-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UFUTo/5n4VcuW0kCJtZ19Asqkp2w2RcF5irHalTecexi/FYe8eSiOT70xgwMWqG7 rZlpBuuKueXpRft94xAZrw== 0000950153-98-000818.txt : 19980727 0000950153-98-000818.hdr.sgml : 19980727 ACCESSION NUMBER: 0000950153-98-000818 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19980724 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: P F CHANGS CHINA BISTRO INC CENTRAL INDEX KEY: 0001039889 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-59749 FILM NUMBER: 98670621 BUSINESS ADDRESS: STREET 1: 5090 N 40TH ST STE 160 CITY: PHOENIX STATE: AZ ZIP: 85018 MAIL ADDRESS: STREET 1: 5090 N. 40TH ST STREET 2: SUITE 160 CITY: PHOENIX STATE: AZ ZIP: 85018 S-1 1 S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 24, 1998 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ P.F. CHANG'S CHINA BISTRO, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 5812 86-0815086 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
5090 NORTH 40TH STREET, SUITE 160 PHOENIX, AZ 85018 (602) 957-8986 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ ROBERT T. VIVIAN CHIEF FINANCIAL OFFICER P.F. CHANG'S CHINA BISTRO, INC. 5090 NORTH 40TH STREET, SUITE 160 PHOENIX, AZ 85018 (602) 957-8986 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: CAMERON JAY RAINS, ESQ. CECIL SCHENKER, P.C. SCOTT M. STANTON, ESQ. J. PATRICK RYAN, ESQ. CHRISTIAN WAAGE, ESQ. AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. GRAY CARY WARE & FREIDENRICH LLP 300 CONVENT STREET, SUITE 1500 4365 EXECUTIVE DRIVE, SUITE 1600 SAN ANTONIO, TX 78205 SAN DIEGO, CA 92121 (210) 281-7000 (619) 677-1400
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- TITLE OF EACH CLASS OF SECURITIES TO AMOUNT TO BE AMOUNT OF BE REGISTERED REGISTERED(1) REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------- Common Stock, $0.001 par value..................... $57,500,000 $16,962.50 - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purposes of computing the registration fee in accordance with Rule 457(o). ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JULY 24, 1998 PROSPECTUS , 1998 SHARES [P.F. CHANG'S LOGO] P.F. CHANG'S CHINA BISTRO, INC. COMMON STOCK Of the shares of common stock offered hereby (the "Common Stock"), shares are being offered by P.F. Chang's China Bistro, Inc. ("P.F. Chang's" or the "Company") and shares are being offered by the Selling Stockholders. See "Principal and Selling Stockholders." The Company will not receive any of the proceeds from the sale of the shares by the Selling Stockholders. Prior to this offering, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price will be between $ and $ per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. Application has been made for the Common Stock to be approved for quotation on the Nasdaq National Market under the symbol "PFCB." SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ------------------------------------------------------------------------------------------------------------------------- PRICE UNDERWRITING PROCEEDS PROCEEDS TO TO THE DISCOUNTS AND TO THE THE SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS - ------------------------------------------------------------------------------------------------------------------------- Per Share............................ $ $ $ $ Total(3)............................. $ $ $ $ - -------------------------------------------------------------------------------------------------------------------------
(1) The Company and Selling Stockholders have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $550,000. (3) The Company and the Selling Stockholders have granted to the Underwriters an option, exercisable within 30 days after the date hereof to purchase up to additional shares of Common Stock on the same terms and conditions set forth above solely to cover over-allotments, if any. If such option is exercised in full, the total Price to the Public, Underwriting Discounts and Commissions, Proceeds to the Company and Proceeds to the Selling Stockholders will be $ , $ , $ and $ , respectively. See "Underwriting." The shares of Common Stock are offered by the several Underwriters subject to prior sale, when, as and if delivered to and accepted by the Underwriters and subject to certain prior conditions including the right of the Underwriters to reject any order in whole or in part. It is expected that delivery of the certificates representing the shares of Common Stock will be made in New York, New York on or about , 1998. DONALDSON, LUFKIN & JENRETTE NATIONSBANC MONTGOMERY SECURITIES LLC DAIN RAUSCHER WESSELS a division of Dain Rauscher Incorporated 3 [INSIDE FRONT COVER] The Company has registered the servicemark "P.F. Chang's China Bistro." All other brand names and trademarks appearing in this Prospectus are the property of their respective holders. