms
to support such expansion. There can be no assurance that the Company will be
successful in addressing these risks, that the Company will be able to open its
planned new operations on a timely basis, if at all, or, if opened, that those
operations will be operated profitably. The Company has experienced, and expects
to continue to experience, delays in restaurant openings from time to time.
Delays or failures in opening planned new restaurants could have a material
adverse effect on the Company's business, financial condition, results of
operations or cash flows.
The Company's growth strategy may strain the Company's management,
financial and other resources. To manage its growth effectively, the Company
must maintain a high level of quality and service at its existing
6
<PAGE> 8
and future restaurants, continue to enhance its operational, financial and
management capabilities and locate, hire, train and retain experienced and
dedicated operating personnel, particularly managers and chefs. There can be no
assurance that the Company will be able to effectively manage these and other
factors necessary to permit it to achieve its expansion objectives, and any
failure to do so could have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows.
DEVELOPMENT AND CONSTRUCTION RISKS
Because each P.F. Chang's restaurant is distinctively designed to
accommodate particular characteristics of each location and to blend local or
regional design themes with the Company's principal trade dress and other common
design elements, each location presents its own development and construction
risks. Many factors may affect the costs associated with the development and
construction of the Company's 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. There can be no assurance that the Company will
be able to develop additional P.F. Chang's restaurants within anticipated
budgets or time periods, and any such failure could materially adversely affect
the Company's business, financial condition, results of operations or cash
flows.
DEPENDENCE ON KEY PERSONNEL
The success of the Company's business will continue to be highly dependent
on its key operating officers and employees, including Richard Federico, the
Company's Chief Executive Officer and President, and Robert Vivian, the
Company's Chief Financial Officer. The Company's success in the future will be
dependent on its ability to attract, retain and motivate a sufficient number of
qualified management and operating personnel, including Market Partners,
Operating Partners and chefs, to keep pace with an aggressive expansion
schedule. Such qualified individuals are historically in short supply and any
inability of the Company to attract and retain such key employees may limit its
ability to effectively penetrate new market areas. Additionally, the ability of
these key personnel to maintain consistency in the quality and atmosphere of the
Company's restaurants in various markets is a critical factor in the Company's
success. Any failure to do so may harm the Company's reputation and could have a
material adverse effect on the Company's business, financial condition, results
of operations or cash flows. See "Business--Operations" and "Management."
RESTAURANT INDUSTRY AND COMPETITION
The restaurant industry is intensely competitive with respect to food
quality, price-value relationships, ambiance, service and location, and many
restaurants compete with the Company at each of its locations. The Company's
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 the Company, and many of the Company's competitors are well
established in the markets where the Company's operations are, or in which they
may be, located. Additionally, other companies may develop restaurants that
operate with similar concepts.
The restaurant business is often affected by changes in consumer tastes,
national, regional or local economic conditions, demographic trends, consumer
confidence in the economy, discretionary spending priorities, weather
conditions, tourist travel, traffic patterns and the type, number and location
of competing restaurants. Changes in these factors could have a material adverse
effect on the Company's business, financial condition, results of operations or
cash flows. In the future, changes in consumer tastes may require the Company to
modify or refine elements of its restaurant system to evolve its concept in
order to compete with popular new restaurant formats or concepts that develop
from time to time, and there can be no assurance that the Company will be
successful in implementing such modifications. See "Business--Competition."
7
<PAGE> 9
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results may fluctuate significantly as a result of
a variety of factors, including general economic conditions, consumer confidence
in the economy, changes in consumer preferences, competitive factors, weather
conditions, the timing of new restaurant openings and related expenses, revenues
contributed by new restaurants and increases or decreases in comparable
restaurant revenues. Historically, the Company has experienced variability in
the amount and percentage of revenues attributable to preopening expenses. The
Company typically incurs 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, the Company's
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 have a meaningful impact on
preopening expenses and labor and operating costs until such time as a larger
base of restaurants in operation mitigates such impact. Due to the foregoing
factors, 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, the Company's results of operations may be below the
expectations of public market analysts and investors. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CHANGES IN FOOD COSTS
The Company's profitability is dependent in part on its ability to
anticipate and react to changes in food costs. Other than for produce, which is
purchased locally by each restaurant, the Company relies on the Distributors
Marketing Alliance as the primary distributor of its food. Distributors
Marketing Alliance is a cooperative of multiple food distributors located
throughout the nation. The Company has a non-exclusive short term contract with
Distributors Marketing Alliance on terms and conditions which the Company
believes are consistent with those made available to similarly situated
restaurant companies. Although the Company believes that alternative
distribution sources are available, any increase in distribution prices or
failure to perform by the Distributors Marketing Alliance could cause the
Company's food costs to fluctuate. Further, various factors beyond the Company's
control, including adverse weather conditions and governmental regulation, may
affect the Company's food costs. There can be no assurance that the Company will
be able to anticipate and react to changing food costs through its purchasing
practices and menu price adjustments in the future, and failure to do so could
have a material adverse effect on the Company's business, financial condition,
results of operations or cash flows.
LITIGATION
The Company is from time to time the subject of complaints or litigation
from guests alleging illness, injury or other food quality, health or
operational concerns. Adverse publicity resulting from such allegations may
materially adversely affect the Company and its restaurants, regardless of
whether such allegations are valid or whether the Company is liable. The Company
also is the subject of complaints or allegations from former or prospective
employees from time to time. A lawsuit or claim could result in an adverse
decision against the Company that could materially adversely affect the Company
or its business.
GOVERNMENTAL REGULATION; MINIMUM WAGE
The Company's operations are subject to regulation by federal agencies and
to licensing and regulation by state and local health, environmental, labor
relations, sanitation, building, zoning, safety, fire and other departments
relating to the development and operation of restaurants and retail
establishments. The Company's activities are also subject to the federal
Americans With Disabilities Act and related regulations, which prohibit
discrimination on the basis of disability in public accommodations and
employment. The Company is also 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. Given the location of many of the Company's
restaurants, even if the Company's operation of those restaurants is in strict
compliance with the requirements of the Immigration and
8
<PAGE> 10
Naturalization Service (the "INS"), the Company's employees may not all meet
federal citizenship or residency requirements, which could lead to disruptions
in its work force. Changes in any or all of these laws or regulations, such as
government-imposed paid leaves of absence or mandated health benefits, or
increased tax reporting and tax payment requirements for employees who receive
gratuities, could have a material adverse effect on the Company's business,
financial condition and results of operations. Delays or failures in obtaining
or maintaining required construction and operating licenses, permits or
approvals could delay or prevent the opening of new restaurants or could
materially and adversely affect the operation of existing restaurants. In
addition, there can be no assurance that the Company will be able to obtain
necessary variances or amendments to required licenses, permits or other
approvals on a cost-effective and timely basis in order to construct and develop
restaurants in the future. See "Business--Governmental Regulation."
A number of the Company's employees are subject to various minimum wage
requirements. Many of the Company's employees work in restaurants located in
California and receive salaries equal to the California minimum wage. The
minimum wage in California rose from $5.00 per hour effective March 1, 1997 to
$5.75 per hour effective March 1, 1998. There can be no assurance that similar
increases will not be implemented in other jurisdictions in which the Company
operates or seeks to operate. In addition, the federal minimum wage increased to
$5.15 per hour effective September 1, 1997. There can be no assurance that the
Company will be able to pass additional increases in labor costs through to its
guests in the form of menu price adjustments and, accordingly, such minimum wage
increases could have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows.
POTENTIAL LABOR SHORTAGES
The success of the Company will continue to be dependent on its ability to
attract and retain a sufficient number of qualified employees, including kitchen
staff and waitstaff, to keep pace with its expansion schedule. Qualified
individuals needed to fill these positions are in short supply in certain areas,
and the inability to recruit and retain such individuals may delay the planned
openings of new restaurants or result in high employee turnover in existing
restaurants which could have a material adverse effect on the Company's
business, financial condition, cash flows or results of operations.
CONTROL BY EXISTING STOCKHOLDERS AND MANAGEMENT
Following the closing of this offering, the Company's directors, officers
and their affiliates will beneficially own approximately % of the
outstanding Common Stock. As a result of such Common Stock ownership, the
Company's directors, officers and their affiliates, if they voted together,
would be able to elect all members of the Company's Board of Directors and
control corporate actions requiring stockholder approval. See "Principal and
Selling Stockholders."
CERTAIN ANTI-TAKEOVER MEASURES
The Company's Amended and Restated Certificate of Incorporation (the
"Charter") authorizes the Board of Directors 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 action by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. The Charter and By-laws, among other things, require that stockholder
actions occur at duly called meetings of the stockholders, limit who may call
special meetings of stockholders, do not permit cumulative voting in the
election of directors and require advance notice of stockholder proposals and
director nominations. Also, Section 203 of the Delaware General Corporation Law
(the "DGCL") restricts certain business combinations with any "interested
stockholder" as defined by such statute. These and other provisions could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company, discourage a hostile bid or
delay, prevent or deter a merger, acquisition or tender offer in which the
Company's stockholders could receive a premium for their shares, or a proxy
contest for control of the Company or other change in the Company's management.
See "Management" and "Description of Capital Stock."
9
<PAGE> 11
ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop or,
if one develops, that it will be maintained. The initial public offering price
of the Common Stock will be established by negotiation among the Company, the
Selling Stockholders and the Underwriters. See "Underwriting" for a discussion
of factors to be considered in determining the initial public offering price.
The market price of the Common Stock could be subject to significant
fluctuations in response to the Company's operating results and other factors,
including general economic and market conditions. In addition, the stock market
in recent periods has experienced and continues to experience significant price
and volume fluctuations, which have affected the market price of the stock of
many companies and which have often been unrelated or disproportionate to the
operating performance of these companies. These fluctuations, as well as a
shortfall in sales or earnings compared to securities analysts' expectations,
changes in analysts' recommendations or projections or general economic and
market conditions, may adversely affect the market price of the Common Stock. In
the past, securities class action litigation has often been instituted following
periods of volatility in the market price for a company's securities. Such
litigation could result in substantial costs and a diversion of management
attention and resources, which could have a material adverse effect on the
Company's business, financial condition, results of operations or cash flows.
ADDITIONAL SHARES ELIGIBLE FOR FUTURE SALE IN THE PUBLIC MARKET
The sale of a substantial number of shares of Common Stock in the public
market following this offering could adversely affect the market price of the
Common Stock. Upon the closing of this offering, the Company will have
outstanding an aggregate of shares of Common Stock (including
shares issuable upon conversion of the Deferred Purchase Price
Liability, assuming an initial public offering price of $ per share),
assuming no exercise of outstanding options, warrants or the Underwriters'
over-allotment option.
The shares of Common Stock sold in this offering (and any
shares sold upon exercise of the Underwriters' over-allotment option) will be
freely tradable without restriction under the Securities Act of 1933, as amended
(the "Securities Act"). The remaining shares of Common Stock are
"restricted shares" within the meaning of Rule 144 promulgated under the
Securities Act and are subject to restrictions under the Securities Act. Of
these restricted shares, are subject to lock-up agreements under which the
holders have agreed not to sell or otherwise dispose of any of their shares for
a period of 180 days after the date of this Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"). In its
sole discretion and at any time without notice, DLJ may release all or any
portion of the shares subject to the lock-up agreements. All of the restricted
shares subject to lock-up agreements will become available for sale in the
public market immediately following expiration of the 180-day lock-up period,
subject (to the extent applicable) to the volume and other limitations of Rule
144 or Rule 701 promulgated under the Securities Act. In addition, beginning 90
days after the date of this Prospectus, restricted shares not
subject to lock-up agreements or contractual restrictions will become available
for sale in the public market, subject to the volume and other limitations of
Rule 144 or Rule 701. In addition, after expiration of the lock-up period,
certain securityholders of the Company have the contractual right to require the
Company to register certain of their shares of Common Stock for future sale. The
Company is unable to predict the effect that future sales made pursuant to any
such registration rights, under Rule 144 or otherwise, may have on the
prevailing market price of the Common Stock. See "Description of Capital
Stock--Registration Rights" and "Shares Eligible for Future Sale."
DILUTION
The price to the public in this offering is substantially higher than the
net tangible book value per share of Common Stock. Investors purchasing shares
of Common Stock in this offering will therefore incur immediate and substantial
dilution of $ per share (assuming an initial public offering price of
$ per share). See "Dilution."
10
<PAGE> 12
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares
of Common Stock being offered by the Company hereby are estimated to be
approximately $ ($ if the Underwriters' over-allotment option
is exercised in full), assuming an initial public offering price of $ per
share and after deducting estimated underwriting discounts and commissions and
other estimated offering expenses. The Company intends to use approximately
$18.0 million of the net proceeds to repay certain indebtedness incurred for the
development of restaurants. As a result of this offering, the Company's
commercial lender has the right to require the Company to repay all amounts
outstanding under its revolving line of credit ($9.0 million at June 28, 1998),
which bears interest at LIBOR plus 3.5% (9.16% at June 28, 1998) and expires
July 1, 1999. In addition, the Company intends to use approximately $6.0 million
of the net proceeds for the development of new restaurants in the remainder of
1998 and the balance of the net proceeds for development of new restaurants
thereafter and for general corporate purposes. The Company expects that its
planned future restaurants will require, on average, a total cash investment per
restaurant, exclusive of landlord contributions, of approximately $1.5 million
to $2.0 million. Preopening expenses are expected to average approximately
$250,000 per restaurant. Pending such uses, the Company intends to invest the
net proceeds in short-term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common Stock
in the past and does not anticipate paying dividends in the foreseeable future.
In addition, the Company's current credit agreements prohibit the payment of
cash dividends. The Company currently intends to retain its earnings for the
operation and development of its business. Any future payment of dividends is
within the discretion of the Company's Board of Directors and will depend, among
other factors, upon the capital requirements, operating results and financial
condition of the Company from time to time and restrictions under credit
agreements existing from time to time.
11
<PAGE> 13
CAPITALIZATION
The following table sets forth the consolidated cash and cash equivalents,
short-term debt and capitalization of the Company as of June 28, 1998: (i) on an
actual basis; (ii) on a pro forma basis to reflect the conversion into Common
Stock of the Preferred Stock and the Deferred Purchase Price Liability, assuming
an initial public offering price of $ per share; and (iii) on a pro forma as
adjusted basis to reflect the sale of the shares of Common Stock offered by the
Company hereby, the conversion into Common Stock of the Preferred Stock and the
Deferred Purchase Price Liability, assuming an initial public offering price of
$ per share, and the application of the estimated net proceeds from the
offering. This table should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included elsewhere in this
Prospectus. See "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 28, 1998
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED(1)
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents.............................. $ 1,802 $ 1,802 $
======= ======= =======
Revolving line of credit and current portion of
long-term debt....................................... $ 9,441 $ 9,441 $ 441
======= ======= =======
Deferred Purchase Price Liability(2)................... $ 2,426 $ -- $ --
Long-term debt, less current portion................... 2,159 2,159 2,159
Convertible Redeemable Preferred Stock: $0.001 par
value; 10,000,000 shares authorized; 6,951,708 shares
issued and outstanding, actual; no shares issued and
outstanding, pro forma and pro forma as adjusted..... 18,285 -- --
Common stockholders' equity (deficit):
Common stock: $0.001 par value; 20,000,000 shares
authorized; 2,500,000 shares issued and
outstanding, actual; shares issued and
outstanding, pro forma; shares issued and
outstanding, pro forma as adjusted(3)............. 3 6
Additional paid-in capital........................ 2 20,710
Accumulated deficit............................... (4,081) (4,081) (4,081)
------- ------- -------
Total common stockholders' equity (deficit)..... (4,076) 16,635
------- ------- -------
Total capitalization............................ $18,794 $18,794 $
======= ======= =======
</TABLE>
- ------------------------------
(1) Adjusted to give effect as of June 28, 1998 to (i) the receipt by the
Company of the estimated net proceeds of $ from the sale of
shares of Common Stock offered hereby by the Company, assuming an initial
public offering price of $ per share, (ii) application of a portion of
the net proceeds of this offering to repay the Company's revolving line of
credit and (iii) the conversion into Common Stock of the Preferred Stock and
the Deferred Purchase Price Liability, assuming an initial public offering
price of $ per share.
(2) See Note 1 of Notes to Consolidated Financial Statements.
(3) Based on shares outstanding at June 28, 1998, which includes (i)
3,475,854 shares issuable on conversion of outstanding Preferred Stock, (ii)
82,130 shares of Common Stock issuable upon conversion of paid-in-kind
dividends paid to holders of Series A Preferred Stock of the Company prior
to consummation of the offering and (iii) shares issuable upon
consummation of this offering upon conversion of the Deferred Purchase Price
Liability, assuming an initial public offering price of $ . Excludes
(i) 1,009,635 shares reserved as of such date for issuance upon the exercise
of outstanding stock options at a weighted average price of $3.87 per share,
(ii) an aggregate of 680,000 shares reserved for future grant under the
Company's stock option and stock purchase plans and (iii) 62,190 shares
reserved for issuance upon the exercise of outstanding warrants at an
exercise price of $4.00 per share. See "Management -- Benefit Plans" and
"Description of Capital Stock."
12
<PAGE> 14
DILUTION
At June 28, 1998, the Company had a net tangible book value of $8.5
million, or $ per share of Common Stock. "Net tangible book value" per share
represents the amount of total tangible assets of the Company reduced by the
amount of its total liabilities and divided by the total number of outstanding
shares of Common Stock, giving effect to the conversion into Common Stock of the
Preferred Stock and the Deferred Purchase Price Liability, assuming an initial
public offering price of $ per share. The pro forma net tangible book value
of the Company as of June 28, 1998, giving effect to the sale by the Company of
the shares offered hereby, assuming an initial public offering price of
$ per share, would have been approximately $ , or $ per share.
This represents an immediate increase in net tangible book value of $ per
share to existing stockholders and an immediate dilution in net tangible book
value of $ per share to new investors. The following table illustrates this
per share dilution:
<TABLE>
<S> <C> <C> <C>
Assumed initial public offering price per share............. $
------
Net tangible book value per share before the offering..... $
------
Increase attributable to new investors....................
------
Pro forma net tangible book value per share after the
offering..................................................
------
Dilution per share to new investors......................... $
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 28, 1998,
the differences between the existing stockholders (including persons who will
receive Common Stock upon conversion of the Deferred Purchase Price Liability)
and the new investors with respect to the number of shares of Common Stock
purchased from the Company, the total consideration paid to the Company and the
average price per share paid by existing stockholders and new investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- ------------------------- AVERAGE
NUMBER PERCENT AMOUNT PERCENT PRICE
(IN THOUSANDS) PER SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)....... % $ % $
New investors(1)...............
-------- ----- ---- -----
Total................ 100.0% $ 100.0%
======== ===== ==== =====
</TABLE>
- ------------------------------
(1) Sales by Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to , or % of the total number
of shares of Common Stock outstanding, and will increase the number of
shares held by new investors to , or % of the total number of shares
of Common Stock outstanding after the offering.
13
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The selected statements of operations data set forth below for the fiscal
year ended December 31, 1995, the period from January 1, 1996 to February 28,
1996, the period from February 29, 1996 to December 29, 1996 and the fiscal year
ended December 28, 1997 and the consolidated balance sheet data set forth below
as of December 29, 1996 and December 28, 1997 have been derived from the
financial statements of the Company and the Predecessors audited by Ernst &
Young LLP, independent auditors, which are included elsewhere in this
Prospectus. The selected combined statements of operations data for the fiscal
years ended December 31, 1993 and December 31, 1994 and the combined balance
sheet data set forth below as of December 31, 1993, December 31, 1994 and
December 31, 1995 are derived from the unaudited combined financial statements
of the Predecessors. The selected consolidated financial data as of June 28,
1998 and for the six months ended June 28, 1998 and June 29, 1997 has been
derived from the unaudited consolidated financial statements of the Company
included elsewhere in this Prospectus. In the opinion of management, all
adjustments, consisting of only normal recurring accruals, considered necessary
for a fair presentation have been made. The results of operations for the six
months ended June 28, 1998 are not necessarily indicative of the results to be
expected for the entire fiscal year. The following table is qualified by
reference to and should be read in conjunction with the consolidated financial
statements, related notes thereto and other financial data included elsewhere
herein. The Company's fiscal quarters typically consist of thirteen week periods
ending on the Sunday closest to the last day of the calendar quarter, and its
fiscal year ends on the Sunday closest to December 31 in each year.
<TABLE>
<CAPTION>
PREDECESSORS(1) COMPANY
------------------------------------- ----------------------------------------------------
PERIOD PERIOD SIX MONTHS ENDED
FISCAL FISCAL FISCAL FROM FROM TOTAL FISCAL -------------------
YEAR YEAR YEAR 1/1/96 TO 2/29/96 TO YEAR YEAR JUNE 29, JUNE 28,
1993 1994 1995 2/28/96 12/29/96 1996(2) 1997 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues........................ $1,478 $5,348 $10,465 $2,815 $15,630 $18,445 $39,768 $17,703 $32,937
Costs and expenses:
Restaurant operating costs:
Cost of sales............. 368 1,422 2,957 772 4,454 5,226 11,317 5,029 9,099
Labor..................... 516 1,728 3,347 918 4,736 5,654 11,683 5,228 9,400
Operating................. 243 917 1,528 527 2,944 3,471 6,727 2,871 5,440
Occupancy................. 134 454 1,059 205 1,279 1,484 2,743 1,206 2,357
------ ------ ------- ------ ------- ------- ------- ------- -------
Total restaurant
operating costs...... 1,261 4,521 8,891 2,422 13,413 15,835 32,470 14,334 26,296
General and
administrative............ 7 57 192 17 1,368 1,385 4,276 1,823 2,753
Depreciation and
amortization.............. 26 70 322 82 352 434 1,102 451 1,013
Preopening.................. 204 249 400 17 765 782 1,922 399 1,217
------ ------ ------- ------ ------- ------- ------- ------- -------
Income (loss) from operations... (20) 451 660 277 (268) 9 (2) 696 1,658
Interest income (expense),
net........................... (1) (10) (13) (4) (127) (131) (317) (127) (455)
------ ------ ------- ------ ------- ------- ------- ------- -------
Income (loss) before elimination
of minority interests and
provision for income taxes.... (21) 441 647 273 (395) (122) (319) 569 1,203
Elimination of minority
interests..................... -- -- -- -- (720) (993) (1,308) (758) (345)
------ ------ ------- ------ ------- ------- ------- ------- -------
Income (loss) before provision
for income taxes.............. (21) 441 647 273 (1,115) (1,115) (1,627) (189) 858
Provision for income taxes...... -- -- -- -- (30) (30) (69) (52) (11)
------ ------ ------- ------ ------- ------- ------- ------- -------
Net income (loss)............... $ (21) $ 441 $ 647 $ 273 (1,145) (1,145) (1,696) (241) 847
====== ====== ======= ======
Convertible Redeemable Preferred Stock accretion....................... (504) (504) (876) (396) (477)
------- ------- ------- ------- -------
Net income (loss) available to common stockholders..................... $(1,649) $(1,649) $(2,572) $ (637) $ 370
======= ======= ======= ======= =======
Basic net income (loss) per share...................................... $ (0.66) $ (1.03) $ (0.25) $ 0.15
======= ======= ======= =======
Diluted net income (loss) per share.................................... $ (0.66) $ (1.03) $ (0.25) $ 0.13
======= ======= ======= =======
Shares used in calculation of basic net income (loss) per share(3)..... 2,500 2,500 2,500 2,500
======= ======= ======= =======
Shares used in calculation of diluted net income (loss) per share(3)... 2,500 2,500 2,500 6,655
======= ======= ======= =======
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------
FISCAL YEAR TOTAL YEAR FISCAL YEAR JUNE 29, JUNE 28,
1995(1) 1996(2) 1997 1997 1998
<S> <C> <C> <C> <C> <C>
PRO FORMA DATA:(4)
Pro forma diluted net income (loss) per share............... -- $ $ $ $
Shares used in calculation of pro forma diluted net income
(loss) per share.......................................... --
OPERATING DATA:
Comparable restaurant sales increase(5)..................... 25.1% 13.0% 13.8% 12.6% 11.7%
Average weekly restaurant sales............................. $81,122 $81,976 $90,383 $91,250 $93,839
Return on investment(6)..................................... 25.2% 34.4% 34.9% -- --
Restaurants open at end of period........................... 4 7 13 8 14
</TABLE>
<TABLE>
<CAPTION>
PREDECESSORS COMPANY
------------------------------------------ --------------------------------------
AS OF AS OF
------------------------------------------ --------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 29, DECEMBER 28, JUNE 28,
1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............. $153 $ 347 $ 480 $ 1,877 $ 2,739 $ 1,802
Total assets.......................... 716 1,692 2,997 13,044 28,489 34,265
Short- and long-term debt............. 33 222 350 1,763 8,372 11,600
Deferred Purchase Price Liability..... -- -- -- -- 2,426 2,426
Convertible Redeemable Preferred
Stock............................... -- -- -- 10,517 17,808 18,285
Common stockholders' and members'
equity (deficit).................... 500 1,217 1,295 (1,874) (4,446) (4,076)
</TABLE>
- ------------------------------
(1) Information for fiscal years 1993, 1994 and 1995 and the period beginning
January 1, 1996 and ending February 28, 1996 as well as information as of
December 31, 1993, December 31, 1994 and December 31, 1995 relate to the
Predecessors. See "Certain Transactions" and Note 1 of Notes to Consolidated
Financial Statements.
(2) Total year 1996 information reflects the combined results of the
Predecessors for the period beginning January 1, 1996 and ending February
28, 1996 and of the Company for the period beginning February 29, 1996 and
ending December 29, 1996. See "Certain Transactions" and Note 1 of Notes to
Consolidated Financial Statements.
(3) See Notes 2, 6 and 8 of Notes to Consolidated Financial Statements.
(4) Pro forma information gives effect as of the beginning of each period to (i)
the purchase of substantially all of the minority interests in the
Predecessors, (ii) the repayment of the Company's revolving line of credit
through the application of the net proceeds from the sale of a sufficient
number of shares of Common Stock, assuming an initial public offering price
of $ per share and (iii) the conversion into Common Stock of the
Preferred Stock and the Deferred Purchase Price Liability, assuming an
initial public offering price of $ per share.
(5) A new restaurant is included in the calculation of the change in comparable
restaurant sales in the eighteenth month of that restaurant's operation.
(6) Return on investment for each restaurant is determined as the quotient of
earnings of such restaurant before interest, taxes and rent divided by the
Company's total investment in restaurant assets. The information presented
in the table is the aggregate return on investment for all restaurants open
during the respective periods. The computation of return on investment
excludes rents, interest and taxes to provide for an evaluation of
operational results of individual restaurants without the variability
introduced by different forms of financing and ownership (i.e., purchased
and financed versus leased). See "Business--Unit Economics."
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
P.F. Chang's owns and operates 17 full service restaurants that feature a
distinctive blend of high quality, traditional Chinese cuisine and American
hospitality in a sophisticated, contemporary bistro setting. The Company was
formed in early 1996 with the acquisition of the four original P.F. Chang's
restaurants and the hiring of an experienced management team, led by Richard
Federico and Robert Vivian, the Company's Chief Executive Officer and Chief
Financial Officer, respectively, to support the Company's founder, Paul Fleming.
Utilizing a partnership management philosophy, the Company embarked on a
strategic expansion of the concept targeted at major metropolitan areas
throughout the United States and opened three additional restaurants in 1996 and
six in 1997.
The Company intends to open ten new restaurants in 1998 (four of which are
open and six of which are under development) and 13 restaurants in 1999. The 23
units that the Company intends to develop in 1998 and 1999 will be situated in
approximately 15 new cities across the United States. The Company has signed
lease agreements for six of the 13 units planned for 1999 and has signed letters
of intent for all of the remaining planned restaurants. The Company intends to
continue to develop 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 between $1.5 million and $2.0 million and a total capitalized investment of
between $2.5 million and $3.0 million per restaurant. This total 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."
Prior to February 29, 1996, the Company's business was conducted by four
business entities controlled by Paul Fleming: Fleming Chinese Restaurants, Inc.
(Scottsdale), P.F. Chang's II, Inc. (Newport Beach), P.F. Chang's III, L.L.C.
(La Jolla) and P.F. Chang's IV, L.L.C. (Irvine)(collectively, the
"Predecessors"). In February 1996, the Company acquired from Paul Fleming and
certain other investors in the Predecessors approximately 70% of the Scottsdale
restaurant, 43% of the Newport Beach restaurant, 50% of the La Jolla restaurant
and 54% of the Irvine restaurant. In May 1996, the Company acquired the
remaining minority interests in the Irvine restaurant, and in October 1997, the
Company acquired all of the outstanding minority interests in the Scottsdale and
Newport Beach restaurants and all but 2.5% of the La Jolla restaurant. As a
result of the ownership structure in place from February 29, 1996 to October
1997, historical financial results for that period reflect an increase in the
Company's net loss attributable to those ownership interests which is reflected
in the elimination of minority interests. The acquisitions of minority interests
in February 1996 and October 1997 were accounted for using the purchase method
of accounting and resulted in goodwill of $4.1 million and $4.6 million,
respectively, which is being amortized over 20 years on a straight-line basis.
See "Certain Transactions."
In addition, elimination of minority interests for all periods subsequent
to 1996 includes the effect of the Company's partnership management structure.
The Company has entered into a series of partnership agreements with each of its
Market Partners, Operating Partners and Culinary Partners. These partnership
agreements typically provide that the Market Partner is entitled to a specified
percentage of the cash flows from the restaurants that partner has developed and
oversees as the regional manager. Similarly, the Operating Partners and Culinary
Partners receive a percentage of the cash flows from the restaurant in which
they work. See "Business--Operations."
16
<PAGE> 18
RESULTS OF OPERATIONS
The operating results of the Company for fiscal years 1995, 1996 and 1997
and for the six months ended June 29, 1997 and June 28, 1998 expressed as a
percentage of revenues were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
FISCAL YEAR TOTAL YEAR FISCAL YEAR JUNE 29, JUNE 28,
1995 1996(1) 1997 1997 1998
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Restaurant operating costs:
Cost of sales................... 28.3 28.3 28.4 28.4 27.6
Labor........................... 32.0 30.7 29.4 29.5 28.5
Operating....................... 14.6 18.8 16.9 16.2 16.5
Occupancy....................... 10.1 8.0 6.9 6.8 7.2
----- ----- ----- ----- -----
Total restaurant operating
costs...................... 85.0 85.8 81.6 80.9 79.8
General and administrative........ 1.8 7.5 10.8 10.3 8.4
Depreciation and amortization..... 3.1 2.4 2.8 2.6 3.1
Preopening........................ 3.8 4.3 4.8 2.3 3.7
----- ----- ----- ----- -----
Income (loss) from operations.......... 6.3 -- -- 3.9 5.0
Interest income (expense), net......... (0.1) (0.7) (0.8) (0.7) (1.4)
Elimination of minority interests...... -- (5.3) (3.3) (4.3) (1.0)
----- ----- ----- ----- -----
Income (loss) before provision for
income taxes......................... 6.2 (6.0) (4.1) (1.1) 2.6
Provision for income taxes............. -- (0.2) (0.2) (0.3) --
----- ----- ----- ----- -----
Net income (loss)...................... 6.2% (6.2)% (4.3)% (1.4)% 2.6%
===== ===== ===== ===== =====
</TABLE>
- ------------------------------
(1) Total fiscal year 1996 information reflects the combined results of the
Predecessors and the Company. See "Selected Consolidated Financial and
Operating Data."
