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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NUMBER: 0-25123
P.F. CHANG'S CHINA BISTRO, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 86-0815086
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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5090 NORTH 40TH STREET, SUITE #160 85018
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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Registrant's telephone number, including area code: (602) 957-8986
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of September 26, 1999, there were outstanding 10,245,424 shares of the
Registrant's Common Stock.
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TABLE OF CONTENTS
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ITEM PAGE
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PART I FINANCIAL INFORMATION
1. Financial Statements (Unaudited)............................ 3
Condensed Consolidated Balance Sheets as of September 26,
1999 and December 27, 1998................................ 3
Condensed Consolidated Statements of Income for the Three
Months Ended September 26, 1999 and September 27, 1998 and
for the nine months ended September 26, 1999 and September
27, 1998.................................................. 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 26, 1999 and September 27, 1998.... 5
Notes to Condensed Consolidated Financial Statements........ 6
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 7
3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 15
PART II OTHER INFORMATION
1. Legal Proceedings........................................... 16
2. Changes in Securities and Use of Proceeds................... 16
3. Defaults upon Senior Securities............................. 16
4. Submission of Matters to a Vote of Security Holders......... 16
5. Other Information........................................... 16
6. Exhibits and Reports on Form 8-K............................ 16
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PART I FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED FINANCIAL STATEMENTS
P.F. CHANG'S CHINA BISTRO, INC.
CONSOLIDATED BALANCE SHEETS
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NOTE 1 UNAUDITED
DECEMBER 27, SEPTEMBER 26,
1998 1999
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(IN THOUSANDS)
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ASSETS
Current assets:
Cash and cash equivalents................................. $18,857 $ 4,380
Receivables............................................... 2,792 1,311
Inventories............................................... 673 914
Current portion of notes receivable from related
parties................................................ 225 245
Prepaids and other current assets......................... 631 987
------- -------
Total current assets........................................ 23,178 7,837
Construction-in-progress.................................... 4,627 3,207
Property and equipment, net................................. 32,246 53,515
Goodwill, net............................................... 7,874 7,560
Notes receivable from related parties, less current
portion................................................... 545 288
Other assets................................................ 717 1,348
------- -------
Total assets................................................ $69,187 $73,755
======= =======
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,938 $ 2,277
Accrued payroll........................................... 1,943 1,776
Other accrued expenses.................................... 2,798 3,536
Income tax liability...................................... -- 1,122
Unearned revenue.......................................... 744 681
Current portion of long-term debt......................... 523 368
------- -------
Total current liabilities................................... 8,946 9,760
Long-term debt.............................................. 1,829 1,596
Interests of minority members and partners in consolidated
limited liability companies and partnerships.............. 183 91
Common stockholders' equity:
Common stock, $0.001 par value, 20,000,000 shares
authorized:
10,192,769 shares issued and outstanding at December
27, 1998 and 10,245,424 at September 26, 1999.......... 10 10
Additional paid-in capital................................ 63,409 63,866
Accumulated deficit....................................... (5,190) (1,568)
------- -------
Total common stockholders' equity........................... 58,229 62,308
------- -------
Total liabilities and common stockholders' equity
(deficit)................................................. $69,187 $73,755
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See accompanying notes to unaudited condensed financial statements.
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P.F. CHANG'S CHINA BISTRO, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26,
1998 1999 1998 1999
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
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Revenues.................................. $20,239 $40,961 $53,176 $104,390
Costs and expenses:
Restaurant operating costs:
Cost of sales........................ 5,653 11,405 14,752 28,888
Labor................................ 5,821 12,268 15,221 31,203
Operating............................ 3,457 7,030 8,897 17,811
Occupancy............................ 1,420 2,588 3,777 6,916
------- ------- ------- --------
Total restaurant operating
costs......................... 16,351 33,291 42,647 84,818
General and administrative.............. 1,574 2,452 4,327 6,600
Depreciation and amortization........... 583 1,327 1,596 3,412
Preopening.............................. 1,191 1,313 2,408 3,340
------- ------- ------- --------
Income from operations.................... 540 2,578 2,198 6,220
Interest income (expense)................. (305) 40 (760) 390
------- ------- ------- --------
Income before elimination of minority
members' and partners' interests and
provision for income taxes.............. 235 2,618 1,438 6,610
Elimination of minority members' and
partners' interests..................... (198) (671) (543) (1,487)
------- ------- ------- --------
Income before provision for income
taxes................................... 37 1,947 895 5,123
Provision for income taxes................ -- (595) (11) (1,501)
------- ------- ------- --------
Net income................................ 37 $ 1,352 884 $ 3,622
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Redeemable preferred stock accretion...... (238) (718)
------- -------
Net income available to common
stockholders............................ $ (201) 166
======= =======
Net income per share:
Basic................................... $ (0.08) $ 0.13 $ 0.07 $ 0.35
======= ======= ======= ========
Diluted................................. $ (0.08) $ 0.12 $ 0.05 $ 0.32
======= ======= ======= ========
Weighted average shares used in
computation:
Basic................................... 2,500 10,223 2,500 10,207
======= ======= ======= ========
Diluted................................. 2,500 11,149 3,206 11,152
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See accompanying notes to unaudited condensed financial statements.