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. As used in this Prospectus, unless the context otherwise requires, the terms "Company" and "P.F. Chang's" include P.F. Chang's China Bistro, Inc. and all of its subsidiaries and affiliates and their respective predecessors. Except as otherwise noted, all information in this Prospectus assumes (i) no exercise of the Underwriters' over-allotment option, (ii) no exercise of options or warrants to purchase shares of Common Stock and (iii) the conversion into shares of Common Stock upon the closing of this offering of all outstanding shares of Convertible Redeemable Preferred Stock and the deferred purchase price liability representing the balance of the purchase price from the acquisition of minority interests in three of the four original restaurants (the "Deferred Purchase Price Liability"). Information in this Prospectus also gives effect to a one-for-two reverse stock split to be effected prior to consummation of this offering. See "Description of Capital Stock" and "Underwriting." THE COMPANY P.F. Chang's owns and operates 15 full service restaurants that feature a unique blend of high quality, authentic Chinese cuisine and American hospitality in a sophisticated, contemporary bistro setting. The Company's restaurants offer intensely flavored, highly memorable culinary creations, prepared from fresh ingredients, including premium herbs and spices imported directly from China. The menu is focused on select dishes created to capture the distinct flavors and styles of the five major culinary regions of China: Canton, Hunan, Mongolia, Shanghai and Szechwan. By adhering to the Chinese culinary precepts of fan and t'sai, a balancing of rice, noodles and grains with meat, seafood and vegetables, the P.F. Chang's menu offers an array of taste, texture, color and aroma. The menu is highlighted by signature dishes such as Chang's Spicy Chicken, Orange Peel Beef, Peking Ravioli, Chicken in Soothing Lettuce Wrap, Szechwan-Style Long Beans and Dan Dan Noodles. The authentic cuisine is complemented by a full service bar offering an extensive selection of wines, specialty drinks, Asian beers, cappuccino and espresso. The average check per customer, including beverage, is approximately $17.00. The Company offers superior customer service in a high energy atmosphere featuring a display kitchen, exhibition wok cooking and a decor that includes wood and slate floors, mounted life-size terra cotta replicas of Xi'an warriors and narrative murals depicting 12th century China. The Company was formed in early 1996 with the acquisition of the four original P.F. Chang's restaurants and the hiring of an experienced management team, led by Richard Federico and Robert Vivian, the Company's Chief Executive Officer and Chief Financial Officer, respectively, to support the Company's founder, Paul Fleming. P.F. Chang's opened three additional restaurants in 1996, six in 1997 and expects to open ten restaurants in 1998 (two of which are open) and 13 in 1999. Key to the Company's expansion strategy and success at the restaurant level is the Company's management philosophy utilizing Market, Operating and Culinary Partners. The Company has demonstrated the viability of the P.F. Chang's concept in a wide variety of markets across the United States, including the Southwest, southern California, Texas and southern Florida. The P.F. Chang's concept was developed in 1993 by Paul Fleming, a highly successful Phoenix-based restaurateur, in collaboration with Philip Chiang, the owner of the acclaimed Mandarin restaurant in Beverly Hills, California. The Company's objectives are to (i) develop and operate a nationwide system of restaurants that offer guests a unique, sophisticated dining experience, (ii) create a loyal customer base that generates a high level of repeat business and (iii) provide superior returns to its investors. To achieve its objectives, the Company strives to offer high quality Chinese cuisine in a memorable atmosphere while delivering superior customer service and an excellent dining value. The Company intends to pursue an accelerated, disciplined expansion program by leveraging its innovative partnership management philosophy in order to build on its exceptional restaurant economics. ------------------ The Company was incorporated in January 1996 as a Delaware corporation in connection with the acquisition of the four original P.F. Chang's restaurants. The Company's principal executive office is located at 5090 North 40th Street, Suite 160, Phoenix, Arizona 85018. The Company's telephone number is (602) 957- 8986, and its facsimile number is (602) 957-8998. 3 5 THE OFFERING Common Stock offered by the Company........... shares Common Stock offered by the Selling Stockholders.................................. shares Common Stock to be outstanding after the offering...................................... shares(1) Use of proceeds............................... Development of new restaurants, repayment of certain indebtedness and general corporate purposes including working capital. See "Use of Proceeds." Proposed Nasdaq National Market symbol........ PFCB - ------------------------------ (1) Based on shares outstanding at June 28, 1998, which includes (i) 3,475,854 shares issuable on conversion of outstanding shares of Series A Convertible Redeemable Preferred Stock (the "Series A Preferred Stock") and outstanding shares of Series B Convertible Redeemable Preferred Stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock"), (ii) 82,130 shares of Common Stock issuable as paid-in-kind dividends to holders of Series A Preferred Stock of the Company prior to consummation of the offering and (iii) shares issuable upon consummation of this offering upon conversion of the Deferred Purchase Price Liability, assuming an initial public offering price of $ . Excludes (i) 1,009,635 shares reserved as of such date for issuance upon the exercise of outstanding stock options at a weighted average exercise price of $3.87 per share, (ii) an aggregate of 680,000 shares reserved for future grant under the Company's stock option and stock purchase plans and (iii) 62,190 shares reserved for issuance upon the exercise of outstanding warrants at an exercise price of $4.00 per share. See "Management--Benefit Plans" and "Description of Capital Stock." SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA(1)