SIX MONTHS ENDED JUNE 28, 1998 COMPARED TO SIX MONTHS ENDED JUNE 29, 1997
REVENUES
The Company's revenues are derived entirely from food and beverage sales.
Revenues increased by $15.2 million, or 86.1%, to $32.9 million in the six
months ended June 28, 1998 from $17.7 million in the six months ended June 29,
1997. The increase was primarily attributable to revenues of $12.2 million
generated by new restaurants opened in the second half of 1997 and the first
half of 1998. Increased customer visits produced comparable restaurant sales
gains of 11.7% in the first half of 1998. The Company did not implement any
meaningful price increases in the first six months of 1998.
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 27.6% in the
six months ended June 28, 1998 from 28.4% in the six months ended June 29, 1997.
This decrease was primarily the result of cost efficiencies achieved through the
improved management of product purchasing, food preparation and waitstaff
performance as the Company's restaurants mature.
Labor. Labor expenses consist of restaurant management salaries, hourly
staff payroll costs and other payroll-related items. Labor expenses as a
percentage of revenues decreased to 28.5% in the six months ended June 28, 1998
from 29.5% in the six months ended June 29, 1997. The decrease in labor expenses
was primarily due to improvements in the management of hourly staff levels in
the restaurants that opened in 1996.
17
<PAGE> 19
These improved efficiencies more than offset the increase in hourly wages
mandated by the federal government and the State of California. The Company
expects that the increase in minimum wage will continue to exert upward pressure
on its labor costs on a year-over-year basis for the remainder of 1998 and the
first quarter of 1999.
Operating. Operating expenses consist primarily of various
restaurant-level costs, which are generally variable and are expected to
fluctuate with revenues. In addition, the Company's 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 increased nominally as a percentage
of revenues to 16.5% in the six months ended June 28, 1998 from 16.2% in the six
months ended June 29, 1997.
Occupancy. Occupancy costs include both fixed and variable portions of
rent, common area maintenance charges, property insurance and property taxes.
Occupancy costs increased as a percentage of revenues to 7.2% in the six months
ended June 28, 1998 from 6.8% in the six months ended June 29, 1997, due
primarily to an increase in property taxes.
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 $2.8 million (8.4% of revenues)
in the six months ended June 28, 1998 from $1.8 million (10.3% of revenues) in
the six months ended June 29, 1997, due primarily to the addition of corporate
management personnel which resulted in approximately $550,000 of additional
compensation and benefits expense as well as additional costs to support a
larger restaurant base including an additional $200,000 in travel and consulting
fees. The decrease as a percentage of revenues was due primarily to the
Company's expanding revenue base and its ability to leverage the duties and
responsibilities of its Market Partners.
Depreciation and amortization. Depreciation and amortization expenses
include the depreciation of fixed assets and the amortization of goodwill costs
associated with the acquisition of the ownership interests in the original
restaurants. Depreciation and amortization increased to $1.0 million in the six
months ended June 28, 1998 from $451,000 in the six months ended June 29, 1997.
This increase was primarily due to depreciation on new restaurants totaling
$400,000 as well as an additional $115,000 of amortization of the goodwill
associated with the acquisition in October 1997 of the remaining minority
interests in three of the four original restaurants.
Preopening. 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, advertising and employee payroll
and related training costs. Preopening expenses in the six months ended June 28,
1998 increased to $1.2 million from $399,000 in the six months ended June 29,
1997 due to the greater number of restaurants opened or under development during
the 1998 period.
Interest income (expense), net. Net interest expense increased to $455,000
in the six months ended June 28, 1998 from $127,000 in the six months ended June
29, 1997 principally due to borrowings under the Company's line of credit.
ELIMINATION OF MINORITY INTERESTS
Elimination of minority interests for the six months ended June 29, 1997
includes approximately $717,000 attributable to the minority interests in the
Scottsdale, Newport Beach and La Jolla restaurants. As a result of the
acquisition of substantially all of these minority interests in October 1997,
elimination of minority interests for the six months ended June 28, 1998
declined to $345,000. Approximately $41,000 and $332,000 was attributable to the
collective minority interests of Market Partners, Operating Partners and
Culinary Partners in the six months ended June 29, 1997 and June 28, 1998,
respectively.
18
<PAGE> 20
PROVISION FOR INCOME TAXES
The provision for income taxes for the six months ended June 28, 1998 and
June 29, 1997 represents certain minimum state taxes based on taxable factors
other than earnings. The Company did not record a tax benefit for the losses
generated for the six months ended June 29, 1997 as utilization of such losses
in future periods was deemed uncertain. The income tax provision for the six
months ended June 28, 1998 differs from the expected provision for income taxes
derived by applying the statutory income tax rate as a result of a reduction in
the previously provided deferred income tax asset valuation allowance.
YEAR ENDED DECEMBER 28, 1997 COMPARED TO YEAR ENDED DECEMBER 29, 1996
The following discussion of the Company's results of operations for the
year ended December 29, 1996 relates to the combined operating results of the
Company and the Predecessors. The Company has not presented separate analyses
regarding the two month period ended February 28, 1996 relating to the
Predecessors or the ten month period ended December 29, 1996 relating to the
Company because the Company believes that such discussion would not be
meaningful.
REVENUES
Revenues increased by $21.3 million, or 115.6%, to $39.8 million in 1997
from $18.4 million in 1996. The increase was primarily attributable to $19.0
million of additional revenues generated by new restaurants opened in 1997 and
the increase in revenues in 1997 for restaurants opened in 1996. Comparable
restaurant sales, driven by increased customer visits, increased 13.8% in 1997.
The Company did not implement any meaningful price increases in 1997.
COSTS AND EXPENSES
Cost of sales. Cost of sales increased nominally as a percentage of
revenues to 28.4% in 1997 from 28.3% in 1996.
Labor. Labor costs decreased as a percentage of revenues to 29.4% in 1997
from 30.7% in 1996. This decrease was primarily the result of improvements in
the management of hourly staff levels in new and existing restaurants.
Operating. Operating expenses decreased as a percentage of revenues to
16.9% in 1997 from 18.8% in 1996, due primarily to the maturation of restaurants
opened in 1996 (which resulted in lower operating expenses as a percentage of
sales for those restaurants) and the larger and more mature restaurant base that
existed in 1997, which mitigated the impact of higher operating expenses
associated with restaurants opened in 1997.
Occupancy. Occupancy costs decreased as a percentage of revenues to 6.9%
in 1997 from 8.0% in 1996. This decrease was primarily the result of the
increase in revenues and, to a lesser extent, more favorable lease terms
associated with the new restaurants opened in 1997.
General and administrative. General and administrative expenses increased
to $4.3 million (10.8% of revenues) in 1997, from $1.4 million (7.5% of
revenues) in 1996. This increase was primarily the result of the addition of
corporate management personnel in 1996 and 1997, resulting in $1.7 million of
additional compensation and benefits in 1997 as well as the increased cost of
supporting a larger restaurant base including $240,000 in additional accounting
and legal fees, $520,000 in additional travel and consulting fees, and an
additional $175,000 in facility expenses.
Depreciation and amortization. Depreciation and amortization increased to
$1.1 million in 1997 from $434,000 in 1996. This increase was primarily the
result of depreciation recognized on capital expenditures for new restaurants
and an additional $90,000 of amortization of goodwill associated with the
purchase of minority interests in October 1997.
Preopening. Preopening expenses in 1997 increased to $1.9 million from
$782,000 in 1996 due to a greater number of restaurants which were developed in
1997 compared to 1996.
19
<PAGE> 21
Interest income (expense), net. Net interest expense increased to $317,000
in 1997 from $131,000 in 1996 due to borrowings on the Company's line of credit
and an increase in long-term debt.
ELIMINATION OF MINORITY INTERESTS
Elimination of minority interests increased to $1.3 million in 1997 from
$993,000 in 1996 primarily due to the increased income generated by the
Scottsdale, Newport Beach and La Jolla restaurants. Elimination of minority
interests in 1997 was also higher due to approximately $110,000 attributable in
1997 to the collective minority interests of Market Partners, Operating Partners
and Culinary Partners; such partnership arrangements were not in place in 1996.
These increases were offset in part by the repurchase in October 1997 of the
minority interests in the Scottsdale, Newport Beach and La Jolla restaurants.
PROVISION FOR INCOME TAXES
The provision for income taxes for 1997 and 1996 represents certain minimum
state taxes based on taxable factors other than earnings. The Company did not
record a tax benefit for the losses generated for fiscal years 1997 and 1996 as
utilization of such losses in future periods was deemed uncertain. At December
28, 1997, the Company had a net operating loss carryforward of approximately
$1.9 million which will expire for federal tax purposes in 2011 and for state
tax purposes in 2001. The expected income tax benefit derived by applying the
statutory income tax rate has been eliminated as a result of an increase in the
deferred income tax asset valuation allowance.
YEAR ENDED DECEMBER 29, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The following discussion of the Company's results of operations for the
year ended December 29, 1996 relates to the combined operating results of the
Company and the Predecessors. The Company has not presented separate analyses
regarding the two month period ended February 28, 1996 relating to the
Predecessors or the ten month period ended December 29, 1996 relating to the
Company because the Company believes that such discussion would not be
meaningful.
REVENUES
Revenues increased by $8.0 million, or 76.3%, to $18.4 million in 1996 from
$10.5 million in 1995. The increase was primarily attributable to revenues of
$6.9 million generated by new restaurants opened in 1996 and the increase in
revenues in 1996 for restaurants opened in 1995. Increased customer visits
generated comparable restaurant sales gains of 13.0% in 1996. The Company did
not implement any meaningful price increases in 1996.
COSTS AND EXPENSES
Cost of sales. Cost of sales remained constant as a percentage of revenues
at 28.3% in both 1996 and 1995.
Labor. Labor costs decreased as a percentage of revenues to 30.7% in 1996
from 32.0% in 1995. This decrease was primarily the result of improvements in
the management of hourly staff levels in new and existing restaurants.
Operating. Operating costs increased as a percentage of revenues to 18.8%
in 1996 from 14.6% in 1995. This increase was primarily the result of new
restaurant openings in the last quarter of 1996 which resulted in additional
restaurant administration and facility costs.
Occupancy. Occupancy costs decreased as a percentage of revenues to 8.0%
in 1996 from 10.1% in 1995. This decrease was primarily the result of the
increased revenue base and to a lesser extent, more favorable lease terms
associated with the new restaurants opened in 1996.
20
<PAGE> 22
General and administrative. General and administrative expenses increased
in 1996 to $1.4 million, or 7.5% of revenues, from $192,000, or 1.8% of
revenues, in 1995. This increase was primarily attributable to the initial
formation of the Company, including the addition of management personnel.
Depreciation and amortization. Depreciation and amortization expenses
increased to $434,000 in 1996 from $322,000 in 1995. This increase was
principally the result of depreciation recognized on capital expenditures on new
restaurants opened in 1996 and $154,000 of amortization of goodwill associated
with the February 1996 acquisition. See "Certain Transactions."
Preopening. Preopening expenses increased to $782,000 in 1996 from
$400,000 in 1995, due to a greater number of restaurants under development in
1996.
Interest income (expense), net. Net interest expense increased to $131,000
in 1996 from $13,000 in 1995 due to interest expense incurred on notes payable
to minority stockholders in connection with the February 1996 acquisition. See
"Certain Transactions."
ELIMINATION OF MINORITY INTERESTS
The elimination of minority interests of $993,000 in 1996 was the result of
the formation of the Company in February 1996 and the related acquisition of the
majority of the interests in the original restaurants. In 1995, because the
operating results of the Predecessors are presented on a combined basis, there
were no minority interests.
PROVISION FOR INCOME TAXES
The provision for income taxes in 1996 represents certain minimum state
taxes based on taxable factors other than earnings. The Company did not record a
tax benefit for the losses generated for fiscal year 1996 as utilization of such
losses in future periods was deemed uncertain. The expected income tax benefit
derived by applying the statutory income tax rate has been eliminated as a
result of a deferred income tax asset valuation allowance. The Company's taxable
income for the year ended December 31, 1995 was allocated and taxed directly to
the stockholders and members of the Predecessors resulting in no tax provision.
21
<PAGE> 23
QUARTERLY RESULTS
The following tables set forth certain unaudited quarterly information for
each of the eight fiscal quarters in the two year period ended June 28, 1998.
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. The Company's
quarterly operating results may fluctuate significantly as a result of a variety
of factors, and operating results for any quarter are not necessarily indicative
of results for a full fiscal year. See "Risk Factors--Fluctuations in Operating
Results."
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997 FISCAL 1998
----------------- ------------------------------------- -----------------
THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $4,363 $5,458 $8,175 $9,528 $9,935 $12,130 $15,728 $17,209
Costs and expenses:
Restaurant operating costs:
Cost of sales............. 1,239 1,575 2,324 2,705 2,798 3,490 4,394 4,705
Labor..................... 1,290 1,713 2,384 2,844 2,885 3,570 4,556 4,844
Operating................. 850 1,063 1,284 1,587 1,705 2,151 2,579 2,861
Occupancy................. 348 491 564 642 681 856 1,103 1,254
------ ------ ------ ------ ------ ------- ------- -------
Total restaurant
operating costs...... 3,727 4,842 6,556 7,778 8,069 10,067 12,632 13,664
General and administrative.... 416 642 760 1,063 1,162 1,291 1,348 1,405
Depreciation and
amortization................ 147 159 209 242 262 389 489 524
Preopening.................... 268 467 146 253 683 840 432 785
------ ------ ------ ------ ------ ------- ------- -------
Income (loss) from operations... (195) (652) 504 192 (241) (457) 827 831
Interest income (expense),
net........................... (10) (72) (81) (46) (38) (152) (210) (245)
------ ------ ------ ------ ------ ------- ------- -------
Income (loss) before elimination
of minority interests and
provision for income taxes.... (205) (724) 423 146 (279) (609) 617 586
Elimination of minority
interests..................... (319) (103) (383) (375) (335) (215) (156) (189)
------ ------ ------ ------ ------ ------- ------- -------
Income (loss) before provision
for income taxes.............. (524) (827) 40 (229) (614) (824) 461 397
Provision for income taxes...... (4) (1) (32) (20) (10) (7) (4) (7)
------ ------ ------ ------ ------ ------- ------- -------
Net income (loss)............... $ (528) $ (828) $ 8 $ (249) $ (624) $ (831) $ 457 $ 390
====== ====== ====== ====== ====== ======= ======= =======
Restaurants open at end of
period........................ 4 7 7 8 9 13 13 14
</TABLE>
22
<PAGE> 24
The operating results of the Company for such eight fiscal quarters
expressed as a percentage of revenues were as follows:
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997 FISCAL 1998
----------------- ------------------------------------- -----------------
THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Restaurant operating costs:
Cost of sales................... 28.4 28.8 28.4 28.4 28.2 28.8 27.9 27.4
Labor........................... 29.5 31.4 29.2 29.8 29.0 29.4 29.0 28.1
Operating....................... 19.5 19.5 15.7 16.7 17.1 17.7 16.4 16.6
Occupancy....................... 8.0 9.0 6.9 6.7 6.9 7.1 7.0 7.3
----- ----- ----- ----- ----- ----- ----- -----
Total restaurant operating
costs...................... 85.4 88.7 80.2 81.6 81.2 83.0 80.3 79.4
General and administrative.......... 9.5 11.8 9.3 11.2 11.7 10.6 8.6 8.2
Depreciation and amortization....... 3.4 2.9 2.5 2.5 2.6 3.2 3.1 3.0
Preopening.......................... 6.1 8.6 1.8 2.7 6.9 6.9 2.7 4.6
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations......... (4.4) (12.0) 6.2 2.0 (2.4) (3.7) 5.3 4.8
Interest income (expense), net........ (0.3) (1.3) (1.0) (0.5) (0.4) (1.3) (1.4) (1.4)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before elimination of
minority interests and provision for
income taxes........................ (4.7) (13.3) 5.2 1.5 (2.8) (5.0) 3.9 3.4
Elimination of minority interests..... (7.3) (1.9) (4.7) (3.9) (3.4) (1.8) (1.0) (1.1)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before provision for
income taxes........................ (12.0) (15.2) 0.5 (2.4) (6.2) (6.8) 2.9 2.3
Provision for income taxes............ (0.1) -- (0.4) (0.2) (0.1) (0.1) -- --
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)..................... (12.1)% (15.2)% 0.1% (2.6)% (6.3)% (6.9)% 2.9% 2.3%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
Historically, the Company has experienced variability in the amount and
percentage of revenues attributable to preopening expenses. The Company
typically incurs 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, the Company's 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 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
The Company has funded its capital requirements since its inception through
private sales of equity securities, debt financing, sale-leaseback arrangements
and cash flow from operations. Net cash provided by operating activities was
$625,000, $139,000 and $4.6 million for total year 1996, fiscal year 1997 and
the six months ended June 28, 1998, respectively. Net cash provided by operating
activities exceeded the net losses for the periods due principally to the effect
of minority interests and depreciation.
The Company uses cash primarily to fund the development and construction of
new restaurants. Net cash used in investing activities in total year 1996,
fiscal year 1997 and the six months ended June 28, 1998 was $8.2 million, $11.5
million and $8.5 million, respectively, which included payments of $4.2 million
and $2.5 million in total year 1996 and fiscal year 1997, respectively, made in
connection with the acquisition of minority interests. Capital expenditures were
$4.0 million, $8.7 million and $8.6 million in total year 1996, fiscal year 1997
and the six months ended June 28, 1998, respectively. The Company intends to
open ten restaurants in 1998 (four of which are open) and 13 in 1999. Total
capital expenditures are expected to be approximately $21 million in 1998. The
Company expects that its planned future restaurants will require, on average, a
total
23
<PAGE> 25
cash investment per restaurant, exclusive of landlord contributions, of
approximately $1.5 million to $2.0 million. Preopening expenses are expected to
average approximately $250,000 per restaurant.
Net cash provided by financing activities in 1996, 1997 and the six months
ended June 28, 1998 was $9.0 million, $12.2 million, and $3.0 million,
respectively. Financing activities in 1996 and 1997 consisted principally of
sales of Preferred Stock. The Company has a line of credit agreement which
permits borrowings of up to $20 million and bears interest at LIBOR plus 3.5%
(9.16% at June 28, 1998). As of June 28, 1998, the Company had $9.0 million
outstanding under this facility, and the Company estimates that it will have
approximately $18.0 million outstanding under this facility upon completion of
this offering. Pursuant to its terms, the lender has the right to require that
all borrowings under the credit agreement be repaid upon the consummation of
this offering; however, the Company will continue to be eligible to borrow funds
under such line of credit after repayment. The terms of the line of credit
require the Company to maintain a net worth of at least $10 million, including
convertible redeemable preferred stock. The line of credit agreement also
contains covenants which place various restrictions on sales of properties,
transactions with affiliates, creation of additional debt, and other customary
nonfinancial covenants. The line of credit agreement is collateralized by the
Company's interests in certain affiliated partnerships. The Company does not
anticipate that the above covenants and restrictions will have a significant
impact on the Company. Although the line of credit matures in fiscal 1999, the
Company believes that the lender will be willing to extend the term of the line
of credit on terms and conditions which are comparable to those contained in the
existing line of credit, or that other financing will be available in an amount
and on terms and conditions which are adequate to meet the Company's working
capital and liquidity needs, but there can be no assurance that such financing
will be available.
Although the Company has achieved positive cash flow from its restaurant
operations since inception and has not budgeted any material portion of the net
proceeds of this offering for the operation of its restaurants, the significant
investment of resources in acquiring and opening its restaurants resulted in the
Company incurring net losses in each fiscal period from inception through
December 28, 1997. As a result, the Company had negative working capital at June
28, 1998 despite the fact that it achieved net income in the first two quarters
of fiscal 1998. Such working capital deficiency will be substantially reduced by
the anticipated repayment of its line of credit from the proceeds of this
offering and by the conversion of the Deferred Purchase Price Liability into
Common Stock.
The Company's capital requirements, including development costs related to
the opening of additional restaurants, have been and will continue to be
significant. To date, the Company has been substantially dependent upon loans
from lending institutions and private equity funding to develop its restaurants.
In addition to the repayment of borrowings under its line of credit, most of
which have been incurred for the development of new restaurants, the Company
intends to use approximately $6.0 million of the net proceeds of this offering
for the development of new restaurants in the remainder of 1998 and the balance
of the net proceeds for development of new restaurants thereafter and for
general corporate purposes. The Company's 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. Although no assurance can be given, the
Company believes that cash flow from operations together with the net proceeds
from this offering and borrowings under its line of credit will be sufficient to
fund its capital requirements through 1999. In the event that additional capital
is required, the Company may seek to raise such capital through public or
private equity or debt financings. Future capital funding transactions may
result in dilution to purchasers in this offering. There can be no assurance
that such capital will be available on favorable terms, if at all.
The Company leases restaurant and office facilities and equipment and
certain real property under operating leases expiring between 2000 and 2019.
Future minimum lease payments under operating leases, including restaurant
facilities currently under construction or yet to be constructed as of June 28,
1998 were as follows: remainder of 1998 - $1.9 million; 1999 - $5.2 million;
2000 - $5.4 million; 2001 - $5.4 million; 2002 - $5.4 million; and
thereafter - $53.5 million.
24
<PAGE> 26
PREFERRED STOCK AND ACCRETION
In February 1996 and September 1996, the Company sold shares of its Series
A Preferred Stock convertible into 2,677,135 shares of Common Stock at $4.00 per
common share, and in May 1997, the Company sold shares of its Series B Preferred
Stock convertible into 758,566 shares of Common Stock at $8.70 per common share.
The Series A Preferred Stock has an annual six percent dividend payable
quarterly on March 31, June 30, September 30, and December 31 in shares of
Series A Preferred Stock on a cumulative basis beginning January 1, 1998. The
Series B Preferred Stock has an annual six percent dividend payable quarterly on
March 31, June 30, September 30, and December 31 in shares of Series B Preferred
Stock on a cumulative basis beginning April 1, 1999. Dividend accretion on the
Series A and Series B Preferred Stock was approximately $504,000 for the year
ended December 29, 1996, $876,000 for the year ended December 28, 1997, and
$477,000 for the six month ended June 28, 1998, respectively. At June 28, 1998,
the carrying basis of the Preferred Stock was $18.3 million. As a result of this
offering, each two shares of Series A Preferred Stock and Series B Preferred
Stock will be automatically converted into one share of Common Stock.
INFLATION
The primary inflationary factors affecting the Company's operations are
food and labor costs. A large number of the Company's restaurant personnel are
paid at rates based on the applicable minimum wage, and increases in the minimum
wage directly affect the Company's labor costs. To date, inflation has not had a
material impact on the Company's results of operations. See "Risk
Factors--Changes in Food Costs."
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000 problem"
is pervasive and complex as virtually every computer operation will be affected
in some way by the rollover of the two digit year value to "00". This issue is
whether computer systems will properly recognize date-sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. The Company
has reviewed both its information technology and its non-information technology
systems to determine whether they are year 2000 compliant, and the Company has
not identified any material systems which are not year 2000 compliant. The
Company has initiated formal communications with all significant suppliers and
service providers to determine the extent to which the Company is vulnerable to
those third parties' failure to remediate the year 2000 problem. The Company has
received written assurances of year 2000 compliance from a majority of the third
parties with whom it has relationships, including its POS, payroll and credit
card service providers. Unless public suppliers of water, electricity and
natural gas are disrupted for a substantial period of time (in which case the
Company's business may be materially adversely affected), the Company believes
its operations will not be significantly disrupted even if third parties with
whom the Company has relationships are not year 2000 compliant. Further, the
Company believes that it will not be required to make any material expenditure
to address the year 2000 problem. However, uncertainty exists concerning the
potential costs and effects associated with any year 2000 compliance, and the
Company intends to continue to make efforts to ensure that third parties with
whom it has relationships are year 2000 compliant. Any year 2000 compliance
problem of either the Company or its vendors could materially adversely affect
the Company's business, financial condition or operating results.
25
<PAGE> 27
BUSINESS
P.F. Chang's owns and operates 17 full service restaurants that feature a
distinctive blend of high quality, traditional Chinese cuisine and American
hospitality in a sophisticated, contemporary bistro setting. The Company's
restaurants offer intensely flavored, highly memorable culinary creations,
prepared from fresh ingredients, including premium herbs and spices imported
directly from China. The 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 t'sai, a balancing of rice, noodles and grains with meat,
seafood and vegetables, the P.F. Chang's menu offers an array of taste, texture,
color and aroma. The menu is highlighted by dishes such as Chang's Spicy
Chicken, Orange Peel Beef, Peking Ravioli, Chicken in Soothing Lettuce Wrap,
Szechwan-Style Long Beans and Dan Dan Noodles. The traditional cuisine is
complemented by a full service bar offering an extensive selection of wines,
specialty drinks, Asian beers, cappuccino and espresso. The average check per
customer, including beverage, is approximately $17.00. The Company offers
superior customer service in a high energy atmosphere featuring a display
kitchen, exhibition wok cooking and a decor that includes wood and slate floors,
mounted life-size terra cotta replicas of Xi'an warriors and narrative murals
depicting 12th century China.
The Company was formed in early 1996 with the acquisition of the four
original P.F. Chang's restaurants and the hiring of an experienced management
team led by Richard Federico and Robert Vivian, the Company's Chief Executive
Officer and Chief Financial Officer, respectively, to support the Company's
founder, Paul Fleming. P.F. Chang's opened three additional restaurants in 1996,
six in 1997 and expects to open ten restaurants in 1998 (four of which are open)
and 13 in 1999. Key to the Company's expansion strategy and success at the
restaurant level is the P.F. Chang's management philosophy utilizing Market,
Operating and Culinary Partners. The Company has demonstrated the viability of
the P.F. Chang's concept in a wide variety of markets across the United States,
including the Southwest, southern California, Texas and southern Florida.
P.F. CHANG'S CHINA BISTRO CONCEPT AND STRATEGY
The P.F. Chang's concept was developed in 1993 by Paul Fleming, a
Phoenix-based restaurateur, in collaboration with Philip Chiang, the owner of
the Mandarin restaurant in Beverly Hills, California. The Company's objectives
are to (i) develop and operate a nationwide system of restaurants that offer
guests a sophisticated dining experience, (ii) create a loyal customer base that
generates a high level of repeat business and (iii) provide superior returns to
its investors. To achieve its objectives, the Company has developed the
following strategies:
Offer High Quality Chinese Cuisine. P.F. Chang's seeks to differentiate
itself from other Chinese restaurants by offering only premium products made
from scratch upon order, from original regional Chinese recipes. The Company
utilizes traditional Hong Kong preparation techniques, which combine high
temperature wok cooking, fresh ingredients and reduced oil to produce dishes
with a distinct, outstanding and highly memorable flavor. A core menu is served
at both lunch and dinner featuring a variety of freshly prepared wok-fired
creations, roasted duck and chicken, fresh seafood, homemade soups, signature
salads and desserts. All products are served family-style allowing the guests to
build a meal of complementary flavors, colors and aromas.
Create a Memorable Atmosphere. The Company seeks to design a unique
atmosphere for each restaurant that it operates. Common design elements of the
restaurants include natural wood and slate floors, custom millwork, special
light fixtures, hand-painted murals depicting ancient Chinese history and
life-size terra cotta soldiers, all of which create a warm and elegant ambiance.
Exhibition-style kitchens, featuring the Company's classically trained wok
chefs, reinforce the perceptions of quality, freshness, authenticity and
cleanliness and add flash and fire to the energy of the restaurant.
Deliver Superior Customer Service. Significant time and resources are
spent in the development and implementation of a comprehensive service system at
each restaurant. The Company offers guests prompt, friendly and efficient
service, keeping waitstaff-to-table ratios high, and staffing each restaurant
with an experienced management team to ensure consistent and attentive customer
service. The Company employs
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<PAGE> 28
food runners to ensure prompt delivery of fresh food at the appropriate
temperature, allowing the waitstaff to focus on overall customer satisfaction.
All service personnel are thoroughly trained in the subtle flavors of each dish.
Using a thorough knowledge and understanding of the Company's menu, the
waitperson assists guests in selecting a meal that balances the principles of
fan and t'sai foods to attain a harmony of taste, texture, color and aroma.
Provide Excellent Dining Value. The Company believes it provides its
guests with an exceptional value by serving high quality Chinese cuisine in a
memorable atmosphere with superior customer service, all for an average check of
approximately $17.00. This price-value relationship helps create the long-term
bond between P.F. Chang's and its guests. Because of the superior level of
customer satisfaction it delivers, the Company believes it enjoys a high level
of repeat business, which serves as a solid foundation from which to grow
incremental sales. For the fiscal year ended December 28, 1997 and the six
months ended June 28, 1998, the Company generated comparable restaurant sales
growth of approximately 13.8% and 11.7%, respectively.
Achieve Exceptional Restaurant Economics. In the first six months of 1998,
the Company's restaurants produced average weekly sales of $93,839 and
restaurant operating income of 20.2% of sales. In addition, for the 12 month
period ended June 28, 1998, the Company's restaurants have achieved restaurant
pre-tax return on investment of 38.2%. The Company believes that it has been
able to achieve these results due to the broad appeal of the P.F. Chang's
concept, careful site selection and consistent application of its management and
training concepts.
Pursue Accelerated, Disciplined Restaurant Expansion. The Company plans to
develop restaurants in both existing and new markets nationwide where the
Company believes it can generate attractive unit-level economics. The Company
targets high traffic, high visibility locations in affluent urban and suburban
markets. The flexibility of the P.F. Chang's concept enables the Company to open
successful restaurants in a wide variety of locations, including residential
neighborhoods, shopping centers, office buildings and hotels. The Company
expects to open ten new restaurants in 1998 (four of which are open) and 13 in
1999. The Company intends to continue to develop 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 $1.5 million to $2.0 million
and a total capitalized investment of between $2.5 million and $3.0 million per
restaurant. This total investment includes the capitalized lease value of the
property, which can vary greatly depending on the specific trade area.
Leverage P.F. Chang's Partnership Management Philosophy. The Company
believes that economic participation by management at the operating level is a
key to the long-term success of its restaurants. The Company has developed a
partnership management philosophy based on a three person team at each
restaurant: the Market Partner (regional manager), Operating Partner (restaurant
manager) and Culinary Partner (chef). Each of these partners is provided an
opportunity to invest in and to participate in the cash flows of the restaurants
for which they are responsible. As a result of this structure, the Company
believes it is able to (i) attract and retain highly experienced and motivated
managers with powerful incentives to execute the Company's strategy and maximize
stockholder value, (ii) provide stable restaurant management which reduces staff
turnover and increases customer satisfaction and (iii) leverage the specific
market knowledge of its partners to facilitate the rapid expansion of the
concept.
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<PAGE> 29
UNIT ECONOMICS
The following table depicts the pre-tax return on investment for the fiscal
years 1995, 1996 and 1997, as well as the 12 months ended June 28, 1998. Return
on investment is calculated as the quotient of restaurant income (loss) before
interest, taxes and rent divided by the total restaurant investment. The
computation of return on investment excludes rents, interest and taxes to
provide for an evaluation of operational results of individual restaurants
without the variability introduced by different forms of financing and ownership
(i.e., purchased and financed versus leased).
