Form 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 28, 2009


o		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.)

7676 East Pinnacle Peak Road		85255
Scottsdale, Arizona		(Zip Code)
(Address of principal executive offices)

Registrant’s telephone number, including area code:

(480) 888-3000

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 reports, and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of June 28, 2009, there were 23,361,502 outstanding shares of the registrant’s Common Stock.

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

P.F. CHANG’S CHINA BISTRO, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)


	June 28,			December 28,
	2009			2008
	(Unaudited)			(Note 1)

ASSETS
Current assets:
Cash and cash equivalents	$	31,462		$	40,951
Inventories		4,905			4,930
Other current assets		31,947			51,643

Total current assets		68,314			97,524
Property and equipment, net		508,568			524,004
Goodwill		6,819			6,819
Intangible assets, net		23,116			24,270
Other assets		16,926			14,746

Total assets	$	623,743		$	667,363


LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	18,603		$	15,203
Construction payable		4,509			4,358
Accrued expenses		68,544			71,162
Unearned revenue		23,154			31,115
Current portion of long-term debt, including $1,353 and $3,502 due to related parties at June 28, 2009 and December 28, 2008, respectively		2,035			5,753

Total current liabilities		116,845			127,591
Long-term debt, including $131 and $1,073 due to related parties at June 28, 2009 and December 28, 2008, respectively		41,381			82,496
Lease obligations		110,747			113,178
Other liabilities		18,316			14,691
Commitments and contingencies (Note 10)		—			—

Total liabilities		287,289			337,956
Equity:
PFCB common stockholders’ equity:
Common stock, $0.001 par value, 40,000,000 shares authorized: 23,361,502 shares and 24,114,107 shares issued and outstanding at June 28, 2009 and December 28, 2008, respectively		28			27
Additional paid-in capital		211,160			206,667
Treasury stock, at cost, 4,460,924 shares and 3,634,979 shares at June 28, 2009 and December 28, 2008, respectively		(125,923	)		(106,372	)
Accumulated other comprehensive loss		(601	)		(755	)
Retained earnings		246,213			221,259

Total PFCB common stockholders’ equity		330,877			320,826
Noncontrolling interests		5,577			8,581
Total equity		336,454			329,407

Total liabilities and equity	$	623,743		$	667,363

See accompanying notes to unaudited consolidated financial statements.

P.F. CHANG’S CHINA BISTRO, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended						Six Months Ended
	June 28,			June 29,			June 28,			June 29,
	2009			2008			2009			2008

Revenues	$	301,360		$	301,533		$	611,197		$	607,450
Costs and expenses:
Cost of sales		79,657			82,132			162,729			165,662
Labor		98,111			99,971			198,818			203,352
Operating		48,809			49,366			99,500			97,427
Occupancy		17,403			17,511			34,781			35,137
General and administrative		20,523			19,128			40,337			37,649
Depreciation and amortization		18,575			17,150			37,071			33,520
Preopening expense		461			1,808			949			4,627
Partner investment expense		(91	)		(500	)		(555	)		(89	)

Total costs and expenses		283,448			286,566			573,630			577,285

Income from operations		17,912			14,967			37,567			30,165
Interest and other income (expense), net		(437	)		(949	)		(1,377	)		(1,883	)

Income from continuing operations before taxes		17,475			14,018			36,190			28,282
Provision for income taxes		(5,108	)		(3,636	)		(10,061	)		(7,217	)

Income from continuing operations, net of tax		12,367			10,382			26,129			21,065
Loss from discontinued operations, net of tax		(474	)		(525	)		(517	)		(854	)

Net income		11,893			9,857			25,612			20,211
Less: Net income attributable to noncontrolling interests		288			487			658			1,192

Net income attributable to PFCB	$	11,605		$	9,370		$	24,954		$	19,019


Basic income per share:
Income from continuing operations attributable to PFCB common stockholders	$	0.52		$	0.41		$	1.10		$	0.83
Loss from discontinued operations, net of tax, attributable to PFCB common stockholders		(0.02	)		(0.02	)		(0.03	)		(0.04	)

Net income attributable to PFCB common stockholders	$	0.50		$	0.39		$	1.07		$	0.79


Diluted income per share:
Income from continuing operations attributable to PFCB common stockholders	$	0.51		$	0.41		$	1.08		$	0.82
Loss from discontinued operations, net of tax, attributable to PFCB common stockholders		(0.02	)		(0.02	)		(0.03	)		(0.04	)

Net income attributable to PFCB common stockholders	$	0.49		$	0.39		$	1.05		$	0.78


Weighted average shares used in computation:
Basic		23,057			23,898			23,249			23,935

Diluted		23,526			24,247			23,660			24,271


Amounts attributable to PFCB:
Income from continuing operations, net of tax	$	12,079		$	9,895		$	25,471		$	19,873
Loss from discontinued operations, net of tax		(474	)		(525	)		(517	)		(854	)

Net income attributable to PFCB	$	11,605		$	9,370		$	24,954		$	19,019

See accompanying notes to unaudited consolidated financial statements.

P.F. CHANG’S CHINA BISTRO, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands)

(Unaudited)


	PFCB Common Stockholders
												Accumulated
						Additional						other
	Common Stock					paid-in			Treasury			comprehensive			Retained		Noncontrolling
	Shares			Amount		capital			stock			loss			earnings		interests			Total
Balances, December 28, 2008		24,114		$	27	$	206,667		$	(106,372	)	$	(755	)	$	221,259	$	8,581		$	329,407
Issuance of common stock under stock option plans		78			1		926			—			—			—		—			927
Issuance of common stock under employee stock purchase plan		21			—		349			—			—			—		—			349
Issuance of restricted stock under incentive plans, net of forfeitures		(25	)		—		—			—			—			—		—			—
Purchases of treasury stock		(826	)		—		—			(19,551	)		—			—		—			(19,551	)
Share-based compensation expense⁽¹⁾		—			—		4,112			—			—			—		—			4,112
Tax benefit from share-based compensation, net		—			—		106			—			—			—		—			106
Unrealized loss on derivatives		—			—		—			—			154			—		—			154
Distributions to noncontrolling interest partners		—			—		—			—			—			—		(1,103	)		(1,103	)
Contributions from noncontrolling interest partners		—			—		—			—			—			—		10			10
Purchases of noncontrolling interests		—			—		(1,000	)		—			—			—		(2,275	)		(3,275	)
Partner investment expense		—			—		—			—			—			—		(555	)		(555	)
Partner bonus expense, imputed		—			—		—			—			—			—		261			261
Net income		—			—		—			—			—			24,954		658			25,612

Balances, June 28, 2009		23,362		$	28	$	211,160		$	(125,923	)	$	(601	)	$	246,213	$	5,577		$	336,454


⁽¹⁾		Share-based compensation expense includes equity-settled awards only

See accompanying notes to unaudited consolidated financial statements.

P.F. CHANG’S CHINA BISTRO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended
	June 28,			June 29,
	2009			2008
Operating Activities:
Net income	$	25,612		$	20,211
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		37,071			34,091
Share-based compensation		5,058			4,481
Net lease termination charges in discontinued operations		712			—
Partner investment expense		(555	)		(89	)
Partner bonus expense, imputed		261			507
Deferred income taxes		(1,542	)		1,622
Tax benefit from share-based compensation, net		(106	)		(140	)
Other		61			54
Changes in operating assets and liabilities:
Inventories		25			(73	)
Other current assets		23,818			1,624
Other assets		(1,342	)		(1,599	)
Accounts payable		3,400			(1,614	)
Accrued expenses		(5,002	)		3,695
Unearned revenue		(7,961	)		(6,295	)
Lease obligations		(1,644	)		12,651
Other long-term liabilities		999			600

Net cash provided by operating activities		78,865			69,726

Investing Activities:
Capital expenditures		(20,773	)		(45,792	)
Capitalized interest		(97	)		(437	)

Net cash used in investing activities		(20,870	)		(46,229	)

Financing Activities:
Repayments of long-term debt		(44,857	)		(10,783	)
Purchases of treasury stock		(19,551	)		(10,014	)
Purchases of noncontrolling interests		(3,275	)		(5,366	)
Proceeds from stock options exercised and employee stock purchases		1,276			588
Distributions to noncontrolling interest partners		(1,103	)		(2,058	)
Payments of capital lease obligations		(90	)		(83	)
Contributions from noncontrolling interest partners		10			170
Tax benefit from share-based compensation, net		106			140

Net cash used in financing activities		(67,484	)		(27,406	)

Net decrease in cash and cash equivalents		(9,489	)		(3,909	)
Cash and cash equivalents at the beginning of the period		40,951			24,055

Cash and cash equivalents at the end of the period	$	31,462		$	20,146


Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	2,259		$	3,186
Cash paid for income taxes, net of refunds	$	3,801		$	3,376

Supplemental Disclosure of Non-Cash Items:
Purchases of noncontrolling interests through issuance of long-term debt	$	—		$	2,431
Change in construction payable	$	151		$	(5,379	)

See accompanying notes to unaudited consolidated financial statements.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Business and Basis of Presentation

As of June 28, 2009, P.F. Chang’s China Bistro, Inc. (the “Company” or “PFCB”) owned and operated 190 full service restaurants throughout the United States under the name of P.F. Chang’s China Bistro (the “Bistro”). The Company also owned and operated 161 quick casual restaurants under the name of Pei Wei Asian Diner (“Pei Wei”).

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 28, 2009 are not necessarily indicative of the results that may be expected for the year ending January 3, 2010.