SIX MONTHS ENDED -------------------- FISCAL YEAR TOTAL YEAR FISCAL YEAR JUNE 29, JUNE 28, 1995(2) 1996(3) 1997 1997 1998 (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) STATEMENTS OF OPERATIONS DATA: Revenues..................................... $10,465 $18,445 $39,768 $17,703 $32,937 Total restaurant operating costs............. 8,891 15,835 32,470 14,334 26,296 Income (loss) from operations................ 660 9 (2) 696 1,658 Net income (loss)............................ $ 647 $(1,145) $(1,696) $ (241) $ 847 Diluted net income (loss) per share.......... -- -- $ (1.03) $ (0.25) $ 0.13 Shares used in calculation of diluted net income (loss) per share(4)................. -- -- 2,500 2,500 6,655 PRO FORMA DATA:(5) Pro forma diluted net income (loss) per share...................................... -- $ $ $ $ Shares used in calculation of pro forma diluted net income (loss) per share........ -- OPERATING DATA: Comparable restaurant sales increase(6)...... 25.1% 13.0% 13.8% 12.6% 11.7% Average weekly restaurant sales.............. $81,122 $81,976 $90,383 $91,250 $93,839 Return on investment(7)...................... 25.2% 34.4% 34.9% -- -- Restaurants open at end of period............ 4 7 13 8 14
JUNE 28, 1998 ------------------------- ACTUAL AS ADJUSTED(8) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 1,802 $ Total assets................................................ 34,265 Deferred Purchase Price Liability........................... 2,426 -- Short- and long-term debt................................... 11,600 2,600 Convertible Redeemable Preferred Stock...................... 18,285 -- Common stockholders' equity (deficit)....................... (4,076)
4 6 - ------------------------------ (1) The Company's fiscal quarters typically consist of thirteen week periods ending on the Sunday closest to the last day of the calendar quarter, and its fiscal year ends on the Sunday closest to December 31 in each year. (2) Fiscal year 1995 information reflects the combined results of operations of the Predecessors. Accordingly, net income (loss) per share for fiscal year 1995 is not presented because it is not meaningful. See "Certain Transactions" and Note 1 of Notes to Consolidated Financial Statements. (3) Prior to February 29, 1996, the Company's business was conducted by four business entities controlled by Paul Fleming: Fleming Chinese Restaurants, Inc. (Scottsdale), P.F. Chang's II, Inc. (Newport Beach), P.F. Chang's III, L.L.C. (La Jolla) and P.F. Chang's IV, L.L.C. (Irvine) (collectively, the "Predecessors"). Total year 1996 information reflects the combined results of the Predecessors for the period beginning January 1, 1996 and ending February 28, 1996 and the results of the Company for the period beginning February 29, 1996 and ending December 29, 1996. Accordingly, net income (loss) per share for total year 1996 is not presented because it is not meaningful. The allocation of the purchase price in connection with the purchase of minority interests resulted in no material adjustment to the historical recorded basis in the assets and liabilities except for goodwill. Therefore, the effect to the statement of operations is primarily amortization of goodwill subsequent to the date of acquisition. See "Selected Consolidated Financial and Operating Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Certain Transactions" and Note 1 of Notes to Consolidated Financial Statements. (4) See Notes 2, 6 and 8 of Notes to Consolidated Financial Statements. (5) Pro forma information gives effect as of the beginning of each period to (i) the purchase of substantially all of the minority interests in the Predecessors, (ii) the repayment of the Company's revolving line of credit through the application of the net proceeds from the sale of a sufficient number of shares of Common Stock at the assumed initial public offering price of $ per share, and (iii) the conversion into Common Stock of the Preferred Stock and the Deferred Purchase Price Liability, assuming an initial public offering price of $ per share. (6) A new restaurant is included in the calculation of the change in comparable restaurant sales in the eighteenth month of that restaurant's operation. (7) Return on investment for each restaurant is determined as the quotient of earnings of such restaurant before interest, taxes and rent divided by the Company's total investment in restaurant assets. The information presented in the table is the aggregate return on investment for all restaurants open during the respective periods. See "Business--Unit Economics." (8) Adjusted to give effect as of June 28, 1998 to (i) the receipt by the Company of the estimated net proceeds of $ from the sale of shares of Common Stock offered hereby by the Company at an assumed initial public offering price of $ per share, (ii) application of a portion of the net proceeds of this offering to repay the Company's revolving line of credit, and (iii) the conversion into Common Stock of the Preferred Stock and the Deferred Purchase Price Liability, assuming an initial public offering price of $ per share. 