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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 OCTOBER 1, 2000
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)
DELAWARE 86-0815086
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
15210 N. SCOTTSDALE RD., STE. 300, SCOTTSDALE, ARIZONA 85254
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 957-8986
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF
THE ACT:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [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 October 1, 2000, there were outstanding 10,411,960 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
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1. Financial Statements (Unaudited)............................................ 2
Condensed Consolidated Balance Sheets as of January 2, 2000
and October 1, 2000....................................................... 2
Condensed Consolidated Statements of Income for the Three
Months Ended September 26, 1999 and October 1, 2000 and for the
Nine Months Ended September 26, 1999 and October 1, 2000.................. 3
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 26, 1999 and October 1, 2000....................... 4
Notes to Unaudited Condensed Consolidated Financial Statements.............. 5
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 6
3. Quantitative and Qualitative Disclosures About Market Risk.................. 13
PART II OTHER INFORMATION
1. Legal Proceedings........................................................... 13
2. Changes in Securities and Use of Proceeds................................... 13
3. Defaults upon Senior Securities............................................. 13
4. Submission of Matters to a Vote of Security Holders......................... 13
5. Other Information........................................................... 14
6. Exhibits and Reports on Form 8-K............................................ 14
</TABLE>
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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
JANUARY 2, OCTOBER 1,
2000 2000
-----------------------
(IN THOUSANDS)
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ASSETS
Current assets:
Cash and cash equivalents .............................. $ 5,333 $ 2,685
Receivables ............................................ 1,275 3,727
Inventories ............................................ 1,085 1,494
Current portion of notes receivable from related
parties ............................................. 386 155
Prepaids and other current assets ...................... 1,204 2,241
-------- --------
Total current assets ..................................... 9,283 10,302
Construction-in-progress ................................. 7,041 7,828
Property and equipment, net .............................. 56,395 80,694
Goodwill, net ............................................ 7,438 7,453
Notes receivable from related parties, less current
portion .................................................. 251 --
Other assets ............................................. 1,299 2,120
-------- --------
Total assets ................................... $ 81,707 $108,397
======== ========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade ............................... $ 2,545 $ 4,105
Construction payable ................................... 1,244 1,610
Accrued payroll ........................................ 2,148 3,441
Sales and use tax payable .............................. 1,317 1,607
Other accrued expenses ................................. 3,376 4,382
Income tax liability ................................... 1,687 --
Unearned revenue ....................................... 1,676 1,349
Revolving Line of Credit ............................... -- 15,000
Current portion of long-term debt ...................... 281 254
-------- --------
Total current liabilities ................................ 14,274 31,748
Long-term debt ........................................... 1,548 1,558
Deferred income tax liability ............................ 601 1,171
Interests of minority members and partners in consolidated
limited liability companies and partnerships ........... 494 925
Common stockholders' equity:
Common stock, $0.001 par value, 20,000,000 shares
authorized: 10,254,856 shares issued and outstanding
at January 2, 2000 and 10,411,960 at
October 1, 2000 ..................................... 10 10
Additional paid-in capital ............................. 63,934 65,502
Retained earnings ...................................... 846 7,483
-------- --------
Total common stockholders' equity ........................ 64,790 72,995
-------- --------
Total liabilities and common stockholders' equity ........ $ 81,707 $108,397
======== ========
</TABLE>
See accompanying notes to unaudited condensed financial statements.