RETURN ON INVESTMENT
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE WEEKLY SALES)
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL 12 MONTHS ENDED
1995 1996 1997 JUNE 28, 1998
<S> <C> <C> <C> <C>
TOTAL RESTAURANTS
Sales weeks................................... 129 225 440 597
Average weekly sales.......................... $81,122 $81,976 $90,383 $ 92,133
Sales......................................... 10,465 18,445 39,768 55,003
Restaurant income (loss) before income
taxes(1).................................... $ 585 $ 1,502 $ 4,482 $ 7,175
Interest expense.............................. 13 67 214 230
Rent expense(2)............................... 656 1,297 2,124 2,944
------- ------- ------- ----------
Restaurant EBIT + rent(a)..................... $ 1,254 $ 2,866 $ 6,820 $ 10,349
======= ======= ======= ==========
Average restaurant assets employed (net)(3)... $ 1,522 $ 2,448 $ 8,243 $ 11,794
Present value of remaining lease
obligations(4).............................. 3,461 5,891 11,272 15,283
------- ------- ------- ----------
Total restaurant investment(b)................ $ 4,983 $ 8,339 $19,515 $ 27,077
======= ======= ======= ==========
Return on investment(a)/(b)................... 25.2% 34.4% 34.9% 38.2%
RESTAURANTS OPENED IN 1998
Sales weeks.................................................................. 13
Average weekly sales......................................................... $ 108,392
Sales........................................................................ 1,409
Restaurant income (loss) before income taxes(1).............................. $ (231)
Interest expense............................................................. --
Rent expense(2).............................................................. 96
----------
Restaurant EBIT + rent(a).................................................... $ (135)
==========
Average restaurant assets employed (net)(3).................................. $ 307
Present value of remaining lease obligations(4).............................. 476
----------
Total restaurant investment(b)............................................... $ 783
==========
Return on investment(a)/(b).................................................. (17.2)%
</TABLE>
28
<PAGE> 30
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL 12 MONTHS ENDED
1995 1996 1997 JUNE 28, 1998
<S> <C> <C> <C> <C>
RESTAURANTS OPENED IN 1997
Sales weeks....................................................... 76 220
Average weekly sales.............................................. $73,675 $ 77,381
Sales............................................................. 5,599 17,024
Restaurant income (loss) before income taxes(1)................... $(1,727) $ 54
Interest expense.................................................. -- --
Rent expense(2)................................................... 282 881
------- ----------
Restaurant EBIT + rent(a)......................................... $(1,445) $ 935
======= ==========
Average restaurant assets employed (net)(3)....................... $ 2,230 $ 5,787
Present value of remaining lease obligations(4)................... 2,068 5,795
------- ----------
Total restaurant investment(b).................................... $ 4,298 $ 11,582
======= ==========
Return on investment(a)/(b)....................................... (33.6)% 8.1%
RESTAURANTS OPENED IN 1996
Sales weeks............................................ 17 156 156
Average weekly sales................................... $63,527 $92,930 $ 101,974
Sales.................................................. 1,080 14,497 15,908
Restaurant income (loss) before income taxes(1)........ $ (850) $ 1,866 $ 2,744
Interest expense....................................... 10 193 213
Rent expense(2)........................................ 65 717 787
------- ------- ----------
Restaurant EBIT + rent(a).............................. $ (775) $ 2,776 $ 3,744
======= ======= ==========
Average restaurant assets employed (net)(3)............ $ 402 $ 4,060 $ 3,849
Present value of remaining lease obligations(4)........ 704 4,294 4,267
------- ------- ----------
Total restaurant investment (b)........................ $ 1,106 $ 8,354 $ 8,116
======= ======= ==========
Return on investment (a)/(b)........................... (70.1)% 33.2% 46.1%
RESTAURANTS OPENED PRIOR TO 1996
Sales weeks................................... 129 208 208 208
Average weekly sales.......................... $81,122 $83,484 $94,578 $ 99,339
Sales......................................... 10,465 17,365 19,672 20,663
Restaurant income (loss) before income
taxes(1).................................... $ 585 $ 2,352 $ 4,343 $ 4,608
Interest expense.............................. 13 57 21 17
Rent expense(2)............................... 656 1,232 1,125 1,180
------- ------- ------- ----------
Restaurant EBIT + rent(a)..................... $ 1,254 $ 3,641 $ 5,489 $ 5,805
======= ======= ======= ==========
Average restaurant assets employed (net)(3)... $ 1,522 $ 2,046 $ 1,953 $ 1,851
Present value of remaining lease
obligations(4).............................. 3,461 5,187 4,910 4,745
------- ------- ------- ----------
Total restaurant investment(b)................ $ 4,983 $ 7,233 $ 6,863 $ 6,596
======= ======= ======= ==========
Return on investment(a)/(b)................... 25.2% 50.3% 80.0% 88.0%
</TABLE>
- ---------------
(1) Restaurant income (loss) before income taxes represents restaurant revenues
less all restaurant-specific operating costs, depreciation, preopening
costs, and interest expense. Preopening costs are aggregated in the month in
which a restaurant opens. General and administrative expenses, interest
expense on general corporate debt, depreciation on general corporate assets,
and amortization of goodwill are excluded from the calculation.
(2) Rent expense consists of minimum contractual rents plus contingent rents.
(3) Average restaurant assets employed (net) represents the 12 month average of
all restaurant-specific long-term assets, net of any accumulated
depreciation, determined on a prorated basis for restaurants opened within
the period.
(4) 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% discount rate, determined on a prorated basis for
restaurants opened within the period.
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<PAGE> 31
LOCATIONS
The following table depicts existing restaurants and restaurants expected
to open in 1998:
<TABLE>
<CAPTION>
APPROXIMATE SQUARE INTERIOR
EXISTING LOCATIONS OPENING DATE FOOTAGE SEATING*
- ------------------ ------------ ------------------ --------
<S> <C> <C> <C>
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) August 1998 7,000 196
Dallas, TX (NorthPark) August 1998 6,100 178
PLANNED LOCATIONS ANTICIPATED OPENING DATE
- --------------------------------------------- -------------------------------------------
Atlanta, GA (Ashwood & Perimeter) Fourth Quarter 1998
Birmingham, AL (The Summit) Fourth Quarter 1998
Denver, CO (LoDo) Fourth Quarter 1998
Northbrook, IL (Northbrook Court) Fourth Quarter 1998
Troy, MI (Somerset) Fourth Quarter 1998
West Hollywood, CA (Beverly Center) Fourth Quarter 1998
</TABLE>
- ------------------------------
* Many of the Company's restaurants have outdoor seating in addition to
interior seating.
** Opened on June 29, 1998 following the end of the fiscal quarter ended June
28, 1998.
In 1999, the Company intends to open 13 new restaurants in approximately
seven new markets, including New York, Boston, Orlando, San Francisco, Salt Lake
City, Raleigh and Cincinnati.
EXPANSION STRATEGY AND SITE SELECTION
The Company is actively developing 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, the
Company identifies specific trade areas with high traffic patterns and suitable
demographic characteristics, including population density, consumer attitudes
and affluence. Within an appropriate trade area, the Company evaluates specific
sites that provide visibility, accessibility and exposure to traffic volume. The
Company's site criteria are flexible, as is evidenced by the variety of
environments and facilities in which the Company currently operates. These
facilities include freestanding buildings, regional malls and entertainment
centers. Each restaurant is designed to convey a unique expression of local
styles incorporated into the P.F. Chang's decor that maximizes the value and
visibility of the site.
The Company intends to continue to develop restaurants 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 between $2.5 million and $3.0 million
per restaurant. This total investment includes the capitalized lease value of
the property, which can vary greatly depending on the specific trade area. The
Company expects that its planned future restaurants will require, on average, a
total cash investment per restaurant, exclusive of landlord contributions,
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<PAGE> 32
of approximately $1.5 million to $2.0 million. Preopening expenses are expected
to average approximately $250,000 per restaurant. The Company currently leases
the sites for all of its restaurants and does not intend to purchase real estate
for its sites in the future.
MENU
The P. F. Chang's menu offers a harmony of taste, texture, color and aroma
by balancing the principles of fan and t'sai foods. Fan foods include rice,
noodles, grains and dumplings, while vegetables, meat, poultry and seafood are
t'sai foods. The Company's 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, BBQ spare ribs
and BBQ pork 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. MSG is not added or used in any P.F. Chang's menu
items.
In addition to the core menu, P.F. Chang's also offers special lunch and
dinner selections. These menus offer specials developed by the Company's
Culinary Partners around the country and are changed two to three times a year.
Individual items that are received well by guests migrate to the core menu. The
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 annual trips to China
by the P.F. Chang's corporate executive chef, continually reinforce the
Company's commitment to training the P.F. Chang's chefs and enhancing the menu
offerings.
The Company's entrees range in price from $8.00 to $13.00, and its
appetizers range in price from $4.00 to $7.00. The Company's average check per
guest, including alcoholic beverages, is approximately $17.00. Sales of
alcoholic beverages, featuring an extensive selection of wines, all of which are
offered by the glass, constitute approximately 20% of revenues. Lunch and dinner
contribute roughly 30% and 70% of revenues, respectively.
DECOR AND ATMOSPHERE
The Company believes that ambiance plays a critical role in the dining
experience. By combining the influences of Chinese and American cultures, each
restaurant is designed to create a warm, sophisticated environment that is
intended to be suitable for a variety of occasions. Each restaurant incorporates
certain elements of local styles and common design elements, including
hand-painted murals depicting 12th century China, sculptures of Xi'an warriors,
hardwood and slate flooring, decorative lighting and custom millwork, all of
which provide continuity of the brand. Seating is a comfortable combination of
tables, booths and banquettes. Bistro-style counter seating is also available,
frequently with a view of the exhibition-style kitchen in order to accommodate
peak-period demand and the preferences of single or time-pressed diners.
OPERATIONS
In order to provide incentive to key management personnel, the Company has
entered into a series of partnership agreements with its regional managers
("Market Partners") and certain of its general managers ("Operating Partners")
and certain of its executive chefs ("Culinary Partners"). These partnership
agreements entitle the Market Partner to a specified percentage of the cash
flows from the restaurants that partner has developed and oversees as the
regional manager. Similarly, the general manager and the executive chef at most
of the Company's restaurants are offered the opportunity to become Operating
Partners and Culinary Partners, respectively, and to receive a percentage of the
cash flows from the restaurant in which they work. At the time an individual
becomes a Market Partner, Operating Partner or Culinary Partner, that person is
required to make an equity investment in the partnership and to enter into a
five year employment agreement with the Company. The Company has the right, in
its sole discretion, to terminate the employment of any Market Partner,
Operating Partner or Culinary Partner, and, upon such termination, to repurchase
that partner's interest in the partnership at such partner's then-current basis
in the partnership. If an individual continues to serve as Market Partner,
Operating Partner or Culinary Partner for five years, then the Company has the
right to repurchase that person's interest in the partnership for a value which
is determined by
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<PAGE> 33
reference to trailing cash flows. The Company has implemented this partnership
structure to facilitate the development and operation of its restaurants. By
requiring this level of commitment and by providing the Market, Operating and
Culinary Partners with a significant stake in the success of the restaurant, the
Company believes that it is able to attract and retain experienced and highly
motivated managers.
Each of the Company's eight Market Partners oversees a territory that can
support seven to ten restaurants. The Market Partner's role is to ensure that
each restaurant within his or her territory achieves a competitive return on
investment through the successful execution of the concept. The typical Market
Partner is an individual who has achieved a leadership position (such as
Director of Operations) at a multi-unit, full-service restaurant company. The
Company anticipates adding six to eight Market Partners over the next five years
for its domestic development.
The Company strives to create a sophisticated dining experience through the
careful selection, training and supervision of personnel. The staff of a typical
restaurant consists of an Operating Partner, two or three managers, a Culinary
Partner, one or two sous chefs and approximately 125 hourly employees, many of
whom work part-time. The Operating Partner of each restaurant is responsible for
the day-to-day operation of that restaurant, including hiring, training and
development of personnel, as well as operating results. The Culinary Partner is
responsible for product quality, purchasing, food costs and kitchen labor costs.
The Company requires its Operating Partners and Culinary Partners to have
significant experience in the full-service restaurant industry.
The Company has a comprehensive 12 week management development program.
This program consists of six weeks of culinary training including both culinary
job functions and culinary management. The remaining six weeks focus on service
strategies, guest relations, office management and shift management. All
management and culinary personal are required to successfully complete all
sections of this program. The training program is comprised of a series of
projects and skill assessments. Each trainee is formally evaluated at the end of
each week in writing by the Operating Partner and Culinary Partner. This
feedback is forwarded to the program's administrators, the Director of Training
and the Director of Culinary Development. Upon the completion of each six week
section each trainee must successfully complete a comprehensive certification
administered by the Market Partner, Director of Culinary Development or the
Director of Training. A trainee cannot advance or complete the program without
being certified.
The Operating Partners and Culinary Partners are responsible for selecting
employees for their restaurants. The Partners are accountable for administering
the Company's staff training programs that are developed by the training and
culinary departments. The employee development program lasts between one and two
weeks and focuses on both technical and cultural knowledge.
MARKETING
The Company 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, the Company has created an environment that fosters
repeat patronage and encourages word-of-mouth recommendations. The Company
believes that word-of-mouth advertising is a key component in driving guest
trial and usage.
To attract new customers, the Company 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 it operates. In order to increase local
awareness of its restaurants, the Company builds relationships with local radio
personalities who provide testimonials to their listening audiences. The
partnered stations 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. In
most cases, the commercials are endorsed, live reads that are typically longer
than a normal 60 second commercial.
The Company 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
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<PAGE> 34
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.
A national advertising campaign comprised of advertisements in inflight
magazines of Southwest Airlines and America West Airlines, which carry a high
level of traffic in the Company's markets, is designed to make frequent
travelers aware of P.F. Chang's locations across the country.
MANAGEMENT INFORMATION SYSTEMS
The Company 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 ("POS") 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 POS 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 the POS system is transmitted to the corporate
office on a daily basis, which enables senior management to continually monitor
operating results. The Company believes that its current POS system will be an
adequate platform to support its planned expansion.
The Company uses software and hardware developed by reputable vendors and
commonly used in the restaurant industry. These systems are integrated to
provide senior management with daily and weekly sales and cost analysis, monthly
detailed profit statements and comparisons between actual and budgeted operating
results.
PURCHASING
The Company's purchasing programs provide its 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 the Company utilizes only fresh ingredients in all of its
menu offerings, inventory is maintained at a modest level. The Company
negotiates short-term and long-term contracts depending on demand for its
products. These contracts range in duration from two to twelve months. With the
exception of produce, which is purchased locally, the Company utilizes the
Distributors Marketing Alliance as the primary distributor of product to all of
its restaurants. Distributors Marketing Alliance is a cooperative of multiple
food distributors located throughout the nation. The Company has a non-exclusive
short term contract with Distributors Marketing Alliance on terms and conditions
which the Company believes are consistent with those made available to similarly
situated restaurant companies. The Company believes that competitively priced
alternative distribution sources are available should such channels be
necessary. Chinese-specific ingredients are usually sourced directly from Hong
Kong, China and Taiwan. The Company has developed an extensive network of
importers in order to maintain an adequate supply of items that conform to the
Company's brand and product specifications.
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 the Company at each of its 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. The Company's primary 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 the Company. In
addition, many of the Company's competitors are well established in the markets
where the Company's operations are, or in which they may be, located. While the
Company believes that its restaurants are distinctive in design and operating
concept, other companies may develop restaurants that operate with similar
concepts.
PROPERTIES
All of the Company's restaurants are located in leased facilities. Current
restaurant leases have expiration dates ranging from 2002 to 2019, with the
majority of the leases providing for five-year options to renew for at least
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<PAGE> 35
one additional term. All of the Company's 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 the Company to pay the costs of insurance, taxes, and a portion of the
lessor's operating costs. The Company does not anticipate any difficulties
renewing existing leases as they expire.
The Company's executive offices are located in approximately 4,400 square
feet of leased space in Phoenix, Arizona.
EMPLOYEES
At June 28, 1998, the Company employed approximately 1,900 persons, 30 of
whom were executive office personnel, 144 of whom were unit management personnel
and the remainder of whom were hourly restaurant personnel. The Company's
employees are not covered by a collective bargaining agreement. The Company
considers its employee relations to be good.
GOVERNMENTAL REGULATION
The Company's restaurants 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. The Company's 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.
There can be no assurance that the Company will 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 the Company's operations and its relationship with its employees,
including minimum wage, overtime, working conditions, fringe benefit and
citizenship requirements. In particular, the Company is subject to the
regulations of the INS. Given the location of many of the Company's restaurants,
even if the Company's operation of those restaurants is in strict compliance
with INS requirements, the Company's employees may not all meet federal
citizenship or residency requirements, which could lead to disruptions in its
work force.
Approximately 20% of the Company's revenues are attributable to the sale of
alcoholic beverages. The Company is required to comply with the alcohol
licensing requirements of the federal government, states and municipalities
where its 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.
Failure to comply with federal, state or local regulations could cause the
Company's licenses to be revoked or force it to terminate the sale of alcoholic
beverages at one or more of its restaurants.
The Company is 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 the Company carries liquor liability coverage as part of
its existing comprehensive general liability insurance, there can be no
assurance that it will not be subject to a judgment in excess of such insurance
coverage or that it will be able to obtain or continue to maintain such
insurance coverage at reasonable costs, or at all.
The federal Americans With Disabilities Act prohibits discrimination on the
basis of disability in public accommodations and employment. The Company is
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.
34
<PAGE> 36
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of the
Company's directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Chief Executive Officer, President and
Richard L. Federico....................... 44 Director
Robert T. Vivian.......................... 40 Chief Financial Officer and Secretary
Frank Ziska............................... 51 Chief Development Officer
Gregory C. Carey.......................... 46 Chief Operating Officer
Paul M. Fleming........................... 44 Director and Founder
J. Michael Chu(2)......................... 40 Director
Gerald R. Gallagher(1).................... 57 Director
R. Michael Welborn(1)(2).................. 47 Director
James G. Shennan.......................... 57 Director
Yves Sisteron............................. 43 Director
</TABLE>
- ------------------------------
(1) Compensation Committee Member.
(2) Audit Committee Member.
Richard L. Federico joined the Company as President and a director in
February 1996 and in September 1997 succeeded Paul M. Fleming as Chief Executive
Officer. From February 1989 to January 1996 Mr. Federico served as President of
the Italian Concepts division of Brinker International, Inc. where he was
responsible for concept development and operations. Under his direction, this
division grew from one unit in 1989 to more than 70 units by 1996.
Robert T. Vivian has served as Chief Financial Officer and Secretary since
April 1996. From January 1991 to April 1996 Mr. Vivian served in a variety of
positions at Brinker International, Inc., the most recent of which was Vice
President of Investor Relations. In this capacity, Mr. Vivian was responsible
for dissemination of financial information and corporate communications to
Brinker's stockholders.
Frank Ziska has served as Chief Development Officer since June 1998. Prior
to joining the Company, from 1994 to June 1998, Mr. Ziska served as Managing
Director of United States and Canadian Operations for Cushman & Wakefield
Worldwide, a real estate brokerage firm. Prior to that time, beginning in 1989,
Mr. Ziska served as Managing Director and Branch Manager of Arizona Operations
for Cushman & Wakefield of Arizona, Inc.
Gregory C. Carey has served as Chief Operating Officer of the Company since
August 1998. From June 1994 to August 1998 Mr. Carey served as Chief Operating
Officer for Rainforest Cafe Inc. where he was responsible for operations as well
as site selection, design and implementation. From July 1989 to June 1994 Mr.
Carey was Senior General Manager for Restaurants Unlimited, Inc.
Paul M. Fleming founded the Company in January 1996 and has served as a
director of the Company since that time. Mr. Fleming also served as Chief
Executive Officer of the Company from January 1996 to September 1997. From
November 1992 to February 1996, Mr. Fleming served as President of Fleming
Chinese Restaurants, Inc., the entity which opened, developed and managed the
first four P.F. Chang's restaurants, each of which were owned by separate
entities and were located in Scottsdale, Arizona and Irvine, Newport Beach and
La Jolla, California. In addition, from 1983 to 1997, Mr. Fleming was also a
franchisee of Ruth's Chris Steakhouse, Inc.
J. Michael Chu has served as a director of the Company since February 1996.
Mr. Chu has been a Managing Director of Catterton-Simon Partners, a venture
capital firm, since 1990. Mr. Chu also serves on the boards of directors of Fine
Host Corp and several private companies.
35
<PAGE> 37
Gerald R. Gallagher has served as a director of the Company since February
1996. He has been a General Partner of Oak Investment Partners, a venture
capital firm, since May 1987. Mr. Gallagher also serves on the boards of
directors of several private companies.
R. Michael Welborn has served as a director of the Company since August
1996. Mr. Welborn has served as the Chairman of Bank One, Arizona, N.A., a
commercial bank, since January 1996. From September 1993 to December 1995 he
served as Managing Director of The Venture West Group, a merchant bank. From May
1988 to September 1993 Mr. Welborn served as Chairman of Citibank of Arizona.
Mr. Welborn also serves on the boards of directors of Bank One, Arizona, N.A.
and a private company.
James G. Shennan, Jr. has served as a director of the Company since May
1997. He has been a principal of Trinity Ventures, a venture capital firm, since
June 1989. Mr. Shennan also serves on the boards of directors of Starbuck's
Corporation and a number of privately-held, consumer-oriented companies in which
Trinity Ventures is an investor.
Yves Sisteron has served as a director of the Company since May 1997. Mr.
Sisteron has been a Principal of Global Retail Partners, L.P. since January 1996
and a Manager, U.S. Investments of Carrefour S.A. since March 1993. Mr. Sisteron
has a J.D. and an L.L.M. from Lyon Law School and an L.L.M. in Comparative Law
from New York University School of Law. Mr. Sisteron also serves on the boards
of directors of InterWorld Technology Ventures, Inc. and several private
companies.
Currently, all directors hold office until the next annual meeting of
stockholders and until their successors have been duly elected and qualified.
Officers are elected by and serve at the discretion of the Company's Board of
Directors. There are no family relationships among the directors or officers of
the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Compensation Committee of the Company's Board of Directors is comprised
of Michael Welborn and Gerald Gallagher. Neither of these individuals was at any
time during the 1997 fiscal year or at any other time an officer or employee of
the Company. No executive officer of the Company serves as a member of the board
of directors or compensation committee of any entity which has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee.
DIRECTOR COMPENSATION
The Company does not compensate directors for service on the Board of
Directors or its committees but does reimburse reasonable costs and expenses
associated with attendance at meetings. Mr. Welborn, the only director who is
not a member of management and who is not affiliated with any of the Company's
venture capital investors, received a nonqualified stock option to purchase
25,000 shares of Common Stock, at an exercise price of $2.40 per share in August
1996, subject to vesting over a five year period. In addition, following the
consummation of this offering, future directors and certain of the Company's
existing directors will be eligible for automatic stock option grants under the
Company's 1998 Stock Option Plan. See "Management -- Benefit Plans."
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to provisions of the Delaware General Corporation Law ("DGCL"),
the Company has adopted provisions in its Charter, which provide that directors
of the Company shall not be personally liable for monetary damages to the
Company or its stockholders for a breach of fiduciary duty as a director, except
for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) under
Section 174 of the DGCL relating to improper dividends or distributions; or (iv)
for any transaction from which the director derived an improper personal
benefit. Such limitation of liability does not affect the availability of
equitable remedies such as injunctive relief or rescission.
The Certificate also authorizes the Company to indemnify its current and
former officers, directors, employees or agents against certain liabilities that
may arise by reason of their status or service as directors,
36
<PAGE> 38
officers, employees or agents of the Company (other than liabilities arising
from acts or omissions not in good faith or willful misconduct).
The Company's By-laws authorize the Company to indemnify its officers,
directors, employees and agents to the extent permitted by the DGCL. Pursuant to
Section 145 of the DGCL, which empowers the Company to enter into
indemnification agreements with its officers, directors, employees and agents,
the Company has entered into separate indemnification agreements with its
directors and executive officers which may, in some cases, be broader than the
specific indemnification provisions contained in the DGCL. The indemnification
agreements may require the Company, among other things, to indemnify such
executive officers and directors against certain liabilities that may arise by
reason of their status or service as directors or officers (other than
liabilities arising from acts or omissions not in good faith or willful
misconduct) and to advance expenses incurred as a result of any proceeding
against them as to which they could be indemnified.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted and the Company is not aware of any threatened
litigation or proceeding that may result in a claim for such indemnification.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation paid
to each person who served as the Company's Chief Executive Officer during the
fiscal year ended December 28, 1997 and each other executive officer whose
combined salary and bonus for the fiscal year ended December 28, 1997 exceeded
$100,000 for services rendered in all capacities to the Company and its
subsidiaries for that fiscal year. The executive officers named below are
referred to herein as the "Named Executive Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION/
AWARDS
------------------
ANNUAL COMPENSATION SHARES OF
-------------------- COMMON STOCK
NAME AND PRINCIPAL POSITION(S) SALARY BONUS UNDERLYING OPTIONS
- ------------------------------ -------- -------- ------------------
<S> <C> <C> <C>
Richard L. Federico.................................. $270,000 $115,000 50,000
Chief Executive Officer and President
Robert T. Vivian..................................... 106,000 23,000 7,500
Chief Financial Officer and Secretary
Paul M. Fleming...................................... 167,000 50,000 --
Founder and former Chief Executive Officer
</TABLE>
37
<PAGE> 39
OPTION GRANTS
The following table sets forth certain information concerning the grant of
options to purchase the Company's Common Stock made during the fiscal year ended
December 28, 1997 to each of the Named Executive Officers:
OPTION GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF SHARES PERCENT OF TOTAL STOCK PRICE
OF COMMON STOCK OPTIONS GRANTED EXERCISE APPRECIATION FOR
UNDERLYING TO EMPLOYEES OR BASE OPTION TERM(3)
OPTIONS IN FISCAL PRICE EXPIRATION --------------------
NAME AND PRINCIPAL POSITION(S) GRANTED(1) YEAR 1997(2) ($/SH) DATE 5% 10%
- ------------------------------ ---------------- ---------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Richard L. Federico........ 50,000 29.4% $ 6.00 08/14/07 $188,688 $478,123
Chief Executive Officer and
President
Robert T. Vivian........... 7,500 4.4 10.00 11/25/07 47,167 119,531
Chief Financial Officer and
Secretary
Paul M. Fleming............ -- -- -- -- -- --
Founder and former Chief
Executive Officer
</TABLE>
- ------------------------------
(1) Options generally vest over a period of five years with 20% of the options
vesting one year after the date of grant and the balance vesting in equal
monthly installments.
(2) In 1997, the Company granted options to purchase an aggregate of 170,000
shares.
(3) Potential Realizable Value is based on certain assumed rates of appreciation
pursuant to rules prescribed by the Securities and Exchange Commission
("SEC"). Actual gains, if any, on stock option exercises are dependent upon
future performance of the Company and related Common Stock price levels
during the terms of the options. There can be no assurance that the amounts
reflected in this table will be achieved.
FISCAL YEAR-END VALUES OF STOCK OPTIONS
The following table sets forth certain information concerning the 1997
fiscal year-end value of unexercised options held by the Named Executive
Officers. None of the Named Executive Officers exercised any options during
fiscal 1997.
AGGREGATED OPTION EXERCISES
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT 12/28/97 12/28/97(2)
------------------------------- -------------------------------
NAME EXERCISABLE(1) UNEXERCISABLE EXERCISABLE(1) UNEXERCISABLE
---- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Richard L. Federico................... 393,965 0 $2,814,134 --
Robert T. Vivian...................... 93,490 0 653,524 --
Paul M. Fleming....................... 286,640 0 1,719,840 --
</TABLE>
- ------------------------------
(1) All options issued to the Named Executive Officers are immediately
exercisable. However, unvested shares are subject to a right of repurchase
on behalf of the Company in the event of the Named Executive Officer's
termination of service with the Company.
(2) Calculated by determining the difference between the fair market value of
the securities underlying the option at December 28, 1997 ($10.00 as
determined by the Company's Board of Directors) and the exercise price of
the Named Executive Officer's options.
38
<PAGE> 40
BENEFIT PLANS
1998 Stock Option Plan. A total of 280,000 shares of the Company's Common
Stock (the "Share Reserve") have been reserved for issuance under the Company's
1998 Stock Option Plan (the "1998 Option Plan"). In addition, the Share Reserve
will be increased if any outstanding options issued under the 1997 Restaurant
Management Plan and the 1996 Employee Stock Option Plan (collectively, the
"Prior Plans") expire or are canceled, or if the Company exercises its right to
repurchase unvested shares of stock which were acquired upon exercise of options
granted under the Prior Plans. As of June 28, 1998, no shares of Common Stock
have been issued upon exercise of options and an aggregate of 1,009,635 shares
were subject to outstanding options under the Prior Plans. The 1998 Option Plan
provides for discretionary grants of incentive stock options and nonqualified
stock options to the Company's employees, officers, directors, consultants,
advisors, and/or other independent contractors. The option price per share for
an incentive stock option may not be less than 100% 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% of the fair market value of a
share of Common Stock on the grant date. The option price per share for an
incentive stock option granted to a person owning stock possessing more than 10%
of the total combined voting power of all classes of stock of the Company (or a
parent or subsidiary) may not be less than 110% of the fair market value of a
share of Common Stock on the grant date. The Company's Compensation Committee
has the authority to, among other things, determine the vesting schedule for
each option granted. All options expire within ten years. The 1998 Option Plan
includes an automatic grant program for outside directors. Pursuant to this
program, each outside director will be granted an option to purchase 10,000
shares of Common Stock at the time he or she is first elected or appointed a
director of the Company. In addition, Michael Welborn and each outside director
elected after the consummation of this offering remaining in office on the day
following each annual meeting of stockholders will be granted an option to
purchase 2,500 shares. With respect to the other outside directors in office
prior to consummation of this offering (Messrs. Chu, Gallagher and Sisteron),
each such director remaining in office 18 months after the consummation of this
offering shall be granted an option to purchase 2,500 shares on the day
following each annual meeting of stockholders thereafter.
1997 Restaurant Management Stock Option Plan. As of June 28, 1998, 56,875
shares were subject to options outstanding under the Company's 1997 Restaurant
Management Plan (the "Restaurant Management Plan"). All of such outstanding
options were exercisable as of such date subject, in certain cases, to the
Company's right to repurchase the shares acquired upon exercise. The Company
will not issue additional options under the Restaurant Management Plan. The
Restaurant Management Plan provides for grants of incentive stock options and
nonqualified stock options to employees of the Company who hold the position of
general manager or assistant manager or a position of similar importance to the
Company. The option price per share for an incentive stock option may not be
less than 100% of the fair market value of a share of Common Stock on the grant
date. The option price per share for nonqualified stock option may not be less
than 85% of the fair market value of a share of Common Stock on the grant date.
The option price per share for an option granted to a person owning stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company (or a parent or subsidiary) or 10% of the total combined
value of all such classes of stock may not be less than 110% of the fair market
value of a share of Common Stock on the grant date. Generally, options vest over
five years with 20% of the options vesting one year after the grant date and the
balance vesting in equal monthly installments over the remaining term of the
options. Options expire within ten years.
1996 Employee Stock Option Plan. As of June 28, 1998, 952,760 shares were
subject to options under the Company's 1996 Employee Stock Option Plan (the
"Employee Plan"). All of such outstanding options were exercisable as of such
date subject, in certain cases, to the Company's right to repurchase the shares
acquired upon exercise. The Company will not issue any additional options under
the Employee Plan. The Employee Plan provides for grants of incentive stock
options and nonqualified stock options to the Company's employees (including
officers), directors, consultants, advisors, and/or other independent
contractors. The option price per share for an incentive stock option may not be
less than 100% of the fair market value of a share of Common Stock on the grant
date. The option price per share for a nonqualified stock option may not be less
than 85% of the fair market value of a share of Common Stock on the grant date.