5 7 RISK FACTORS In addition to the other information in this Prospectus, prospective investors should carefully consider the following risk factors in evaluating an investment in the Company before purchasing any shares of Common Stock offered hereby. This Prospectus contains forward-looking statements which involve risks and uncertainties. Such forward-looking statements may be deemed to include anticipated restaurant openings, anticipated costs and sizes of future restaurants and the adequacy of anticipated sources of cash, including the proceeds from this offering, to fund the Company's future capital requirements. Words such as "believes," "anticipates," "expects," "intends," "plans" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. Prospective investors are cautioned that actual events or results may differ materially from those discussed in the forward-looking statements. Factors that might cause actual events or results to differ materially from those indicated by such forward- looking statements may include the matters set forth below and elsewhere in this Prospectus. UNCERTAINTIES ASSOCIATED WITH EXPANDING OPERATIONS Because the Company currently operates only 15 restaurants, several of which have been opened within the last twelve months, the results achieved to date by the Company's relatively small number of restaurants may not be indicative of those restaurants' long-term performance or the potential market acceptance of restaurants in other locations. Further, there can be no assurance that any new restaurant which the Company opens will obtain similar operating results to those of prior restaurants. The Company anticipates that its new restaurants will commonly take several months to reach planned operating levels due to certain inefficiencies typically associated with new restaurants, including lack of market awareness, inability to hire sufficient staff and other factors. A critical factor in the Company's future success is its ability to successfully expand its operations. The Company expanded from seven restaurants at the end of 1996 to 15 restaurants as of June 1998. The Company expects to open a total of ten restaurants during 1998 (two of which are open) and an additional 13 in 1999. The Company's ability to expand successfully will depend on a number of factors, including the identification and availability of suitable locations, competition for restaurant sites, the negotiation of favorable lease arrangements, timely development in certain cases of commercial, residential, street or highway construction near the Company's restaurants, management of the costs of construction and development of new restaurants, securing required governmental approvals and permits, recruitment of qualified operating personnel (particularly managers and chefs), the competition in new markets, general economic conditions and other factors, some of which are beyond the control of the Company. The opening of additional restaurants in the future will depend in part upon the Company's ability to generate sufficient funds from operations or to obtain sufficient equity or debt financing on favorable terms to support such expansion. There can be no assurance that the Company will be successful in addressing these risks, that the Company will be able to open its planned new operations on a timely basis, if at all, or, if opened, that those operations will be operated profitably. The Company has experienced, and expects to continue to experience, delays in restaurant openings from time to time. Delays or failures in opening planned new restaurants could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows. The Company's growth strategy may strain the Company's management, financial and other resources. To manage its growth effectively, the Company must maintain a high level of quality and service at its existing and future restaurants, continue to enhance its operational, financial and management capabilities and locate, hire, train and retain experienced and dedicated operating personnel, particularly managers and chefs. There can be no assurance that the Company will be able to effectively manage these and other factors necessary to permit it to achieve its expansion objectives, and any failure to do so could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows. 6 8 DEVELOPMENT AND CONSTRUCTION RISKS Because each P.F. Chang's restaurant is distinctively designed to accommodate particular characteristics of each location and to blend local or regional design themes with the Company's principal trade dress and other common design elements, each location presents its own development and construction risks. Many factors may affect the costs associated with the development and construction of the Company's restaurants, including labor disputes, shortages of materials and skilled labor, weather interference, unforeseen engineering problems, environmental problems, construction or zoning problems, local government regulations, modifications in design to the size and scope of the