2
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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
------------------------ ------------------------
SEPT. 26, OCTOBER 1, SEPT. 26, OCTOBER 1,
1999 2000 1999 2000
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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Revenues ..................................... $ 40,961 $ 61,179 $ 104,390 $ 166,088
Costs and expenses:
Restaurant operating costs:
Cost of sales ........................... 11,405 16,996 28,888 45,806
Labor ................................... 12,268 18,118 31,203 48,988
Operating ............................... 7,030 10,696 17,811 28,615
Occupancy ............................... 2,588 3,798 6,916 10,411
--------- --------- --------- ---------
Total restaurant operating costs ...... 33,291 49,608 84,818 133,820
General and administrative ................. 2,452 3,042 6,600 8,892
Depreciation and amortization .............. 1,327 2,011 3,412 5,473
Preopening ................................. 1,313 2,021 3,340 4,187
--------- --------- --------- ---------
Income from operations ....................... 2,578 4,497 6,220 13,716
Interest income .............................. 40 33 390 98
--------- --------- --------- ---------
Income before elimination of minority members'
and partners' interests and provision for
income taxes ................................. 2,618 4,530 6,610 13,814
Elimination of minority members' and partners'
interests .................................. (671) (1,105) (1,487) (3,084)
--------- --------- --------- ---------
Income before provision for income taxes ..... 1,947 3,425 5,123 10,730
Provision for income taxes ................... (595) (1,305) (1,501) (4,093)
--------- --------- --------- ---------
Net income ................................... $ 1,352 $ 2,120 $ 3,622 $ 6,637
========= ========= ========= =========
Net income per share:
Basic ...................................... $ 0.13 $ 0.20 $ 0.35 $ 0.64
========= ========= ========= =========
Diluted .................................... $ 0.12 $ 0.19 $ 0.32 $ 0.59
========= ========= ========= =========
Weighted average shares used in computation:
Basic ...................................... 10,223 10,400 10,207 10,356
========= ========= ========= =========
Diluted .................................... 11,149 11,344 11,152 11,324
========= ========= ========= =========
</TABLE>
See accompanying notes to unaudited condensed financial statements.
3
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P.F. CHANG'S CHINA BISTRO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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NINE MONTHS ENDED
----------------------
SEPT. 26, OCTOBER 1,
1999 2000
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(IN THOUSANDS)
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OPERATING ACTIVITIES:
Net income .......................................... $ 3,622 $ 6,637
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................... 3,086 5,142
Amortization of goodwill .......................... 326 331
Minority members' and partners' interests ......... 1,487 3,084
Changes in operating assets and liabilities:
Receivables .................................... 1,481 (2,452)
Inventories .................................... (241) (409)
Prepaids and other current assets .............. (356) (1,037)
Other assets ................................... (643) (821)
Accounts payable -- trade ...................... (826) 1,560
Construction payable ........................... (165) 366
Accrued payroll ................................ (167) 1,293
Sales and use tax payable ...................... 330 290
Other accrued expenses ......................... 738 1,006
Income tax liability ........................... 1,122 (644)
Unearned revenue ............................... (63) (327)
-------- --------
Net cash provided by operating activities ........... 9,731 14,019
INVESTING ACTIVITIES:
Capital expenditures ................................ (22,935) (30,228)
Increase (decrease) in notes receivable from related
parties ............................................. 237 482
-------- --------
Net cash used in investing activities ............... (22,698) (29,746)
FINANCING ACTIVITIES:
Proceeds from revolving line of credit, net of
repayments .......................................... -- 15,000
Repayments of long-term debt ........................ (388) (233)
Proceeds from stock options exercised and employee
stock purchases ..................................... 457 1,095
Proceeds from minority partners contributions ....... 311 390
Purchase of minority interests ...................... -- 102
Distributions to minority members and partners ...... (1,890) (3,275)
-------- --------
Net cash provided by (used in) financing activities . (1,510) 13,079
-------- --------
Net decrease in cash and cash equivalents ........... (14,477) (2,648)
Cash and cash equivalents at the beginning of the
period .............................................. 18,857 5,333
-------- --------
Cash and cash equivalents at the end of the period .. $ 4,380 $ 2,685
======== ========
Supplemental disclosure of cash flow information:
Purchase of minority interests through issuance of LT
debt and conversion to members capital .............. $ -- $ 346
Cash paid for interest .............................. 32 494
Cash paid for income taxes .......................... 379 5,637
Benefit from disqualifying stock option dispositions
credited to equity ................................ -- 473
</TABLE>
See accompanying notes to unaudited condensed financial statements.
4
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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 49 full
service restaurants (as of October 1, 2000) throughout the United States 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
October 1, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
The balance sheet at January 2, 2000 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 January 2, 2000 included in the
Company's Form 10-K.
2. NET INCOME PER SHARE
Net income per share is computed in accordance with SFAS No. 128, "Earnings
per Share." Basic net income per share is computed based on the weighted average
of common shares outstanding during the period. Diluted net income per share is
computed based on the weighted average number of common shares and common stock
equivalents, which includes options under the Company's stock option plans and
outstanding warrants.