The consolidated balance sheet at December 28, 2008 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2008.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Principles of Consolidation and Presentation

The Company’s consolidated financial statements include the accounts and operations of the Company and its majority-owned subsidiaries. All material balances and transactions between the consolidated entities have been eliminated. In accordance with the Company’s fiscal 2009 adoption of Statement of Financial Accounting Standards (“SFAS”) No. 160, Noncontrolling Interests in Consolidated Statements, an amendment of ARB No. 51 (“SFAS 160”), noncontrolling interests (previously shown as minority interest) are reported below net income under the heading “Net income attributable to noncontrolling interests” in the consolidated income statements and shown as a component of equity in the consolidated balance sheets. See Recent Accounting Pronouncements for further discussion.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) approved the FASB Accounting Standards Codification (“the Codification”) as the single source of authoritative nongovernmental GAAP. All existing accounting standard documents, such as FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the Securities and Exchange Commission (“SEC”), will be superseded by the Codification. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative. The Codification does not change GAAP, but instead introduces a new structure that will combine all authoritative standards into a comprehensive, topically organized online database. The Codification will be effective for interim or annual periods ending after September 15, 2009, and will impact the Company’s financial statement disclosures beginning with the quarter ending September 27, 2009 as all future references to authoritative accounting literature will be referenced in accordance with the Codification. There will be no changes to the content of the Company’s financial statements or disclosures as a result of implementing the Codification.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date, but before the financial statements are issued or available to be issued (“subsequent events”). SFAS 165 requires disclosure of the date through which the entity has evaluated subsequent events and the basis for that date. For public entities, this is the date the financial statements are issued. SFAS 165 does not apply to subsequent events or transactions that are within the scope of other GAAP and will not result in significant changes in the subsequent events reported by the Company. SFAS 165 is effective for interim or annual periods ending after June 15, 2009. The Company implemented SFAS 165 during the quarter ended June 28, 2009. The Company evaluated for subsequent events through July 22, 2009, the issuance date of the Company’s financial statements. No recognized or non-recognized subsequent events were noted.

In April 2009, the FASB issued FASB Staff Position (“FSP”) FAS No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”), which amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about the fair value of financial instruments for interim reporting periods, as well as annual reporting periods. FSP FAS 107-1 and APB 28-1 are effective for all interim and annual reporting periods ending after June 15, 2009 and did not impact the Company’s consolidated financial statements.

In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). This change is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under Statement No. 141R (revised 2007), “Business Combinations” (“SFAS 141R”) and other GAAP. The requirement for determining useful lives must be applied prospectively to intangible assets acquired after the effective date and the disclosure requirements must be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of FSP 142-3 did not impact the Company’s consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, (“SFAS 161”). SFAS 161 requires companies to provide enhanced disclosures about derivative instruments and hedging activities to enable investors to better understand the effects of such instruments and activities on a company’s financial position, financial performance and cash flows. Under SFAS 161, companies are required to disclose the fair value of derivative instruments and their gains and losses in a tabular format. SFAS 161 is effective for fiscal years beginning after November 15, 2008. The implementation of SFAS 161 did not impact the Company’s consolidated financial statements.

In February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date of Statement No. 157, “Fair Value Measurements” (“SFAS 157”), for most nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. The implementation of SFAS 157 for nonfinancial assets and nonfinancial liabilities did not impact the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS 141R, which establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the target at the acquisition date. SFAS 141R is effective for fiscal years beginning after December 15, 2008 with early application prohibited. The Company adopted SFAS 141R at the beginning of fiscal 2009, and this guidance will be implemented for any future business combinations entered into after the effective date.

SFAS 160 — Noncontrolling Interests

In December 2007, the FASB issued SFAS 160 which changes the accounting and reporting for minority interests such that they will be recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions with minority interest holders. SFAS 160 is effective for fiscal years beginning after December 15, 2008 with early application prohibited.

As a result of adopting SFAS 160, at the start of fiscal 2009, the Company no longer records an intangible asset when the purchase price of a noncontrolling interest exceeds the book value at the time of buyout. Any excess or shortfall for buyouts of noncontrolling interests in mature restaurants is recognized as an adjustment to additional paid-in capital in stockholders’ equity. Any shortfall resulting from the early buyout of noncontrolling interests will continue to be recognized as a benefit in partner investment expense up to the initial amount recognized at the time of buy-in. Additionally, operating losses can be allocated to noncontrolling interests even when such allocation results in a deficit balance (i.e. book value can go negative).

The Company presents noncontrolling interests (previously shown as minority interest) as a component of equity on the consolidated balance sheets. Minority interest expense is no longer separately reported as a reduction to net income on the consolidated income statement, but is instead shown below net income under the heading “net income attributable to noncontrolling interests.” Total provision for income taxes remains unchanged; however, the Company’s effective tax rate as calculated from the balances shown on the consolidated income statement has changed as net income attributable to noncontrolling interests is no longer included as a deduction in the determination of income from continuing operations. The adoption of SFAS 160 did not have any other material impact on the Company’s consolidated financial statements.

2. Discontinued Operations

Discontinued operations include results attributable to 10 Pei Wei restaurants that were closed during the fourth quarter of 2008 and Taneko Japanese Tavern (“Taneko”), a third restaurant concept developed in 2006 and the assets of which were sold on August 1, 2008. Loss from discontinued operations includes both the historical results of operations as well as estimated and actual lease termination costs associated with the 10 closed Pei Wei restaurants and Taneko.

Loss from discontinued operations, net of tax is comprised of the following (in thousands):


	Three Months Ended						Six Months Ended
	June 28,			June 29,			June 28,			June 29,
	2009			2008			2009			2008

Revenues	$	—		$	3,022		$	—		$	6,424

Loss from discontinued operations before income tax benefit⁽¹⁾		(778	)		(831	)		(848	)		(1,367	)
Income tax benefit		304			306			331			513

Loss from discontinued operations, net of tax	$	(474	)	$	(525	)	$	(517	)	$	(854	)


(1)		Includes net impact of non-cash charges and credits recognized for the three and six months ended June 28, 2009 in connection with lease settlement activity.

The Company is pursuing lease termination agreements with each of the closed Pei Wei restaurant’s landlords as well as potential sub-tenant agreements. Lease termination agreements for six of the ten locations had been executed as of June 28, 2009.

Activity associated with the lease termination accrual is summarized below (in thousands):


	Lease Termination
	Accrual

Balance, December 28, 2008	$	2,379
Cash payments		(1,505	)
Charges		1,402

Balance, June 28, 2009	$	2,276

Charges include additional amounts recognized based on updated estimates of anticipated lease termination costs for certain closed locations where the accrual recorded at the time of lease termination was insufficient. Cash payments include settlement payments and ongoing rent payments. Through June 28, 2009, the Company has recognized a total of $4.0 million in lease termination charges for the closed Pei Wei locations which was reported in discontinued operations. The lease termination accrual is included in accrued expenses on the consolidated balance sheets with the timing of payments uncertain.

3. Income from Continuing Operations Attributable to PFCB per Share

Basic income from continuing operations attributable to PFCB per share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted income from continuing operations attributable to PFCB per share is computed based on the weighted average number of shares of common stock and potentially dilutive securities, which includes options, restricted stock and restricted stock units (“RSUs”) outstanding under the Company’s stock option plans and the employee stock purchase plan. For the three months ended June 28, 2009 and June 29, 2008, 2.2 million and 2.4 million, respectively, of the Company’s shares were excluded from the calculation due to their anti-dilutive effect. For the six months ended June 28, 2009 and June 29, 2008, 2.3 million and 2.4 million, respectively, of the Company’s shares were excluded from the calculation due to their anti-dilutive effect.

4. Intangible Assets

Intangible assets were historically recognized upon the Company’s buyout of noncontrolling interests when the Company’s purchase price exceeded the imputed fair value at the time of the partners’ original investment. In accordance with the Company’s adoption of SFAS 160, beginning December 29, 2008, an intangible asset is no longer recognized upon buyout of noncontrolling interests. Instead, any excess of the Company’s purchase price over the imputed fair value is recognized as additional paid-in capital in equity. Intangible assets outstanding as of December 28, 2008 will continue to be amortized over their useful lives.

Intangible assets consist of the following (in thousands):


	June 28,			December 28,
	2009			2008

Intangible assets, gross	$	29,863		$	29,863
Accumulated amortization		(6,747	)		(5,593	)

Intangible assets, net	$	23,116		$	24,270

5. Accrued Expenses

Accrued expenses consist of the following (in thousands):


	June 28,		December 28,
	2009		2008

Accrued payroll	$	21,224	$	25,409
Accrued insurance		17,490		16,130
Sales and use tax payable		5,726		5,026
Property tax payable		3,699		4,151
Accrued rent		3,090		4,315
Other accrued expenses		17,315		16,131

Total accrued expenses	$	68,544	$	71,162

6. Long-Term Debt

Credit Facility

On August 31, 2007, the Company entered into a senior credit facility (“Credit Facility”) with several commercial financial institutions, which allows for borrowings of up to $150.0 million. The Credit Facility expires on August 30, 2013 and contains customary representations, warranties, negative and affirmative covenants, including a requirement to maintain a maximum leverage ratio, as defined, of 2.5:1 and a minimum fixed charge coverage ratio, as defined, of 1.25:1, as well as customary events of default and certain default provisions that could result in acceleration of the Credit Facility. The Company was in compliance with these restrictions and conditions as of June 28, 2009 as the Company’s leverage ratio was 1.26:1 and the fixed charge coverage ratio was 2.17:1.