projects and other unanticipated increases in costs, any of which could give rise to delays or cost overruns. There can be no assurance that the Company will be able to develop additional P.F. Chang's restaurants within anticipated budgets or time periods, and any such failure could materially adversely affect the Company's business, financial condition, results of operations or cash flows. DEPENDENCE ON KEY PERSONNEL The success of the Company's business will continue to be highly dependent on its key operating officers and employees, including Richard Federico, the Company's Chief Executive Officer and President, and Robert Vivian, the Company's Chief Financial Officer. The Company's success in the future will be dependent on its ability to attract, retain and motivate a sufficient number of qualified management and operating personnel, including Market Partners, Operating Partners and chefs, to keep pace with an aggressive expansion schedule. Such qualified individuals are historically in short supply and any inability of the Company to attract and retain such key employees may limit its ability to effectively penetrate new market areas. Additionally, the ability of these key personnel to maintain consistency in the quality and atmosphere of the Company's restaurants in various markets is a critical factor in the Company's success. Any failure to do so may harm the Company's reputation and could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows. See "Business--Operations" and "Management." RESTAURANT INDUSTRY AND COMPETITION The restaurant industry is intensely competitive with respect to food quality, price-value relationships, ambiance, service and location, and many restaurants compete with the Company at each of its locations. The Company's competitors include mid-price, full-service casual dining restaurants and locally owned and operated Chinese restaurants. There are many well-established competitors with substantially greater financial, marketing, personnel and other resources than the Company, and many of the Company's competitors are well established in the markets where the Company's operations are, or in which they may be, located. Additionally, other companies may develop restaurants that operate with similar concepts. The restaurant business is often affected by changes in consumer tastes, national, regional or local economic conditions, demographic trends, consumer confidence in the economy, discretionary spending priorities, weather conditions, tourist travel, traffic patterns and the type, number and location of competing restaurants. Changes in these factors could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows. In the future, changes in consumer tastes may require the Company to modify or refine elements of its restaurant system to evolve its concept in order to compete with popular new restaurant formats or concepts that develop from time to time, and there can be no assurance that the Company will be successful in implementing such modifications. See "Business--Competition." FLUCTUATIONS IN OPERATING RESULTS The Company's operating results may fluctuate significantly as a result of a variety of factors, including general economic conditions, consumer confidence in the economy, changes in consumer preferences, competitive factors, weather conditions, the timing of new restaurant openings and related expenses, revenues contributed by new restaurants and increases or decreases in comparable restaurant revenues. Historically, the Company has experienced variability in the amount and percentage of revenues attributable to preopening expenses. The Company typically incurs the most significant portion of preopening expenses associated with a given restaurant within the two months immediately preceding and the month of the opening of the restaurant. 7 9 In addition, the Company's experience to date has been that labor and operating costs associated with a newly opened restaurant for the first several months of operation are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Accordingly, the volume and timing of new restaurant openings has had and is expected to have a meaningful impact on preopening expenses and labor and operating costs until such time as a larger base of restaurants in operation mitigates such impact. Due to the foregoing factors, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for a full fiscal year, and, from time to time in the future, the Company's results of operations may be below the expectations of public market analysts and investors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." CHANGES IN FOOD COSTS The Company's profitability is dependent in part on its ability to anticipate and react to changes in food costs. Other than for produce, which is purchased locally by each restaurant, the Company relies on the Distributors Marketing Alliance as the primary distributor of its food. Although the Company believes that alternative distribution sources are available, any increase in distribution prices or failure to perform by the Distributors Marketing Alliance could cause the Company's food costs to fluctuate. Further, various factors beyond the Company's control, including adverse weather conditions and governmental regulation, may affect the Company's food costs. There can be no assurance that the Company will