3. CREDIT FACILITY
In December of 1999, the Company entered into a credit facility with a
commercial lending institution. The credit facility allowed for borrowings up to
$15 million at an interest rate ranging from 150 to 225 basis points over the
applicable London Interbank Offered Rate (LIBOR). In June of 2000, the Company
amended the credit facility to allow for borrowings up to $45 million at an
interest rate ranging from 100 to 225 basis points over the applicable LIBOR.
The revolving credit facility expires on November 30, 2002. All of the
borrowings under this facility are short-term in nature and have maturity dates
ranging from one to six months. The credit facility contains certain
restrictions and conditions which require the Company to: maintain a minimum
tangible net worth, a leverage ratio at a maximum of 3.75: 1.00 and a
fixed-charge ratio no less than 1.25: 1.00. The Company had borrowings totaling
$15 million under the credit facility as of October 1, 2000. The Company has not
recorded interest expense related to borrowings under the credit facility thus
far in fiscal 2000 since all borrowings under the credit facility have been to
fund the construction of new restaurants; thus interest incurred to date on the
Company's credit facility has been capitalized to the extent allocable in
accordance with generally accepted accounting principles. Interest paid under
the credit facility for the nine months ended October 1, 2000 was $358,000.
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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 concerning the
Company which involve risks and uncertainties. Such forward-looking statements
may be deemed to include those regarding 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.
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. 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.
OVERVIEW
P.F. Chang's owns and operates 49 full service restaurants (as of October 1,
2000) 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, 10 in 1998 and 13 in 1999.
The Company intends to open 16 new restaurants in fiscal year 2000 (thirteen
of which were open as of October 1, 2000). The units that the Company intends to
develop in 2000 will be situated in approximately eight new markets across the
United States. All of the remaining units planned for 2000 are currently under
construction. Additionally, the Company anticipates opening thirteen to fourteen
restaurants in 2001. The Company has signed lease agreements or letters of
intent for all of these units. 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 $2.1
million and a total capitalized investment of approximately $3.1 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."
The Company believes that there is an opportunity to leverage its knowledge
and expertise in Chinese and Asian cuisine. Accordingly, the Company has
dedicated a limited amount of resources (both human and capital) to develop Pei
Wei Asian Diner ("Pei Wei"), a new concept that will cater to a quicker, more
casual dining experience as compared to P.F. Chang's China Bistro. Pei Wei
opened its first unit in July 2000 in the Phoenix area. The Company has
committed to opening one additional Pei Wei unit in the Phoenix area. Capital
required for these two units will approximate $1.5 million in total. Additional
resources may be allocated to Pei Wei in the future should Pei Wei demonstrate
attractive unit-level return characteristics.
RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly information for
the three months ended September 26, 1999 and October 1, 2000 and for the nine
months ended September 26, 1999 and October 1, 2000, 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 continue to have, a
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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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SEPT. 26, OCTOBER 1, SEPT. 26, OCTOBER 1,
1999 2000 1999 2000
----------- ----------- ----------- --------
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STATEMENTS OF OPERATIONS DATA:
Revenues (in thousands) ............... $ 40,961 $ 61,179 $ 104,390 $ 166,088
Costs and expenses:
Restaurant operating costs:
Cost of sales .................... 27.8% 27.8% 27.7% 27.6%
Labor ............................ 30.0 29.6 29.9 29.5
Operating ........................ 17.2 17.5 17.1 17.2
Occupancy ........................ 6.3 6.2 6.6 6.3
---------- ---------- ---------- ----------
Total restaurant operating costs 81.3 81.1 81.3 80.6
General and administrative .......... 6.0 5.0 6.3 5.4
Depreciation and amortization ....... 3.2 3.3 3.3 3.3
Preopening expense .................. 3.2 3.3 3.2 2.5
---------- ---------- ---------- ----------
Income from operations ................ 6.3 7.3 5.9 8.2
Interest income (expense), net ........ 0.1 0.0 0.4 0.1
Elimination of minority interests ..... (1.6) (1.8) (1.4) (1.8)
---------- ---------- ---------- ----------
Income before provision for income
taxes ................................. 4.8 5.5 4.9 6.5
Provision for income taxes ............ (1.5) (2.1) (1.4) (2.5)
---------- ---------- ---------- ----------
Net income ............................ 3.3% 3.4% 3.5% 4.0%
========== ========== ========== ==========
</TABLE>
Revenues
The Company's revenues are derived entirely from food and beverage sales.