The Credit Facility is guaranteed by the Company’s material existing and future domestic subsidiaries. As of June 28, 2009, the Company had borrowings outstanding under the Credit Facility totaling $40.0 million as well as $11.2 million committed for the issuance of letters of credit, which is required by insurance companies for the Company’s workers’ compensation and general liability insurance programs. The Company repaid $40.0 million of the $80.0 million of outstanding borrowings under the Credit Facility during the first half of fiscal 2009. Available borrowings under the Credit Facility were $98.8 million at June 28, 2009.

Interest Rate Swap

During the second quarter of fiscal 2008, the Company entered into an interest rate swap with a notional amount of $40.0 million. The purpose of this transaction is to provide a hedge against the effects of changes in interest rates on a portion of the Company’s current variable rate borrowings. The Company has designated the interest rate swap as a cash flow hedge of its exposure to variability in future cash flows attributable to interest payments on a $40.0 million tranche of floating rate debt.

Under the terms of the interest rate swap, the Company pays a fixed rate of 3.32% on the $40.0 million notional amount and receives payments from its counterparty based on the 1-month LIBOR rate for a term ending on May 20, 2010, effectively resulting in a fixed rate on the LIBOR component of the $40.0 million notional amount. Interest rate differentials paid or received under the swap agreement are recognized as adjustments to interest expense.

At June 28, 2009 and December 28, 2008, the recorded fair value of the interest rate swap was a liability of $1.0 million and $1.2 million, respectively ($0.6 million and $0.8 million, net of tax, respectively). The interest rate swap is reported in the consolidated balance sheets within accrued expenses at June 28, 2009 and other liabilities at December 28, 2008 and is offset by a corresponding amount in equity, representing the net unrealized losses included in accumulated other comprehensive loss. Such amounts will be recognized in the consolidated income statement over the remainder of the term ending on May 20, 2010. At June 28, 2009 and December 28, 2008, accumulated other comprehensive loss, as reflected in equity, consisted of unrealized losses on derivatives totaling $0.6 million and $0.8 million, net of tax, respectively. For the three and six months ended June 28, 2009, a $0.1 million and $0.2 million unrealized gain, respectively, was recorded in other comprehensive loss. For the three and six months ended June 29, 2008, a $2.0 thousand unrealized loss was recorded in other comprehensive loss. There was no hedge ineffectiveness recognized during the period ended June 28, 2009 and June 29, 2008.

7. Fair Value Measurements

The Company’s financial assets and financial liabilities measured at fair value are summarized below (in thousands):


	Fair Value Measurements as of June 28, 2009
				Quoted Prices in
				Active Markets for
				Identical		Significant Other			Significant
	June 28,			Assets/Liabilities		Observable Inputs			Unobservable Inputs
	2009			(Level 1)		(Level 2)			(Level 3)		Valuation Technique

Money markets	$	22,704		$	—	$	22,704		$	—	market approach
401(k) Restoration Plan investments		2,546			—		2,546			—	market approach
Interest rate swap liability		(973	)		—		(973	)		—	income approach

Total	$	24,277		$	—	$	24,277		$	—

The Company invests excess cash in money market funds and reflects these amounts within cash and cash equivalents on the consolidated balance sheet at a net value of 1:1 for each dollar invested. As of June 28, 2009, $17.1 million of the Company’s money market investments were guaranteed by the federal government under the Treasury Temporary Guarantee Program for Money Market Funds. This program expires on September 18, 2009. Other money market investments held by the Company were invested primarily in government backed securities at June 28, 2009.

The Company’s 401(k) Restoration Plan investments are considered trading securities and are reported at fair value based on third party broker statements. The realized and unrealized holding gains and losses related to these investments are recorded in interest and other income (expense), net in the consolidated income statements.

The fair value of the Company’s interest rate swap is estimated using the net present value of a series of cash flows on both the fixed and floating legs of the swap. These cash flows are based on yield curves which take into account the contractual terms of the derivative, including the period to maturity and market-based parameters such as interest rates and volatility. The yield curves used in the valuation model are based on published data for counterparties with an AA rating. Market practice in pricing derivatives initially assumes all counterparties have the same credit quality. The Company mitigates derivative credit risk by transacting with highly rated counterparties. Management has evaluated the credit and nonperformance risks associated with its derivative counterparty and believes them to be insignificant and not warranting a credit adjustment at June 28, 2009. See Note 6 for a discussion of the Company’s interest rate swap.

8. Share-Based Compensation

Equity-Classified Awards

The Company may grant stock options for a fixed number of shares to certain employees and directors with an exercise price equal to or greater than the fair value of the shares at the date of grant. The Company also may grant restricted stock and RSUs with the fair value determined based on the Company’s closing stock price on the date of grant. The estimated fair value of share-based compensation plans is amortized to expense over the vesting period.

Share-based compensation expense recognized for equity-classified awards is based on awards ultimately expected to vest, and as such, it must be reduced for estimated or actual forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The fair value for options granted during the three and six months ended June 29, 2008 was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions.


	Three and Six Months
	Ended
	June 29, 2008⁽¹⁾

Weighted average risk-free interest rate		3.1	%
Expected life of options (years)		5.5
Expected stock volatility		35.0	%
Expected dividend yield		0.0	%


⁽¹⁾		There were no stock options granted during the three and six months ended June 28, 2009

Liability-Classified Awards

Performance Units

During the first quarter of fiscal 2009, the Company awarded 600,000 performance units to each of the Company’s Co-Chief Executive Officers pursuant to the Company’s 2006 Equity Incentive Plan. Each award will vest on January 1, 2012, at which time the value of such awards, if any, will be determined and paid in cash.

The cash value of the performance units will be equal to the amount, if any, by which the Company’s final average stock price, as defined in the agreements, exceeds the strike price. The strike price will be adjusted, either up or down, based on the percentage change in the Russell 2000 Index during the performance period, as defined in the agreements, which approximates three years. The total value of the performance units is subject to a maximum value of $12.50 per unit. If the Company’s stock appreciation is less than the Russell 2000 Index, the performance units will have no value. In the event of an executive’s involuntary separation without cause or due to a change in control (as both terms are defined in the executive employment agreements) occurs prior to the end of the performance period, the performance period will end and the maximum value per unit may be calculated at a reduced amount. Additionally, if the Company’s final average stock price declines compared to the original strike price, the total value of the performance units, if any, will be reduced by 50 percent.

The performance units have been classified as liability awards in other liabilities in the consolidated balance sheet, as they will be cash-settled at the end of the performance period. The fair value of the performance units is remeasured at each reporting period until the awards are settled. The fair value per performance unit was $5.52 and was calculated using a Monte-Carlo simulation model which incorporates the historical performance, volatility and correlation of the Company’s stock price and the Russell 2000 Index. At June 28, 2009, the recorded liability of the performance units was $0.8 million.

Cash-Settled Awards

During the second quarter of fiscal 2009, the Company issued cash-settled stock appreciation rights (“SARs”) and cash-settled stock-based awards (“stock-based awards”) to members of its Board of Directors. The cash value of the SARs will be based on the appreciation of the Company’s stock price on the date of settlement compared to the Company’s stock price on the date of grant. At the election of each director, the settlement date of SARs and stock-based awards was deferred until the earlier of the date they cease serving on the Company’s Board of Directors or a change in control of the Company. The SARs and stock-based awards are classified as liability awards in other liabilities in the consolidated balance sheet, as they will be paid in cash on the settlement date.

The fair value of the cash-settled awards was estimated at June 28, 2009 using a Black-Scholes option pricing model with the following weighted average assumptions:


	Three and Six Months			Three and Six Months
	Ended			Ended
	June 28, 2009⁽¹⁾			June 28, 2009⁽¹⁾
	Stock-Based Awards			SARs
Weighted average risk-free interest rate		3.0	%		2.3	%
Expected life of cash-settled awards (years)		9.9			4.5
Expected stock volatility		43.3	%		43.6	%
Expected dividend yield		0.0	%		0.0	%


⁽¹⁾		There were no cash-settled awards granted during the three and six months ended June 29, 2008

The fair value of the SARS is equal to the value calculated per the Black-Scholes model. The fair value of the stock-based awards is equal to the sum of the value calculated per the Black-Scholes model and the Company’s stock price. The fair value of cash-settled awards will be remeasured at each reporting period until the awards are settled. At June 28, 2009, the recorded liability of the cash-settled awards was $0.1 million.

Share-based compensation expense for all liability-classified awards are recognized ratably over the service period with fair value fluctuations recognized as cumulative adjustments to share-based compensation expense at the end of each reporting period.

Share-Based Compensation

Share-based compensation from continuing operations for equity and liability-classified awards is classified as follows (in thousands):


	Three Months Ended						Six Months Ended
	June 28, 2009			June 29, 2008			June 28, 2009			June 29, 2008
Equity-classified awards:
Labor	$	88		$	137		$	191		$	296
General and administrative		1,911			2,021			3,921			4,147
Liability-classified awards:
General and administrative		731			—			946			—

Total share-based compensation		2,730			2,158			5,058			4,443
Less: tax benefit		(811	)		(581	)		(1,431	)		(1,182	)

Total share-based compensation, net of tax	$	1,919		$	1,577		$	3,627		$	3,261

Share-based compensation presented above excludes approximately $18,000 and $38,000 ($12,000 and $25,000, net of tax) for the three and six months ended June 29, 2008, respectively, related to discontinued operations. There was no share-based compensation recorded in discontinued operations for the three and six months ended June 28, 2009.