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P.F. CHANG'S CHINA BISTRO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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NINE MONTHS ENDED
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SEPTEMBER 27, SEPTEMBER 26,
1998 1999
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(IN THOUSANDS)
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OPERATING ACTIVITIES:
Net income.................................................. $ 884 $ 3,622
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 1,269 3,086
Amortization of goodwill.................................. 327 326
Minority members' and partners' interests................. 543 1,487
Changes in operating assets and liabilities:
Receivables............................................ 1,637 1,481
Inventories............................................ (68) (241)
Prepaids and other current assets...................... 64 (356)
Other assets........................................... (270) (643)
Accounts payable....................................... (560) (661)
Accrued payroll........................................ (149) (167)
Other accrued expenses................................. 980 738
Income Tax Liability................................... -- 1,122
Unearned revenue....................................... (31) (63)
-------- --------
Net cash provided by operating activities................... 4,626 9,731
INVESTING ACTIVITIES:
Capital expenditures........................................ (15,538) (22,935)
Increase (decrease) in notes receivable from related
parties................................................... (9) 237
Payment for members' interests.............................. (227) --
-------- --------
Net cash used in investing activities....................... (15,774) (22,698)
FINANCING ACTIVITIES:
Proceeds from revolving line of credit, net of repayments... 12,500 --
Repayments of long-term debt................................ (397) (388)
Proceeds from stock options exercised and employee stock
purchases................................................. -- 457
Proceeds from minority partners' contributions.............. 289 311
Distributions to minority members and partners.............. (799) (1,890)
-------- --------
Net cash provided by (used in) financing activities......... 11,593 (1,510)
-------- --------
Net increase (decrease) in cash and cash equivalents........ 445 (14,477)
Cash and cash equivalents at the beginning of the period.... 2,739 18,857
-------- --------
Cash and cash equivalents at the end of the period.......... $ 3,184 $ 4,380
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</TABLE>
See accompanying notes to unaudited condensed financial statements.
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P.F. CHANG'S CHINA BISTRO, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
P.F. Chang's China Bistro, Inc. (the "Company") owns and operates 34 full
service restaurants (as of September 26, 1999) in Arizona, California, Colorado,
Utah, Texas, Illinois, New York, Michigan, Nevada, Florida, North Carolina,
Louisiana, Alabama, Georgia, Massachusetts, Ohio and Virginia under the name of
"P.F. Chang's China Bistro."
The accompanying condensed financial statements have been prepared by the
Company without audit and reflect all adjustments, consisting of normal
recurring adjustments, which are, in the opinion of management, necessary for a
fair statement of financial position and the results of operations for the
interim periods. The statements have been prepared in accordance with generally
accepted accounting principles and with the regulations of the Securities and
Exchange Commission ("SEC"). Certain information and footnote disclosures,
normally included in financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant to such
SEC rules and regulations. Operating results for the nine month period ended
September 26, 1999 are not necessarily indicative of the results that may be
expected for the year ending January 2, 2000.
The balance sheet at December 27, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the financial statements
and notes thereto for the fiscal year ended December 27, 1998 included in the
Company's Form 10-K.
2. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed in accordance with SFAS No. 128,
"Earnings per Share." Basic net income per share is computed based on the
weighted average of common shares outstanding during the period. Diluted net
income per share is computed based on the weighted average number of common
shares and common stock equivalents, which includes options under the Company's
stock option plans and outstanding warrants.
3. CREDIT FACILITY
The Company has obtained a commitment from a financial institution for a
$15 million credit facility. The credit facility will be used to help fund the
Company's development beyond 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following section 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 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. The Company's actual results may differ materially from those
discussed in the forward-looking statements. Factors that might cause actual
events or results to differ materially from those indicated by such
forward-looking statements may include matters noted elsewhere in this Form
10-Q, such as development and construction risks, potential labor shortages,
fluctuations in operating results, and changes in food costs.