Revenues increased by $20.2 million, or 49.3%, to $61.2 million in the three
months ended October 1, 2000 from $41.0 million in the three months ended
September 26, 1999. Revenues increased by $61.7 million, or 59.1%, to $166.1
million in the nine months ended October 1, 2000 from $104.4 million in the nine
months ended September 26, 1999. The increase in third quarter 2000 revenues
compared to third quarter 1999 revenues was primarily attributable to revenues
of $12.5 million generated by new restaurants opened subsequent to September 26,
1999, a $7.2 million increase in revenues in the three months ended October 1,
2000 for existing restaurants and $510,000 of revenues generated by Pei Wei
Asian Diner, Inc. The increase in year-to-date revenues for the nine months
ended October 1, 2000 compared to the nine months ended September 26, 1999 was
primarily attributable to revenues of $22.6 million generated by new restaurants
opened subsequent to September 26, 1999, a $38.6 million increase in revenues in
the nine months ended October 1, 2000 for existing restaurants and $510,000 of
revenues generated by Pei Wei Asian Diner, Inc. Increased customer visits
produced comparable restaurant sales gains of 10.9% in the three months ended
October 1, 2000 and 13.0% in the nine months ended October 1, 2000. 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 remained consistent as a percentage of revenues at 27.8% in the
three months ended October 1, 2000 and the three months ended September 26,
1999. Cost of sales decreased nominally as a percentage of revenues to 27.6% in
the nine months ended October 1, 2000 from 27.7% in the nine months ended
September 26, 1999. The Company does not anticipate a significant change in
commodity prices for the balance of the year.
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 29.6% in the three months ended October 1,
2000 from 30.0% in the three months ended September 26, 1999. Labor expenses
decreased to 29.5% in the nine months ended October 1, 2000 from 29.9% in the
nine months ended September 26, 1999. The decrease in labor expenses was
primarily due to improvements in the management of hourly staff levels in the
restaurants as the Company's restaurants mature. However, as a result of
tightening labor markets around the country, the Company has continued to
experience an increase in its hourly wage rates across its system. The Company
expects that tighter labor markets will continue to exert upward pressure on its
labor costs for the remainder of 2000 and 2001.
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
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17.5% in the three months ended October 1, 2000 from 17.2% in the three months
ended September 26, 1999 due primarily to rising utility costs, particularly in
Southern California. Operating expenses increased nominally for the nine months
ended October 1, 2000 to 17.2% from 17.1% in the nine months ended September 26,
1999.
Occupancy. Occupancy costs include both fixed and variable portions of rent,
common area maintenance charges, property insurance and property taxes.
Occupancy costs decreased nominally as a percentage of revenues to 6.2% in the
three months ended October 1, 2000 from 6.3% in the three months ended September
26, 1999. Occupancy costs decreased as a percentage of revenues to 6.3% in the
nine months ended October 1, 2000 from 6.6% in the nine months ended September
26, 1999. The decrease in occupancy was primarily the result of the increased
revenue base and, to a lesser extent, more favorable lease terms associated with
new restaurants.
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 $3.0 million (5.0% of revenues) in the
three months ended October 1, 2000 from $2.5 million (6.0% of revenues) in the
three months ended September 26, 1999. General and administrative expenses
increased to $8.9 million (5.4% of revenues) in the nine months ended October 1,
2000 from $6.6 million (6.3% of revenues) in the nine months ended September 26,
1999. The increase was due primarily to the addition of corporate management
personnel which resulted in approximately $350,000 and $1.5 million of
additional compensation and benefits expense for the three months ended October
1, 2000 and the nine months ended October 1, 2000 respectively, as well as
additional costs to support a larger restaurant base, including additional
travel expenses, consulting fees and accounting and legal 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 (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 minority ownership interests. Depreciation
and amortization increased to $2.0 million in the three months ended October 1,
2000 from $1.3 million in the three months ended September 26, 1999.