At June 28, 2009, non-vested share-based compensation for equity-classified awards, (net of actual forfeitures for options and estimated forfeitures for restricted stock), totaled $6.2 million for stock options and $4.6 million for restricted stock. This expense will be recognized over the remaining weighted average vesting period, which is approximately 1.3 years for stock options and 1.6 years for restricted stock.

9. Segment Reporting

The Company operates exclusively in the United States food-service industry and has determined that its reportable segments are those that are based on the Company’s methods of internal reporting and management structure. The Company’s reportable segments are Bistro and Pei Wei. There were no material amounts of revenues or transfers among reportable segments.

The table below presents information about reportable segments (in thousands):


			Shared Services
	Total		and Other			Bistro		Pei Wei
For the Three Months Ended June 28, 2009:
Revenues	$	301,360	$	—		$	227,144	$	74,216
Segment profit		38,517		(489	)		31,533		7,473
Capital expenditures		12,587		341			9,494		2,752
Depreciation and amortization		18,575		489			13,646		4,440

For the Three Months Ended June 29, 2008:
Revenues	$	301,533	$	—		$	231,972	$	69,561
Segment profit		34,916		(361	)		30,323		4,954
Capital expenditures		19,139		109			14,944		4,086
Depreciation and amortization		17,150		361			12,794		3,995

For the Six Months Ended June 28, 2009:
Revenues	$	611,197	$	—		$	462,285	$	148,912
Segment profit		77,640		(907	)		64,339		14,208
Capital expenditures		20,773		1,963			14,790		4,020
Depreciation and amortization		37,071		907			27,374		8,790

For the Six Months Ended June 29, 2008:
Revenues	$	607,450	$	—		$	468,061	$	139,389
Segment profit		71,160		(692	)		60,617		11,235
Capital expenditures		45,792		199			35,173		10,420
Depreciation and amortization		33,520		692			25,059		7,769

As of June 28, 2009:
Total assets	$	623,743	$	21,756		$	492,751	$	109,236
Goodwill		6,819		—			6,566		253

As of December 28, 2008:
Total assets	$	667,363	$	20,478		$	534,224	$	112,661
Goodwill		6,819		—			6,566		253

In addition to using consolidated GAAP results in evaluating the Company’s financial results, a primary measure used by executive management in assessing the performance of existing restaurant businesses is segment profitability (sometimes referred to as restaurant operating income). Segment profitability is defined as income from operations before general and administrative, preopening and partner investment expenses, but including a deduction for net income attributable to noncontrolling interests. Because preopening and partner investment expenses are solely related to expansion of the Company’s business, they make an accurate assessment of its ongoing operations more difficult and are therefore excluded. Additionally, general and administrative expenses are only included in the Company’s consolidated financial results as these costs relate to support of both restaurant businesses and are generally not specifically identifiable to individual restaurant operations. As the Company’s expansion is funded entirely from its ongoing restaurant operations, segment profitability is a consideration when determining whether and when to open additional restaurants.


	For the Three Months Ended						For the Six Months Ended
	June 28,			June 29,			June 28,			June 29,
	2009			2008			2009			2008

Segment profit	$	38,517		$	34,916		$	77,640		$	71,160
Less: General and administrative		(20,523	)		(19,128	)		(40,337	)		(37,649	)
Less: Preopening expense		(461	)		(1,808	)		(949	)		(4,627	)
Less: Partner investment expense		91			500			555			89
Less: Interest and other income (expense), net		(437	)		(949	)		(1,377	)		(1,883	)
Add: Net income attributable to noncontrolling interests		288			487			658			1,192

Income from continuing operations before taxes	$	17,475		$	14,018		$	36,190		$	28,282

10. Commitments and Contingencies

The Company is engaged in various legal actions, which arise in the ordinary course of its business. The Company is also currently under examination by various taxing authorities for years not closed by the statute of limitations. Although there can be no assurance as to the ultimate disposition of these matters, it is the opinion of the Company’s management, based upon the information available at this time, that the outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the results of operations, liquidity or financial condition of the Company.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This information should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 28, 2008 contained in our 2008 Annual Report on Form 10-K.

Some of the statements in this section contain forward-looking statements, which involve risks and uncertainties. In some cases, you can identify forward-looking statements by terms such as may, will, should, expect, plan, intend, forecast, anticipate, believe, estimate, predict, potential, continue or the negative of these terms or other comparable terminology. The forward-looking statements contained in this section involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements may include the matters listed under “Risk Factors” in Item 1A (a detailed description of which can be found under the caption “Risk Factors” in our most recently filed Form 10-K) and elsewhere in this Form 10-Q, including, but not limited to, failure of our existing or new restaurants to achieve predicted results, changes in general economic and political conditions that affect consumer spending; our initiatives to improve the operating performance of our Pei Wei concept; changes in food costs; and our dependence on the financial performance of restaurants concentrated in certain geographic areas. Because we cannot guarantee future results, levels of activity, performance or achievements, you should not place undue reliance on these forward-looking statements.

Overview

We own and operate two restaurant concepts in the Asian niche: P.F. Chang’s China Bistro (“Bistro”) and Pei Wei Asian Diner (“Pei Wei”).

Bistro

As of June 28, 2009, we owned and operated 190 full service Bistro restaurants that feature a blend of high quality, traditional Chinese cuisine and attentive service in a high energy contemporary bistro setting. P.F. Chang’s was formed in early 1996 with the acquisition of the four original Bistro restaurants and the hiring of an experienced management team. Utilizing a partnership management philosophy, we embarked on a strategic expansion of the concept targeted at major metropolitan areas throughout the United States. We own and operate all of our restaurants with the exception of two Bistro restaurants located in Hawaii which are operated under a joint venture arrangement in which we own a noncontrolling interest.

We intend to open eight new Bistros in 2009, one of which was open by the end of the second quarter of 2009. We have signed lease agreements for all of our development planned for fiscal 2009 and we have exercised our lease renewal options for all leases that are scheduled to expire in 2009. Our Bistro restaurants typically range in size from 6,000 to 7,500 square feet and require an average total cash investment of approximately $2.8 million to $3.0 million and total invested capital of approximately $4.0 million per restaurant (net of estimated landlord reimbursements). Total invested capital includes the present value of the operating lease obligation for the initial lease term of each property, which can vary greatly depending on the specific trade area. Preopening expenses are expected to average approximately $350,000 to $400,000 per restaurant during 2009.

Pei Wei

As of June 28, 2009, we owned and operated 161 quick casual Pei Wei restaurants that serve freshly prepared, wok-seared, contemporary pan-Asian cuisine in a relaxed, warm environment with friendly, attentive counter service and take-out flexibility. We opened our first Pei Wei restaurant in July 2000 in the Phoenix, Arizona area and have expanded the concept significantly since that time. We closed 10 Pei Wei restaurants during the fourth quarter of 2008 and the results of these restaurants are reported within discontinued operations in our consolidated financial statements for all periods presented. See Note 2 to our consolidated financial statements for further discussion.

We intend to open seven new Pei Wei restaurants in 2009, two of which were open by the end of the second quarter of 2009. We have signed lease agreements for all of our development planned for fiscal 2009. Our Pei Wei restaurants are generally 2,800 to 3,400 square feet in size and require an average total cash investment of approximately $800,000 to $900,000 and total invested capital of approximately $1.5 million per restaurant (net of estimated landlord reimbursements). Total invested capital includes the present value of the operating lease obligation for the initial lease term of each property, which can vary greatly depending on the specific trade area. Preopening expenses are expected to average approximately $140,000 to $160,000 per restaurant during fiscal 2009.

Global Brand Development

The Company is actively pursuing international expansion of its Bistro restaurants. During the second quarter of fiscal 2009, the Company signed two development and licensing agreements with partners who will develop and operate Bistro restaurants in international markets.

The first development and licensing agreement was signed with M.H. Alshaya, the Middle East’s leading retailer, to develop 34 Bistro restaurants throughout the Middle East over the next 10 years. The first restaurant is scheduled to open in Kuwait City by the end of fiscal 2009.

The second development and licensing agreement was signed with Alsea S.A.B. de C.V., the leading quick service restaurant operator in Mexico, to develop 30 Bistro restaurants in Mexico over the next 10 years. The first restaurant is scheduled to open in Mexico City by the end of fiscal 2009.

The Company continues to engage in discussions with additional potential partners regarding expansion of the Bistro into various international markets.

Critical Accounting Policies

Our critical accounting policies are those that require significant judgment. There have been no material changes to the critical accounting policies previously reported in our 2008 Annual Report on Form 10-K.

Results of Operations

The following tables set forth certain unaudited quarterly information for the three and six month periods ended June 28, 2009 and June 29, 2008, respectively. This quarterly information has been prepared on a basis consistent with the audited financial statements and, in the opinion of management, includes all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented. Our quarterly operating results may fluctuate significantly as a result of a variety of factors, and operating results for any quarter are not necessarily indicative of results for a full fiscal year.

One of the factors that has in the past caused fluctuations in our operating results is the amount and timing of preopening expenses. Historically, we have experienced variability in the amount and percentage of revenues attributable to preopening expenses. We typically incur the most significant portion of preopening expenses associated with a given restaurant within the two months immediately preceding, and the month of, the opening of the restaurant. Additionally, there may be variability in the amount and percentage of revenues attributable to partner investment expense as a result of the timing of opening new Pei Wei restaurants where we continue to offer partnership interests and the timing of our purchases of existing partner interests.

In addition, our experience to date has been that labor and operating costs associated with a newly opened restaurant for the first several months of operation are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Accordingly, the volume and timing of new restaurant openings has historically had a meaningful impact on preopening, labor, operating and partner investment expenses.