OVERVIEW
P.F. Chang's owns and operates 34 full service restaurants (as of September
26, 1999) 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, six in 1997, and 10 in 1998.
The Company intends to open three new restaurants for the remainder of 1999
(eleven new restaurants were opened during the first nine months of 1999) and
another thirteen to fifteen new restaurants in 2000. The units that the Company
intends to develop in the remainder of 1999 and 2000 will be situated in
approximately 9 new markets across the United States. The Company has signed
lease agreements for all of the remaining units planned for 1999. Additionally,
the Company has signed lease agreements or letters of intent for all units
expected to open in 2000. 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."
RESULTS OF OPERATIONS
The following tables set forth certain unaudited quarterly information for
the three months ended September 27, 1998 and September 26, 1999, and the nine
months ended September 27, 1998 and September 26, 1999, expressed as a
percentage of revenues, except for revenues which are expressed in thousands.
This quarterly information has been prepared on a consistent basis with the
audited financial statements and, in the opinion of management, includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information for the periods presented. 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.
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.
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THREE MONTHS ENDED NINE MONTHS ENDED
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SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26,
1998 1999 1998 1999
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STATEMENTS OF OPERATIONS DATA:
Revenues (in thousands)................ $20,239 $40,961 $53,176 $104,390
Costs and expenses:
Restaurant operating costs:
Cost of sales..................... 27.9% 27.8% 27.8% 27.7%
Labor............................. 28.8 30.0 28.6 29.9
Operating......................... 17.1 17.2 16.7 17.1
Occupancy......................... 7.0 6.3 7.1 6.6
------- ------- ------- --------
Total restaurant operating
costs...................... 80.8 81.3 80.2 81.3
General and administrative........... 7.7 6.0 8.1 6.3
Depreciation and amortization........ 2.9 3.2 3.0 3.3
Preopening expense................... 5.9 3.2 4.5 3.2
------- ------- ------- --------
Income from operations................. 2.7 6.3 4.2 5.9
Interest income (expense), net......... (1.5) 0.1 (1.4) 0.4
Elimination of minority interests...... (1.0) (1.6) (1.0) (1.4)
------- ------- ------- --------
Income before provision for income
taxes................................ 0.2 4.8 1.8 4.9
Provision for income taxes............. (0.0) (1.5) (0.0) (1.4)
------- ------- ------- --------
Net income............................. 0.2% 3.3% 1.8% 3.5%
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Revenues
The Company's revenues are derived entirely from food and beverage sales.
Revenues increased by $20.8 million, or 102.4%, to $41.0 million in the three
months ended September 26, 1999 from $20.2 million in the three months ended
September 27, 1998. Revenues increased by $51.3 million, or 96.3%, to $104.4
million in the nine months ended September 26, 1999 from $53.1 million in the
nine months ended September 27, 1998. The increase in third quarter 1999
revenues compared to third quarter 1998 revenues was primarily attributable to
revenues of 16.7 million generated by new restaurants opened subsequent to
September 27, 1998 and a 4.1 million increase in revenues in the three months
ended September 26, 1999 for existing restaurants. The increase in year-to-date
revenues for the nine months ended September 26, 1999 compared to the nine
months ended September 27, 1998 was primarily attributable to revenues of 33.3
million generated by new restaurants opened subsequent to September 27, 1998 and
a 18.0 million increase in revenues in the nine months ended September 26, 1999
for existing restaurants. Increased customer visits produced comparable
restaurant sales gains of 12.2% in the three months ended September 26, 1999 and
11.9% in the nine months ended September 26, 1999. The Company did not implement
any meaningful price increases in either period.
Costs and expenses
Cost of sales. Cost of sales is composed of the cost of food and
beverages. Cost of sales decreased nominally as a percentage of revenues to
27.8% in the three months ended September 26, 1999 from 27.9% in the three
months ended September 27, 1998. Cost of sales decreased nominally to 27.7% for
the nine months ended September 26, 1999 from 27.8% in the nine months ended
September 27, 1998.
Labor. Labor expenses consist of restaurant management salaries, hourly
staff payroll costs and other payroll-related items. Labor expenses as a
percentage of revenues increased to 30.0% in the three months ended September
26, 1999 from 28.8% in the three months ended September 27, 1998. Labor expenses
increased to 29.9% in the nine months ended September 26, 1999 from 28.6% in the
nine months ended September 27, 1998. The increase in labor expenses for both
periods was primarily due to the fact that the Company opened eleven new
restaurants in the first nine months of 1999 compared to only four new
restaurants in the first nine months of 1998. The Company's experience to date
has been that labor costs
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associated with a newly opened restaurant (for approximately its first four to
six months of operation) are materially greater than what can be expected after
that time, both in aggregate dollars and as a percentage of revenues.