The option price per
39
<PAGE> 41
share for an option granted to a person owning stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company (or a
parent or subsidiary) or 10% of the total combined value of all such classes of
stock may not be less than 110% of the fair market value of a share of Common
Stock on the grant date. Generally, options vest over five years with 20% of the
options vesting one year after the grant date and the balance vesting in equal
monthly installments over the remaining term of the options. Options expire
within ten years.
1998 Employee Stock Purchase Plan. A total of 400,000 shares of the
Company's Common Stock have been reserved for issuance under the Company's 1998
Employee Stock Purchase Plan (the "Purchase Plan"), none of which have been
issued. 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 six
month purchase periods. The price at which stock is purchased under the Purchase
Plan is equal to 85% 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. The initial offering period will
commence on the effective date of this offering.
EMPLOYMENT AGREEMENT
The Company entered into an employment agreement with Paul M. Fleming on
January 31, 1996. Pursuant to the terms of the agreement, Mr. Fleming served as
Chief Executive Officer of the Company from January 1996 until September 1997
and is currently serving as a director and an employee of the Company for a term
which expires January 31, 1999. The term of Mr. Fleming's employment will be
automatically renewed for successive one year terms unless either Mr. Fleming or
the Company provides notice of an intention not to renew the agreement. In the
event that Mr. Fleming's employment is terminated by the Company without cause
or by Mr. Fleming for good reason (as defined in the agreement), Mr. Fleming is
entitled to receive as severance compensation (i) his base salary until the
earlier of (a) one year from the date of termination or (b) the expiration of
the initial term of the agreement, (ii) a lump sum payment of the average annual
bonuses paid over the term of the agreement and (iii) the right to exercise in
full all unvested stock options granted to him in accordance with the terms of
the Employee Plan under the agreement. In addition to his base salary, Mr.
Fleming is eligible to receive discretionary bonuses, when and if declared by
the Board of Directors. The agreement prohibits Mr. Fleming from competing with
the Company during the term of the agreement and for two years after the
termination thereof.
40
<PAGE> 42
CERTAIN TRANSACTIONS
Since December 31, 1995, there has not been, nor is there currently
proposed, any transaction or series of similar transactions to which the Company
or its Predecessors was or is to be a party in which the amount involved exceeds
$60,000 and in which any director, executive officer or beneficial holder of
more than 5% of any class of voting securities of the Company or members of such
person's immediate family had or will have a direct or indirect material
interest other than the transactions described below.
Formation and Series A Preferred Financing. The Company was formed on
January 31, 1996, through the issuance of 500 shares of Common Stock to Paul
Fleming for a purchase price of $100. In February 1996, the Company sold shares
of Series A Preferred Stock convertible into 2,487,500 shares of Common Stock at
a price of $4.00 per common share and related warrants for an aggregate purchase
price of $9,950,000. Contemporaneously, the Company acquired Paul and Kelly
Fleming's 52% interest in Fleming Chinese Restaurants, Inc., which operated the
first P.F. Chang's restaurant in Scottsdale, Arizona, for $1,037,000 in cash and
$954,000 in notes payable. The Company also acquired from the Flemings (i) a 43%
interest in P.F. Chang's II, Inc., which operated a P.F. Chang's restaurant in
Newport Beach, California, (ii) a 50% ownership in P.F. Chang's III, L.L.C.,
which operated a P.F. Chang's restaurant in La Jolla, California and (iii) a 54%
ownership interest in P.F. Chang's IV, L.L.C., which operated a P.F. Chang's
restaurant in Irvine, California, all for an aggregate purchase price of
$2,006,000 in cash and 2,499,500 shares of Common Stock of the Company. In
September 1996, the Company issued shares of Series A Preferred Stock
convertible into 189,635 shares of Common Stock at a price of $4.00 per common
share for an aggregate purchase price of $758,540. Pursuant to the terms of the
Company's Charter, on March 31, 1998 and June 30, 1998 the Company issued, and
upon the consummation of this offering will issue, paid-in-kind dividends ("PIK
Dividends") to the stockholders of the Company who hold Series A Preferred
Stock. PIK Dividends are cumulative and are equal to 6% of the number of shares
of Series A Preferred Stock owned by each stockholder payable in quarterly
installments. Upon completion of this offering, all shares of the Series A
Preferred Stock will convert into shares of Common Stock.
The following executive officers, directors and beneficial holders of more
than 5% of a class of the Company's capital stock purchased shares of the Series
A Preferred Stock having an aggregate purchase price of at least $60,000.
<TABLE>
<CAPTION>
SHARES
EXECUTIVE OFFICERS, DIRECTORS AND 5% STOCKHOLDERS(1) PURCHASED(4)
- ---------------------------------------------------- ------------
<S> <C>
Oak Investment Partners VI, Limited Partnership(2).......... 906,085
Catterton-Simon Partners, L.P.(2)........................... 625,000
Trinity Ventures V, L.P.(2)................................. 475,000
Silver Creek Investments Limited(2)......................... 437,500
Yves Sisteron(2)............................................ 40,450
Richard L. Federico(3)...................................... 50,000
</TABLE>
- ------------------------------
(1) See notes to "Principal and Selling Stockholders" for information relating
to the beneficial ownership of shares and identification of affiliated
stockholders.
(2) A beneficial owner (together with its affiliates) of more than 5% of a class
of the Company's capital stock. Gerald R. Gallagher, J. Michael Chu, James
G. Shennan and Yves Sisteron, each a director of the Company, are affiliated
with Oak Investment Partners VI, Limited Partnership, Catterton-Simon
Partners, L.P., Trinity Ventures V, L.P. and Global Retail Partners, L.P.,
respectively.
(3) An officer and director of the Company.
(4) Represents number of shares of Common Stock issuable upon conversion of
purchased shares of Series A Preferred Stock. Excludes an aggregate of
115,749 shares of Common Stock issuable upon conversion of PIK Dividends
paid to holders of Series A Preferred Stock on March 31, 1998, June 30, 1998
and September 30, 1998.
41
<PAGE> 43
Series B Preferred Financing. In May 1997, the Company sold shares of
Series B Preferred Stock convertible into 758,565 shares of Common Stock at a
price of $8.70 per common share, for an aggregate purchase price of $6,599,519.
The following executive officers, directors and beneficial holders of more than
5% of a class of the Company's capital stock purchased shares of Series B
Preferred Stock having an aggregate purchase price of at least $60,000.
<TABLE>
<CAPTION>
SHARES
EXECUTIVE OFFICERS, DIRECTORS AND 5% STOCKHOLDERS(1) PURCHASED(3)
- ---------------------------------------------------- ------------
<S> <C>
Global Retail Partners, L.P.(2)............................. 322,018
Oak Investment Partners VI, Limited Partnerships(2)......... 114,942
Catterton-Simon Partners, L.P.(2)........................... 114,942
Trinity Ventures V, L.P.(2)................................. 114,942
Silver Creek Investments Limited(2)......................... 54,959
</TABLE>
- ------------------------------
(1) See notes to table of beneficial ownership in "Principal and Selling
Stockholders" for information relating to the beneficial ownership of shares
and identification of affiliated stockholders.
(2) A beneficial owner (together with its affiliates) of more than 5% of a class
of the Company's Capital Stock. Gerald R. Gallagher, J. Michael Chu, James
G. Shennan and Yves Sisteron, each a director of the Company, are affiliated
with Oak Investment Partners VI, Limited Partnership, Catterton-Simon
Partners, L.P., Trinity Ventures V, L.P. and Global Retail Partners, L.P.,
respectively.
(3) Represents number of shares of Common Stock issuable upon conversion of
purchased shares of Series B Preferred Stock.
Purchase of Remaining Minority Interests. During 1997, the Company
purchased substantially all the remaining outstanding minority interests in the
Scottsdale, La Jolla and Newport Beach restaurants for approximately $2,520,000
in cash and $2,426,000 in Common Stock of the Company to be issued upon
consummation of this offering upon conversion of the Deferred Purchase Price
Liability. The number of shares of Common Stock to be issued will be determined
by dividing $2,426,000 by the initial offering per share price. In the event the
offering is not completed by October 23, 1998, the Company will be obligated
(upon demand of the individual holders) to pay the minority interest holders an
aggregate amount of $2,426,000 in cash.
Promissory Notes. Prior to the formation of the Company, Paul Fleming, the
founder and a director of the Company, personally guaranteed several promissory
notes entered into by the Predecessors to pay for improvements to the
Scottsdale, La Jolla and Newport Beach restaurants. The aggregate original
principal amount of the notes was $472,000. In connection with the Company's
acquisition of the interests in the Predecessors, the Company assumed the
promissory notes. Mr. Fleming remains a guarantor of the notes. As of June 28,
1998, the aggregate outstanding principal amount of the notes was approximately
$120,000.
42
<PAGE> 44
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information concerning the
beneficial ownership of the Company's Common Stock as of June 28, 1998, and as
adjusted to reflect the sale of the shares offered hereby, assuming no exercise
of the Underwriters' over-allotment option, by (i) each person (together with
its affiliates) who is known by the Company to be the beneficial owner of more
than 5% of the Company's Common Stock; (ii) each of the Named Executive
Officers; (iii) each director of the Company (who, where applicable, is listed
under the name of the principal stockholder with which he is affiliated); (iv)
all executive officers and directors of the Company as a group; and (v) each of
the Selling Stockholders. Except pursuant to applicable community property laws
or as indicated in the footnotes to this table, the Company believes that each
stockholder identified in the table possesses sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned by such
stockholder. The address of the individuals listed below is the address of the
Company appearing on the cover of this registration statement.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO THE OFFERING(1) SHARES AFTER THE OFFERING(1)
------------------------- BEING -----------------------
NUMBER PERCENT(2) OFFERED NUMBER PERCENT(2)
<S> <C> <C> <C> <C> <C>
Oak Investment Partners VI, Limited
Partnership(3)...................... 1,062,415
Gerald R. Gallagher
4550 Norwest Center
Minneapolis, MN 55402
Catterton-Simon Partners, L.P.(4)..... 768,491
J. Michael Chu
9 Greenwich Office Park
Greenwich, CT 06830
Trinity Ventures V, L.P.(5)........... 611,639
James G. Shennan, Jr.
3000 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94025
Global Retail Partners, L.P.(6)....... 364,316
Yves Sisteron
2121 Avenue of the Stars, Suite 1600
Los Angeles, CA 90067
Silver Creek Investments Limited(7)... 512,443
61 Purchase Street, Suite #2R
Rye, NY 10580
Paul M. Fleming(8).................... 2,774,170
R. Michael Welborn(9)................. 30,172
Richard L. Federico(10)............... 446,249
Robert T. Vivian(11).................. 93,490
All officers and directors as a group
(10 persons)(12).................... 6,150,912
</TABLE>
- ------------------------------
* Less than one percent.
(1) Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, a person has beneficial ownership of any securities over which
such person directly or indirectly, through any contract, arrangement,
undertaking, relationship or otherwise has or shares voting power and/or
investment power, or as to which such person has the right to acquire such
voting and/or investment power within 60 days.
(2) Percentage ownership is based on: (i) before the offering, shares
of Common Stock (which includes (a) shares outstanding on June 28, 1998,
(b) 82,130 shares of Common Stock issuable upon conversion of PIK Dividends
paid to holders of Series A Preferred Stock prior to consummation of the
offering, and (c) shares issuable upon completion of this offering
upon conversion of the Deferred Purchase Price Liability (assuming
43
<PAGE> 45
an initial public offering price of $ per share)); and (ii) after the
offering, shares of Common Stock outstanding (assuming no
exercise of the Underwriter's over-allotment option). Percentage of
beneficial ownership as to any person as of a particular date is calculated
by dividing the number of shares beneficially owned by such person by the
sum of the number of shares outstanding as of such date and the number of
shares as to which such person has the right to acquire voting and/or
investment power within 60 days of such date.
(3) Includes 27,797 shares of Common Stock issuable upon conversion of PIK
Dividends paid to the named stockholder and its affiliates who hold Series
A Preferred Stock prior to consummation of the offering. Includes 1,038,191
shares held by Oak Investment Partners VI, Limited Partnership and 24,224
shares held by Oak VI Affiliates Fund, Limited Partnership. Gerald
Gallagher, a director of the Company, is a partner of Oak Investment
Partners with certain voting and investment power over such shares.
Although Mr. Gallagher may be deemed to be a beneficial owner of such
shares, he disclaims all such beneficial ownership except to the extent of
any pecuniary interest therein which he may have.
(4) Includes 19,174 shares of Common Stock issuable upon conversion of PIK
Dividends paid to the named stockholder and its affiliates who hold Series
A Preferred Stock prior to consummation of the offering. Includes 457,484
shares held by Catterton-Simon Partners, L.P., 224,800 shares held by
Catterton-PFC, L.L.C. and 86,207 shares held by Catterton-PFC Partners II,
L.L.C. Michael Chu, a director of the Company, is President and Managing
Director of Catterton-Simon Partners with certain voting and investment
power over such shares. Although Mr. Chu may be deemed to be a beneficial
owner of such shares, he disclaims all such beneficial ownership except to
the extent of any pecuniary interest therein which he may have.
(5) Includes 14,572 shares of Common Stock issuable upon conversion of PIK
Dividends paid to the named stockholder and its affiliates who hold Series
A Preferred Stock prior to consummation of the offering. Includes 575,993
shares held by Trinity Ventures V, L.P. and 35,645 shares held by Trinity
Ventures V Side-by-Side Fund, L.P. James G. Shennan, Jr., a director of the
Company, is a partner of Trinity Ventures with certain voting and
investment power over such shares. Although Mr. Shennan may be deemed to be
a beneficial owner of such shares, he disclaims all such beneficial
ownership except to the extent of any pecuniary interest therein which he
may have.
(6) Includes 1,242 shares of Common Stock issuable upon conversion of PIK
Dividends paid to Yves Sisteron and certain other individuals affiliated
with DLJ who hold Series A Preferred Stock prior to consummation of the
offering. Includes 8,047 shares held by Mr. Sisteron, 202,662 shares held
by Global Retail Partners, L.P., 13,952 shares held by Global Retail
Partners Funding, Inc., 13,174 shares held by GRP Partners, L.P., 60,389
shares held by DLJ Diversified Partners, L.P., 3,488 shares held by DLJ
First ESC, L.P., 22,426 shares held by DLJ Diversified Partners -- A, L.P.
and 40,177 shares held by certain other individuals affiliated with DLJ.
Each of such persons is affiliated with Global Retail Partners, L.P. and
Global Retail Partners, L.P. and such affiliates are each affiliates of
DLJ. Yves Sisteron, a director of the Company, is a Principal of Global
Retail Partners L.P. Mr. Sisteron disclaims beneficial ownership of all
shares owned by Global Retail Partners, L.P. and its affiliates except to
the extent of his pecuniary interest, if any, therein.
(7) Includes 13,422 shares of Common Stock issuable upon conversion of PIK
Dividends paid to the named stockholder who holds Series A Preferred Stock
prior to consummation of the offering.
(8) Includes 286,640 shares subject to options which are exercisable within 60
days of September 30, 1998.
(9) Includes 25,000 shares subject to options which are exercisable within 60
days of September 30, 1998.
(10) Includes 1,534 shares of Common Stock issuable upon conversion of PIK
Dividends paid to the named stockholder who holds Series A Preferred Stock
prior to consummation of the offering. Includes 393,965 shares subject to
options which are exercisable within 60 days of September 30, 1998.
(11) Includes 93,490 shares subject to options which are exercisable within 60
days of September 30, 1998.
(12) Includes 799,095 shares subject to options which are exercisable within 60
days of September 30, 1998 and 64,319 shares of Common Stock issuable upon
conversion of PIK Dividends.
44
<PAGE> 46
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Charter and By-laws is a summary and is qualified in
its entirety by the provisions of the Charter and By-laws, which have been filed
as exhibits to the Company's Registration Statement, of which this Prospectus is
a part.
Upon the closing of the offering, the authorized capital stock of the
Company will consist of 20,000,000 shares of Common Stock, $0.001 par value, and
10,000,000 shares of Preferred Stock, $0.001 par value.
COMMON STOCK
As of June 28, 1998, there were shares of Common Stock
(after giving effect to the conversion into Common Stock of the Preferred Stock
and the Deferred Purchase Price Liability upon the closing of this offering)
outstanding held of record by fifty-nine (59) stockholders. Holders of Common
Stock are entitled to one vote per share on all matters to be voted upon by the
stockholders. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available thereof. In the event of a liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior liquidation rights of preferred stock, if any, then
outstanding. The Common Stock has no preemptive or conversion rights or other
subscriptive rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and non-assessable, and the shares of Common Stock to be outstanding upon
completion of the offering contemplated by this Prospectus will be fully paid
and non-assessable. The Charter does not provide for cumulative voting, and
accordingly, the holders of a majority of the shares of Common Stock entitled to
vote in any election of directors may elect all of the directors standing for
election.
PREFERRED STOCK
Upon consummation of the offering there will be no outstanding shares of
preferred stock of the Company. The Board of Directors has the authority,
without action by the stockholders, to designate and issue preferred stock in
one or more series and to designate the dividend rate, voting rights and other
rights, preferences and restrictions of each series, any or all of which may be
greater than the rights of the Common Stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the Common Stock until the Board of Directors determines the
specific rights of the holders of such preferred stock. However, the effects
might include, among other things, restricting dividends on the Common Stock,
diluting the voting power of the Common Stock, impairing the liquidation rights
of the Common Stock and delaying or preventing a change in control of the
Company without further action by the stockholders. The Company has no present
plans to issue any shares of preferred stock.
REGISTRATION RIGHTS
Pursuant to the Amended and Restated Registration Rights Agreement dated
May 1, 1997, between the Company and certain stockholders, certain investors
holding an aggregate of shares (the "Registrable Securities") will
have certain "demand" rights to register those shares under the Securities Act.
Beginning 180 days after the date of this Prospectus, if requested by holders of
more than 50% of the Registrable Securities then outstanding and assuming a
reasonably anticipated aggregate price to the public of at least $5 million,
then, subject to certain limitations, the Company must file a registration
statement under the Securities Act covering all Registrable Securities requested
to be included by holders of Registrable Securities. The Company is required to
effect up to three such "demand" registrations. The Company has the right to
delay any such registration for up to 90 days under certain circumstances. All
fees, costs and expenses of such registrations other than underwriting discounts
and commissions, will be borne by the Company.
In addition, holders of Registrable Securities have certain "piggyback"
registration rights. If the Company proposes to register any of its securities
under the Securities Act other than in connection with the Company's employee
benefit plans or a corporate reorganization, then, subject to certain
limitations, the
45
<PAGE> 47
holders of Registrable Securities may require the Company to include all or a
portion of their shares in such registration, although the managing underwriter
of any such offering has certain rights to limit the number of shares in such
registration.
Subject to certain limitations, expenses incurred in connection with the
above registrations (other than underwriters' and brokers' discounts and
commissions) will be borne by the Company.
DEFERRED PURCHASE PRICE LIABILITY
In connection with the repurchase by the Company of minority interests in
the Scottsdale, La Jolla and Newport Beach restaurants, certain of the former
minority interest holders have the right to receive a number of shares of
restricted Common Stock of the Company upon completion of the offering
determined by dividing $2,426,000 by the initial public offering price per
share. In the event the offering is not completed by October 23, 1998, the
Company will be obligated (upon demand of the individual holders) to pay the
holders of such rights the aggregate amount of $2,426,000 in cash.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 102(b)(7) of the DGCL authorizes corporations to limit or eliminate
the personal liability of directors to corporations and their stockholders for
monetary damages for a breach of a director's fiduciary duty of care. Although
Section 102(b)(7) does not change a director's duty of care, it enables
corporations to limit available relief to equitable remedies such as injunction
or rescission. The Company's Charter limits the liability of directors to the
Company and its stockholders. Specifically, directors of the Company are not
personally liable for monetary damages to the Company or its stockholders for a
breach of fiduciary duty as a director, except for liability: (i) for any breach
of the director's duty of loyalty to the Company or its stockholders; (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) under Section 174 of the DGCL; or (iv) for any
transaction from which the director derived an improper personal benefit.
ANTI-TAKEOVER PROVISIONS
General. Certain provisions of the DGCL and the Company's Charter and
By-laws may discourage or make it more difficult for a third-party to acquire
control of the Company. Such provisions may limit the price that certain
investors are willing to pay in the future for shares of the Company's Common
Stock. These certain provisions may also have the effect of discouraging or
preventing certain types of transactions involving an actual or threatened
change of control of the Company (including unsolicited takeover attempts), even
though such a transaction may offer the Company's stockholders the opportunity
to sell their stock at a price above the prevailing market price. The Charter
allows the Company to issue preferred stock with rights senior to those of the
Common Stock and other rights that could adversely affect the interests of
holders of shares of Common Stock without any further vote or action by the
stockholders. The issuance of preferred stock, for example, could decrease the
amount of earnings or assets available for distribution to the holders of shares
of Common Stock or could adversely affect the rights and powers, including
voting rights, of the holders of shares of Common Stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the Common Stock, as well as having the anti-takeover effects discussed
above.
Delaware Takeover Statute. The Company is subject to Section 203 of the
DGCL, which prohibits a Delaware corporation from engaging in a "business
combination" with certain persons ("Interested Stockholders") for three years
following the time any such person becomes an Interested Stockholder. Interested
Stockholders generally include (i) persons who are the beneficial owners of 15%
or more of the outstanding voting stock of the corporation, and (ii) persons who
are affiliates or associates of the corporation and who hold 15% or more of the
corporation's outstanding voting stock at any time within three years before the
date on which such person's status as an Interested Stockholder is determined.
Subject to certain exceptions, a business combination includes, among other
things, (i) mergers or consolidations, (ii) the sale, lease, exchange, mortgage,
pledge, transfer or other disposition of assets having an aggregate market value
equal to 10% or more of either the aggregate market value of all assets of the
corporation determined on a consolidated
46
<PAGE> 48
basis or the aggregate market value of all the outstanding stock of the
corporation, (iii) transactions that result in, among other things, the issuance
or transfer by the corporation of any stock of the corporation to the Interested
Stockholder, except pursuant to a transaction that effects a pro rata
distribution to all stockholders of the corporation, (iv) any transaction
involving the corporation that has the effect of increasing the proportionate
share of the stock of any class or series, or securities convertible into the
stock of any class or series, of the corporation that is owned directly or
indirectly by the Interested Stockholder, or (v) any receipt by the Interested
Stockholder of the benefit (except proportionately as a stockholder) of any
loans, advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
Section 203 does not apply to a business combination if (i) before a person
becomes an Interested Stockholder, the board of directors of the corporation
approved either the business combination or the transaction which resulted in
the Interested Stockholder becoming an Interested Stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
Interested Stockholder, the Interested Stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, other than certain excluded shares, or (iii) at or subsequent to such
time the business combination is (a) approved by the board of directors of the
corporation and (b) authorized at a regular or special meeting of stockholders,
and not by written consent, by the affirmative vote of the holders of at least
two-thirds of the outstanding voting stock of the corporation not owned by the
Interested Stockholder.
CHARTER AND BY-LAWS
The Company's By-laws provide that special meetings of the stockholders of
the Company may be called only by the President of the Company, and shall be
called by the President or Secretary of the Company upon the written request of
a majority of the Board of Directors or by any person or persons holding shares
representing a majority of the outstanding capital stock entitled to vote. The
Company's Bylaws also require advance written notice of a special meeting to
each stockholder of the Company entitled to vote at such meeting not less than
10, nor more than 60, days prior to the meeting. The Company's Charter does not
include a provision for cumulative voting in the election of directors. Under
cumulative voting, a minority stockholder holding a sufficient number of shares
may be able to ensure the election of one or more directors. The absence of
cumulative voting may have the effect of limiting the ability of minority
stockholders to effect changes in the Board of Directors and, as a result, may
have the effect of deterring a hostile takeover or delaying or preventing
changes in control or management of the Company.
The Company's By-laws provide that the authorized number of directors may
be changed by an amendment to the By-laws adopted by the Board of Directors or
by the stockholders. Vacancies in the Board of Directors may be filled either by
holders of a majority of the Company's directors then in office, though less
than a quorum, or by a sole remaining director, or if there are no directors in
office, in the manner provided by statute. If the directors then in office
constitute less than a majority of the whole board, any stockholder or
stockholders holding at least ten percent (10%) of the outstanding capital stock
entitled to vote may apply to the Court of Chancery to order an election.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is First Chicago
Trust Company, P.O. Box 20533, Jersey City, New Jersey 07303, attention: John
Gagnon (201) 222-4114.
47
<PAGE> 49
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect market prices prevailing from time to time. Furthermore,
since only a limited number of shares will be available for sale shortly after
the offering because of certain contractual and legal restrictions on resale (as
described below), sales of substantial amounts of Common Stock in the public
market after such restrictions lapse could adversely affect the prevailing
market price at such time and the ability of the Company to raise equity capital
in the future.
Upon completion of this offering, the Company will have outstanding an
aggregate of shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options or
warrants to purchase Common Stock. Of these shares, the shares of Common Stock
to be sold in this Offering will be freely tradable without restriction or
further registration under the Securities Act, unless such shares are held by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act (the "Affiliates"). The remaining shares held by
existing stockholders of the Company were sold by the Company in reliance on
exemptions from the registration requirements of the Securities Act and are
"restricted" securities within the meaning of Rule 144 under the Securities Act
(the "Restricted Shares"). Restricted Shares may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rule 144 or Rule 701 promulgated under the Securities Act, which rules are
summarized below. As a result of the contractual restrictions described below
and the provisions of Rule 144 Rule and 701, the Restricted Shares will be
available for sale in the public market as follows (based on the number of
shares outstanding as of June 28, 1998): (i) Restricted Shares will be
eligible for sale 90 days after the date of this Prospectus; and (ii) all
Restricted Shares will be eligible for sale upon expiration of the lock-up
agreements 180 days after the date of this Prospectus.
All officers and directors, and certain stockholders and option holders of
the Company have agreed not to sell, make any short sale of, grant any option
for the purchase of, or otherwise transfer or dispose of, any shares of Common
Stock or any securities convertible into or exercisable for Common Stock held by
such persons for a period of 180 days after the date of this Prospectus, without
the prior written consent of DLJ. When determining whether or not to release
shares from the lock-up agreements, DLJ will consider, among other factors, the
stockholder's reasons for requesting the release, the number of shares for which
the release is being requested and market conditions at the time.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
shares for at least one year is entitled to sell, within any three-month period
commencing 90 days after the date of this Prospectus, a number of shares that
does not exceed the greater of (i) 1% of the then outstanding shares of Common
Stock (approximately shares immediately after the offering) or
(ii) the average weekly trading volume of the Common Stock on the Nasdaq
National Market during the four calendar weeks preceding such sale, subject to
the filing of a Form 144 with respect to such sale. Sales under rule 144 are
also subject to certain manner of sale provisions and notice requirements and to
the availability of current public information about the Company. In addition, a
person who is not deemed to have been an Affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, would be entitled to sell such
shares under Rule 144(k) without regard to the requirements described above.
Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately
following completion of the offering. In general, under Rule 701 of the
Securities Act as currently in effect, any employee, consultant or advisor of
the Company who purchased shares from the Company in connection with a
compensatory stock or option plan or written employment agreement is eligible to
resell such shares 90 days after the effective date of the offering in reliance
on Rule 144, but without compliance with certain restrictions, including the
holding period conditions, contained in Rule 144.
Within 90 days of the date of this Prospectus, the Company intends to file
a registration statement under the Securities Act to register shares of Common
Stock reserved for issuance under its equity incentive plans, thus permitting
the resale of such shares by non-affiliates in the public market without
restriction under the Securities Act. Such registration statements will become
effective immediately upon filing. As of June 28, 1998, 1,009,635 options to
purchase shares of Common Stock were outstanding under the Company's stock
option plans and agreements, all of which are subject to the lock-up agreements
described above.
48
<PAGE> 50
UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement dated
, 1998 (the "Underwriting Agreement"), the Underwriters named below,
who are represented by Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ"), NationsBanc Montgomery Securities LLC ("NationsBanc Montgomery") and
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated ("Dain Rauscher
Wessels") (the "Representatives"), have severally agreed to purchase from the
Company and the Selling Stockholders the respective number of shares of Common
Stock set forth opposite their names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ -----------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
NationsBanc Montgomery Securities LLC.......................
Dain Rauscher Wessels.......................................
-----------
Total.............................................
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal matters
and to certain other conditions. The Underwriters are obligated to purchase and
accept delivery of all the shares of Common Stock offered hereby (other than
those shares covered by the over-allotment option described below) if any are
purchased.
The Underwriters initially propose to offer the shares of Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain dealers (including the
Underwriters) at such price less a concession not in excess of $ per share.
The Underwriters may allow, and such dealers may re-allow, to certain other
dealers a concession not in excess of $ per share. After the initial
offering of the Common Stock, the public offering price and other selling terms
may be changed by the Representatives at any time without notice. The
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
The Company and the Selling Stockholders have granted to the Underwriters
an option, exercisable within 30 days after the date of this Prospectus, to
purchase, from time to time, in whole or in part, up to an aggregate of
additional shares of Common Stock at the initial public offering
price less underwriting discounts and commissions. The Underwriters may exercise
such option solely to cover over-allotments, if any, made in connection with the
offering. To the extent that the Underwriters exercise such option, each
Underwriter will become obligated, subject to certain conditions, to purchase
its pro rata portion of such additional shares based on such Underwriter's
percentage underwriting commitment as indicated in the preceding table.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
Each of the Company, its executive officers and directors and certain
stockholders of the Company (including the Selling Stockholders) has agreed,
subject to certain exceptions, not to (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (ii) enter
into any swap or other arrangement that transfers all or a portion of the
economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise) for a period of 180 days after the date of this Prospectus
without the prior written consent of DLJ. In addition, during such period, the
Company has also agreed not to file any registration statement with respect to,
and each of its executive officers, directors and certain stockholders of the
Company (including the Selling Stockholders) has agreed not to make any demand
for, or exercise any right with respect to, the
49
<PAGE> 51
registration of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock other than registrations relating
to equity compensation plans without DLJ's prior written consent.
Prior to the offering, there has been no established trading market for the
Common Stock. The initial public offering price for the shares of Common Stock
offered hereby will be determined by negotiation among the Company,
representatives of the Selling Stockholders and the Representatives. The factors
to be considered in determining the initial public offering price include the
history of and the prospects for the industry in which the Company competes, the
past and present operations of the Company, the historical results of operations
of the Company, the prospects for future earnings of the Company, the recent
market prices of securities of generally comparable companies and the general
condition of the securities markets at the time of the offering.
Global Retail Partners, L.P. ("GRP") and certain of its affiliates, each an
affiliate of DLJ, are stockholders of the Company. Yves Sisteron, a Principal of
GRP and a director of the Company, has been elected to the Board of Directors
pursuant to the provisions of a stockholder agreement which entitles Global
Retail Partners, L.P., as a holder of Series B Preferred Stock and so long as it
continues to hold at least a specified percentage of the Series B Preferred
Stock, to elect one of the seven directors of the Company. Such stockholder
agreement will terminate upon consummation of this offering. In May 1997, Global
Retail Partners, L.P. and its affiliates, including Mr. Sisteron, acquired
shares of the Company's Series B Preferred Stock convertible into an aggregate
of 322,018 shares of Common Stock. Previously, in February 1996, Mr. Sisteron
and two other individual affiliates of DLJ, acquired shares of the Company's
Series A Preferred Stock convertible into an aggregate of 40,450 shares of
Common Stock and have since received and will receive scheduled PIK Dividends
thereon. In addition, certain individuals who are associated with NationsBanc
Montgomery acquired shares of Series A Preferred Stock convertible into an
aggregate of 90,762 shares of Common Stock in February 1996, and such
individuals and one other individual associated with NationsBanc Montgomery
acquired shares of Series B Preferred Stock convertible into an aggregate of
24,404 shares of Common Stock in May 1997. In February 1996, NationsBanc
Montgomery also received a five-year warrant to purchase shares of Series A
Preferred Stock convertible into 62,190 shares of Common Stock at an exercise
price of $4.00 per common share in connection with placement agent and other
services it performed for the Company. See "Management," "Certain Transactions"
and "Principal and Selling Stockholders."