Noncontrolling Interests

We adopted SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51, at the beginning of fiscal 2009. SFAS 160 changes the accounting and reporting for minority interests, which are now recharacterized as noncontrolling interests and classified as a component of equity. Minority interest expense is no longer separately reported as a reduction to net income on the consolidated income statements and is instead shown below net income under the heading “Net income attributable to noncontrolling interests.” See Note 1 to our consolidated financial statements for further discussion of our adoption of SFAS 160.

Results for the three months ended June 28, 2009 and June 29, 2008

Our consolidated operating results were as follows (dollars in thousands):


	Three Months Ended
	June 28,			% of			June 29,			% of
	2009			Revenues			2008			Revenues			Change			% Change
Revenues	$	301,360			100.0	%	$	301,533			100.0	%	$	(173	)		(0.1	%)
Costs and expenses:
Cost of sales		79,657			26.4	%		82,132			27.2	%		(2,475	)		(3.0	%)
Labor		98,111			32.6	%		99,971			33.2	%		(1,860	)		(1.9	%)
Operating		48,809			16.2	%		49,366			16.4	%		(557	)		(1.1	%)
Occupancy		17,403			5.8	%		17,511			5.8	%		(108	)		(0.6	%)
General and administrative		20,523			6.8	%		19,128			6.3	%		1,395			7.3	%
Depreciation and amortization		18,575			6.2	%		17,150			5.7	%		1,425			8.3	%
Preopening expense		461			0.2	%		1,808			0.6	%		(1,347	)		(74.5	%)
Partner investment expense		(91	)		0.0	%		(500	)		(0.2	%)		409			(81.8	%)

Total costs and expenses		283,448			94.1	%		286,566			95.0	%		(3,118	)		(1.1	%)

Income from operations		17,912			5.9	%		14,967			5.0	%		2,945			19.7	%
Interest and other income (expense), net		(437	)		(0.1	%)		(949	)		(0.3	%)		512			(54.0	%)

Income from continuing operations before taxes		17,475			5.8	%		14,018			4.6	%		3,457			24.7	%
Provision for income taxes		(5,108	)		(1.7	%)		(3,636	)		(1.2	%)		(1,472	)		40.5	%

Income from continuing operations, net of tax		12,367			4.1	%		10,382			3.4	%		1,985			19.1	%
Loss from discontinued operations, net of tax		(474	)		(0.2	%)		(525	)		(0.2	%)		51			(9.7	%)

Net income		11,893			3.9	%		9,857			3.3	%		2,036			20.7	%
Less: Net income attributable to noncontrolling interests		288			0.1	%		487			0.2	%		(199	)		(40.9	%)

Net income attributable to PFCB	$	11,605			3.9	%	$	9,370			3.1	%	$	2,235			23.9	%

Certain percentage amounts may not sum to total due to rounding.

Selected operating statistics for the Bistro were as follows (dollars in thousands):


	Three Months Ended
	June 28,			% of			June 29,			% of
	2009			Revenues			2008			Revenues			Change			% Change
Revenues	$	227,144			100.0	%	$	231,972			100.0	%	$	(4,828	)		(2.1	%)
Costs and expenses:
Cost of sales		59,749			26.3	%		62,999			27.2	%		(3,250	)		(5.2	%)
Labor		73,286			32.3	%		76,153			32.8	%		(2,867	)		(3.8	%)
Operating		36,373			16.0	%		36,603			15.8	%		(230	)		(0.6	%)
Occupancy		12,412			5.5	%		12,730			5.5	%		(318	)		(2.5	%)
Depreciation and amortization		13,646			6.0	%		12,794			5.5	%		852			6.7	%
Preopening expense		280			0.1	%		1,271			0.5	%		(991	)		(78.0	%)
Partner investment expense		(20	)		0.0	%		(500	)		(0.2	%)		480			(96.0	%)
Net income attributable to noncontrolling interests		145			0.1	%		370			0.2	%		(225	)		(60.8	%)

Certain percentage amounts may not sum to total due to rounding.

Selected operating statistics for Pei Wei were as follows (dollars in thousands):


	Three Months Ended
	June 28,			% of			June 29,		% of
	2009			Revenues			2008		Revenues			Change			% Change
Revenues	$	74,216			100.0	%	$	69,561		100.0	%	$	4,655			6.7	%
Costs and expenses:
Cost of sales		19,908			26.8	%		19,133		27.5	%		775			4.1	%
Labor		24,825			33.4	%		23,818		34.2	%		1,007			4.2	%
Operating		12,436			16.8	%		12,763		18.3	%		(327	)		(2.6	%)
Occupancy		4,991			6.7	%		4,781		6.9	%		210			4.4	%
Depreciation and amortization		4,440			6.0	%		3,995		5.7	%		445			11.1	%
Preopening expense		181			0.2	%		537		0.8	%		(356	)		(66.3	%)
Partner investment expense		(71	)		(0.1	%)		—		0.0	%		(71	)		—
Net income attributable to noncontrolling interests		143			0.2	%		117		0.2	%		26			22.2	%

Certain percentage amounts may not sum to total due to rounding. Percentages over 100% are not displayed.

Revenues

Our revenues are derived primarily from food and beverage sales. Each segment contributed as follows:

Bistro: The decrease in revenues was attributable to a $15.6 million decline in revenues for stores that opened prior to the second quarter of 2008, due to a significant reduction in overall guest traffic combined with a very slight decline in the average check. The decrease was partially offset by incremental new store revenues of $10.8 million, comprised of a full quarter of revenues for the 12 new stores that opened during the last three quarters of 2008 and revenues generated by the one new Bistro restaurant that opened during 2009.

Pei Wei: The increase in revenues was attributable to incremental new store revenues of $5.3 million, comprised of a full quarter of revenues for the 14 new stores that opened during the last three quarters of 2008 and revenues generated by the two new Pei Wei restaurants that opened during 2009. The increase was partially offset by a decrease of $0.6 million for stores that opened prior to the second quarter of 2008, due to a decline in the average check, largely offset by an increase in overall guest traffic.

Costs and Expenses

Cost of Sales

Cost of sales is comprised of the cost of food and beverages. Cost of sales as a percentage of revenues decreased at both Bistro and Pei Wei due to the net impact of favorable product mix shifts combined with operational efficiencies. We negotiate annual pricing agreements for many of our key commodities and such contracts provide for consistent beef and seafood costs, as well as unfavorable wok oil and poultry costs for fiscal 2009 compared to fiscal 2008.

Labor

Labor expenses consist of restaurant management salaries, hourly staff payroll costs, other payroll-related items and imputed partner bonus expense. Imputed partner bonus expense represents the portion of restaurant level operating results that is allocable to certain noncontrolling partners, but is presented as bonus expense for accounting purposes. Each segment contributed as follows:

Bistro: Labor expenses as a percentage of revenues decreased primarily due to improved labor efficiencies in culinary and hospitality positions, partially offset by the impact of decreased leverage on lower average weekly sales on the portion of labor expenses that is fixed in nature and higher management incentive accruals.

Pei Wei: Labor expenses as a percentage of revenues decreased primarily due to improved labor efficiencies in culinary and hospitality positions and, to a lesser extent, lower manager salaries resulting from reduced management headcount. This decrease was partially offset by higher expenses associated with the utilization of additional key hourly employees and higher management incentive accruals.

Operating

Operating expenses consist primarily of various restaurant-level costs such as repairs and maintenance, utilities and marketing, certain of which are variable and may fluctuate with revenues. Our experience to date has been that operating costs during the first four to nine months of a newly opened restaurant are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Marketing expenses are also included in operating expenses. As these expenditures are discretionary in nature, the timing and amount of marketing spend will vary. Each segment contributed as follows:

Bistro: Operating expenses as a percentage of revenues increased primarily due to the impact of decreased leverage on lower average weekly sales on the portion of operating costs that is fixed in nature and higher marketing spend, partially offset by lower net utilities costs resulting from favorable rates and lower usage.

Pei Wei: Operating expenses as a percentage of revenues decreased primarily due to reduced marketing spend and lower net utilities costs resulting from favorable rates partially offset by increased usage, partially offset by the impact of decreased leverage on lower average weekly sales on the portion of operating costs that is fixed in nature.

Occupancy

Occupancy costs include both fixed and variable portions of rent, common area maintenance charges, property and general liability insurance and property taxes. Each segment contributed as follows:

Bistro: Occupancy costs as a percentage of revenues was consistent with prior year primarily due to lower contingent rent expense offset by the impact of decreased leverage on lower average weekly sales.

Pei Wei: Occupancy costs as a percentage of revenues decreased primarily due to lower property tax expense, partially offset by the impact of decreased leverage on lower average weekly sales.

General and Administrative

General and administrative expenses are comprised of costs associated with corporate and administrative functions that support restaurant development and operations and provide infrastructure to support future growth including, but not limited to, management and staff compensation, employee benefits, travel, legal and professional fees, technology and market research.

Consolidated general and administrative costs increased primarily due to higher management incentive accruals, higher share-based compensation expense primarily driven by the performance unit award grants issued to our co-CEOs during the first quarter of 2009, and to a lesser extent, additional compensation expense resulting from unrealized holding gains associated with investments in the 401(k) Restoration Plan, partially offset by lower consulting fees expense.

Depreciation and Amortization

Depreciation and amortization expenses include the depreciation of fixed assets, gains and losses on disposal of assets and the amortization of intangible assets, software and non-transferable liquor license fees.

Depreciation and amortization increased at both Bistro and Pei Wei primarily due to additional depreciation on restaurants that opened during the last three quarters of fiscal 2008 and during fiscal 2009. As a percentage of revenues, depreciation and amortization increased at both Bistro and Pei Wei primarily due to the impact of decreased leverage resulting from lower average weekly sales.