Additionally, as a result of tightening labor markets around the country, the
Company has experienced an increase in its labor costs across the system. The
Company expects that tighter labor markets will continue to exert upward
pressure on its labor costs on a year-over-year basis for the remainder 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 as a percentage of revenues
to 17.2% in the three months ended September 27, 1999 from 17.1% in the three
months ended September 27, 1998. Operating expenses increased to 17.1% in the
nine months ended September 26, 1999 from 16.7% in the nine months ended
September 27, 1998. The increase for both periods was primarily due to the fact
that the Company opened eleven new restaurants during the first nine months of
1999 compared to only four new restaurants in the first nine months of 1998.
Occupancy. Occupancy costs include both fixed and variable portions of
rent, common area maintenance charges, property insurance and property taxes.
Occupancy costs decreased as a percentage of revenues to 6.3% in the three
months ended September 26, 1999 from 7.0% in the three months ended September
27, 1998. Occupancy expenses decreased to 6.6% for the nine months ended
September 26, 1999 from 7.1% in the nine months ended September 27, 1998. The
decrease in occupancy for both periods was primarily the result of the increased
revenue base and, to a lesser extent, more favorable lease terms associated with
new restaurants.
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 $2.5 million (6.0% of revenues)
in the three months ended September 26, 1999 from $1.6 million (7.7% of
revenues) in the three months ended September 27, 1998. General and
administrative expenses increased to $6.6 million (6.3% of revenues) in the nine
months ended September 26, 1999 from $4.3 million (8.1% of revenues) in the nine
months ended September 27, 1998. The increase was due primarily to the addition
of corporate management personnel which resulted in approximately $460,000 and
$1.1 million of additional compensation and benefits expense for the three
months ended September 26, 1999 and the nine months ended September 26, 1999
respectively, as well as additional costs to support a larger restaurant base,
including travel and consulting fees. Also, the Company incurred additional
costs during the first nine months of 1999, such as printing, accounting, and
legal costs, as a result of becoming a public company in December of 1998. 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 (See "Elimination of minority interests"
below).
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 $1.3 million in the
three months ended September 26, 1999 from $583,000 in the three months ended
September 27, 1998. Depreciation and amortization increased to $3.4 million for
the nine months ended September 26, 1999 from $1.6 million for the nine months
ended September 27, 1998. The increase for both periods was primarily due to
depreciation on fixed assets purchased for new 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, employee payroll and related
training costs. Preopening expenses in the three months ended September 26, 1999
increased to $1.3 million from $1.2 million in the three months ended September
27, 1998 and increased to $3.3 million for the nine months ended September 26,
1999 from $2.4 million for the nine months ended September 27, 1998
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due to the greater number of restaurants opened or under development during the
1999 period than the 1998 period.
Interest income (expense), net. Interest income increased to $40,000 in
the three months ended September 26, 1999 from an expense of $305,000 in the
three months ended September 27, 1998. Interest income increased to $390,000 in
the nine months ended September 26, 1999 from an expense of $760,000 in the nine
months ended September 27, 1998. The increase in both periods was principally
due to the repayment of the Company's revolving line of credit in December of
1998, and the subsequent investment of cash from its initial public offering.
Elimination of minority interests
Elimination of minority interests represents the portion of the Company's
net earnings which are attributable to the collective ownership interests of its
partners. The Company has provided for a partnership management structure in
which it has entered into a series of partnership agreements with its regional
managers ("Market Partners"), certain of its general managers ("Operating
Partners") and certain of its executive chefs ("Culinary Partners"). Elimination
of minority interests increased to $671,000 for the three months ended September
26, 1999 from $198,000 for the three months ended September 27, 1998 and it
increased to $1.5 million in the nine months ended September 26, 1999 from
$543,000 in the nine months ended September 27, 1998 due primarily to the
addition of new restaurants and an increase in the operating profit of those
restaurants.