Depreciation and amortization increased to $5.5 million in the nine months ended
October 1, 2000 from $3.4 million in the nine months ended September 26, 1999.
The increase was primarily due to depreciation and amortization on fixed assets
purchased for new restaurants opened subsequent to September 26, 1999 totaling
$526,000 and $1.1 million for the three months ended October 1, 2000 and the
nine months ended October 1, 2000, respectively; as well as a full year's
depreciation and amortization on fixed assets in restaurants opened during the
first three quarters of 1999.
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 expenses, employee payroll and
related training costs. Preopening expenses in the three months ended October 1,
2000 increased to $2.0 million from $1.3 million in the three months ended
September 26, 1999 and increased to $4.2 million in the nine months ended
October 1, 2000 from $3.3 million in the nine months ended September 26, 1999.
Preopening expenses in the three month period ended October 1, 2000 and the nine
month period ended October 1, 2000 increased primarily due to the fact that the
company opened 13 restaurants in the first nine months of 2000 compared to only
11 new restaurants in the first nine months of 1999. Additionally, due to
construction delays in opening some of our restaurants in the third quarter of
2000, the company incurred higher than expected preopening costs on those
restaurants.
Interest income (expense), net
Interest income decreased to $33,000 in the three months ended October 1,
2000 from $40,000 in the three months ended September 26, 1999. Interest income
decreased to $98,000 in the nine months ended October 1, 2000 from $390,000 in
the nine months ended September 26, 1999. The decrease was due to the Company's
use of its current cash reserves for restaurant development (see "Liquidity and
Capital Resources" below). The Company has not recorded interest expense thus
far in fiscal 2000 since all borrowings under its credit facility have been to
fund the construction of new restaurants; thus interest incurred to date on the
Company's credit facility has been capitalized to the extent allocable in
accordance with generally accepted accounting principles. Interest paid under
the credit facility for the nine months ended October 1, 2000 was $358,000
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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 $1.1 million for the three months ended
October 1, 2000 from $671,000 for the three months ended September 26, 1999.
Elimination of minority interests increased to $3.1 million for the nine months
ended October 1, 2000 from $1.5 for the nine months ended September 26, 1999.
The increase in both periods was due primarily to the addition of new
restaurants and an increase in the operating profit of those restaurants.
Provision for income taxes
The provision for income taxes increased to $1.3 million for the three
months ended October 1, 2000 from $595,000 for the three months ended September
26, 1999 and increased to $4.1 million for the nine months ended October 1, 2000
from $1.5 million for the nine months ended September 26, 1999. The increase in
the tax provision was due primarily to higher profitability in both periods
without the benefit of any net operating loss carryforward. The income tax
provision for 2000 differs from the expected provision for income taxes, derived
by applying the statutory income tax rate, due primarily to state income tax
benefits and wage related tip credits. The income tax provision for 1999 differs
from the expected provision for income taxes, derived by applying the statutory
income tax rate, as a result of 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 and cash flows from operations. Net
cash provided by operating activities was $14.0 million and $9.7 million for the
nine months ended October 1, 2000 and September 26, 1999, respectively. Net cash
provided by operating activities exceeded net income for the nine months ended
October 1, 2000 due principally to the effect of minority interest, depreciation
and amortization, offset by an increase in receivables (amounts due from
landlords for tenant improvements). Net cash provided by operating activities
exceeded net income for the nine months ended September 26, 1999 due principally
to the effect of minority interest, depreciation and amortization, and a
reduction in receivables.
The Company uses cash primarily to fund the development and construction of
new restaurants. Net cash used in investing activities for the nine months ended
October 1, 2000 and September 26, 1999 was $29.7 million and $22.7 million,
respectively. Capital expenditures made up the majority of its investing
activities in both periods. The Company intends to open 3 new restaurants for
the remainder of 2000 (13 new restaurants were opened during the first nine
months of 2000) and another 13 to 14 new restaurants in 2001. The Company
expects that its planned future restaurants will require, on average, a total
cash investment per restaurant, exclusive of landlord contributions, of
approximately $2.1 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 provided by financing activities for the nine months ended October
1, 2000 was $13.1 million compared to net cash used in financing activities for
the nine months ended September 26, 1999 of $1.5 million. Financing activities
in the first nine months of 2000 consisted principally of proceeds on the
Company's credit facility, offset by distributions to minority partners.