Preopening Expense

Preopening expenses, which are expensed as incurred, consist of expenses incurred prior to opening a new restaurant and are comprised principally of manager salaries and relocation costs, employee payroll and related training costs. Preopening expenses also include straight-line rent expense for the period between the possession date of leased premises and the restaurant opening date. Each segment contributed as follows:

Bistro: Preopening expense decreased primarily due to the impact of opening no new restaurants during the second quarter of 2009 compared to opening five new restaurants during the second quarter of 2008, partially offset by the timing of expenses for new restaurant openings scheduled for the remainder of fiscal 2009 compared to fiscal 2008.

Pei Wei: Preopening expense decreased primarily due to the impact of opening one new restaurant during the second quarter of 2009 compared to opening four new restaurants during the second quarter of 2008, as well as a lower number of scheduled new restaurant openings for the remainder of fiscal 2009 compared to fiscal 2008.

Partner Investment Expense

Partner investment expense represents the difference between the imputed fair value of noncontrolling interests at the time our partners invest in our restaurants and our partners’ cash contributions for those ownership interests. Additionally, for those interests that are bought out prior to the restaurant reaching maturity (typically after five years of operation), partner investment expense includes a reversal of previously recognized expense for the difference between the fair value of the noncontrolling interest at inception date and the fair value at the date of repurchase, to the extent that the former is greater. Each segment contributed as follows:

Bistro: All partner investment expense activity for the Bistro is related to early buyouts of noncontrolling interests. The change in partner investment expense resulted from fewer early buyouts of noncontrolling interests during the second quarter of 2009 as compared to the second quarter of 2008.

Pei Wei: Partner investment expense decreased primarily due to the impact of opening fewer new restaurants during the second quarter of 2009 compared to the second quarter of 2008, as well as the impact of expense reversals related to noncontrolling interest buyouts.

Interest and Other Income (Expense), Net

Interest expense recognized primarily consists of interest costs in excess of amounts capitalized related to our outstanding credit line and other borrowings, as well as accretion expense related to our conditional asset retirement obligations. Interest income earned primarily relates to interest-bearing overnight deposits. Realized and unrealized holding gains (losses) related to investments in the 401(k) Restoration Plan are included within other income (expense), with a corresponding offset in general and administrative expense.

The change in consolidated interest and other income (expense), net was primarily due to an increase in the unrealized holding gains associated with investments in the 401(k) Restoration Plan. Lower interest expense resulting primarily from the repayment of $40.0 million of outstanding credit line borrowings and lower interest income also contributed to the change. We expect to continue to recognize net interest expense until such time as we further lower our outstanding debt levels or increase our development.

Provision for Income Taxes

Our effective tax rate from continuing operations, including discrete items, was 29.7% for the second quarter of 2009 compared to 26.9% for the second quarter of 2008. The current quarter includes additional tax expense as a result of increasing our forecasted effective tax rate to 28.5% for the full year. The income tax rate for both the second quarter of fiscal 2009 and the second quarter of fiscal 2008 differed from the expected provision for income taxes, which is derived by applying the statutory income tax rate, primarily as a result of FICA tip credits.

Management has evaluated all positive and negative evidence concerning the realizability of deferred tax assets and has determined that, with the exception of a small amount of state net operating losses, we will recognize sufficient future taxable income to realize the benefit of our deferred tax assets.

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests represents the portion of our net income which is attributable to the collective ownership interests of our noncontrolling partners. In many of our restaurants, we employ a partnership management structure whereby we have entered into a series of partnership agreements with our regional managers, certain of our general managers, and certain of our executive chefs. Each segment contributed as follows:

Bistro: Net income attributable to noncontrolling interests as a percentage of revenues decreased due to the impact of noncontrolling interest buyouts occurring since the beginning of fiscal 2008. These buyouts reduced the number of noncontrolling interests from 133 at the beginning of fiscal 2008 to 29 as of June 28, 2009.

Pei Wei: Net income attributable to noncontrolling interests as a percentage of revenues was consistent with prior year primarily due to the impact of 112 noncontrolling interest buyouts occurring since the beginning of fiscal 2008, offset by the impact of higher restaurant net income.

Results for the six months ended June 28, 2009 and June 29, 2008

Our consolidated operating results were as follows (dollars in thousands):


	Six Months Ended
	June 28,			% of			June 29,			% of
	2009			Revenues			2008			Revenues			Change			% Change
Revenues	$	611,197			100.0	%	$	607,450			100.0	%	$	3,747			0.6	%
Costs and expenses:
Cost of sales		162,729			26.6	%		165,662			27.3	%		(2,933	)		(1.8	%)
Labor		198,818			32.5	%		203,352			33.5	%		(4,534	)		(2.2	%)
Operating		99,500			16.3	%		97,427			16.0	%		2,073			2.1	%
Occupancy		34,781			5.7	%		35,137			5.8	%		(356	)		(1.0	%)
General and administrative		40,337			6.6	%		37,649			6.2	%		2,688			7.1	%
Depreciation and amortization		37,071			6.1	%		33,520			5.5	%		3,551			10.6	%
Preopening expense		949			0.2	%		4,627			0.8	%		(3,678	)		(79.5	%)
Partner investment expense		(555	)		(0.1	%)		(89	)		0.0	%		(466	)		—

Total costs and expenses		573,630			93.9	%		577,285			95.0	%		(3,655	)		(0.6	%)

Income from operations		37,567			6.1	%		30,165			5.0	%		7,402			24.5	%
Interest and other income (expense), net		(1,377	)		(0.2	%)		(1,883	)		(0.3	%)		506			(26.9	%)

Income from continuing operations before taxes		36,190			5.9	%		28,282			4.7	%		7,908			28.0	%
Provision for income taxes		(10,061	)		(1.6	%)		(7,217	)		(1.2	%)		(2,844	)		39.4	%

Income from continuing operations, net of tax		26,129			4.3	%		21,065			3.5	%		5,064			24.0	%
Loss from discontinued operations, net of tax		(517	)		(0.1	%)		(854	)		(0.1	%)		337			(39.5	%)

Net income		25,612			4.2	%		20,211			3.3	%		5,401			26.7	%
Less: Net income attributable to noncontrolling interests		658			0.1	%		1,192			0.2	%		(534	)		(44.8	%)

Net income attributable to PFCB	$	24,954			4.1	%	$	19,019			3.1	%	$	5,935			31.2	%

Certain percentage amounts may not sum to total due to rounding. Percentages over 100% are not displayed.

Selected operating statistics for the Bistro were as follows (dollars in thousands):


	Six Months Ended
	June 28,			% of			June 29,			% of
	2009			Revenues			2008			Revenues			Change			% Change
Revenues	$	462,285			100.0	%	$	468,061			100.0	%	$	(5,776	)		(1.2	%)
Costs and expenses:
Cost of sales		122,712			26.5	%		127,409			27.2	%		(4,697	)		(3.7	%)
Labor		149,337			32.3	%		155,471			33.2	%		(6,134	)		(3.9	%)
Operating		73,346			15.9	%		72,927			15.6	%		419			0.6	%
Occupancy		24,853			5.4	%		25,711			5.5	%		(858	)		(3.3	%)
Depreciation and amortization		27,374			5.9	%		25,059			5.4	%		2,315			9.2	%
Preopening expense		574			0.1	%		3,000			0.6	%		(2,426	)		(80.9	%)
Partner investment expense		(168	)		0.0	%		(745	)		(0.2	%)		577			(77.4	%)
Net income attributable to noncontrolling interests		324			0.1	%		867			0.2	%		(543	)		(62.6	%)

Certain percentage amounts may not sum to total due to rounding.

Selected operating statistics for Pei Wei were as follows (dollars in thousands):


	Six Months Ended
	June 28,			% of			June 29,		% of
	2009			Revenues			2008		Revenues			Change			% Change
Revenues	$	148,912			100.0	%	$	139,389		100.0	%	$	9,523			6.8	%
Costs and expenses:
Cost of sales		40,017			26.9	%		38,253		27.4	%		1,764			4.6	%
Labor		49,481			33.2	%		47,881		34.4	%		1,600			3.3	%
Operating		26,154			17.6	%		24,500		17.6	%		1,654			6.8	%
Occupancy		9,928			6.7	%		9,426		6.8	%		502			5.3	%
Depreciation and amortization		8,790			5.9	%		7,769		5.6	%		1,021			13.1	%
Preopening expense		375			0.3	%		1,627		1.2	%		(1,252	)		(77.0	%)
Partner investment expense		(387	)		(0.3	%)		656		0.5	%		(1,043	)		—
Net income attributable to noncontrolling interests		334			0.2	%		325		0.2	%		9			2.8	%

Certain percentage amounts may not sum to total due to rounding. Percentages over 100% are not displayed.

Revenues

Each segment contributed as follows:

Bistro: The decrease in revenues was attributable to a $31.8 million decline in revenues for stores that opened prior to 2008, due to a significant reduction in overall guest traffic combined with a very slight decline in the average check. The decrease was partially offset by incremental new store revenues of $26.0 million, comprised of a full six months of revenues for the 17 new stores that opened during 2008 and revenues generated by the one new Bistro restaurant that opened during 2009.

Pei Wei: The increase in revenues was attributable to incremental new store revenues of $11.0 million, comprised of a full six months of revenues for the 25 new stores that opened during 2008 combined with the two new Pei Wei restaurant that opened during 2009. Revenues for stores that opened prior to 2008 decreased $1.5 million primarily due to a decline in the average check.