Other than in the United States, no action has been taken by the Company,
the Selling Stockholders or the Underwriters that would permit a public offering
of the shares of Common Stock offered hereby in any jurisdiction where action
for that purpose is required. The shares of Common Stock offered hereby may not
be offered or sold, directly or indirectly, nor may this Prospectus or any other
offering material or advertisements in connection with the offer and sale of any
such shares of Common Stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of such jurisdiction. Persons into whose possession this
Prospectus comes are advised to inform themselves about and to observe any
restrictions relating to the offering of the Common Stock and the distribution
of this Prospectus. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any shares of Common Stock offered hereby in any
jurisdiction in which such an offer or a solicitation is unlawful.
In connection with the offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot the offering,
creating a syndicate short position. The Underwriters may bid for and purchase
shares of Common Stock in the open market to cover such syndicate short position
or to stabilize the price of the Common Stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members and selected
dealers if they repurchase previously distributed Common Stock in syndicate
covering transactions, in stabilizing transactions or otherwise. These
activities may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.
50
<PAGE> 52
LEGAL MATTERS
The validity of the securities offered hereby has been and general
corporate legal matters will be passed upon for the Company by Gray Cary Ware &
Freidenrich LLP, San Diego, California. Certain legal matters will be passed
upon for the Underwriters by Akin, Gump, Strauss, Hauer & Feld, L.L.P., San
Antonio, Texas.
EXPERTS
The consolidated financial statements of P.F. Chang's China Bistro, Inc. at
December 28, 1997 and December 29, 1996 and for the year ended December 28,
1997, and the period from February 29, 1996 to December 29, 1996, and the
combined results of operations of its Predecessors for the period from January
1, 1996 to February 28, 1996 and the year ended December 31, 1995 appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement (which term shall include any amendments thereto) on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement. As
used herein, the term "Registration Statement" means the initial Registration
Statement (including the exhibits, schedules, financial statements and notes
filed as part thereof) and any and all amendments thereto. This Prospectus omits
certain information contained in the Registration Statement as permitted by the
rules and regulations of the Commission. For further information with respect to
the Company and the Common Stock offered hereby, reference is made to the
Registration Statement. Statements herein concerning the contents of any
contract or other document are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed with the
Commission as an exhibit to the Registration Statement, each such statement
being qualified by and subject to such reference in all respects. With respect
to each such document filed with the Commission as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved.
As a result of this offering, the Company will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and in accordance therewith, will file reports and other information with the
Commission. Reports, registration statements, proxy statements, and other
information filed by the Company with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the
Commission's Regional Offices: 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, New York, New York 10048. Copies of
such material can be obtained at prescribed rates from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549. The Commission maintains a World Wide Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of the site is
http://www.sec.gov.
The Company intends to furnish holders of the Common Stock with annual
reports containing, among other information, audited financial statements
certified by an independent audited accounting firm and quarterly reports
containing unaudited condensed financial information for the first three
quarters of each fiscal year. The Company intends to furnish such other reports
as it may determine or as may be required by law.
51
<PAGE> 53
P.F. CHANG'S CHINA BISTRO, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Financial Statements:
Consolidated Balance Sheets at December 29, 1996, December
28, 1997, and June 28, 1998 (unaudited)................ F-3
Consolidated Statements of Operations for the Year Ended
December 31, 1995, the Period from January 1, 1996 to
February 28, 1996, the Period from February 29, 1996 to
December 29, 1996, the Year Ended December 28, 1997,
and the Six Months Ended June 29, 1997 and June 28,
1998 (unaudited)....................................... F-4
Consolidated Statements of Convertible Redeemable
Preferred Stock and Common Stockholders' and Members'
Equity (Deficit) for the Year Ended December 31, 1995,
the Period from January 1, 1996 to February 28, 1996,
the Period from February 29, 1996 to December 29, 1996,
the Year Ended December 28, 1997, and the Six Months
Ended June 28, 1998 (unaudited)........................ F-5
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1995, the Period from January 1, 1996 to
February 28, 1996, the Period from February 29, 1996 to
December 29, 1996, the Year Ended December 28, 1997,
and the Six Months Ended June 29, 1997 and June 28,
1998 (unaudited)....................................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 54
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
P.F. Chang's China Bistro, Inc.
We have audited the accompanying consolidated balance sheets of P.F.
Chang's China Bistro, Inc. (Company) as of December 29, 1996 and December 28,
1997, and the related consolidated statements of operations, convertible
redeemable preferred stock and common stockholders' and members' equity
(deficit), and cash flows for the period from February 29, 1996 to December 29,
1996 and for the year ended December 28, 1997. We have also audited the combined
statements of operations, stockholders' and members' equity (deficit), and cash
flows of the corporations and limited liability companies listed in Note 2 for
the year ended December 31, 1995 and for the period from January 1, 1996 to
February 28, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of P.F. Chang's
China Bistro, Inc. at December 29, 1996 and December 28, 1997 and the results of
its operations and its cash flows for the period from February 29, 1996 to
December 29, 1996 and for the year ended December 28, 1997, and the combined
results of operations and cash flows of the corporations and limited liability
companies listed in Note 2 for the year ended December 31, 1995 and for the
period from January 1, 1996 to February 28, 1996, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
January 26, 1998, except for Note 11
as to which the date is August 27, 1998
F-2
<PAGE> 55
P.F. CHANG'S CHINA BISTRO, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 29, DECEMBER 28, JUNE 28, JUNE 28,
1996 1997 1998 1998
------------ ------------ -------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 1,877 $ 2,739 $ 1,802 $ 1,802
Receivables.......................................... 659 2,062 825 825
Inventories.......................................... 194 363 362 362
Current portion of notes receivable from related
parties............................................ -- 130 69 69
Prepaids and other current assets.................... 79 417 766 766
------- ------- ------- -------
Total current assets................................... 2,809 5,711 3,824 3,824
Construction-in-progress............................... 3,202 3,787 7,522 7,522
Property and equipment, net............................ 2,954 10,207 14,234 14,234
Goodwill, net of accumulated amortization of $154,000,
$398,000 and $616,000 in 1996, 1997 and 1998,
respectively......................................... 3,971 8,307 8,089 8,089
Notes receivable from related parties, less current
portion.............................................. -- 162 187 187
Other assets........................................... 108 315 409 409
------- ------- ------- -------
Total assets........................................... $13,044 $28,489 $34,265 $34,265
======= ======= ======= =======
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Revolving line of credit............................. $ -- $ 5,500 $ 9,000 $ 9,000
Accounts payable..................................... 1,049 1,658 2,789 2,789
Accrued payroll...................................... 624 1,214 1,266 1,266
Other accrued expenses............................... 536 988 1,470 1,470
Unearned revenue..................................... 133 305 269 269
Current portion of long-term debt, including
$290,000, $316,000, and $333,000 due to related
parties in 1996, 1997 and 1998, respectively....... 432 481 441 441
Deferred purchase price.............................. -- 2,426 2,426 --
Accrued minority members' distributions.............. 281 -- -- --
------- ------- ------- -------
Total current liabilities.............................. 3,055 12,572 17,661 15,235
Long-term debt, including $775,000, $446,000 and
$273,000 due to related parties in 1996, 1997 and
1998, respectively................................... 1,331 2,391 2,159 2,159
Interests of minority members and partners in
consolidated limited liability companies and
partnerships......................................... 15 164 236 236
Commitments and contingencies..........................
Convertible redeemable preferred stock, $0.001 par
value, 10,000,000 shares authorized:
Series A--5,354,270 shares issued and outstanding at
December 29, 1996 and December 28, 1997 and
5,434,578 shares issued and outstanding at June 28,
1998, liquidation preference of $10,709,000 at
December 29, 1996 and December 28, 1997 and
$10,869,000 at June 28, 1998....................... 10,517 11,175 11,432 --
Series B--1,517,131 shares issued and outstanding,
liquidation preference of $6,600,000 at December
28, 1997 and June 28, 1998......................... -- 6,633 6,853 --
Common stockholders' equity (deficit):
Common stock, $0.001 par value, 20,000,000 shares
authorized: 2,500,000 shares issued and outstanding
( shares pro forma)........................ 3 3 3 6
Additional paid-in capital........................... 2 2 2 20,710
Accumulated deficit.................................. (1,879) (4,451) (4,081) (4,081)
------- ------- ------- -------
Total common stockholders' equity (deficit)............ (1,874) (4,446) (4,076) 16,635
------- ------- ------- -------
Total liabilities, convertible redeemable preferred
stock and common stockholders' equity (deficit)...... $13,044 $28,489 $34,265 $34,265
======= ======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 56
P.F. CHANG'S CHINA BISTRO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSORS COMPANY
------------------------------ -------------------------------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, 1996 FEBRUARY 29, SIX MONTHS ENDED
YEAR ENDED TO 1996 TO YEAR ENDED -------------------
DECEMBER 31, FEBRUARY 28, DECEMBER 29, DECEMBER 28, JUNE 29, JUNE 28,
1995 1996 1996 1997 1997 1998
------------ --------------- ------------ ------------ -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues.......................... $10,465 $2,815 $15,630 $39,768 $17,703 $32,937
Costs and expenses:
Restaurant operating costs:
Cost of sales................. 2,957 772 4,454 11,317 5,029 9,099
Labor......................... 3,347 918 4,736 11,683 5,228 9,400
Operating..................... 1,528 527 2,944 6,727 2,871 5,440
Occupancy..................... 1,059 205 1,279 2,743 1,206 2,357
------- ------ ------- ------- ------- -------
Total restaurant
operating costs........ 8,891 2,422 13,413 32,470 14,334 26,296
General and administrative...... 192 17 1,368 4,276 1,823 2,753
Depreciation and amortization... 322 82 352 1,102 451 1,013
Preopening...................... 400 17 765 1,922 399 1,217
------- ------ ------- ------- ------- -------
Income (loss) from operations..... 660 277 (268) (2) 696 1,658
Interest income (expense):
Interest expense................ (13) (4) (163) (380) (150) (520)
Interest income................. - - 36 63 23 65
------- ------ ------- ------- ------- -------
Income (loss) before elimination
of minority members' and
partners' interests and
provision for income taxes...... 647 273 (395) (319) 569 1,203
Elimination of minority members'
and partners' interests......... - - (720) (1,308) (758) (345)
------- ------ ------- ------- ------- -------
Income (loss) before provision for
income taxes.................... 647 273 (1,115) (1,627) (189) 858
Provision for income taxes........ - - (30) (69) (52) (11)
------- ------ ------- ------- ------- -------
Net income (loss)................. $ 647 $ 273 (1,145) (1,696) (241) 847
======= ======
Redeemable preferred stock
accretion....................... (504) (876) (396) (477)
------- ------- ------- -------
Net income (loss) available to
common stockholders............. $(1,649) $(2,572) $ (637) $ 370
======= ======= ======= =======
Net income (loss) per share:
Basic........................... $ (0.66) $ (1.03) $ (0.25) $ 0.15
======= ======= ======= =======
Diluted......................... $ (0.66) $ (1.03) $ (0.25) $ 0.13
======= ======= ======= =======
Weighted average shares used in
computation:
Basic........................... 2,500 2,500 2,500 2,500
======= ======= ======= =======
Diluted......................... 2,500 2,500 2,500 6,655
======= ======= ======= =======
Pro forma data (unaudited):
Net income (loss) per share:
Basic......................... $ (0.30) $ 0.14
======= =======
Diluted....................... $ (0.30) $ 0.13
======= =======
Weighted average shares used in
computation:
Basic......................... 5,706 6,099
======= =======
Diluted....................... 5,706 6,798
======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 57
P.F. CHANG'S CHINA BISTRO, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
COMMON STOCKHOLDERS' AND MEMBERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONVERTIBLE REDEEMABLE PREFERRED STOCK
-----------------------------------------
SERIES A SERIES B
------------------- ------------------
SHARES AMOUNT SHARES AMOUNT
------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
PREDECESSORS
Balances, January 1, 1995......................... -- $ -- -- $ --
Members' contributions............................ -- -- -- --
Distributions..................................... -- -- -- --
Net income (loss)................................. -- -- -- --
----- ------- ----- ------
Balances, December 31, 1995....................... -- -- -- --
Distributions..................................... -- -- -- --
Net income (loss)................................. -- -- -- --
----- ------- ----- ------
Balances, February 28, 1996....................... -- -- -- --
COMPANY
Conversion of S corporations to limited liability
companies....................................... -- -- -- --
Purchase of members' interests.................... -- -- -- --
Reclassification to minority interest upon
consolidation in connection with acquisition of
interests....................................... -- -- -- --
Issuance of common stock.......................... -- -- -- --
Issuance of Series A preferred stock, net of
issuance costs of $695,000...................... 5,354 10,013 -- --
Redeemable preferred stock accretion.............. -- 504 -- --
Net loss.......................................... -- -- -- --
----- ------- ----- ------
Balances, December 29, 1996....................... 5,354 10,517
Issuance of Series B preferred stock, net of
issuance costs of $184,000...................... -- -- 1,517 6,415
Redeemable preferred stock accretion.............. -- 658 -- 218
Net loss.......................................... -- -- -- --
----- ------- ----- ------
Balances, December 28, 1997....................... 5,354 11,175 1,517 6,633
Series A preferred stock dividend paid
(unaudited)..................................... 80 -- -- --
Redeemable preferred stock accretion
(unaudited)..................................... -- 257 -- 220
Net income (unaudited)............................ -- -- -- --
----- ------- ----- ------
Balances, June 28, 1998 (unaudited)............... 5,434 $11,432 1,517 $6,853
===== ======= ===== ======
<CAPTION>
COMMON STOCKHOLDERS' AND MEMBERS' EQUITY (DEFICIT)
--------------------------------------------------------------------
COMMON STOCK ADDITIONAL
---------------- PAID-IN MEMBERS' ACCUMULATED
SHARES AMOUNT CAPITAL CAPITAL DEFICIT TOTAL
------ ------ ---------- -------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
PREDECESSORS
Balances, January 1, 1995......................... 20 $-- $1,419 $ -- $ (202) $ 1,217
Members' contributions............................ -- -- -- 710 -- 710
Distributions..................................... -- -- (706) (50) (523) (1,279)
Net income (loss)................................. -- -- -- (18) 665 647
----- -- ------ ------- ------- -------
Balances, December 31, 1995....................... 20 -- 713 642 (60) 1,295
Distributions..................................... -- -- (112) -- (228) (340)
Net income (loss)................................. -- -- -- (12) 285 273
----- -- ------ ------- ------- -------
Balances, February 28, 1996....................... 20 -- 601 630 (3) 1,228
COMPANY
Conversion of S corporations to limited liability
companies....................................... (20) -- (601) 601 -- --
Purchase of members' interests.................... -- -- -- (1,231) -- (1,231)
Reclassification to minority interest upon
consolidation in connection with acquisition of
interests....................................... -- -- -- -- (227) (227)
Issuance of common stock.......................... 2,500 3 2 -- -- 5
Issuance of Series A preferred stock, net of
issuance costs of $695,000...................... -- -- -- -- -- --
Redeemable preferred stock accretion.............. -- -- -- -- (504) (504)
Net loss.......................................... -- -- -- -- (1,145) (1,145)
----- -- ------ ------- ------- -------
Balances, December 29, 1996....................... 2,500 3 2 -- (1,879) (1,874)
Issuance of Series B preferred stock, net of
issuance costs of $184,000...................... -- -- -- -- -- --
Redeemable preferred stock accretion.............. -- -- -- -- (876) (876)
Net loss.......................................... -- -- -- -- (1,696) (1,696)
----- -- ------ ------- ------- -------
Balances, December 28, 1997....................... 2,500 3 2 -- (4,451) (4,446)
Series A preferred stock dividend paid
(unaudited)..................................... -- -- -- -- -- --
Redeemable preferred stock accretion
(unaudited)..................................... -- -- -- -- (477) (477)
Net income (unaudited)............................ -- -- -- -- 847 847
----- -- ------ ------- ------- -------
Balances, June 28, 1998 (unaudited)............... 2,500 $3 $ 2 $ -- $(4,081) $(4,076)
===== == ====== ======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 58
P.F. CHANG'S CHINA BISTRO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSORS COMPANY
------------------------------ ------------------------------------------------------
PERIOD FROM PERIOD FROM SIX MONTHS ENDED
YEAR ENDED JANUARY 1, 1996 FEBRUARY 29, 1996 YEAR ENDED -------------------
DECEMBER 31, TO FEBRUARY 28, TO DECEMBER 29, DECEMBER 28, JUNE 29, JUNE 28,
1995 1996 1996 1997 1997 1998
------------ --------------- ----------------- ------------ -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)....................... $ 647 $ 273 $(1,145) $(1,696) $ (241) $ 847
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation.......................... 322 82 198 858 348 795
Amortization.......................... -- -- 154 244 103 218
Minority members' and partners'
interests........................... -- -- 720 1,308 758 345
Change in operating assets and
liabilities:
Receivables......................... (127) 134 (658) (1,403) 659 1,237
Inventories......................... (54) (5) (75) (169) (10) 1
Prepaids and other current assets... (56) (6) 17 (338) (310) (349)
Other assets........................ (40) 8 (63) (207) 3 (94)
Accounts payable.................... 489 (65) 395 609 (331) 1,131
Accrued payroll..................... 50 80 385 590 (433) 52
Other accrued expenses.............. 299 (143) 289 452 214 482
Unearned revenue.................... 67 (13) 63 172 (3) (36)
Accrued minority members'
distributions..................... -- -- -- (281) (281) --
------- ----- ------- ------- ------- -------
Net cash provided by operating
activities............................ 1,597 345 280 139 476 4,629
INVESTING ACTIVITIES:
Capital expenditures.................... (824) -- (4,008) (8,696) (2,769) (8,557)
Decrease (increase) in notes receivable
from related parties.................. -- -- -- (292) (119) 36
Payment for members' interests.......... -- -- (4,175) (2,520) -- --
------- ----- ------- ------- ------- -------
Net cash used in investing activities... (824) -- (8,183) (11,508) (2,888) (8,521)
FINANCING ACTIVITIES:
Net proceeds from revolving line of
credit................................ -- -- -- 5,500 -- 3,500
Proceeds from issuance of long-term
debt.................................. -- -- -- 1,600 1,600 --
Repayments of long-term debt............ (71) (7) (267) (491) (246) (272)
Proceeds from issuance of common
stock................................. -- -- 5 -- -- --
Proceeds from issuance of redeemable
preferred stock, net of issuance
costs................................. -- -- 10,013 6,415 6,415 --
Proceeds from minority partners'
contributions......................... -- -- -- 441 183 92
Proceeds from members' contributions.... 710 -- -- -- -- --
Distributions to members and
stockholders.......................... (1,279) (340) -- -- -- --
Distributions to minority members and
partners.............................. -- -- (449) (1,234) (321) (365)
------- ----- ------- ------- ------- -------
Net cash provided by (used in) financing
activities............................ (640) (347) 9,302 12,231 7,631 2,955
------- ----- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents........................... 133 (2) 1,399 862 5,219 (937)
Cash and cash equivalents at the
beginning of the period............... 347 480 478 1,877 1,877 2,739
------- ----- ------- ------- ------- -------
Cash and cash equivalents at the end of
the period............................ $ 480 $ 478 $ 1,877 $ 2,739 $ 7,096 $ 1,802
======= ===== ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest.................. $ 13 $ 4 $ 108 $ 319 $ 112 $ 494
Cash paid for income taxes.............. -- -- 30 69 52 11
Purchase of members' interests through
issuance of long-term debt............ -- -- 1,266 -- -- --
Purchase of property and equipment
through issuance of long-term debt.... 200 -- 421 -- -- --
Purchase of members' and partners'
interest through deferred purchase
price................................. -- -- -- 2,426 -- --
</TABLE>
See accompanying notes.
F-6
<PAGE> 59
P.F. CHANG'S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997 AND JUNE 28, 1998
(THE INFORMATION AS OF JUNE 28, 1998 AND FOR THE SIX MONTHS ENDED JUNE 29, 1997
AND JUNE 28, 1998 IS UNAUDITED)
1. BASIS OF PRESENTATION
P.F. Chang's China Bistro, Inc. (Company) operates restaurants in Arizona,
California, Colorado, Texas, Nevada, Florida, North Carolina, Louisiana, and
Virginia under the name of "P.F. Chang's China Bistro." The Company was formed
in January, 1996 through the issuance of 500 shares of common stock to Mr. Paul
Fleming for $100 in cash. In February 1996, the Company sold 4,975,000 shares of
Series A convertible preferred stock convertible into 2,487,500 shares of common
stock and warrants for $9,950,000 in cash. Contemporaneously, the Company
acquired Mr. Fleming's 52 percent interest in Fleming Chinese Restaurants, Inc.,
which operates a restaurant in Scottsdale, Arizona (Scottsdale), for $1,037,000
in cash and $954,000 in notes payable. The Company also acquired Mr. Fleming's
43 percent interest in P.F. Chang's II, Inc., which operates a restaurant in
Newport Beach, California (Newport Beach); 49.85 percent ownership in P.F.
Chang's III, L.L.C., which operates a restaurant in La Jolla, California (La
Jolla); and 54.2 percent ownership interest in P.F. Chang's IV, L.L.C., which
operates a restaurant in Irvine, California (Irvine), for $2,006,000 in cash and
2,499,500 shares of common stock of the Company. In addition, in 1996 the
Company acquired an additional 18 percent ownership in Scottsdale and the
remaining 45.8 percent ownership of Irvine in various transactions for an
aggregate of $1,132,000 in cash and $312,000 in notes payable.
The acquisition of the ownership interests in the various entities during
1996 have been accounted for under the purchase method of accounting for
business combinations. Accordingly, the purchase price was allocated to the
proportional assets acquired and liabilities assumed based on their relative
fair values, with $4,125,000 allocated to goodwill. As a result of the start-up
nature of the operations of the Company, the significant prior claims of the
preferred stockholders of the Company, and the minority interests in Scottsdale,
Newport Beach and La Jolla, no significant value was assigned to the common
stock issued in the acquisitions.
During 1997, the Company purchased substantially all the remaining
outstanding minority interests in the Scottsdale, La Jolla and Newport Beach
restaurants for approximately $2,520,000 in cash and $2,426,000 in common stock
of the Company to be issued in connection with a contemplated initial public
offering (IPO). Upon consummation of an IPO, the number of common shares to be
issued will be the fixed purchase price of $2,426,000 divided by the price per
share of the common stock sold in the IPO. Should the IPO not be completed by a
stipulated date as defined, the Company will be obligated (upon demand of the
individual holders) to pay the minority interest holders the $2,426,000 in cash.
The acquisition of the ownership interests in the various entities during
1997 has been accounted for under the purchase method of accounting for business
combinations. Accordingly, the purchase price was allocated to the proportional
assets acquired and liabilities assumed based on their relative fair values,
with $4,581,000 allocated to goodwill.
Two of the predecessor entities, Fleming Chinese Restaurants, Inc. and P.F.
Chang's II, Inc. were dissolved and their operations transferred to two new
entities, PFCCB Scottsdale, L.L.C. and PFCCB Newport Beach, L.L.C. Accordingly,
at December 29, 1996, each of the existing restaurants was structured as a
limited liability corporation, and the Company's ownership of these restaurants
is through its membership in each limited liability corporation. The Company's
new restaurants are generally organized as partnerships with the Company as
general partner.
The operations of the predecessor entities which operated the restaurants
have been presented in the accompanying combined financial statements for 1995
and through the date of acquisition at historical cost due to the common
ownership. The allocation of the purchase price resulted in no material
adjustment to the historical recorded basis in the assets and liabilities except
for goodwill. Therefore, the effect to the statement of operations is primarily
amortization subsequent to the date of acquisition.
F-7
<PAGE> 60
P.F. CHANG'S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has incurred successive losses and has negative working capital
at December 28, 1997, and its capital requirements, including start-up costs,
related to the opening of additional restaurants have been, and will continue to
be significant. The Company has experienced positive operating cash flows since
its inception. To date, the Company has been substantially dependent upon loans
from lending institutions and private equity funding to develop its restaurants.
The Company will be required to seek significant amounts of additional debt
and/or equity capital in order to fund its planned development activities.
Although there is no assurance that the Company will be able to obtain adequate
financing for its future development, management believes that such capital will
be available to the Company.
In the event the Company is unsuccessful in obtaining additional funds for
development, management may need to take steps to continue to operate within the
available cash flow. Such steps may include, among others, the postponement of
planned future development.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The 1996 and 1997 consolidated financial statements include the accounts
and operations of the Company and its subsidiaries or partnerships in which it
owns more than a 50 percent interest. All material balances and transactions
between the consolidated entities have been eliminated.
The 1995 combined statements of operations and cash flows includes the
accounts of Fleming Chinese Restaurants, Inc., P.F. Chang's II, Inc., P.F.
Chang's III, L.L.C., and P.F. Chang's IV, L.L.C. All material balances and
transactions between the combined entities have been eliminated.
INTERIM FINANCIAL INFORMATION
The consolidated financial statements for the six months ended June 29,
1997 and June 28, 1998 are unaudited and have been prepared on the same basis as
the audited consolidated financial statements included herein. In the opinion of
management, such unaudited consolidated financial statements include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of financial position and results of operations. The results
of operation for such interim periods are not necessarily indicative of the
results that may be expected for any future periods.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity date of
three months or less when purchased to be cash equivalents.
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 limited partners of affiliated partnerships. Payments of principal and
interest of 11.0 percent amortized over a five year period are due monthly with
a balloon payment for the outstanding principal and interest due at the end of
two years.
F-8
<PAGE> 61
P.F. CHANG'S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSTRUCTION-IN-PROGRESS
The Company capitalizes all direct costs in the construction of new
restaurants. Upon opening, these costs are depreciated over their useful lives
based upon the property classifications.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Furniture, fixtures, and
equipment are depreciated on a straight line basis over the estimated useful
service lives of the related assets which approximate 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, after which subsequent
additions are expensed as purchased.
GOODWILL
Goodwill represents the excess of cost over net assets acquired in the
purchase of interests in various restaurants (see Note 1) and is being amortized
over 20 years on a straight-line basis. The Company assesses the recoverability
of goodwill based upon expected future undiscounted cash flows resulting from
the acquired interests in the restaurants.
UNEARNED REVENUE
Unearned revenue represents gift certificates sold but not yet redeemed.
Revenues are recognized upon redemption of the gift certificates.
ADVERTISING
The Company expenses advertising as incurred. Advertising expense during
the year ended December 31, 1995, the period from January 1, 1996 to February
28, 1996, the period from February 29, 1996 to December 29, 1996, and for the
year ended December 28, 1997 was approximately $328,000, $10,000, $232,000, and
$901,000, respectively. During the six months ended June 29, 1997 and June 28,
1998, advertising expense was approximately $432,000 and $550,000, respectively.
PREOPENING
Preopening expenses, consisting primarily of manager salaries and
relocation, advertising, and 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 Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under the liability method, deferred taxes are determined
based on the difference between the financial statement and tax bases 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 members' and partners' interests in income or loss of limited
liability corporations and partnerships includes no provision for income taxes
as any tax liability related thereto is the responsibility of the individual
minority members.
The predecessor entities are S corporations and limited liability
corporations under the Internal Revenue Code. Accordingly, the taxable income
and losses are allocated and taxed directly to the stockholders and
F-9
<PAGE> 62
P.F. CHANG'S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
members resulting in no tax provision for the year ended December 31, 1995 or
the period from January 1, 1996 to February 28, 1996.
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 25), and, accordingly,
recognizes no compensation expense for the stock option grants.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share."
Pro forma basic and diluted net income per share has been computed giving
effect to the conversion of all the outstanding shares of convertible redeemable
preferred stock and deferred purchase price liability into common stock upon
closing of the Company's IPO (determined using the if-converted method).
PRO FORMA BALANCE SHEET (UNAUDITED)
As discussed in Notes 1 and 6, the convertible redeemable preferred stock
and deferred purchase price liability will be automatically converted upon the
closing of the public offering contemplated herein. The accompanying pro forma
balance sheet gives effect to this conversion as if such event occurred on June
28, 1998.
FISCAL YEAR
The Company's fiscal year ends on the Sunday closest to the end of December
and includes 52 weeks in 1995, 1996 and 1997.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, 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.
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, restricted funds
on deposit and certain other financial instruments with financial institutions
that are considered in the Company's investment strategy. Concentrations of
credit risk with respect to receivables are limited as the Company's receivables
are primarily with its landlords for the reimbursement of tenant improvements.
F-10
<PAGE> 63
P.F. CHANG'S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATIONS
Certain amounts shown in the prior period combined and consolidated
financial statements have been reclassified to conform with the current year
consolidated financial statements presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 28, JUNE 28,
1996 1997 1998
------------ ------------ -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Leasehold improvements........................ $1,551 $ 6,904 $10,380
Furniture, fixtures and equipment............. 1,946 4,386 5,576
China and smallwares.......................... 142 423 575
------ ------- -------
3,639 11,713 16,531
Less accumulated depreciation................. 685 1,506 2,297
------ ------- -------
$2,954 $10,207 $14,234
====== ======= =======
</TABLE>
4. REVOLVING LINE OF CREDIT
On October 24, 1997, the Company entered into a $10,000,000 revolving line
of credit agreement with a finance corporation. The line of credit bears
interest at LIBOR plus 4.0 percent, payable monthly, and expires on November 1,
1998. At December 28, 1997, amounts available under the line of credit were
approximately $4,500,000. In June 1998, the Company amended its revolving line
of credit to provide for a $20,000,000 line with interest at LIBOR plus 3.5
percent and expires on July 1, 1999. At June 28, 1998, amounts available under
the line of credit were $11,000,000. The weighted average interest rate under
the line of credit was 9.5 percent in 1997 and 1998, respectively.
The line of credit requires the Company to maintain a net worth of at least
$10,000,000 including convertible redeemable preferred stock. The line of credit
agreement also contains covenants which place various restrictions on sales of
properties, transactions with affiliates, creation of additional debt, and other
nonfinancial covenants, as defined. The line of credit agreement is
collateralized by the Company's interests in certain affiliated partnerships.
F-11
<PAGE> 64
P.F. CHANG'S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 28, JUNE 28,
1996 1997 1998
------------ ------------ ------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
$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. ............... $ -- $1,088 $1,080
$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. ................................... -- 463 436
$1,266,000 unsecured promissory notes to
related parties, payable in quarterly
installments of $96,967 including interest
at 10.0 percent, until March 1, 2000, when
all remaining principal and interest is due
and payable. ............................... 1,065 762 606
$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. ............... 421 382 358
$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. ................ 173 133 114
Other......................................... 104 44 6
------ ------ ------
1,763 2,872 2,600
Less current portion.......................... 432 481 441
------ ------ ------
$1,331 $2,391 $2,159
====== ====== ======
</TABLE>
The aggregate annual payments of long-term debt outstanding at December 28,
1997, for the next five years and thereafter, are summarized as follows:
1998--$481,000; 1999--$523,000; 2000--$281,000; 2001--$178,000; 2002--$184,000;
and thereafter--$1,225,000.