Financing activities in the first nine months of 1999 consisted principally of
distributions to minority partners.
In December of 1999, the Company entered into a credit facility with a
commercial lending institution. The credit facility allowed for borrowings up to
$15 million at an interest rate ranging from 150 to 225 basis points over the
applicable London Interbank Offered Rate (LIBOR). In June of 2000, the Company
amended the credit facility to allow for borrowings up to $45 million at an
interest rate ranging from 100 to 225 basis points over the applicable LIBOR.
The revolving credit facility matures on November 30, 2002 and contains certain
restrictions and conditions which require the Company to: maintain a minimum
tangible net worth, a leverage ratio at a maximum of 3.75: 1.00 and a
fixed-charge ratio no less than 1.25: 1.00. The Company had borrowings totaling
$15 million under the credit facility as of October 1, 2000.
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<PAGE> 11
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 credit
facility will be sufficient to fund its capital requirements through 2002. 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
Uncertainties Associated with Expanding Operations
The Company operates 49 restaurants (as of October 1, 2000), 15 of which
have been opened within the last twelve months. The results achieved to date by
the Company's existing 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 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.
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.
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
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<PAGE> 12
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, seasonality, 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."
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.
Minimum Wage
A number of the Company's employees are subject to various minimum wage
requirements. The federal minimum wage increased to $5.15 per hour effective
September 1, 1997. In addition, many of the Company's employees work in
restaurants located in California and receive salaries equal to the California
minimum wage, which 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. The Company believes that the federal minimum wage
will be increased again within the next 12 months. Such minimum wage increases
could have a material adverse effect on 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
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<PAGE> 13
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 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.
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 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.
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
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<PAGE> 14
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.
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 October 1, 2000 is not material, and
therefore, disclosure is not required.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was not involved in any material legal proceedings as of October
1, 2000.
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
The Company's Annual Meeting of Stockholders was held on April 26, 2000.
There were three proposals up for approval. The results of voting are as
follows:
1) The election of the entire Board of Directors:
<TABLE>
<CAPTION>
TOTAL
TOTAL VOTES
VOTES FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C>
Richard L. Federico....................... 7,510,319 1,635
Paul M. Fleming........................... 7,510,414 1,540
J. Michael Chu............................ 7,502,674 9,280
R. Michael Welborn........................ 7,510,414 1,540
James G. Shennan.......................... 7,510,319 1,635
Lane Cardwell............................. 7,510,019 1,935
</TABLE>
2) The amendment to the 1998 Stock Option Plan to increase the number of
shares reserved for issuance thereunder by 400,000 shares:
<TABLE>
<CAPTION>
TOTAL
TOTAL VOTES
VOTES FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C>
6,039,853 1,462,521 9,580
</TABLE>
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<PAGE> 15
3) The ratification of the appointment of Ernst & Young LLP as the Company's
independent auditors:
<TABLE>
<CAPTION>
TOTAL
TOTAL VOTES
VOTES FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C>
7,505,119 5,985 850
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION DOCUMENT
<S> <C>
10.1 Amendment to Credit Agreement, dated
June 26, 2000, between the Company and
Bank of America, N.A.
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 October 1, 2000.
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<PAGE> 16
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 14, 2000.
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
--------- ----- ----
<S> <C> <C>
/s/ RICHARD L. FEDERICO Chief Executive Officer, November 14, 2000
--------------------------- President and Director
Richard L. Federico (Principal Executive Officer)
/s/ ROBERT T. VIVIAN Chief Financial Officer and November 14, 2000
--------------------------- Secretary (Principal Financial
Robert T. Vivian and Accounting Officer)
</TABLE>
15
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION DOCUMENT
<S> <C>
10.1 Amendment to Credit Agreement, dated June
26, 2000, between the Company and Bank of
America, N.A.
27.1 Financial Data Schedule.
</TABLE>
16