Costs and Expenses

Cost of Sales

Cost of sales as a percentage of revenues decreased at both Bistro and Pei Wei due to the net impact of favorable product mix shifts combined with operational efficiencies. We negotiate annual pricing agreements for many of our key commodities and such contracts provide for consistent beef and seafood costs as well as unfavorable wok oil and poultry costs for fiscal 2009 compared to fiscal 2008.

Labor

Each segment contributed as follows:

Operating

Each segment contributed as follows:

Pei Wei: Operating expenses as a percentage of revenues were consistent with prior year primarily due to lower net utilities costs resulting from favorable rates partially offset by increased usage, and, to a lesser extent, decreased menu printing costs. These declines were offset by the impact of decreased leverage on lower average weekly sales on the portion of operating costs that is fixed in nature combined with higher repairs and maintenance costs.

Occupancy

Each segment contributed as follows:

Bistro: Occupancy costs as a percentage of revenues decreased primarily due to decreased general liability insurance expense and lower contingent rent expense, partially offset by the impact of decreased leverage on lower average weekly sales.

Pei Wei: Occupancy costs as a percentage of revenues decreased primarily due to lower property tax expense, partially offset by the impact of decreased leverage on lower average weekly sales.

General and Administrative

Consolidated general and administrative costs increased primarily due to higher management incentive accruals and higher share-based compensation expense primarily driven by the performance unit award grants issued to our co-CEOs during the first quarter of 2009 and, to a lesser extent, higher franchise tax expense, legal fees and additional compensation expense resulting from unrealized holding gains associated with investments in the 401(k) Restoration Plan. These increases were partially offset by lower consulting fees expense.

Depreciation and Amortization

Depreciation and amortization increased at both Bistro and Pei Wei primarily due to additional depreciation on restaurants that opened during the last half of fiscal 2008 and the first half of fiscal 2009. As a percentage of revenues, depreciation and amortization increased at both Bistro and Pei Wei primarily due to the impact of decreased leverage resulting from lower average weekly sales.

Preopening Expense

Each segment contributed as follows:

Bistro: Preopening expense decreased primarily due to the impact of opening one new restaurant during the first half of 2009 compared to opening 10 new restaurants during the first half of 2008, partially offset by the timing of expenses for new restaurant openings scheduled for the remainder of fiscal 2009 compared to fiscal 2008.

Pei Wei: Preopening expense decreased primarily due to the impact of opening two new restaurants during the first half of 2009 compared to opening 15 new restaurants during the first half of 2008, as well as a lower number of scheduled new restaurant openings for the remainder of fiscal 2009 compared to fiscal 2008.

Partner Investment Expense

Each segment contributed as follows:

Bistro: All partner investment expense activity for the Bistro is related to early buyouts of noncontrolling interests. The change in partner investment expense resulted from fewer early buyouts of noncontrolling interests during the first half of 2009 compared to the first half of 2008.

Pei Wei: Partner investment expense decreased primarily due to the impact of opening fewer new restaurants during the first half of 2009 compared to the first half of 2008 as well as the impact of expense reversals related to noncontrolling interest buyouts.

Interest and Other Income (Expense), Net

The change in consolidated interest and other income (expense), net was due to an increase in the unrealized holding gains associated with investments in the 401(k) Restoration Plan. Additionally, interest expense decreased due to the net impact of repayment of $40.0 million of our outstanding credit line borrowings, a lower average interest rate primarily due to the impact of an interest rate swap on a portion of our outstanding credit line borrowings, and lower capitalized interest. Lower interest income also contributed to the change. We expect to continue to recognize net interest expense until such time as we further lower our outstanding debt levels or increase our development.

Provision for Income Taxes

Our effective tax rate from continuing operations, including discrete items, was 28.3% for the first half of 2009 compared to 26.6% for the first half of 2008. The income tax rate for both fiscal 2009 and fiscal 2008 differed from the expected provision for income taxes, which is derived by applying the statutory income tax rate, primarily as a result of FICA tip credits.

Net Income Attributable to Noncontrolling Interests

Each segment contributed as follows:

Pei Wei: Net income attributable to noncontrolling interests as a percentage of revenues was consistent with prior year primarily due to the impact of 112 noncontrolling interest buyouts occurring since the beginning of fiscal 2008 offset by the impact of higher restaurant net income.

Liquidity and Capital Resources

Cash Flow

Our primary sources of liquidity are cash provided by operations and borrowings under our Credit Facility. Historically, our need for capital resources has primarily resulted from our construction of new restaurants. More recently, our need for capital resources has also been driven by repayments of long-term debt, repurchases of our common stock and purchases of noncontrolling interests.

The following table presents a summary of our cash flows for the six months ended June 28, 2009 and June 29, 2008 (in thousands):


	June 28,			June 29,
	2009			2008
Net cash provided by operating activities	$	78,865		$	69,726
Net cash used in investing activities		(20,870	)		(46,229	)
Net cash used in financing activities		(67,484	)		(27,406	)

Net decrease in cash and cash equivalents	$	(9,489	)	$	(3,909	)

Operating Activities

We have funded our capital requirements since inception through sales of equity securities, debt financing and cash flows from operations. Net cash provided by operating activities exceeded net income for the periods shown due principally to the effect of depreciation and amortization, a net increase in operating liabilities, share-based compensation and non-cash lease termination charges. The change in other current assets is primarily due to collection of receivables from third-party gift card sales and, to a lesser extent, collection of tenant incentives due from landlords and rebates.

Investing Activities

We have historically used cash primarily to fund the development and construction of new restaurants. Investment activities were primarily related to capital expenditures of $20.8 million and $45.8 million during the first half of fiscal years 2009 and 2008, respectively. Capital expenditures declined significantly compared to the prior year primarily due to the impact of opening one new Bistro and two new Pei Wei restaurants in the first half of 2009 compared to 10 new Bistro and 15 new Pei Wei restaurants in the first half of 2008.

We intend to open eight new Bistro restaurants and seven new Pei Wei restaurants in fiscal year 2009. We expect that our planned future Bistro restaurants will require, on average, a total cash investment per restaurant of approximately $2.8 million to $3.0 million. We expect to spend approximately $350,000 to $400,000 per restaurant for preopening costs. Total cash investment per each Pei Wei restaurant is expected to average $800,000 to $900,000 and we expect to spend $140,000 to $160,000 per restaurant for preopening costs. The anticipated total cash investment per restaurant is based on recent historical averages. We expect total gross capital expenditures for fiscal 2009 to approximate $45.0 million to $55.0 million ($40.0 million to $50.0 million, net of landlord reimbursements).

Financing Activities

Financing activities during the first half of fiscal 2009 and 2008 were primarily comprised of $44.9 million and $10.8 million, respectively, in debt repayments and $19.6 million and $10.0 million, respectively, in repurchases of common stock. Financing activities also included purchases of noncontrolling interests, proceeds from stock options exercised and employee stock purchases, distributions to noncontrolling interest partners, and the tax benefit from disqualifying stock option dispositions.

Credit Facility

On August 31, 2007, we entered into a senior credit facility (“Credit Facility”) with several commercial financial institutions, which allows for borrowings of up to $150.0 million. The Credit Facility is guaranteed by our material existing and future domestic subsidiaries. The Credit Facility expires on August 30, 2013 and contains customary representations, warranties, and negative and affirmative covenants, including a requirement to maintain a maximum leverage ratio, as defined, of 2.5:1 and a minimum fixed charge coverage ratio, as defined, of 1.25:1, as well as customary events of default and certain default provisions that could result in acceleration of the Credit Facility. We were in compliance with these restrictions and conditions as of June 28, 2009 as our leverage ratio was 1.26:1 and the fixed charge coverage ratio was 2.17:1.

As of June 28, 2009, we had borrowings outstanding under the Credit Facility totaling $40.0 million as well as $11.2 million committed for the issuance of letters of credit, which is required by insurance companies for our workers’ compensation and general liability insurance programs. Available borrowings under the Credit Facility were $98.8 million at June 28, 2009. See Item 3 below for a discussion of interest rates and our interest rate swap.

Share Repurchase Program

Under share repurchase programs authorized by our Board of Directors, we have repurchased a total of 4.5 million shares of our common stock for $125.9 million at an average price of $28.23 since July 2006. Included in this total is 0.8 million shares of our common stock repurchased during the first half of 2009 for $19.6 million at an average price of $23.67. At June 28, 2009, there remains $20.5 million available under our current share repurchase authorization of $100.0 million, which expires in December 2009.

Purchases of Noncontrolling Interests

As of June 28, 2009, there were 43 partners representing 161 noncontrolling interests. During the first half of fiscal 2009, we had the opportunity to purchase 15 noncontrolling interests which had reached the five-year threshold period during the year, as well as 53 additional noncontrolling interests which (i) had reached the end of their initial five-year term in prior years (ii) related to partners who left the Company prior to the initial five-year term or (iii) related to partners who requested an early buyout of their interest. We purchased 67 of these noncontrolling interests in their entirety for a total of approximately $3.3 million, all of which was paid in cash.

During the remainder of fiscal 2009, we will have the opportunity to purchase three additional noncontrolling interests which will reach their five-year anniversary. If all of these interests are purchased, the total purchase price will approximate $0.1 million to $0.2 million based upon the estimated fair value of the respective interests at June 28, 2009.

New Accounting Standards

See Recent Accounting Pronouncements section of Note 1 to our consolidated financial statements for a summary of new accounting standards.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk primarily from fluctuations in interest rates on our Credit Facility and other borrowings as well as from changes in commodities prices.