F-12
<PAGE> 65
P.F. CHANG'S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY
PREFERRED STOCK
In February 1996, the Company issued 4,975,000 shares of Series A
convertible redeemable preferred stock (Series A preferred stock) convertible
into 2,487,500 shares of common stock, and warrants exercisable for 1,243,750
shares of Series A preferred stock convertible into 621,875 Shares of common
stock, for an aggregate purchase price of approximately $9,950,000, less
issuance costs of $695,000. In September 1996, the Company issued an additional
379,270 shares of Series A preferred stock convertible into 189,635 shares of
common stock for $758,000 in order to purchase the remaining minority interests
in the Irvine restaurant. The Series A preferred stock has a $0.001 par value
and an annual six percent dividend payable quarterly on March 31, June 30,
September 30, and December 31 in shares of such Series A preferred stock on a
cumulative basis beginning January 1, 1998. The Company may also declare, upon
unanimous consent of the Non-Investor Directors as defined, a cash dividend
equal to ten percent of the liquidation price of the Series A preferred stock in
lieu of the Series A preferred stock dividend.
In May 1997, the Company issued 1,517,131 shares of Series B convertible
redeemable preferred stock (Series B preferred stock) convertible into 758,565
shares of common stock for an aggregate purchase price of $6,599,000, less
issuance costs of approximately $184,000. The Series B preferred stock has a
$0.001 par value and an annual six percent dividend payable quarterly on March
31, June 30, September 30, and December 31 in shares of such Series B preferred
stock on a cumulative basis beginning April 1, 1999. The Company may also
declare, upon unanimous consent of the Non-Investor Directors as defined, a cash
dividend equal to ten percent of the liquidation price of the Series B preferred
stock in lieu of the Series B preferred stock dividend.
Each two shares of Series A and Series B preferred stock are convertible at
any time into one share of common stock, subject to dilution adjustments as
defined, at the option of the holder and is automatically converted into common
stock at the date of a qualified IPO. The Series A preferred stock is
mandatorily redeemable at a minimum of 50 percent of the shares outstanding in
May 2003 with the remaining outstanding shares becoming mandatorily redeemable
in May 2004 at $2.00 per share plus accrued and unpaid dividends. The Series A
preferred stock has a liquidation preference equal to the greater of $2.00 per
share or such amount per share as would have been payable had each share of
Series A preferred stock been converted into common stock. The Series B
preferred stock is mandatorily redeemable at a minimum of 50 percent of the
shares outstanding in May 2003 with the remaining in May 2004 at $4.35 per share
plus accrued and unpaid dividends. The Series B preferred stock has a
liquidation preference equal to the greater of $4.35 per share or such amount
per share as would have been payable had each share of Series B preferred stock
been converted into common stock. Upon voluntary or involuntary liquidation, the
holders of the Series A and Series B preferred stock shall be entitled to be
paid out of the assets of the Company with the common stockholders being
entitled to all remaining assets of the Company to be distributed. The holders
of the Series A and Series B preferred stock have the right to vote based on the
number of shares of common stock into which each share of Series A and Series B
preferred stock would thus be converted. The difference between the redemption
amount and the carrying amount of the Series A and Series B preferred stock and
dividends thereon calculated on a straight-line basis beginning with the date of
issuance is being recorded through periodic accretions charged to accumulated
deficit. Effective April 30, 1997, 2,233,980 and 417,156 shares of Series A and
Series B preferred stock, respectively, have been reserved for issuance upon the
exercise of warrants previously issued and upon issuance of "payment-in-kind"
dividends of Series A and Series B preferred stock.
The warrant to purchase Series A preferred stock issued during 1996 was
cancelable by the Company should the Irvine restaurant achieve certain operating
goals. During 1997, the Irvine restaurant achieved such goals, and the warrant
was consequently canceled.
F-13
<PAGE> 66
P.F. CHANG'S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the original capitalization of the Company, an
additional warrant to purchase 124,380 shares of Series A 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. The warrant expires February
28, 2001.
SHAREHOLDERS' AGREEMENT
The Company's common and preferred stock is subject to a shareholders'
agreement which provides to the stockholders a right of first refusal to
purchase the other stockholders' interests. Before any such shares of common and
preferred stock may be sold, assigned, transferred, pledged, encumbered, or
disposed in any way, such shares shall first be offered to the Company and other
stockholders party to the shareholders' agreement. In addition, such
stockholders have certain bring-along and tag-along rights with respect to sales
of common stock by certain other stockholders. Upon a qualified IPO, all rights
and obligations under the shareholders' agreement terminate.
PARTNERSHIP AGREEMENTS
The Company has entered into a series of partnership agreements with each
of its regional managers (Market Partners), certain of its general managers
(Operating Partners) and certain of its executive chefs (Culinary Partners).
These partnership agreements entitle the Market Partner to a specified
percentage of the cash flows from the restaurants that partner has developed and
oversees as the regional manager. Similarly, the general manager and the
executive chef at most of the Company's restaurants are offered the opportunity
to become Operating Partners and Culinary Partners, respectively, and to receive
a percentage of the cash flows from the restaurant in which they work. At the
time an individual becomes a Market Partner, Operating Partner or Culinary
Partner, that person is required to make an equity investment in the partnership
and to enter into a five year employment agreement with the Company. The Company
has the right, in its sole discretion, to terminate the employment of any Market
Partner, Operating Partner or Culinary Partner, and, upon such termination, to
repurchase that partner's interest in the partnership at such partners
then-current basis in the partnership. If an individual continues to serve as
Market Partner, Operating Partner or Culinary Partner for five years, then the
Company has the right to repurchase that person's interest in the partnership
for a value, which is determined by reference to trailing cash flows.
COMMON STOCK
The Company has reserved 5,912,920 shares of common stock for issuance upon
the exercise of options and warrants to purchase such shares, and upon the
conversion of Series A and Series B preferred stock into such shares.
STOCK OPTION PLAN
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," (Statement 123) requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
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 Company's common stock at
an exercise price that equals or exceeds the fair value of such shares on the
date such option is granted. Options under the 1997 Plan may be granted to key
employees of the Company who are actively engaged in the management and
operation of the Company's restaurants to purchase the Company's common stock at
an
F-14
<PAGE> 67
P.F. CHANG'S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 28, 1997 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. Incentive options
granted to individuals who own more than ten percent of the total combined
voting power of all classes of stock shall not be exercisable after five years
and options granted to prospective employees, consultants or directors may not
become exercisable prior to the date on which such person commences services
with the Company. Upon certain changes in control of the Company, the Plan
provides 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.
Pro forma information regarding net income (loss) is required by Statement
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 1996 and 1997:
risk-free interest rate of 5.5 percent; a dividend yield of -0-percent;
volatility factors of the expected market price of the Company's common stock of
.01 and .122, 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 the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Because Statement 123 is applicable to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
approximately 2002. For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options' vesting period.
The Company's pro forma information follows:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 29,
1996 TO YEAR ENDED
DECEMBER 29, DECEMBER 28,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Net loss, as reported.............................. $1,145 $1,696
Pro forma compensation expense for stock options... 48 82
------ ------
Pro forma net loss................................. $1,193 $1,778
====== ======
</TABLE>
F-15
<PAGE> 68
P.F. CHANG'S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information regarding activity for stock options outstanding under the
Plans are as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------
SHARES WEIGHTED-
AVAILABLE AVERAGE
FOR EXERCISE
OPTIONS SHARES PRICE
--------- --------- ---------
<S> <C> <C> <C>
Outstanding at December 31, 1995................... -- -- $ --
Authorized....................................... 890,000 -- --
Granted.......................................... (791,510) 791,510 2.98
Exercised........................................ -- -- --
Forfeited (canceled)............................. -- -- --
-------- --------- -----
Outstanding at December 29, 1996................... 98,490 791,510 2.98
Authorized....................................... 196,500 -- --
Granted.......................................... (170,000) 170,000 5.40
Exercised........................................ -- -- --
Forfeited (canceled)............................. -- -- --
-------- --------- -----
Outstanding at December 28, 1997................... 124,990 961,510 3.40
Authorized (unaudited)........................... -- -- --
Granted (unaudited).............................. (48,125) 48,125 13.09
Exercised (unaudited)............................ -- -- --
Forfeited (canceled) (unaudited)................. -- -- --
-------- --------- -----
Outstanding at June 28, 1998 (unaudited)........... 76,865 1,009,635 $3.87
======== ========= =====
</TABLE>
Information regarding options outstanding and exercisable at December 28,
1997 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ----------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.40 504,872 8.16 years $ 2.40 176,672 $2.40
$4.00-$6.00 445,388 5.38 years 4.38 105,510 4.00
$10.00 11,250 9.90 years 10.00 -- --
</TABLE>
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 during the period from February 29, 1996 to December 29, 1996 and for
the year ended December 28, 1997 was $0.56 and $1.38, respectively.
F-16
<PAGE> 69
P.F. CHANG'S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 29,
1996 TO YEAR ENDED
DECEMBER 29, DECEMBER 28,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Federal:
Current.......................................... $-- $--
Deferred......................................... -- --
--- ---
-- --
State:
Current.......................................... 30 69
Deferred......................................... -- --
--- ---
30 69
--- ---
$30 $69
=== ===
</TABLE>
The Company's effective tax rate differs from the federal statutory rate
for the following reasons:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 29,
1996 TO YEAR ENDED
DECEMBER 29, DECEMBER 28,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Income tax benefit at federal statutory rate....... $(379) $(553)
State taxes, net of federal benefit................ 30 69
Increase in valuation allowance.................... 398 426
Other, net......................................... (19) 127
----- -----
$ 30 $ 69
===== =====
</TABLE>
The Company's net income for the year ended December 31, 1995 and for the
period from January 1, 1996 to February 28, 1996 included earnings attributable
to the Scottsdale, Newport Beach, La Jolla and Irvine restaurants. These
restaurants were organized as limited liability companies or had elected under
Subchapter S of the Internal Revenue Code to have their stockholders pay any
federal and state income tax due on their earnings. Although income prior to the
consolidation attributable to the acquired restaurants is included in the
Company's consolidated financial statements, the Company is not required to pay
income taxes on the income since they are the responsibility of the members and
stockholders of the acquired companies.
F-17
<PAGE> 70
P.F. CHANG'S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax effects of temporary differences that give rise to
significant portions of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 28,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Bonus accrual.................................... $ 47 $ --
Depreciation on property and equipment........... 44 2
Preopening expenses.............................. 80 267
Goodwill amortization............................ 7 --
Net operating loss carryforwards................. 290 760
----- ------
468 1,029
Deferred tax liabilities:
Goodwill amortization............................ -- 136
----- ------
468 893
Valuation allowance................................ (468) (893)
----- ------
Net deferred tax assets............................ $ -- $ --
===== ======
</TABLE>
During the period from January 1, 1996 to December 29, 1996 and for the
year ended December 28, 1997, the valuation allowance increased $468,000 and
$425,000, respectively. At December 28, 1997, the Company has a net operating
loss carryforward of approximately $1,900,000 which begins to expire for federal
purposes in 2011 and for state purposes in 2001.
F-18
<PAGE> 71
P.F. CHANG'S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. NET INCOME (LOSS) PER SHARE AND PRO FORMA NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 29, SIX MONTHS ENDED
1996 TO YEAR ENDED --------------------
DECEMBER 29, DECEMBER 28, JUNE 29, JUNE 28,
1996 1997 1997 1998
------------ ------------ -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Numerator:
Net income (loss).................... $(1,145) $(1,696) $ (241) $ 847
Convertible redeemable preferred
stock accretion................... (504) (876) (396) (477)
------- ------- ------ ------
Numerator for basic net income (loss)
per share--income available to
common stockholders............... (1,649) (2,572) (637) 370
Effect of dilutive securities:
Convertible redeemable preferred
stock accretion................. -- -- -- 477
------- ------- ------ ------
Numerator for diluted net income
(loss) per share--income available
to common stockholders after
assumed conversions............... $(1,649) $(2,572) $ (637) $ 847
======= ======= ====== ======
Denominator:
Denominator for basic net income
(loss) per share--weighted-average
shares............................ 2,500 2,500 2,500 2,500
Effect of dilutive securities:
Employee and director stock
options........................... -- -- -- 660
Warrants............................. -- -- -- 39
Convertible redeemable preferred
stock............................. -- -- -- 3,456
------- ------- ------ ------
Denominator for diluted net income
(loss) per share--adjusted weighted
average shares and assumed
conversions.......................... 2,500 2,500 2,500 6,655
======= ======= ====== ======
Net income (loss) per share:
Basic................................ $ (0.66) $ (1.03) $(0.25) $ 0.15
======= ======= ====== ======
Diluted.............................. $ (0.66) $ (1.03) $(0.25) $ 0.13
======= ======= ====== ======
</TABLE>
Warrants to purchase Series A Preferred Stock convertible into 62,190
shares of common stock and options to purchase 961,510 shares of common stock
ranging from $2.40 to $10.00 per share were outstanding during the year ended
December 28, 1997, but were not included in the computation of diluted net
income (loss) per share because the effect would be antidilutive. The Series A
and B preferred stock convertible to common stock is not included in the
computation of diluted net income (loss) per share during the year ended
December 28, 1997, because the assumed conversions would be antidilutive.
As discussed in Note 1 and should the Company complete an IPO, contingently
issuable shares based on the IPO common stock price will be issued. As the
conditions for the shares to be issued have not been satisfied, the contingent
shares are not included in diluted net income (loss) per share.
F-19
<PAGE> 72
P.F. CHANG'S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the computation of basic and diluted pro
forma net income (loss) per share giving effect to the conversion of the
preferred stock and the deferred purchase price to common stock as of the
beginning of each period presented:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 28, ENDED JUNE 28,
1997 1998
------------ --------------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Numerator for basic pro forma net income (loss) per share:
Net income (loss)....................................... $(1,696) $ 847
======= ======
Denominator:
Weighted-average shares................................. 2,500 2,500
Conversion of convertible preferred stock and deferred
purchase price liability............................. 3,206 3,599
------- ------
Denominator for basic pro forma net income (loss) per
share................................................ 5,706 6,099
Effect of dilutive securities:
Employee and director stock options.................. -- 660
Warrants............................................. -- 39
------- ------
Denominator for dilutive pro forma net income (loss) per
share -- adjusted weighted average shares and assumed
conversions.......................................... 5,706 6,798
======= ======
Pro forma net income (loss) per share:
Basic................................................... $ (0.30) $ 0.14
======= ======
Diluted................................................. $ (0.30) $ 0.13
======= ======
</TABLE>
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 2000
and 2019. The restaurant facility and real property leases primarily have
renewal clauses of five to 15 years exercisable at the option of the Company and
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 during the year ended December 31, 1995, the period from January 1, 1996
to February 28, 1996, the period from February 29, 1996 to December 29, 1996 and
for the year ended December 28, 1997 was approximately $656,000, $121,000,
$1,176,000 and $2,203,000, respectively. During the six months ended June 29,
1997 and June 28, 1998, rent expense was approximately $698,000 and $1,311,000,
respectively. Contingent rent included in rent expense during the year ended
December 31, 1995, the period from January 1, 1996 to February 28, 1996, the
period from February 29, 1996 to December 29, 1996 and for the year ended
December 28, 1997 was approximately $152,000, $76,000, $225,000 and $605,000,
respectively. During the six months ended June 29, 1997 and June 28, 1998,
contingent rent included in rent expense was approximately $270,000 and
$493,000, respectively.
At December 28, 1997, 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
F-20
<PAGE> 73
P.F. CHANG'S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
additional contingent rent based upon gross sales, as defined in the leases.
Future minimum lease payments under operating leases (including restaurants to
be opened in 1998) are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................... $ 3,158
1999............................................... 4,161
2000............................................... 4,220
2001............................................... 4,172
2002............................................... 4,145
Thereafter......................................... 38,537
-------
Total minimum lease payments....................... $58,393
=======
</TABLE>
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 are included in the above disclosed amounts.
10. BENEFIT PLAN
Effective July 1, 1997, the Company adopted the 401(k) Defined Contribution
Benefit 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 year ended December 28, 1997 and for the six
months ended June 28, 1998, the Company did not make any contributions to the
Plan.
11. SUBSEQUENT EVENTS
On June 2, 1998, the Company's Board of Directors approved, subject to
stockholder approval, a one-for-two reverse stock split of the common stock and
made conforming adjustments on the terms of all outstanding common stock
equivalents, including the preferred stock, except for the par value and
authorized shares. All shares and per share information in the accompanying
consolidated financial statements has been retroactively adjusted to reflect the
reverse split.
During 1998, the Company's Board of Directors approved, subject to
stockholder approval, the 1998 Stock Option Plan (1998 Plan) which provides for
discretionary grants of incentive stock options and nonqualified stock options
to the Company's employees including officers, directors, consultants, advisors,
and other independent contractors. A total of 280,000 shares 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% 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 option price per share for an incentive
stock option granted to a person owning stock possessing more than 10 percent of
the total combined voting power of all classes of stock of the Company (or a
parent or subsidiary) may not be less than 110 percent of the fair market value
of a share of common stock on the grant date. The Company's Compensation
Committee has the authority to, among other things, determine the vesting
schedule for each option granted. All options expire within 10 years. The 1998
Plan includes an automatic grant program for outside directors. Pursuant to this
program, each outside director will be granted an option to purchase 10,000
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 2,500 shares on the day following each
annual meeting of stockholders.
During 1998, the Company's Board of Directors approved, subject to
stockholder approval, 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.
F-21
<PAGE> 74
APPETIZERS
- --------------------------------------------------------------------------------
PEKING RAVIOLIS
Crescent-shaped dumplings filled with
ground pork and vegetables.
(Pan Fried or Steamed)
$4.95
TRADITIONAL SPARE RIBS
BBQed using our age-old technique.
$5.95
SALT & PEPPER SHRIMP
Shell on shrimp, tossed with scallions,
Kosher salt and course black pepper.
$6.95
CHANG'S CHICKEN IN
SOOTHING LETTUCE WRAP
Quickly-cooked spiced chicken served
in a cool lettuce cup.
$5.95
NORTHERN STYLE SHORT RIBS
Marinated and lightly fried.
Served with a salt and pepper dip.
$5.95
CHANG'S VEGETABLES IN
SOOTHING LETTUCE WRAP
Wok seared vegetables Southeast Asian style
with mint and lime. Served in a cool lettuce cup.
$5.95
HARVEST SPRING ROLLS
Shredded vegetables wrapped in a delicate
pancake then fried.
$3.50
VEGETARIAN DUMPLINGS
Crescent-shaped dumplings filled
with shredded vegetables.
(Pan Fried or Steamed)
$4.95
CANTONESE PORK MEDALLIONS
BBQed, then sliced.
$4.95
SHRIMP DUMPLINGS
Steamed, served with a ginger
chili soy sauce.
$6.95
RED SAUCED WONTONS
Shrimp and pork filled wontons
served with chili soy sauce.
$5.75
SOUPS
- --------------------------------------------------------------------------------
HOT AND SOUR SOUP
A seductive blend of chicken and bean curd.
Sparked with hot white pepper, and vinegar which
creates an appetite for more.
Cup $2.95 Bowl $4.95
WONTON SOUP
Mushrooms, chicken, shrimp, and pork wontons
in a chicken broth.
Bowl $4.95
SALADS
- --------------------------------------------------------------------------------
WONTON CHICKEN SALAD
Fried wonton strips, chicken and garden vegetables
with a refreshing vinaigrette on shredded lettuce.
$6.95
WARM DUCK SALAD
Strips of crisp duck tossed with soy vinaigrette
and red cabbage.
$8.95
AHI TUNA SALAD
Rolled in Chinese spices, wok seared, served
on mixed greens with a spicy mustard dressing.
$9.95
COLD CUCUMBER SALAD
Cucumbers sprinkled with
soy and sesame.
$4.95
CHANG'S CHICKEN SALAD
Tossed with a ginger vinaigrette and peanut
sauce on a bed of greens.
$7.95
BARBECUE CHICKEN SALAD
Slow roasted Cantonese style chicken breast
served warm over mixed greens.
$7.95
<PAGE> 75
CHANG'S RECOMMENDS
----------------------------------
(Served with steamed rice)
LEMON PEPPER SHRIMP
Served on sauteed chives and bean sprouts.
$12.95
CANTONESE DUCK
Slow-roasted with Chang's secret ingredients.
$12.95
PHILIP'S BETTER LEMON CHICKEN
Quick-fired with a tart citrus sauce that
has a hint of sweetness.
$10.75
MALAYSIAN CHICKEN
In a curry sauce with coconut milk and onions.
Served with peanuts, raisins, coconut and
plum sauce on the side.
$9.95
[CHINESE CHARACTER]BEEF A LA SZECHWAN
Twice-cooked with celery and carrots resulting in
a crispy texture unlike anything you are used to.
$11.95
[CHINESE CHARACTER]SZECHWAN CHICKEN CHOW FUN
Wok seared with chilis, green onions and
Szechwan preserved vegetables.
$8.95
[CHINESE CHARACTER]SZECHWAN FROM THE SEA
Tender scallops, shrimp or calamari prepared
in a red chili garlic sauce.
$11.95
CHEF ROY'S FAVORITE CHICKEN
With oyster sauce and scallions. Served on
a bed of fresh steamed broccoli.
$10.25
CHICKEN WITH BLACK BEAN SAUCE
Chunks of chicken, stir-fried in Oriental
black bean sauce.
$10.50
[CHINESE CHARACTER]CHANG'S SPICY CHICKEN
Lightly-breaded chunks stir-fried in
a sweet Szechwan sauce.
(Our version of General Chu's)
$10.75
CANTONESE CHICKEN
Slow-roasted with Chang's
secret ingredients.
$9.95
CRISPY HONEY SHRIMP
Lightly battered shrimp, quick fried and
coated with a flavorful sauce.
$12.95
MEATS
----------------------------------
(Served with steamed rice)
[CHINESE CHARACTER]ORANGE PEEL BEEF
Szechwan-style beef tossed with red chilis and
fresh orange peel for a rewarding taste sensation.
$10.25
MONGOLIAN BEEF
Quickly-cooked steak with
scallions and garlic.
$10.95
SWEET AND SOUR PORK
Stir-fried with pineapples, peppers and onions
in a pungent sweet flavored sour sauce.
$8.95
MU SHU PORK
An American favorite served with hoisin
sauce and thin pancakes.
$7.95
CHICKEN
----------------------------------
(Served with steamed rice)
[CHINESE CHARACTER]KUNG PAO CHICKEN
Diced chicken quick-fired with peanuts, chili
peppers and scallions. Our hot favorite.
$9.95
[CHINESE CHARACTER]ORANGE PEEL CHICKEN
Tossed with orange peel and chili peppers
for a spicy/citrus combination.
$9.95
MU SHU CHICKEN
A Chinese classic served with hoisin
sauce and thin pancakes.
$8.95
[CHINESE CHARACTER]SPICY GROUND CHICKEN AND EGGPLANT
Eggplant sauteed with fiery spices,
ground chicken and scallions.
$8.95
SWEET AND SOUR CHICKEN
Stir-fried with pineapples, peppers and onions
in a pungent sweet flavored sour sauce.
$8.95
<PAGE> 76
SEAFOOD
(Served with steamed rice)
TREASURES OF THE SEA [CHINESE CHARACTER]ORANGE PEEL SHRIMP
Choice of scallops or shrimp Tossed with hot chilis and
sauteed with chives, snow fresh orange peel.
peas and wine. $12.95
$11.95
CHANG'S LEMON SCALLOPS PAUL'S CATFISH
A light lemon sauce over Farm raised catfish fillets
quick-cooked scallops. sauteed and served with
$11.95 black bean sauce.
$12.95
[CHINESE CHARACTER]KUNG PAO SCALLOPS OR SHRIMP
Cooked traditionally with peanuts
and fresh chili peppers.
$1l.95
NOODLES, MEINS AND RICE
DOUBLE PAN FRIED NOODLES [CHINESE CHARACTER]GARLIC NOODLES
Semi-crisp egg noodles stir-fried Egg noodles tossed with
with vegetables and served with a garlic and chilis.
choice of beef, pork, A Mainland tradition.
chicken, or shrimp. $7.95
$8.95
CHOW MEIN P.F. CHANG'S FRIED RICE
Egg noodles stir fried with a Mixed with egg and soy, garnished
choice of beef, pork, with sliced scallions. Choice of
chicken or shrimp. beef, chicken, pork, or shrimp.
$8.95 $5.95
[CHINESE CHARACTER]DAN DAN NOODLES SINGAPORE NOODLES
Scallions, garlic and chilis sauteed Thin rice noodles stir-fried
with ground chicken nesting on hot with vegetables. Served
egg noodles. Garnished with shredded with or without curry.
cucumber and bean sprouts. (Chinese angel hair)
$8.95 $7.95
CANTONESE CHOW FUN
Wide rice noodles with choice of chicken
or beef with onions and garlic.
$9.95
VEGETARIAN PLATES AND SIDES
SZECHWAN-STYLE LONG BEANS GARLIC SNAP PEAS
Quickly cooked with Stir-fried with garlic.
preserved vegetables. $4.95
$5.95
SPINACH SAUTEED WITH GARLIC BUDDHA'S FEAST
The name says it all. Mixed vegetables.
$4.95 (Steamed or Stir-Fried)
$5.95
SHANGHAI SNOW PEAS POACHED BABY BOK CHOY
Sauteed with black mushrooms Served with lightly
and water chestnuts. sauteed black mushrooms.
$4.95 $5.95
[CHINESE CHARACTER]SAUTEED SPICY EGGPLANT
Tossed with scallions and a fiery sauce.
$6.95
Please no cigar or pipe smoking.
[CHINESE CHARACTER]Spicy dish Sorry, no checks accepted.
<PAGE> 77
WELCOME
--------------------------------------------
P.F. Chang's believes that variety is the
keystone of a great meal. Our menu offers
culinary creations from the major regions of
China: Canton, Shanghai, Szechwan, Hunan,
Mongolia, as well as our unique
specialties, which draw on a multitude
of traditions to create a unique
dining adventure.
FAN AND T'SAI
--------------------------------------------
The essential goal of a Chinese meal is to
attain the harmony of taste, texture, color and
aroma by balancing the principles of fan and
t'sai foods. Fan foods include rice, noodles,
grains and dumplings, while vegetables,
meat poultry and seafood are t'sai foods.
Only the very best of fresh ingredients find
their way to our kitchens. You can't help but
notice a unique clarity and distinctness of flavor.
And no MSG is allowed by our chef in
food preparation.
WINE AND CHINESE?
--------------------------------------------
Absolutely. It's a perfect way to excite all the
flavors of each of China's principal food
regions. Your server can offer sophisticated
recommendations from our extensive wine list
for the ideal selection. And make sure to sample
our specially blended teas. They are the perfect
complement to our one-of-a-kind
dessert creations.
PREPARATIONS FOR YOU
--------------------------------------------
We are proud of our food preparation
techniques. Each dish is prepared to order using
only the freshest of ingredients. Ask questions.
Then experience a memorable blend of
Chinese cuisine and American hospitality:
the delicious harmony of
P.F. Chang's China Bistro.
<PAGE> 78
YOU ARE SURROUNDED
---------------------------------
...by a unique environment combining the best influences of
Chinese and American cultures. As you dine in comfort, enjoying
the finest traditions of American hospitality, you are also aware of
the mystery and legend of a people thousands of years old.
You'll notice...
FROM THE MOMENT
---------------------------------
...you enter P.F. Chang's China Bistro, everything you see
from the Mural to the Menu tells ancient stories of Emperors,
Gods, Guardians and more.
In fact...
THE SCULPTURES
---------------------------------
...are interpretations of those unearthed in the ancient city
of Xi'an, dating back to the 11th Century B.C. They depict a time
when lions proudly guarded the Qian Ling Mausoleum during
the T'ang Dynasty; when loyal handmaidens willingly attended to
the needs of royalty and when stern figures of warriors were buried
with Emperors in place of entombing the ruler's actual servants.
Now, if you...
LOOK TO THE MURAL
---------------------------------
... intimidation gives way to meditation in this dramatic
recreation of a typical mid-12th Century narrative screen
painting. The challenge for our artist was to achieve a mural
of this magnitude from a very small original scene.
And finally...
THE MENU SPEAKS
---------------------------------
...to us in Chinese symbols, each with a variety of meanings
when read alone, but presenting a specific meaning when
combined. Look at the front of the menu. The topmost character
symbolizes all things rich, and often represents China, herself.
The lower figure usually means an intimate, casual place to
enjoy fine dining. Combined on the front of our menu, these
characters can be read to mean...A China Bistro.
[P. F. CHANG'S CHINA BISTRO LOGO]
<PAGE> 79
The inside back cover of the prospectus contains photographs of menu items
offered at the Company's restaurants set over the background of a mural
depicting 12th century China.
<PAGE> 80
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER
OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR
SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 6
Use of Proceeds............................ 11
Dividend Policy............................ 11
Capitalization............................. 12
Dilution................................... 13
Selected Consolidated Financial and
Operating Data........................... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 16
Business................................... 26
Management................................. 35
Certain Transactions....................... 41
Principal and Selling Stockholders......... 43
Description of Capital Stock............... 45
Shares Eligible for Future Sale............ 48
Underwriting............................... 49
Legal Matters.............................. 51
Experts.................................... 51
Additional Information..................... 51
Index to Consolidated Financial
Statements............................... F-1
</TABLE>
------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
SHARES
[P.F. CHANG'S LOGO]
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
DONALDSON, LUFKIN & JENRETTE
NATIONSBANC MONTGOMERY
SECURITIES LLC
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 81
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. The Company is paying all of the expenses
incurred on behalf of the Selling Stockholders (other than underwriting
discounts and commissions). All amounts shown are estimates except for the
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee............................................ $ 16,963
NASD filing fee............................................. 6,250
Nasdaq National Market fee.................................. 41,250
Blue sky qualification fees and expenses.................... 5,000
Printing and engraving expenses............................. 100,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 100,000
Transfer agent and registrar fees........................... 10,000
Fee for Custodian for Selling Stockholders.................. 10,000
Miscellaneous............................................... 65,537
--------
Total............................................. $650,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the DGCL permits indemnification of officers, directors, and
other corporate agents under certain circumstances and subject to certain
limitations. The Registrant's Amended and Restated Certificate of Incorporation
and By-laws provide that the Registrant shall indemnify its directors, officers,
employees and agents to the full extent permitted by the DGCL, including
circumstances in which indemnification is otherwise discretionary under Delaware
law. In addition, the Registrant has entered into separate indemnification
agreements with its directors and executive officers which require the
Registrant, among other things, to indemnify them against certain liabilities
which may arise by reason of their status or service (other than liabilities
arising from acts or omissions not in good faith or willful misconduct).
These indemnification provisions and the indemnification agreements entered
into between the Registrant and its executive officers and directors may be
sufficiently broad to permit indemnification of the Registrant's executive
officers and directors for liabilities (including reimbursement of expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act").
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act, or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since July 31, 1995, the Registrant and its Predecessors have sold and
issued the following unregistered securities:
(a) Issuances of Shares of Common Stock.
On January 31, 1996, the Registrant issued a total of 500 shares of Common
Stock to Paul Fleming in exchange for an aggregate purchase price of $100.00, or
$0.20 per share. On February 28, 1996, the Registrant issued a total of
2,499,500 shares of Common Stock to Paul and Kelly Fleming in exchange for their
interests in the Predecessors.
(b) Issuances of Shares of Preferred Stock.