Provision for income taxes
The provision for income taxes for the three months ended September 26,
1999 was $595,000. There was no provision for income taxes for the three months
ended September 27, 1998. Tax expense increased to $1.5 million for the nine
months ended September 26, 1999 from $11,000 for the nine months ended September
27, 1998 due primarily to the fact that the Company's taxable income increased
substantially from the prior period. The income tax provision for 1999 differs
from the expected provision for income taxes, derived by applying the statutory
income tax rate, as a result of the Company's expected utilization in 1999 of
its net operating loss carryforward and the resulting decrease in the related
deferred income tax valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its capital requirements since its inception through
sales of equity securities, debt financing, sale-leaseback arrangements and cash
flows from operations. Net cash provided by operating activities was $9.7
million and $4.6 million for the nine months ended September 26, 1999 and
September 27, 1998, respectively. Net cash provided by operating activities
exceeded the net income for the periods due principally to the effect of
depreciation and amortization and reductions in receivables.
The Company uses cash primarily to fund the development and construction of
new restaurants. Net cash used in investing activities in the nine months ended
September 26, 1999 and September 27, 1998 was $22.7 million and $15.8 million,
respectively. Capital expenditures made up the majority of its investing
activities in both periods. The Company intends to open three new restaurants
for the remainder of 1999 (eleven new restaurants were opened during the first
nine months of 1999) and another thirteen to fifteen new restaurants in 2000.
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 $300,000 per restaurant, however,
any unexpected delays in construction, labor shortages, or other factors could
result in higher than anticipated preopening costs.
Net cash used in financing activities in the nine months ended September
26, 1999 was $1.5 million compared to net cash provided by financing activities
in the nine months ended September 27, 1998 of $11.6 million. Financing
activities in the first nine months of 1999 consisted primarily of distributions
to the Company's partners and repayments of long-term debt. Financing activities
in the first nine months of 1998 consisted principally of borrowings under the
Company's credit facility, which was paid in full at the time of the Company's
initial public offering and expired in December 1998.
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The Company's capital requirements, including development costs related to
the opening of additional restaurants, have been and will continue to be
significant. 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 its current cash reserves
will be sufficient to fund its capital requirements through 1999. The Company
has obtained a commitment for a $15 million credit facility to help fund its
development beyond 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
current shareholders. There can be no assurance that such capital will be
available on favorable terms, if at all.
RISK FACTORS
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.
Uncertainties Associated with Expanding Operations
The Company operates 34 restaurants (as of September 26, 1999), 17 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'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
11
<PAGE> 12
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 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.
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
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.
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.
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, Robert Vivian, the Company's
Chief Financial Officer, Greg Carey, the Company's Chief Operating Officer, and
Frank Ziska, the Company's Chief Development 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 Culinary Partners, 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
12
<PAGE> 13
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.
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.
Minimum Wage
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.
13
<PAGE> 14
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.
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 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.
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". The 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
14
<PAGE> 15
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 expenditures 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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Management believes that the market risk associated with the Company's
market risk sensitive instruments as of September 26, 1999 is not material, and
therefore, disclosure is not required.
15
<PAGE> 16
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was not involved in any material legal proceedings as of
September 26, 1999.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION DOCUMENT
------- --------------------
<C> <S>
27.1 Financial Data Schedule.
</TABLE>
(b) Report on Form 8-K:
No reports on Form 8-K have been filed by the Company during the nine
months ended September 26, 1999.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on November 9, 1999.
P.F. CHANG'S CHINA BISTRO, INC.
By: /s/ RICHARD FEDERICO
------------------------------------
Richard Federico
Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RICHARD L. FEDERICO Chief Executive Officer, November 9, 1999
- --------------------------------------------------- President and Director
Richard L. Federico (Principal Executive
Officer)
/s/ ROBERT T. VIVIAN Chief Financial Officer and November 9, 1999
- --------------------------------------------------- Secretary (Principal
Robert T. Vivian Financial and Accounting
Officer)
</TABLE>
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION DOCUMENT
- ------- --------------------
<C> <S>
27.1 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR QUARTERLY PERIOD ENDED SEPTEMBER 26, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> JUN-28-1999
<PERIOD-END> SEP-26-1999
<EXCHANGE-RATE> 1
<CASH> 4,380
<SECURITIES> 0
<RECEIVABLES> 1,311
<ALLOWANCES> 0
<INVENTORY> 914
<CURRENT-ASSETS> 7,837
<PP&E> 53,515
<DEPRECIATION> 0
<TOTAL-ASSETS> 73,755
<CURRENT-LIABILITIES> 9,760
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 62,298
<TOTAL-LIABILITY-AND-EQUITY> 73,755
<SALES> 104,390
<TOTAL-REVENUES> 104,390
<CGS> 28,888
<TOTAL-COSTS> 84,818
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (390)
<INCOME-PRETAX> 6,610
<INCOME-TAX> 1,501
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,622
<EPS-BASIC> 0.35
<EPS-DILUTED> 0.32
</TABLE>