Interest Rates

We have exposure to interest rate risk related to our variable rate borrowings. Our Credit Facility allows for borrowings of up to $150.0 million with outstanding amounts bearing interest at variable rates equal to LIBOR plus an applicable margin which is subject to change based on our leverage ratio. At June 28, 2009, we had borrowings of $40.0 million outstanding under our Credit Facility as well as unsecured promissory notes totaling $2.1 million.

During the second quarter of fiscal 2008, we entered into an interest rate swap with a notional amount of $40.0 million to hedge a portion of the cash flows of our variable rate borrowings. We have designated the interest rate swap as a cash flow hedge of our exposure to variability in future cash flows attributable to interest payments on a $40.0 million tranche of floating rate debt borrowed under our Credit Facility. Under the terms of the swap, we pay a fixed rate of 3.32% on the $40.0 million notional amount and receive payments from the counterparty based on the 1-month LIBOR rate for a term ending on May 20, 2010, effectively resulting in a fixed rate on the LIBOR component of the $40.0 million notional amount. The effective interest rate on the total borrowings outstanding under our Credit Facility, including the impact of the interest rate swap agreement, was 4.1% as of June 28, 2009.

Additionally, by using a derivative instrument to hedge exposures to changes in interest rates, we expose ourselves to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. We seek to minimize the credit risk by entering into transactions with high-quality counterparties whose credit rating is evaluated on a quarterly basis.

As of June 28, 2009, based on current interest rates and total borrowings outstanding, including the impact of our interest rate swap, a hypothetical 100 basis point increase in interest rates would have an insignificant pre-tax impact on our results of operations.

Commodities Prices

We purchase certain commodities such as beef, pork, poultry, seafood and produce. These commodities are generally purchased based upon market prices established with vendors. These purchase arrangements may contain contractual features that fix the price paid for certain commodities. Historically, we have not used financial instruments to hedge commodity prices because these purchase arrangements help control the ultimate cost paid and any commodity price aberrations have historically been somewhat short-term in nature.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A. Risk Factors

Risks that could have a negative impact on our business, revenues and performance results include risks associated with the following: failure of our existing or new restaurants to achieve expected results; changes in general economic and political conditions that affect consumer spending; changes in food costs; the financial performance of restaurants concentrated in certain geographic areas; litigation; our inability to retain key personnel; potential labor shortages that may delay planned openings; changes in government legislation that may increase labor costs; intense competition in the restaurant industry; tax returns may be subjected to audits that could have material adverse impact; rising insurance costs; the inability to develop and construct our restaurants within projected budgets and time periods; failure to comply with governmental regulations; changes in how we account for certain aspects of our partnership program; and our ability to successfully expand our operations. A more detailed description of each of these risk factors can be found under the caption “Risk Factors” in our most recent Form 10-K, filed on February 11, 2009.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth our share repurchases of common stock during each period in the second quarter of fiscal 2009:


					Total Number of		Maximum Dollar Value of
	Total Number		Average		Shares Purchased as		Shares that May Yet Be
	of Shares		Price Paid		Part of Publicly		Purchased Under the
Period	Purchased		per Share		Announced Programs		Programs
March 30, 2009 – May 3, 2009		137,145	$	26.62		137,145	$	26,993,939
May 4, 2009 – May 31, 2009		97,850	$	30.15		97,850	$	24,043,761
June 1, 2009 – June 28, 2009		111,600	$	32.13		111,600	$	20,458,053

Total		346,595				346,595	$	20,458,053

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

Our Annual Meeting of Stockholders was held on April 28, 2009. There were three proposals up for approval. The results of voting were as follows:

The election of the Board of Directors:


			Total
	Total Votes		Votes
	For		Against		Abstain		Total Votes cast
Richard L. Federico		22,064,921		514,392		21,910		22,601,223
Robert T. Vivian		22,162,704		416,593		21,926		22,601,223
F. Lane Cardwell, Jr.		22,238,038		340,490		22,695		22,601,223
Lesley H. Howe		22,240,905		337,942		22,376		22,601,223
M. Ann Rhoades		22,238,402		340,751		22,070		22,601,223
James G. Shennan, Jr.		22,183,575		394,873		22,775		22,601,223
R. Michael Welborn		22,155,714		417,956		27,553		22,601,223
Kenneth J. Wessels		22,218,132		360,738		22,353		22,601,223
Kenneth A. May		22,232,955		346,484		21,784		22,601,223

To ratify the appointment of KPMG LLP as the Company’s independent auditors for the fiscal year ending January 3, 2010:

Total

Total Votes

Votes

For

Against

Abstain

Total Votes cast

Ratify KPMG

22,551,784

42,482

6,957

22,601,223

To approve any adjournments of the meeting to another time or place, if necessary in the judgment of proxy holders, for the purpose of soliciting additional proxies in favor of any of the foregoing proposals:

Total

Total Votes

Votes

For

Against

Abstain

Total Votes cast

Adjournment

14,273,895

8,292,985

34,343

22,601,223

Item 5. Other Information

None

Item 6. Exhibits


Exhibit
Number			Description Document
	3(i	)(1)	Amended and Restated Certificate of Incorporation.

	3(ii	)(2)	Amended and Restated Bylaws.

	4.1	(3)	Specimen Common Stock Certificate.

	4.2	(3)	Amended and Restated Registration Rights Agreement dated May 1, 1997.

	†10.28	(4)	First Amendment to Amended and Restated Employment Agreement between the Company and Richard L. Federico, as amended, dated February 18, 2009.

	†10.29	(4)	First Amendment to Amended and Restated Employment Agreement between the Company and Robert T. Vivian, as amended, dated February 18, 2009.

	†10.33		Amended and Restated Non-Employee Director Compensation Plan, effective April 28, 2009.

	10.35		First Amendment to 2007 Credit Agreement dated December 31, 2008.

	10.36		Second Amendment to 2007 Credit Agreement dated June 23, 2009.

	31.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Richard L. Federico.

	31.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Robert T. Vivian.

	31.3		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Mark D. Mumford.

	32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Richard L. Federico.

	32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Robert T. Vivian.

	32.3		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Mark D. Mumford.


†		Management Contract or Compensatory Plan.

(1)		Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on April 25, 2002.

(2)		Incorporated by reference to the Registrant’s Annual Report on Form 10-K filed on February 11, 2009.

(3)		Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-59749).

(4)		Incorporated by reference to the Registrant’s Form 8-K filed on February 20, 2009.

INDEX TO EXHIBITS


Exhibit
Number			Description Document
	3(i	)(1)	Amended and Restated Certificate of Incorporation.

	3(ii	)(2)	Amended and Restated Bylaws.

	4.1	(3)	Specimen Common Stock Certificate.

	4.2	(3)	Amended and Restated Registration Rights Agreement dated May 1, 1997.

	†10.28	(4)	First Amendment to Amended and Restated Employment Agreement between the Company and Richard L. Federico, as amended, dated February 18, 2009.

	†10.29	(4)	First Amendment to Amended and Restated Employment Agreement between the Company and Robert T. Vivian, as amended, dated February 18, 2009.

	†10.33		Amended and Restated Non-Employee Director Compensation Plan, effective April 28, 2009.

	10.35		First Amendment to 2007 Credit Agreement dated December 31, 2008.

	10.36		Second Amendment to 2007 Credit Agreement dated June 23, 2009.

	31.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Richard L. Federico.

	31.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Robert T. Vivian.

	31.3		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Mark D. Mumford.

	32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Richard L. Federico.

	32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Robert T. Vivian.

	32.3		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Mark D. Mumford.


†		Management Contract or Compensatory Plan.

(1)		Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on April 25, 2002.

(2)		Incorporated by reference to the Registrant’s Annual Report on Form 10-K filed on February 11, 2009.

(3)		Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-59749).

(4)		Incorporated by reference to the Registrant’s Form 8-K filed on February 20, 2009.


Item	Page

PART I FINANCIAL INFORMATION

1. Financial Statements		3

Consolidated Balance Sheets as of June 28, 2009 and December 28, 2008		3

Consolidated Statements of Income for the Three and Six Months Ended June 28, 2009 and June 29, 2008		4

Consolidated Statements of Equity for the Six Months Ended June 28, 2009		5

Consolidated Statements of Cash Flows for the Six Months Ended June 28, 2009 and June 29, 2008		6

Notes to Unaudited Consolidated Financial Statements		7

2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

3. Quantitative and Qualitative Disclosures About Market Risk		27

4. Controls and Procedures		28

PART II OTHER INFORMATION

1. Legal Proceedings		29

1A. Risk Factors		29

2. Unregistered Sales of Equity Securities and Use of Proceeds		29

3. Defaults Upon Senior Securities		29

4. Submission of Matters to a Vote of Security Holders		30

5. Other Information		30

6. Exhibits		31

Signatures		32

Index to Exhibits		33

Exhibit 10.33
Exhibit 10.35
Exhibit 10.36
Exhibit 31.1
Exhibit 31.2
Exhibit 31.3
Exhibit 32.1
Exhibit 32.2
Exhibit 32.3


	P.F. CHANG’S CHINA BISTRO, INC.
	By:	/s/ RICHARD L. FEDERICO
		Richard L. Federico
		Chairman and Co-Chief Executive Officer Principal Executive Officer

	By:	/s/ ROBERT T. VIVIAN
		Robert T. Vivian
		Co-Chief Executive Officer Principal Executive Officer

	By:	/s/ MARK D. MUMFORD
		Mark D. Mumford
		Chief Financial Officer Principal Financial and Accounting Officer

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