On February 1, 1996, the Registrant sold shares of Series A Convertible
Redeemable Preferred Stock ("Series A Preferred Stock") convertible into
2,487,500 shares of Common Stock and Warrants exercisable for shares of Series A
Preferred Stock convertible into 621,875 shares of Common Stock to accredited
II-1
<PAGE> 82
investors for an aggregate purchase price of $9,950,000. In September 1996, the
Company issued additional shares of Series A Preferred Stock convertible into
189,635 shares of Common Stock to accredited investors for an aggregate purchase
price of $758,540. On March 31, 1998 and June 30, 1998, the Company issued
shares of Series A Preferred Stock as paid-in-kind dividends to holders of
Series A Preferred Stock convertible into an aggregate of 80,913 shares of
Common Stock.
On May 1, 1997, the Registrant sold shares of Series B Convertible
Redeemable Preferred Stock convertible into 758,565 shares of Common Stock to
accredited investors for an aggregate offering price of $6,599,519.
(c) Option Issuances to, and Exercises by, Employees and Directors.
From June 28, 1996 to June 28, 1998, the Registrant issued options to
purchase a total of 1,009,635 shares of Common Stock at a weighted-average
exercise price of $3.87 per share to 45 employees. No consideration was paid to
the Registrant by any recipient of any of the foregoing options for the grant of
any such options. As of June 28, 1998, no employees had exercised their options.
(d) Warrants
In connection with the original capitalization of the Company, warrants to
purchase shares of Series A Preferred Stock convertible into 62,190 shares of
Common Stock at $4.00 per common share were issued to an investment bank. The
warrants expire February 28, 2001.
There were no underwriters employed in connection with any of the
transactions set forth in Item 15.
The issuances described in Items 15(a) and 15(b) were deemed to be exempt
from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering. In
addition, the issuances described in Item 15(c) were deemed exempt from
registration under the Securities Act in reliance on Rule 701 promulgated
thereunder as transactions pursuant to compensatory benefit plans and contracts
relating to compensation. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and other instruments
issued in such transactions. All recipients either received adequate information
about the Registrant or had access, through employment or other relationships,
to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<C> <S>
1.1 Form of Underwriting Agreement.
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.
5.1** Opinion of Gray Cary Ware & Freidenrich LLP.
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 31, 1996.
10.7* Series A Preferred Stock Purchase Agreement dated February
1, 1996.
10.8* Series B Preferred Stock Purchase Agreement dated May 1,
1997.
10.9* Amended and Restated Revolving Line of Credit Loan Agreement
between the Company and FFCA dated June 20, 1998.
10.10* Office Lease between the Company and U.S. West Business
Resources, Inc. dated February 15, 1997.
21.1* List of Subsidiaries.
23.1 Consent of Independent Auditors (see page II-5).
</TABLE>
II-2
<PAGE> 83
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<C> <S>
23.2** Consent of Counsel (included in Exhibit 5.1).
24.1* Power of Attorney (see page II-4).
27.1* Financial Data Schedule.
</TABLE>
- ------------------------------
* Filed with the Registrant's Registration Statement on Form S-1 (File No.
333-59749) on July 24, 1998.
** To be filed by amendment.
(b) Financial Statement Schedules.
None.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, employee or agent of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer, employee or agent in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 84
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Scottsdale,
County of Maricopa, State of Arizona, on the 3rd day of September 1998.
P.F. Chang's China Bistro, Inc.
By: RICHARD L. FEDERICO*
------------------------------------
Richard L. Federico
Chief Executive Officer and
President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<C> <S> <C>
RICHARD L. FEDERICO* Chief Executive Officer, September 3, 1998
- --------------------------------------------------- President and Director
Richard L. Federico (Principal Executive
Officer)
/s/ ROBERT T. VIVIAN Chief Financial Officer and September 3, 1998
- --------------------------------------------------- Secretary (Principal
Robert T. Vivian Financial and Accounting
Officer)
PAUL M. FLEMING* Director September 3, 1998
- ---------------------------------------------------
Paul M. Fleming
J. MICHAEL CHU* Director September 3, 1998
- ---------------------------------------------------
J. Michael Chu
GERALD R. GALLAGHER* Director September 3, 1998
- ---------------------------------------------------
Gerald R. Gallagher
R. MICHAEL WELBORN* Director September 3, 1998
- ---------------------------------------------------
R. Michael Welborn
JAMES G. SHENNAN, JR.* Director September 3, 1998
- ---------------------------------------------------
James G. Shennan, Jr.
YVES SISTERON* Director September 3, 1998
- ---------------------------------------------------
Yves Sisteron
*By: /s/ ROBERT T. VIVIAN September 3, 1998
---------------------------------------------
Robert T. Vivian,
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 85
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the captions "Selected
Consolidated Financial and Operating Data" and "Experts" and to the use of our
report dated January 26, 1998, except Note 11 as to which the date is August 27,
1998, in Amendment No. 1 to the Registration Statement (Form S-1 No. 333-59749)
and related Prospectus of P.F. Chang's China Bistro, Inc. for the registration
of shares of its common stock.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
September 2, 1998
II-5
<PAGE> 86
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement
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
5.1** Opinion of Gray Cary Ware & Freidenrich LLP
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 31, 1996
10.7* Series A Preferred Stock Purchase Agreement dated February
1, 1996
10.8* Series B Preferred Stock Purchase Agreement dated May 1,
1997
10.9* Amended and Restated Revolving Line of Credit Loan Agreement
between the Company and FFCA dated June 20, 1998
10.10* Office Lease between the Company and U.S. West Business
Resources, Inc. dated February 15, 1997
21.1* List of Subsidiaries
23.1 Consent of Independent Auditors (see page II-5)
23.2** Consent of Counsel (included in Exhibit 5.1)
24.1* Power of Attorney (see page II-4)
27.1* Financial Data Schedule
</TABLE>
- ------------------------------
* Filed with the Registrant's Registration Statement on Form S-1 (File No.
333-59749) on July 24, 1998.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 1.1
__________ Shares
P.F. CHANG'S CHINA BISTRO, INC.
Common Stock
UNDERWRITING AGREEMENT
__________, 1998
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC MONTGOMERY SECURITIES LLC
DAIN RAUSCHEL WESSELS, a division of Dain Rauscher Incorporated
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
P.F. CHANG'S CHINA BISTRO, INC., a Delaware corporation (the
"COMPANY"), proposes to issue and sell to the several underwriters named in
Schedule I hereto (the "UNDERWRITERS"), and certain stockholders of the Company
named in Schedule II hereto (the "SELLING STOCKHOLDERS") severally propose to
sell to the several Underwriters, an aggregate of _______________ shares of the
Common Stock, $0.001 par value of the Company (the "FIRM SHARES"), of which
_____________ shares are to be issued and sold by the Company and _____________
shares are to be sold by the Selling Stockholders, each Selling Stockholder
selling the amount set forth opposite such Selling Stockholder's name in
Schedule II hereto. The Company also proposes to issue and sell to the several
Underwriters not more than an additional _______ shares of its Common Stock,
$0.001 par value, (the "ADDITIONAL SHARES") if requested by the Underwriters as
provided in Section 2 hereof. The Firm Shares and the Additional Shares are
hereinafter referred to collectively as the "SHARES". The shares of common stock
of the Company to be outstanding after giving effect to the sales contemplated
hereby are hereinafter referred to as the "COMMON STOCK". The Company and the
Selling Stockholders are hereinafter sometimes referred to collectively as the
"SELLERS."
SECTION 1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"COMMISSION") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "ACT"), a registration statement on Form S-1, including a
prospectus, relating to the Shares. The registration statement, as amended at
the time it became
1
<PAGE> 2
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Act, is hereinafter referred to as the "REGISTRATION STATEMENT"; and the
prospectus in the form first used to confirm sales of Shares is hereinafter
referred to as the "PROSPECTUS". If the Company has filed or is required
pursuant to the terms hereof to file a registration statement pursuant to Rule
462(b) under the Act registering additional shares of Common Stock (a "RULE
462(B) REGISTRATION STATEMENT"), then, unless otherwise specified, any reference
herein to the term "Registration Statement" shall be deemed to include such Rule
462(b) Registration Statement.
SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements . On
the basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, (i) the Company agrees to issue and sell
______________ Firm Shares, (ii) each Selling Stockholder agrees, severally and
not jointly, to sell the number of Firm Shares set forth opposite such Selling
Stockholder's name in Schedule II hereto and (iii) each Underwriter agrees,
severally and not jointly, to purchase from each Seller at a price per Share of
$______ (the "PURCHASE PRICE") the number of Firm Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Firm Shares to be sold by such Seller as
the number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto bears to the total number of Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell the Additional Shares and the Underwriters shall have the right to
purchase, severally and not jointly, up to _______ Additional Shares from the
Company at the Purchase Price. Additional Shares may be purchased solely for the
purpose of covering over-allotments made in connection with the offering of the
Firm Shares. The Underwriters may exercise their right to purchase Additional
Shares in whole or in part from time to time by giving written notice thereof to
the Company within 30 days after the date of this Agreement. You shall give any
such notice on behalf of the Underwriters and such notice shall specify the
aggregate number of Additional Shares to be purchased pursuant to such exercise
and the date for payment and delivery thereof, which date shall be a business
day (i) no earlier than two business days after such notice has been given (and,
in any event, no earlier than the Closing Date (as hereinafter defined)) and
(ii) no later than ten business days after such notice has been given. If any
Additional Shares are to be purchased, each Underwriter, severally and not
jointly, agrees to purchase from the Company the number of Additional Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) which bears the same proportion to the total number of Additional
Shares to be purchased from the Company as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I bears to the total number of
Firm Shares.
Each Seller hereby agrees not to (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
(ii) enter into any swap or other arrangement that transfers all or a portion of
the economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the
2
<PAGE> 3
transactions described in clause (i) or (ii) is to be settled by the delivery of
Common Stock, or such other securities, in cash or otherwise), except to the
Underwriters pursuant to this Agreement, for a period of 180 days after the date
of the Prospectus without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation. Notwithstanding the foregoing, during such
period (i) the Company may grant stock options pursuant to the Company's
existing stock option plan and (ii) the Company may issue shares of Common Stock
upon the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof. The Company also agrees not to file any
registration statement with respect to any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock for
a period of 180 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. In addition,
each Selling Stockholder agrees that, for a period of 180 days after the date of
the Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation, it will not make any demand for, or exercise any right
with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock. The
Company shall, prior to or concurrently with the execution of this Agreement,
deliver an agreement executed by (i) each Selling Stockholder, (ii) each of the
directors and officers of the Company who is not a Selling Stockholder and (iii)
each stockholder listed on Annex I hereto to the effect that such person will
not, during the period commencing on the date such person signs such agreement
and ending 180 days after the date of the Prospectus, without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation, (A) engage in
any of the transactions described in the first sentence of this paragraph or (B)
make any demand for, or exercise any right with respect to, the registration of
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock.
SECTION 3. Terms of Public Offering. The Sellers are advised by you
that the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
SECTION 4. Delivery and Payment. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations and
registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation
shall request no later than two business days prior to the Closing Date or the
applicable Option Closing Date (as defined below), as the case may be. The
Shares shall be delivered by or on behalf of the Sellers, with any transfer
taxes thereon duly paid by the respective Sellers, to Donaldson, Lufkin &
Jenrette Securities Corporation through the facilities of The Depository Trust
Company ("DTC"), for the respective accounts of the several Underwriters,
against payment to the Sellers of the Purchase Price therefor by wire transfer
of Federal or other funds immediately available in New York City. The
certificates representing the Shares shall be made available for inspection not
later than 9:30 A.M., New York City time, on the business day prior to the
Closing Date or the applicable Option Closing Date, as the case may be, at the
office of DTC or its designated custodian (the "DESIGNATED OFFICE"). The time
and date of delivery and payment for the Firm Shares shall be 9:00 A.M., New
York City time, on ________, 1998 or such other time on the same or such
3
<PAGE> 4
other date as Donaldson, Lufkin & Jenrette Securities Corporation and the
Company shall agree in writing. The time and date of delivery and payment for
the Firm Shares are hereinafter referred to as the "CLOSING DATE". The time and
date of delivery and payment for any Additional Shares to be purchased by the
Underwriters shall be 9:00 A.M., New York City time, on the date specified in
the applicable exercise notice given by you pursuant to Section 2 or such other
time on the same or such other date as Donaldson, Lufkin & Jenrette Securities
Corporation and the Company shall agree in writing. The time and date of
delivery and payment for any Additional Shares are hereinafter referred to as
the "OPTION CLOSING DATE".
The documents to be delivered on the Closing Date or any Option Closing
Date on behalf of the parties hereto pursuant to Section 9 of this Agreement
shall be delivered at the offices of Akin, Gump, Strauss, Hauer & Feld, L.L.P.,
[590 Madison Avenue, New York, New York 10022] and the Shares shall be delivered
at the Designated Office, all on the Closing Date or such Option Closing Date,
as the case may be.
SECTION 5. Agreements of the Company. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 5(d)
below which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires any additions to or changes
in the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will use
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
(b) To furnish to you four signed copies of the Registration Statement
as first filed with the Commission and of each amendment to it, including all
exhibits, and to furnish to you and each Underwriter designated by you such
number of conformed copies of the Registration Statement as so filed and of each
amendment to it, without exhibits, as you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall
be satisfactory to you, and to file the Prospectus in such form with the
Commission within the applicable period specified in Rule 424(b) under the Act;
during the period specified in Section 5(d) below, not to file any further
amendment to the Registration Statement and not to make any amendment or
supplement to the Prospectus of which you shall not previously have been advised
or to which
4
<PAGE> 5
you shall reasonably object after being so advised; and, during such period, to
prepare and file with the Commission, promptly upon your reasonable request, any
amendment to the Registration Statement or amendment or supplement to the
Prospectus which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective.
(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as such Underwriter or dealer may reasonably request.
(e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of counsel
for the Underwriters, it becomes necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the circumstances when
the Prospectus is delivered to a purchaser, not misleading, or if, in the
opinion of counsel for the Underwriters, it is necessary to amend or supplement
the Prospectus to comply with applicable law, forthwith to prepare and file with
the Commission an appropriate amendment or supplement to the Prospectus so that
the statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as required for distribution of the Shares and to file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; provided, however, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other than
as to matters and transactions relating to the Prospectus, the Registration
Statement, any preliminary prospectus or the offering or sale of the Shares, in
any jurisdiction in which it is not now so subject.
(g) To mail and make generally available to its stockholders as soon
as practicable an earnings statement covering the twelve-month period ending
__________, 199_ that shall satisfy the provisions of Section 11(a) of the Act,
and to advise you in writing when such statement has been so made available.
(h) During the period of three years after the date of this Agreement,
to furnish to you as soon as available copies of all reports or other
communications furnished to the record holders
5
<PAGE> 6
of Common Stock or furnished to or filed with the Commission or any national
securities exchange on which any class of securities of the Company is listed
and such other publicly available information concerning the Company and its
subsidiaries as you may reasonably request.
(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of the Sellers' obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the Company's
counsel, the Company's accountants and any Selling Stockholder's counsel (in
addition to the Company's counsel) in connection with the registration and
delivery of the Shares under the Act and all other fees and expenses in
connection with the preparation, printing, filing and distribution of the
Registration Statement (including financial statements and exhibits), any
preliminary prospectus, the Prospectus and all amendments and supplements to any
of the foregoing, including the mailing and delivering of copies thereof to the
Underwriters and dealers in the quantities specified herein, (ii) all costs and
expenses related to the transfer and delivery of the Shares to the Underwriters,
including any transfer or other taxes payable thereon, (iii) all costs of
printing or producing this Agreement and any other agreements or documents in
connection with the offering, purchase, sale or delivery of the Shares, (iv) all
expenses in connection with the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of the several states and
all costs of printing or producing any Preliminary and Supplemental Blue Sky
Memoranda in connection therewith (including the filing fees and fees and
disbursements of counsel for the Underwriters in connection with such
registration or qualification and memoranda relating thereto), (v) the filing
fees and disbursements of counsel for the Underwriters in connection with the
review and clearance of the offering of the Shares by the National Association
of Securities Dealers, Inc., (vi) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating to the
Common Stock and all costs and expenses incident to the listing of the Shares on
the Nasdaq National Market, (vii) the cost of printing certificates representing
the Shares, (viii) the costs and charges of any transfer agent, registrar and/or
depositary, and (ix) all other costs and expenses incident to the performance of
the obligations of the Company and the Selling Stockholders hereunder for which
provision is not otherwise made in this Section. The provisions of this Section
shall not supersede or otherwise affect any agreement that the Company and the
Selling Stockholders may otherwise have for allocation of such expenses among
themselves.
(j) To use its best efforts to list for quotation the Shares on the
Nasdaq National Market and to maintain the listing of the Shares on the Nasdaq
National Market for a period of three years after the date of this Agreement.
(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
6
<PAGE> 7
(l) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so covered
in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
SECTION 6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any
Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement); any Rule 462(b) Registration Statement filed
after the effectiveness of this Agreement will become effective no later than
10:00 P.M., New York City time, on the date of this Agreement; and no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or threatened by the Commission.
(b) (i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement), when it became effective, did not contain and, as amended, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement (other than
any Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement) and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the Act,
(iii) if the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement and any amendments thereto, when they become effective (A) will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and (B) will comply in all material respects with the Act and (iv)
the Prospectus does not contain and, as amended or supplemented, if applicable,
will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph do not apply to
statements or omissions in the Registration Statement or the Prospectus based
upon information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
set forth in this paragraph do not apply to statements or omissions in any
preliminary prospectus based upon information relating to any
7
<PAGE> 8
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use therein.
(d) Each of the Company and its subsidiaries has been duly
incorporated or organized, is validly existing as a corporation, limited
partnership or limited liability company, as the case may be, in good standing
under the laws of its jurisdiction of incorporation or organization and has the
power and authority to carry on its business as described in the Prospectus and
to own, lease and operate its properties, and each is duly qualified and is in
good standing as a foreign corporation, limited partnership or limited liability
company, as the case may be, authorized to do business in each jurisdiction in
which the nature of its business or its ownership or leasing of property
requires such qualification, except where the failure to be so qualified would
not have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole.
(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company or any of its subsidiaries relating to or entitling any person to
purchase or otherwise to acquire any shares of the capital stock of the Company
or any of its subsidiaries, except as otherwise disclosed in the Registration
Statement.
(f) All the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholders) have been duly
authorized and validly issued and are fully paid, non-assessable and not subject
to any preemptive or similar rights; all the shares of Common Stock of the
Company to be issued by the Company on or prior to the Closing Date upon
conversion of the Company's outstanding shares of Convertible Redeemable
Preferred Stock and Deferred Purchase Price Liability (as such terms are defined
in the Prospectus) have been duly authorized and, upon the issuance thereof in
the manner described in the Prospectus, will be validly issued, fully paid,
non-assessable, and not subject to any preemptive or similar rights; and the
Shares to be issued and sold by the Company have been duly authorized and, when
issued and delivered to the Underwriters against payment therefor as provided by
this Agreement, will be validly issued, fully paid and non-assessable, and the
issuance of such Shares will not be subject to any preemptive or similar rights.
(g) All of the outstanding shares of capital stock (or equivalent
partnership or membership interests, as the case may be, for noncorporate
subsidiaries) of each of the Company's subsidiaries have been duly authorized
and validly issued and are fully paid and non-assessable, and are owned by the
Company, directly or indirectly through one or more subsidiaries, free and clear
of any security interest, claim, lien, encumbrance or adverse interest of any
nature.
(h) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
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<PAGE> 9
(i) Neither the Company nor any of its subsidiaries is in violation of
its respective charter or by-laws (or equivalent organizational documents for
non-corporate subsidiaries) or in default in the performance of any obligation,
agreement, covenant or condition contained in any indenture, loan agreement,
mortgage, lease or other agreement or instrument that is material to the Company
and its subsidiaries, taken as a whole, to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries or
their respective property is bound.
(j) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (ii) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the charter or by-laws of the Company or any of its subsidiaries (or equivalent
organizational documents for non-corporate subsidiaries) or any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is material to
the Company and its subsidiaries, taken as a whole, to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective property is bound, (iii) violate or conflict
with any applicable law or any rule, regulation, judgment, order or decree of
any court or any governmental body or agency having jurisdiction over the
Company, any of its subsidiaries or their respective property or (iv) result in
the suspension, termination or revocation of any Authorization (as defined
below) of the Company or any of its subsidiaries or any other impairment of the
rights of the holder of any such Authorization.
(k) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is or could be a
party or to which any of their respective property is or could be subject that
are required to be described in the Registration Statement or the Prospectus and
are not so described; nor are there any statutes, regulations, contracts or
other documents that are required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration Statement that
are not so described or filed as required.
(l) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), any provisions of the
Employee Retirement Income Security Act of 1974, as amended, or any provisions
of the Foreign Corrupt Practices Act or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the aggregate, would
not have a material adverse effect on the business, prospects, financial
condition or results of operation of the Company and its subsidiaries, taken as
a whole.
(m) Each of the Company and its subsidiaries has such permits,
licenses, consents, exemptions, franchises, authorizations and other approvals
(each, an "AUTHORIZATION") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-
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<PAGE> 10
regulatory organizations and all courts and other tribunals, including, without
limitation, under any applicable Environmental Laws, as are necessary to own,
lease, license and operate its respective properties and to conduct its
business, except where the failure to have any such Authorization or to make any
such filing or notice would not, singly or in the aggregate, have a material
adverse effect on the business, prospects, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole. Each such
Authorization is valid and in full force and effect and each of the Company and
its subsidiaries is in compliance with all the terms and conditions thereof and
with the rules and regulations of the authorities and governing bodies having
jurisdiction with respect thereto; and no event has occurred (including, without
limitation, the receipt of any notice from any authority or governing body)
which allows or, after notice or lapse of time or both, would allow, revocation,
suspension or termination of any such Authorization or results or, after notice
or lapse of time or both, would result in any other impairment of the rights of
the holder of any such Authorization; and such Authorizations contain no
restrictions that are burdensome to the Company or any of its subsidiaries;
except where such failure to be valid and in full force and effect or to be in
compliance, the occurrence of any such event or the presence of any such
restriction would not, singly or in the aggregate, have a material adverse
effect on the business, prospects, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole.
(n) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with Environmental
Laws or any Authorization, any related constraints on operating activities and
any potential liabilities to third parties) which would, singly or in the
aggregate, have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole.
(o) The Company and its subsidiaries own or possess, or can acquire on
reasonable terms, all patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), trademarks,
service marks and trade names ("INTELLECTUAL PROPERTY") currently employed by
them in connection with the business now operated by them except where the
failure to own or possess or otherwise be able to acquire such intellectual
property would not, singly or in the aggregate, have a material adverse effect
on the business, prospects, financial condition or results of operation of the
Company and its subsidiaries, taken as a whole; and neither the Company nor any
of its subsidiaries has received any notice of infringement of or conflict with
asserted rights of others with respect to any of such intellectual property
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole.
(p) The Company and each of its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; and neither the Company nor any of its subsidiaries (i) has received
notice from any insurer or agent of such insurer that substantial
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<PAGE> 11
capital improvements or other material expenditures will have to be made in
order to continue such insurance or (ii) has any reason to believe that it will
not be able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers at a cost that would
not have a material adverse effect on the business, prospects, financial
conditions or results of operations of the Company and its subsidiaries, taken
as a whole.
(q) No relationship, direct or indirect, exists between or among the
Company or any of its subsidiaries on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company or any of its subsidiaries
on the other hand, which is required by the Act to be described in the
Registration Statement or the Prospectus which is not so described.
(r) This Agreement has been duly authorized, executed and delivered by
the Company.
(s) Ernst & Young LLP are independent public accountants with respect
to the Company and its subsidiaries as required by the Act.
(t) The consolidated financial statements included in the Registration
Statement and the Prospectus (and any amendment or supplement thereto), together
with related schedules and notes, present fairly the consolidated financial
position, results of operations and changes in financial position of the Company
and its subsidiaries and the combined financial position, results of operations
and changes in financial position of the Predecessors (as such term is defined
in the Registration Statement and Prospectus), in each case on the basis stated
therein at the respective dates or for the respective periods to which they
apply; such statements and related schedules and notes have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved, except as disclosed therein; the supporting
schedules, if any, included in the Registration Statement present fairly in
accordance with generally accepted accounting principles the information
required to be stated therein; and the other financial and statistical
information and data set forth in the Registration Statement and the Prospectus
(and any amendment or supplement thereto) are, in all material respects,
accurately presented and prepared on a basis consistent with such financial
statements and the books and records of the Company and the Predecessors, as the
case may be.
(u) The pro forma financial data of the Company and its
subsidiaries and the Predecessors, as the case may be, and the related notes
thereto set forth in the Registration Statement and the Prospectus (and any
supplement or amendment thereto) have been prepared on a basis consistent with
the historical financial statements of the Company and its subsidiaries and the
Predecessors, as the case may be, give effect to the assumptions used in the
preparation thereof on a reasonable basis and in good faith and present fairly
the historical and proposed transactions contemplated by the Registration
Statement and the Prospectus. Such pro forma financial data have been prepared
in accordance with the applicable requirements of Rule 11-02 of Regulation S-X
promulgated by the Commission.
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<PAGE> 12
(v) The Company and each of its subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(w) All material tax returns required to be filed by the Company and
each of its subsidiaries in any jurisdiction have been filed, other than those
filings being contested in good faith, and all material taxes, including
withholding taxes, penalties and interest, assessments, fees and other charges
due pursuant to such returns or pursuant to any assessment received by the
Company or any of its subsidiaries have been paid, other than those being
contested in good faith and for which adequate reserves have been provided.
(x) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not be, an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended.
(y) Except as otherwise disclosed in the Registration Statement with
respect to registration rights held by certain stockholders of the Company
(which registration rights have been waived with respect to any obligation of
the Company to include such securities with the Shares registered pursuant to
the Registration Statement), there are no contracts, agreements or
understandings between the Company and any person granting such person the right
to require the Company to file a registration statement under the Act with
respect to any securities of the Company or to require the Company to include
such securities with the Shares registered pursuant to the Registration
Statement.
(z) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
or the earnings, business, management or operations of the Company and its
subsidiaries, taken as a whole, (ii) there has not been any material adverse
change or any development involving a prospective material adverse change in the
capital stock or in the long-term debt of the Company or any of its subsidiaries
and (iii) neither the Company nor any of its subsidiaries has incurred any
material liability or obligation, direct or contingent.
(aa) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be deemed to
be a representation and warranty by the Company to the Underwriters as to the
matters covered thereby.
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<PAGE> 13
SECTION 7. Representations and Warranties of the Selling Stockholders.
Each Selling Stockholder represents and warrants to each Underwriter that:
(a) Such Selling Stockholder is the lawful owner of the Shares to be
sold by such Selling Stockholder pursuant to this Agreement and has, and on the
Closing Date will have, good and clear title to such Shares, free of all
restrictions on transfer, liens, encumbrances, security interests, equities and
claims whatsoever.
(b) The Shares to be sold by such Selling Stockholder have been duly
authorized and are validly issued, fully paid and non-assessable.
(c) Such Selling Stockholder has, and on the Closing Date will have,
full legal right, power and authority, and all authorization and approval
required by law, to enter into this Agreement, the Custody Agreement signed by
such Selling Stockholder and , as Custodian, relating to the
deposit of the Shares to be sold by such Selling Stockholder (the "CUSTODY
AGREEMENT") and the Power of Attorney of such Selling Stockholder appointing
certain individuals as such Selling Stockholder's attorneys-in-fact (the
"ATTORNEYS") to the extent set forth therein, relating to the transactions
contemplated hereby and by the Registration Statement and the Custody Agreement
(the "POWER OF ATTORNEY") and to sell, assign, transfer and deliver the Shares
to be sold by such Selling Stockholder in the manner provided herein and
therein.
(d) This Agreement has been duly authorized, executed and delivered by
or on behalf of such Selling Stockholder.
(e) The Custody Agreement of such Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and is a valid
and binding agreement of such Selling Stockholder, enforceable in accordance
with its terms.
(f) The Power of Attorney of such Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and is a valid
and binding instrument of such Selling Stockholder, enforceable in accordance
with its terms, and, pursuant to such Power of Attorney, such Selling
Stockholder has, among other things, authorized the Attorneys, or any one of
them, to execute and deliver on such Selling Stockholder's behalf this Agreement
and any other document that they, or any one of them, may deem necessary or
desirable in connection with the transactions contemplated hereby and thereby
and to deliver the Shares to be sold by such Selling Stockholder pursuant to
this Agreement.
(g) Upon delivery of and payment for the Shares to be sold by such
Selling Stockholder pursuant to this Agreement, good and clear title to such
Shares will pass to the Underwriters, free of all restrictions on transfer,
liens, encumbrances, security interests, equities and claims whatsoever.
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<PAGE> 14
(h) The execution, delivery and performance of this Agreement and the
Custody Agreement and Power of Attorney of such Selling Stockholder by or on
behalf of such Selling Stockholder, the compliance by such Selling Stockholder
with all the provisions hereof and thereof and the consummation of the
transactions contemplated hereby and thereby will not (i) require any consent,
approval, authorization or other order of, or qualification with, any court or
governmental body or agency (except such as may be required under the securities
or Blue Sky laws of the various states), (ii) conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the
organizational documents of such Selling Stockholder, if such Selling
Stockholder is not an individual, or any indenture, loan agreement, mortgage,
lease or other agreement or instrument to which such Selling Stockholder is a
party or by which such Selling Stockholder or any property of such Selling
Stockholder is bound or (iii) violate or conflict with any applicable law or any
rule, regulation, judgment, order or decree of any court or any governmental
body or agency having jurisdiction over such Selling Stockholder or any property
of such Selling Stockholder.
(i) The information in the Registration Statement under the caption
"Principal and Selling Stockholders" which specifically relates to such Selling
Stockholder does not, and will not on the Closing Date, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(j) At any time during the period described in Section 5(d), if there
is any change in the information referred to in Section 7(i), such Selling
Stockholder will immediately notify you of such change.
(k) Each certificate signed by or on behalf of such Selling
Stockholder and delivered to the Underwriters or counsel for the Underwriters
shall be deemed to be a representation and warranty by such Selling Stockholder
to the Underwriters as to the matters covered thereby.
(l) To the best of such Selling Stockholder's knowledge, (i) the
Registration Statement (other than any Rule 462(b) Registration Statement to be
filed by the Company after the effectiveness of this Agreement), when it became
effective, did not contain and, as amended, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading,
(ii) if the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement and any amendments thereto, when they become effective, will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and (iii) the Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading,
except that the representations and warranties set forth in this paragraph do
not apply to statements or omissions in the Registration Statement or the
Prospectus based upon information relating to any Underwriter furnished to the
Company in writing by such Underwriter through you expressly for use therein.
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<PAGE> 15
SECTION 8. Indemnification. (a) The Sellers, jointly and severally,
agree to indemnify and hold harmless each Underwriter, its directors, its
officers and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT"), from and against any and all losses,
claims, damages, liabilities and judgments (including, without limitation, any
legal or other expenses incurred in connection with investigating or defending
any matter, including any action, that could give rise to any such losses,
claims, damages, liabilities or judgments) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), the Prospectus (or any amendment or
supplement thereto) or any preliminary prospectus, or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages, liabilities or judgments are caused by any such
untrue statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished in writing to the Company by
such Underwriter through you expressly for use therein provided, however, that
the foregoing indemnity agreement with respect to any preliminary prospectus
shall not inure to the benefit of any Underwriter who failed to deliver a
Prospectus, as then amended or supplemented, (so long as the Prospectus and any
amendment or supplement thereto was provided by the Company to the several
Underwriters in the requisite quantity and on a timely basis to permit proper
delivery on or prior to the Closing Date) to the person asserting any losses,
claims, damages, liabilities or judgments caused by any untrue statement or
alleged untrue statement of a material fact contained in such preliminary
prospectus, or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, if such material misstatement or omission or alleged
material misstatement or omission was cured in the Prospectus, as so amended or
supplemented, and such Prospectus was required by law to be delivered at or
prior to the written confirmation of sale to such person. Notwithstanding the
foregoing, the aggregate liability of any Selling Stockholder pursuant to this
Section 8(a) shall be limited to an amount equal to the total proceeds (before
deducting underwriting discounts and commissions and expenses) received by such
Selling Stockholder from the Underwriters for the sale of the Shares sold by
such Selling Stockholder hereunder.
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<PAGE> 16
Notwithstanding the foregoing, and without limiting in any way the
ability of the Underwriters to commence an action or proceeding against any of
the Selling Stockholders, no Selling Stockholder shall be required to make
payment of any amount pursuant to this Section 8 to any Underwriter with respect
to any losses, claims, damages, liabilities or judgments which fall within the
scope of this Section 8 unless and until (i) the Underwriters make a written
demand for indemnification from the Company and (ii) the Company or any
subsidiary has failed to pay any amount owed to any Underwriter pursuant to this
Section 8(a) with respect to any such losses, claims, damages, liabilities and
judgments, within twenty business days. In the event that any Selling
Stockholder fails to comply with its obligations with respect to any losses,
claims, damages, liabilities or judgments, the Underwriters further agree that
(x) they will not commence any legal proceeding against any such Selling
Stockholder to recover such losses, claims, damages, liabilities or judgments
unless, prior to or concurrently therewith they shall have commenced a legal
proceeding against the Company or any of its subsidiaries to recover the same,
(y) the Underwriters will diligently and in good faith prosecute any such legal
proceeding against the Company and its subsidiaries for as long as the Selling
Stockholders are a party thereto, and (z) in the event that judgments are
entered in favor of the Underwriters against both the Company or its
subsidiaries and the Selling Stockholders in any such legal proceeding, (1)
during the period of 45 days following the date on which the judgment against
the Company or its subsidiaries becomes final and is not subject to appeal, the
Underwriters will take commercially reasonable steps to enforce the judgment
entered against the Company or its subsidiaries and will not seek to enforce the
judgment entered against any Selling Stockholder and (2) after the expiration of
such period, the Underwriters may seek to enforce the judgment entered against
any such Selling Stockholder, but will continue to take commercially reasonable
steps to enforce the judgment entered against the Company or its subsidiaries
for so long as they are seeking to enforce the judgment entered against the
Selling Stockholders. Notwithstanding the foregoing, the Selling Stockholders
shall be liable in accordance with Section 8(a) without regard to the provisions
set forth in this paragraph immediately after any Insolvency Event (as
hereinafter defined).
For the purposes of the foregoing paragraph, an "Insolvency Event"
shall have occurred when the Company or any of its subsidiaries has (i)
commenced a voluntary proceeding under any Federal or state bankruptcy,
insolvency, reorganization or similar law, or other proceeding to be adjudicated
a bankrupt or insolvent, (ii) consented to the entry of a decree or order for
relief in any involuntary proceeding or to the commencement of any similar
proceeding against it, (iii) had entered against it any decree or order for
relief in any involuntary proceeding or adjudging the Company or any subsidiary
a bankrupt or insolvent or appointing a custodian, receiver or similar official
of the Company or any subsidiary or any substantial part of its property, or had
any such party appointed or take possession thereof, (iv) made any assignment
for the benefit or creditors, or (v) taken any corporate action to authorize any
of the foregoing actions.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, each Selling
Stockholder and each person, if any, who controls such Selling Stockholder
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act to
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<PAGE> 17
the same extent as the foregoing indemnity from the Sellers to such Underwriter
but only with reference to information relating to such Underwriter furnished in
writing to the Company by such Underwriter through you expressly for use in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the
"INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 8(a) and 8(b), the Underwriter shall not be required to assume
the defense of such action pursuant to this Section 8(c), but may employ
separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel, except as provided below, shall be at the expense of
such Underwriter). Any indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of the indemnified party
unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified party).
In any such case, the indemnifying party shall not, in connection with any one
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for (i) the fees and expenses of more than one separate firm of attorneys
(in addition to any local counsel) for all Underwriters, their officers and
directors and all persons, if any, who control any Underwriter within the
meaning of either Section 15 of the Act or Section 20 of the Exchange Act, (ii)
the fees and expenses of more than one separate firm of attorneys (in addition
to any local counsel) for the Company, its directors, its officers who sign the
Registration Statement and all persons, if any, who control the Company within
the meaning of either such Section and (iii) the fees and expenses of more than
one separate firm of attorneys (in addition to any local counsel) for all
Selling Stockholders and all persons, if any, who control any Selling
Stockholder within the meaning of either such Section, and all such fees and
expenses shall be reimbursed as they are incurred. In the case of any such
separate firm for the Underwriters, their officers and directors and such
control persons of any Underwriters, such firm shall be designated in writing by
Donaldson, Lufkin & Jenrette Securities Corporation. In the case of any such
separate firm for the Company and such directors, officers and control persons
of the Company, such firm shall be designated in writing by the Company. In the
case of any such separate firm for the Selling Stockholders and such control
persons of any Selling Stockholders, such firm shall be designated in writing by
the Attorneys. The indemnifying party shall indemnify and hold harmless the
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<PAGE> 18
indemnified party from and against any and all losses, claims, damages,
liabilities and judgments by reason of any settlement of any action (i) effected
with its written consent or (ii) effected without its written consent if the
settlement is entered into more than twenty business days after the indemnifying
party shall have received a request from the indemnified party for reimbursement
for the fees and expenses of counsel (in any case where such fees and expenses
are at the expense of the indemnifying party) and, prior to the date of such
settlement, the indemnifying party shall have failed to comply with such
reimbursement request. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement or compromise of, or
consent to the entry of judgment with respect to, any pending or threatened
action in respect of which the indemnified party is or could have been a party
and indemnity or contribution may be or could have been sought hereunder by the
indemnified party, unless such settlement, compromise or judgment (i) includes
an unconditional release of the indemnified party from all liability on claims
that are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this Section 8
is unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 8(d)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 8(d)(i) above but also the
relative fault of the Sellers on the one hand and the Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Sellers on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (after deducting
underwriting discounts and commissions, but before deducting expenses) received
by the Sellers, and the total underwriting discounts and commissions received by
the Underwriters, bear to the total price to the public of the Shares, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Sellers on the one hand and the Underwriters on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Selling Stockholders on the one hand or the Underwriters on the other hand and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
The Sellers and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the
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<PAGE> 19
losses, claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such indemnified party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 8, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 8(d) are several in proportion to the respective number
of Shares purchased by each of the Underwriters hereunder and not joint.
(e) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
(f) Each Selling Stockholder hereby designates P.F. Chang's China
Bistro, Inc., 5090 North 40th Street, Suite 160, Phoenix, Arizona 85018, as its
authorized agent, upon which process may be served in any action which may be
instituted in any state or federal court in the State of New York by any
Underwriter, any director or officer of any Underwriter or any person
controlling any Underwriter asserting a claim for indemnification or
contribution under or pursuant to this Section 8, and each Selling Stockholder
will accept the jurisdiction of such court in such action, and waives, to the
fullest extent permitted by applicable law, any defense based upon lack of
personal jurisdiction or venue. A copy of any such process shall be sent or
given to such Selling Stockholder, at the address for notices specified in
Section 12 hereof.
SECTION 9. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same force
and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
(c) You shall have received on the Closing Date a certificate dated
the Closing Date, signed by Richard L. Federico and Robert Vivian, in their
capacities as the Chief Executive Officer and Chief Financial Officer of the
Company, confirming the matters set forth in Sections
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<PAGE> 20
6(z), 9(a) and 9(b) and that the Company has complied with all of the agreements
and satisfied all of the conditions herein contained and required to be complied
with or satisfied by the Company on or prior to the Closing Date.
(d) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company and its subsidiaries, taken as
a whole, (ii) there shall not have been any change or any development involving
a prospective change in the capital stock or in the long-term debt of the
Company or any of its subsidiaries and (iii) neither the Company nor any of its
subsidiaries shall have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause 9(d)(i),
9(d)(ii) or 9(d)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
(e) All the representations and warranties of each Selling Stockholder
contained in this Agreement shall be true and correct on the Closing Date with
the same force and effect as if made on and as of the Closing Date and you shall
have received on the Closing Date a certificate dated the Closing Date from each
Selling Stockholder to such effect and to the effect that such Selling
Stockholder has complied with all of the agreements and satisfied all of the
conditions herein contained and required to be complied with or satisfied by
such Selling Stockholder on or prior to the Closing Date.
(f) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of Gray Cary Ware & Freidenrich, LLP, counsel for the Company and the Selling
Stockholders, to the effect that:
(i) each of the Company and its subsidiaries has been duly
incorporated or organized, is validly existing as a corporation,
limited partnership or limited liability company, as the case may be,
in good standing under the laws of its jurisdiction of incorporation or
organization and has the power and authority to carry on its business
as described in the Prospectus and to own, lease and operate its
properties;
(ii) each of the Company and its subsidiaries is duly qualified
and is in good standing as a foreign corporation, limited partnership
or limited liability company, as the case may be, authorized to do
business in each jurisdiction in which the nature of its business or
its ownership or leasing of property requires such qualification,
except where the failure to be so qualified would not have a material
adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a
whole;
(iii) all the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholders) have been
duly authorized and validly
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<PAGE> 21
issued and are fully paid, non-assessable and not subject to any
preemptive or similar rights; and all the shares of Common Stock of the
Company to be issued by the Company on or prior to the Closing Date
upon conversion of the Company's outstanding shares of Convertible
Redeemable Preferred Stock and Deferred Purchase Price Liability (as
such terms are defined in the Prospectus) have been duly authorized
and, upon the issuance thereof in the manner described in the
Prospectus, will be validly issued, fully paid, non-assessable, and not
subject to any preemptive or similar rights;
(iv) the Shares to be issued and sold by the Company hereunder
have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement,
will be validly issued, fully paid and non-assessable, and the issuance
of such Shares will not be subject to any preemptive or similar rights;
(v) all of the outstanding shares of capital stock (or
equivalent partnership or membership interests, as the case may be, for
non-corporate subsidiaries) of each of the Company's subsidiaries have
been duly authorized and validly issued and are fully paid and
non-assessable, and are owned by the Company, directly or indirectly
through one or more subsidiaries, free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature;
(vi) this Agreement has been duly authorized, executed and
delivered by the Company and by or on behalf of each Selling
Stockholder;
(vii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(viii) the Registration Statement has become effective under the
Act, no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are, to the best of such counsel's
knowledge after due inquiry, pending before or contemplated by the
Commission;
(ix) the statements under the captions "Business-Government
Regulation," "Management-Limitation of Liability and Indemnification,"
"Management-Benefit Plans-Certain Transactions," "Description of
Capital Stock," "Shares Eligible for Future Sale" and "Underwriting" in
the Prospectus and Items 14 and 15 of Part II of the Registration
Statement, insofar as such statements constitute a summary of the legal
matters, documents or proceedings referred to therein, fairly present
the information called for with respect to such legal matters,
documents and proceedings;
(x) neither the Company nor any of its subsidiaries is in
violation of its respective charter or by-laws (or equivalent
organizational documents for non-corporate subsidiaries), and, to the
best of such counsel's knowledge after due inquiry, neither the Company
nor any of its subsidiaries is in default in the performance of any
obligation, agreement, covenant or condition contained in any
indenture, loan agreement, mortgage, lease or other agreement or
instrument that is material to the Company and its
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<PAGE> 22
subsidiaries, taken as a whole, to which the Company or any of its
subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective property is bound;
(xi) the execution, delivery and performance of this Agreement
by the Company, the compliance by the Company with all the provisions
hereof and the consummation of the transactions contemplated hereby
will not (A) require any consent, approval, authorization or other
order of, or qualification with, any court or governmental body or
agency (except such as may be required under the securities or Blue Sky
laws of the various states), (B) conflict with or constitute a breach
of any of the terms or provisions of, or a default under, the charter
or by-laws of the Company or any of its subsidiaries (or equivalent
organizational documents for non-corporate subsidiaries) or any
indenture, loan agreement, mortgage, lease or other agreement or
instrument that is material to the Company and its subsidiaries, taken
as a whole, to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries or their respective
property is bound, (C) violate or conflict with any applicable law or
any rule, regulation, judgment, order or decree of any court or any
governmental body or agency having jurisdiction over the Company, any
of its subsidiaries or their respective property or (D) result in the
suspension, termination or revocation of any Authorization of the
Company or any of its subsidiaries or any other impairment of the
rights of the holder of any such Authorization;
(xii) after due inquiry, such counsel does not know of any legal
or governmental proceedings pending or threatened to which the Company
or any of its subsidiaries is or could be a party or to which any of
their respective property is or could be subject that are required to
be described in the Registration Statement or the Prospectus and are
not so described, or of any statutes, regulations, contracts or other
documents that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not so described or filed as required;
(xiii) neither the Company nor any of its subsidiaries has
violated any Environmental Law, any provisions of the Employee
Retirement Income Security Act of 1974, as amended, or any provisions
of the Foreign Corrupt Practices Act or the rules and regulations
promulgated thereunder, except for such violations which, singly or in
the aggregate, would not have a material adverse effect on the
business, prospects, financial condition or results of operation of the
Company and its subsidiaries, taken as a whole;
(xiv) each of the Company and its subsidiaries has such
Authorizations of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory
organizations and all courts and other tribunals, including, without
limitation, under any applicable Environmental Laws, as are necessary
to own, lease, license and operate its respective properties and to
conduct its business, except where the failure to have any such
Authorization or to make any such filing or notice would not, singly or
in the aggregate, have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole; each such Authorization is
valid and in full force and effect and each of the
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<PAGE> 23
Company and its subsidiaries is in compliance with all the terms and
conditions thereof and with the rules and regulations of the
authorities and governing bodies having jurisdiction with respect
thereto; and no event has occurred (including, without limitation, the
receipt of any notice from any authority or governing body) which
allows or, after notice or lapse of time or both, would allow,
revocation, suspension or termination of any such Authorization or
results or, after notice or lapse of time or both, would result in any
other impairment of the rights of the holder of any such Authorization;
and such Authorizations contain no restrictions that are burdensome to
the Company or any of its subsidiaries; except where such failure to be
valid and in full force and effect or to be in compliance, the
occurrence of any such event or the presence of any such restriction
would not, singly or in the aggregate, have a material adverse effect
on the business, prospects, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole;
(xv) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be, an "investment
company" as such term is defined in the Investment Company Act of 1940,
as amended;
(xvi) except as otherwise disclosed in the Registration
Statement with respect to registration rights held by certain
stockholders of the Company (which registration rights have been waived
with respect to any obligation of the Company to include such
securities with the Shares registered pursuant to the Registration
Statement), to the best of such counsel's knowledge after due inquiry,
there are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the
Company to file a registration statement under the Act with respect to
any securities of the Company or to require the Company to include such
securities with the Shares registered pursuant to the Registration
Statement;
(xvii) (A) the Registration Statement and the Prospectus and any
supplement or amendment thereto (except for the financial statements
and other financial data included therein as to which no opinion need
be expressed) comply as to form with the Act, (B) such counsel has no
reason to believe that at the time the Registration Statement became
effective or on the date of this Agreement, the Registration Statement
and the prospectus included therein (except for the financial
statements and other financial data as to which such counsel need not
express any belief) contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (C) such
counsel has no reason to believe that the Prospectus, as amended or
supplemented, if applicable (except for the financial statements and
other financial data, as aforesaid) contains any untrue statement of a
material fact or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading;
(xviii) each Selling Stockholder is the lawful owner of the Shares
to be sold by such Selling Stockholder pursuant to this Agreement and
has good and clear title to such
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<PAGE> 24
Shares, free of all restrictions on transfer, liens, encumbrances,
security interests, equities and claims whatsoever;
(xix) each Selling Stockholder has full legal right, power and
authority, and all authorization and approval required by law, to enter
into this Agreement and the Custody Agreement and the Power of Attorney
of such Selling Stockholder and to sell, assign, transfer and deliver
the Shares to be sold by such Selling Stockholder in the manner
provided herein and therein;
(xx) the Custody Agreement of each Selling Stockholder has been
duly authorized, executed and delivered by such Selling Stockholder and
is a valid and binding agreement of such Selling Stockholder,
enforceable in accordance with its terms;
(xxi) the Power of Attorney of each Selling Stockholder has been
duly authorized, executed and delivered by such Selling Stockholder and
is a valid and binding instrument of such Selling Stockholder,
enforceable in accordance with its terms, and, pursuant to such Power
of Attorney, such Selling Stockholder has, among other things,
authorized the Attorneys, or any one of them, to execute and deliver on
such Selling Stockholder's behalf this Agreement and any other document
they, or any one of them, may deem necessary or desirable in connection
with the transactions contemplated hereby and thereby and to deliver
the Shares to be sold by such Selling Stockholder pursuant to this
Agreement;
(xxii) upon delivery of and payment for the Shares to be sold by
each Selling Stockholder pursuant to this Agreement, good and clear
title to such Shares will pass to the Underwriters, free of all
restrictions on transfer, liens, encumbrances, security interests,
equities and claims whatsoever; and
(xxiii) the execution, delivery and performance of this Agreement
and the Custody Agreement and Power of Attorney of each Selling
Stockholder by such Selling Stockholder, the compliance by such Selling
Stockholder with all the provisions hereof and thereof and the
consummation of the transactions contemplated hereby and thereby will
not (A) require any consent, approval, authorization or other order of,
or qualification with, any court or governmental body or agency (except
such as may be required under the securities or Blue Sky laws of the
various states), (B) conflict with or constitute a breach of any of the
terms or provisions of, or a default under, the organizational
documents of such Selling Stockholder, if such Selling Stockholder is
not an individual, or any indenture, loan agreement, mortgage, lease or
other agreement or instrument to which such Selling Stockholder is a
party or by which any property of such Selling Stockholder is bound or
(C) violate or conflict with any applicable law or any rule,
regulation, judgment, order or decree of any court or any governmental
body or agency having jurisdiction over such Selling Stockholder or any
property of such Selling Stockholder.
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<PAGE> 25
The opinion of Gray Cary Ware & Freidenrich, LLP described in Section
9(f) above shall be rendered to you at the request of the Company and the
Selling Stockholders and shall so state therein.
(g) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Akin, Gump, Strauss, Hauer & Feld, L.L.P., counsel for the
Underwriters, as to the matters referred to in Sections 9(f)(iv), 9(f)(vi) (but
only with respect to the Company), 9(f)(ix) (but only with respect to the
statements under the caption "Description of Capital Stock" and "Underwriting")
and 9(f)(xvii).
In giving such opinions with respect to the matters covered by Section
9(f)(xvii), counsel for the Company and the Selling Stockholders and counsel for
the Underwriters may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and Prospectus
and any amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification except as
specified.
(h) You shall have received, on each of the date hereof and the
Closing Date, a letter dated the date hereof or the Closing Date, as the case
may be, in form and substance satisfactory to you, from Ernst & Young, L.L.P.,
independent public accountants, containing the information and statements of the
type ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
(i) The Company shall have delivered to you the agreements specified
in Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(j) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.
(k) The Company and the Selling Stockholders shall not have failed on
or prior to the Closing Date to perform or comply with any of the agreements
herein contained and required to be performed or complied with by the Company or
the Selling Stockholders, as the case may be, on or prior to the Closing Date.
(l) You shall have received on the Closing Date, a certificate of each
Selling Stockholder who is not a U.S. Person (as defined under applicable U.S.
federal tax legislation) to the effect that such Selling Stockholder is not a
U.S. Person, which certificate may be in the form of a properly completed and
executed United States Treasury Department Form W-8 (or other applicable form or
statement specified by Treasury Department regulations in lieu thereof).
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due
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<PAGE> 26
authorization and issuance of such Additional Shares and other matters related
to the issuance of such Additional Shares.
SECTION 10. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Sellers if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) the
suspension or material limitation of trading in securities or other instruments
on the New York Stock Exchange, the American Stock Exchange, the Chicago Board
of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade
or the Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects, or will materially and adversely affect, the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by
either federal or New York State authorities or (vi) the taking of any action by
any federal, state or local government or agency in respect of its monetary or
fiscal affairs which in your opinion has a material adverse effect on the
financial markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
Firm Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the total number of Firm Shares or Additional Shares, as the
case may be, to be purchased on such date by all Underwriters, each
non-defaulting Underwriter shall be obligated severally, in the proportion which
the number of Firm Shares set forth opposite its name in Schedule I bears to the
total number of Firm Shares which all the non-defaulting Underwriters have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided that in no event shall the number of Firm Shares or Additional
Shares, as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 10 by an
amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased by all Underwriters and
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<PAGE> 27
arrangements satisfactory to you, the Company and the Selling Stockholders for
purchase of such Firm Shares are not made within 48 hours after such default,
this Agreement will terminate without liability on the part of any
non-defaulting Underwriter, the Company or the Selling Stockholders. In any such
case which does not result in termination of this Agreement, either you or the
Sellers shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or any other documents or arrangements
may be effected. If, on an Option Closing Date, any Underwriter or Underwriters
shall fail or refuse to purchase Additional Shares and the aggregate number of
Additional Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Additional Shares to be purchased on such
date, the non-defaulting Underwriters shall have the option to (i) terminate
their obligation hereunder to purchase such Additional Shares or (ii) purchase
not less than the number of Additional Shares that such non-defaulting
Underwriters would have been obligated to purchase on such date in the absence
of such default. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any default of any such
Underwriter under this Agreement.
SECTION 11. Agreements of the Selling Stockholders. Each Selling
Stockholder agrees with you and the Company:
(a) To pay or to cause to be paid all transfer taxes payable in
connection with the transfer of the Shares to be sold by such Selling
Stockholder to the Underwriters.
(b) To do and perform all things to be done and performed by such
Selling Stockholder under this Agreement prior to the Closing Date and to
satisfy all conditions precedent to the delivery of the Shares to be sold by
such Selling Stockholder pursuant to this Agreement.
SECTION 12. Miscellaneous. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to P.F.
Chang's China Bistro, Inc., 5090 North 40th Street, Suite 160, Phoenix, Arizona
85018, (ii) if to the Selling Stockholders, to
__________________________________________________ c/o
_________________________________________ and (iii) if to any Underwriter or to
you, to you c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park
Avenue, New York, New York 10172, Attention: Syndicate Department, or in any
case to such other address as the person to be notified may have requested in
writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, the Selling Stockholders and the
several Underwriters set forth in or made pursuant to this Agreement shall
remain operative and in full force and effect, and will survive delivery of and
payment for the Shares, regardless of (i) any investigation, or statement as to
the results thereof, made by or on behalf of any Underwriter, the officers or
directors of any Underwriter, any person controlling any Underwriter, the
Company, the officers or directors of the Company, any person controlling the
Company, any Selling Stockholder or any person controlling such Selling
Stockholder, (ii) acceptance of the Shares and payment for them hereunder and
(iii) termination of this Agreement.
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<PAGE> 28
If for any reason the Shares are not delivered by or on behalf of any
Seller as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10), the Sellers agree, jointly and severally, to
reimburse the several Underwriters for all out-of-pocket expenses (including the
fees and disbursements of counsel) incurred by them. Notwithstanding any
termination of this Agreement, the Company shall be liable for all expenses
which it has agreed to pay pursuant to Section 5(i) hereof. The Sellers also
agree, jointly and severally, to reimburse the several Underwriters, their
directors and officers and any persons controlling any of the Underwriters for
any and all fees and expenses (including, without limitation, the fees
disbursements of counsel) incurred by them in connection with enforcing their
rights hereunder (including, without limitation, pursuant to Section 8 hereof).
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the Selling
Stockholders, the Underwriters, the Underwriters' directors and officers, any
controlling persons referred to herein, the Company's directors and the
Company's officers who sign the Registration Statement and their respective
successors and assigns, all as and to the extent provided in this Agreement, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
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<PAGE> 29
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
P.F. CHANG'S CHINA BISTRO, INC.
By: ______________________________
Title:
THE SELLING STOCKHOLDERS NAMED
IN SCHEDULE II HERETO, ACTING
SEVERALLY
By ______________________________
Attorney-in-fact
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC MONTGOMERY SECURITIES LLC
DAIN RAUSCHER WESSELS, a division of
Dain Rauscher Incorporated
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By ___________________________
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SCHEDULE I
Underwriters Number of Firm Shares
to be Purchased
Donaldson, Lufkin & Jenrette Securities Corporation
Nationsbanc Montgomery Securities LLC
Dain Rauscher Wessels, a division of
Dain Rauscher Incorporated
[Names of other underwriters]
Total
1
<PAGE> 31
SCHEDULE II
Selling Stockholders
Number of Firm
Name Shares Being Sold
Total
2
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Annex I
[Insert names of stockholders of the Company who will be required to sign lock
ups]
3
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COMMENTARY TO UNDERWRITING AGREEMENTS WITH SECONDARY COMPONENTS
1. TRANSFER TAXES. The state of New York imposes a transfer tax on
secondary sales of stock which tax is subsequently reimbursed to the payor. Such
tax is generally payable if the underwriting agreement is signed in New York or
the offering is closed in New York. As a result of the relationship between
Donaldson, Lufkin & Jenrette Securities Corporation and Pershing, a clearing
house, Selling Stockholders participating in the offering need not pay such
transfer tax prior to delivering their Shares. Instead, at the end of each
quarter, Pershing will remit to the state of New York the total amount of the
transfer tax due on all secondary offerings underwritten by Donaldson, Lufkin &
Jenrette Securities Corporation and will simultaneously be reimbursed for the
full amount of the transfer tax. Steve Tyrell at Pershing (201-413-2130 (phone)
and 201-413-5265 (fax)) is in charge of this reimbursement procedure and should
be contacted early in the transaction with an estimate of the taxes.
The tax rate is:
<TABLE>
<CAPTION>
Sale Price Per Share Tax Rate Per Share
-------------------- ------------------
<S> <C>
$20.00 and over $0.05
$10.00 - $19.99 $0.0375
$5.00 - $9.99 $0.025
Under $5.00 $0.0125
</TABLE>
Although there is a $350 maximum tax on a single taxable sale, a sale by a
selling stockholder to a group of underwriters each of whom is severally liable
for its purchase is treated as a number of separate sales. (For example, the
sale of shares by a single stockholder to a syndicate consisting of 20
underwriters would have a maximum tax of $350 x 20 = $7,000.) If there is more
than one selling stockholder, the sale of shares by each selling stockholder to
each underwriter is treated as a separate transaction. (For example, the sale of
shares by 20 stockholders to a syndicate consisting of 20 underwriters would
have a maximum tax of $350 x 20 x 20 = $140,000.)
2. SELLING STOCKHOLDERS. This form assumes that the Selling
Stockholders (i) are not officers or directors of the Company and (ii) do not
control or otherwise exert significant influence over the Company, whether by
ownership of securities of the Company, by contract or otherwise. If the Selling
Stockholders are officers or directors of the Company or control or otherwise
exert significant influence over the Company, then the following changes to this
form should be considered and discussed with Maureen Block in the legal
department of Donaldson, Lufkin & Jenrette Securities Corporation
(415-249-2188).
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(a) REPRESENTATIONS AND WARRANTIES AND COVENANTS OF THE COMPANY. If any
Selling Stockholder controls the Company, it may be appropriate for such Selling
Stockholder to make all of the representations and warranties that the Company
makes, jointly and severally, with the Company, and to agree to pay all costs
and expenses in connection with the offering that the Company agrees to pay,
jointly and severally, with the Company.
(b) REPRESENTATIONS AND WARRANTIES OF SELLING STOCKHOLDERS - DISCLOSURE
REPRESENTATION. Each Selling Stockholder's representation regarding the adequacy
and completeness of the offering document is limited to the information provided
by such Stockholder on the theory that such information is the only information
with which such Stockholder is intimately familiar. If the Selling Stockholders
are officers, directors or control persons of the Company or otherwise exert
significant influence over the Company then, in light of their familiarity with
the Company, it may be appropriate for their disclosure representation to track
that of the Company-- that is, to cover the entire offering document.
(c) INDEMNIFICATION AND CONTRIBUTION. Even though the Selling
Stockholders' disclosure representation is limited to information provided by
the Selling Stockholders, this form requires the Selling Stockholders to
indemnify the Underwriters against misstatements or omissions in the entire
offering document with the Selling Stockholders liability limited to the
benefits it receives from the offering--that is the net proceeds received by
such Stockholders for the sale of their Shares. The theory for this position is
that each Selling Stockholder (vis-a-vis the Underwriters) should bear the risk
that the entire offering document is correct but that such Stockholder (unlike
the Company) should not have unlimited liability for information that such
Stockholder has not provided. In certain situations (i.e., where the Selling
Stockholders are individual investors who are not venture capitalists) it may be
appropriate to limit the scope of the Selling Stockholders' indemnity to
information that they provide. If the Selling Stockholders are officers,
directors or control persons of the Company or otherwise exert significant
influence over the Company then, in light of their ability to verify the
information in the disclosure document, it may be appropriate to remove the
monetary limitation on their indemnity.
In contrast to the Selling Stockholders' indemnity, the Company's
indemnity is not limited, monetarily or otherwise. The Company's ability to
indemnify the Underwriters with respect to information provided by the Selling
Stockholders, however, depends on the laws of its state of incorporation. If the
Company is contractually obligated to register the Selling Stockholders' shares
or in some other way benefits from the secondary portion of the offering, then
the Company should generally be permitted by law to provide a complete
indemnity.
3. OPINIONS. This form assumes that the opinion of the Company's
counsel will address all matters relating to the Selling Stockholders and, if
such counsel deems it necessary, it will require one or more Selling
Stockholders to provide opinions from their counsel upon which it will rely. (In
the event of such reliance, the opinions upon which the Company's counsel will
rely should be in form and substance satisfactory to Underwriters' counsel and
the opinion of Company's counsel should state that they are justified in relying
on each such opinion and both these conditions should be included in the
Underwriting Agreement.) Requiring the Company's counsel to give all such
opinions alleviates the need for Underwriters' counsel to deal directly with
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counsel for each Selling Stockholder which can be both time consuming and
costly. Whether or not the Company's counsel is prepared to render all Selling
Stockholder-related opinions, any opinions that will be required from any
Selling Stockholder's counsel should be identified early in the transaction to
ensure timely delivery of such an opinion.
4. POWERS OF ATTORNEY AND CUSTODY AGREEMENT. A Power of Attorney and a
Custody Agreement should be secured from each Selling Stockholder early in the
transaction and, in any event, no later than the commencement of the roadshow.
The purpose of the Power of Attorney and the Custody Agreement is to facilitate
the pricing of the offering and the delivery of the Shares to be sold by the
Selling Stockholders and to streamline the mechanics of the offering process
when there are a large number of Selling Stockholders. Failure to secure a Power
of Attorney from each Selling Stockholder could delay the pricing of the
offering and the signing of the Underwriting Agreement. Similarly, failure to
secure a Custody Agreement from each Selling Stockholder could delay the closing
of the transaction if a Selling Stockholder were to refuse to deliver the Shares
it was selling and would complicate payment for the Shares by the Underwriters.
In the event that any Selling Stockholder objects to signing either of such
documents Maureen Block in the legal department of Donaldson, Lufkin & Jenrette
Securities Corporation should be contacted.
iv