be able to anticipate and react to changing food costs through its purchasing practices and menu price adjustments in the future, and failure to do so could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows. LITIGATION The Company is from time to time the subject of complaints or litigation from guests alleging illness, injury or other food quality, health or operational concerns. Adverse publicity resulting from such allegations may materially adversely affect the Company and its restaurants, regardless of whether such allegations are valid or whether the Company is liable. The Company also is the subject of complaints or allegations from former or prospective employees from time to time. A lawsuit or claim could result in an adverse decision against the Company that could materially adversely affect the Company or its business. GOVERNMENTAL REGULATION; MINIMUM WAGE The Company's operations are subject to regulation by federal agencies and to licensing and regulation by state and local health, environmental, labor relations, sanitation, building, zoning, safety, fire and other departments relating to the development and operation of restaurants and retail establishments. The Company's activities are also subject to the federal Americans With Disabilities Act and related regulations, which prohibit discrimination on the basis of disability in public accommodations and employment. The Company is also subject to state "dram-shop" laws and regulations, which generally provide that a person injured by an intoxicated person may seek to recover damages from an establishment that wrongfully served alcoholic beverages to such person. Given the location of many of the Company's restaurants, even if the Company's operation of those restaurants is in strict compliance with the requirements of the Immigration and Naturalization Service (the "INS"), the Company's employees may not all meet federal citizenship or residency requirements, which could lead to disruptions in its work force. Changes in any or all of these laws or regulations, such as government-imposed paid leaves of absence or mandated health benefits, or increased tax reporting and tax payment requirements for employees who receive gratuities, could have a material adverse effect on the Company's business, financial condition and results of operations. Delays or failures in obtaining or maintaining required construction and operating licenses, permits or approvals could delay or prevent the opening of new restaurants or could materially and adversely affect the operation of existing restaurants. In addition, there can be no assurance that the Company will be able to obtain necessary variance or amendments to required licenses, permits or other approvals on a cost-effective and timely basis in order to construct and develop restaurants in the future. See "Business--Governmental Regulation." 8 10 A number of the Company's employees are subject to various minimum wage requirements. Many of the Company's employees work in restaurants located in California and receive salaries equal to the California minimum wage. The minimum wage in California rose from $5.00 per hour effective March 1, 1997 to $5.75 per hour effective March 1, 1998. There can be no assurance that similar increases will not be implemented in other jurisdictions in which the Company operates or seeks to operate. In addition, the federal minimum wage increased to $5.15 per hour effective September 1, 1997. There can be no assurance that the Company will be able to pass additional increases in labor costs through to its guests in the form of menu price adjustments and, accordingly, such minimum wage increases could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows. CONTROL BY EXISTING STOCKHOLDERS AND MANAGEMENT Following the closing of this offering, the Company's directors, officers and their affiliates will beneficially own approximately % of the outstanding Common Stock. As a result of such Common Stock ownership, the Company's directors, officers and their affiliates, if they voted together, would be able to elect all members of the Company's Board of Directors and control corporate actions requiring stockholder approval. See "Principal and Selling Stockholders." CERTAIN ANTI-TAKEOVER MEASURES The Company's Amended and Restated Certificate of Incorporation (the "Charter") authorizes the Board of Directors to issue up to 10,000,000 shares of preferred stock and to determine the powers, preferences, privileges, rights, including voting rights, qualifications, limitations and restrictions of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The Charter and By-laws, among other things, require that stockholder actions occur at duly called meetings of the stockholders, limit who may call special meetings of stockholders, do not permit cumulative voting in the election of directors and require advance notice of stockholder proposals and director nominations. Also, Section 203 of the Delaware General Corporation Law (the "DGCL") restricts certain business combinations with any "interested stockholder" as defined by such statute. These and other provisions could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company, discourage a hostile bid or delay, prevent or deter a merger, acquisition or tender offer in which the Company's stockholders could receive a premium for their shares, or a proxy contest for control of the Company or other change in the Company's management. See "Management" and "Description of Capital Stock." ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE Prior to this offering, there has been no public market for the Common Stock. There can be no assurance that an active trading market will develop or, if one develops, that it will be maintained. The initial public offering price of the Common Stock will be established by negotiation among the Company, the Selling Stockholders and the Underwriters. See "Underwriting" for a discussion of factors to be considered in determining the initial public offering price. The market price of the Common Stock could be subject to significant fluctuations in response to the Company's operating results and other factors, including general economic and market conditions. In addition, the stock market in recent years has experienced and continues to experience significant price and volume fluctuations, which have affected the market price of the stock of many companies and which have often been unrelated or disproportionate to the operating performance of these companies. These fluctuations, as well as a shortfall in sales or earnings compared to securities analysts' expectations, changes in analysts' recommendations or projections or general economic and market conditions, may adversely affect the market price of the Common Stock. In the past, securities class action litigation has often been instituted following periods of volatility in the market price for a company's securities. Such litigation could result in substantial costs and a diversion of management attention and resources, which could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows. 9 11 ADDITIONAL SHARES ELIGIBLE FOR FUTURE SALE IN THE PUBLIC MARKET The sale of a substantial number of shares of Common Stock in the public market following this offering could adversely affect the market price of the Common Stock. Upon the closing of this offering, the Company will have outstanding an aggregate of shares of Common Stock (including shares issuable upon conversion of the Deferred Purchase Price Liability, assuming an initial public offering price of $ per share), assuming no exercise of outstanding options, warrants or the Underwriters' over-allotment option. The shares of Common Stock sold in this offering (and any shares sold upon exercise of the Underwriters' over-allotment option) will be freely tradable without restriction under the Securities Act of 1933, as amended (the "Securities Act"). The remaining shares of Common Stock are "restricted shares" within the meaning of Rule 144 promulgated under the Securities Act and are subject to restrictions under the Securities Act. Of these restricted shares, are subject to lock-up agreements under which the holders have agreed not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"). In its sole discretion and at any time without notice, DLJ may release all or any portion of the shares subject to the lock-up agreements. All of the restricted shares subject to lock-up agreements will become available for sale in the public market immediately following expiration of the 180-day lock-up period, subject (to the extent applicable) to the volume and other limitations of Rule 144 or Rule 701 promulgated under the Securities Act. In addition, beginning 90 days after the date of this Prospectus, restricted shares not subject to lock-up agreements or contractual restrictions will become available for sale in the public market, subject to the volume and other limitations of Rule 144 or Rule 701. In addition, after expiration of the lock-up period, certain securityholders of the Company have the contractual right to require the Company to register certain of their shares of Common Stock for future sale. The Company is unable to predict the effect that future sales made pursuant to any such registration rights, under Rule 144 or otherwise, may have on the prevailing market price of the Common Stock. See "Description of Capital Stock--Registration Rights" and "Shares Eligible for Future Sale." DILUTION The price to the public in this offering is substantially higher than the net tangible book value per share of Common Stock. Investors purchasing shares of Common Stock in this offering will therefore incur immediate and substantial dilution. See "Dilution." 10 12 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock being offered by the Company hereby are estimated to be approximately $ ($ if the Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $ per share and after deducting estimated underwriting discounts and commissions and other estimated offering expenses. The Company intends to use a portion of the net proceeds to repay certain indebtedness incurred for the development of restaurants. Upon consummation of this offering, the Company is required to repay all amounts outstanding under its revolving line of credit ($9.0 million at June 28, 1998), which bears interest at LIBOR plus 3.5% (9.16% at June 28, 1998) and expires July 1, 1999. The Company intends to use the balance of the net proceeds for development of new restaurants and for general corporate purposes, including working capital. Pending such uses, the Company intends to invest the net proceeds in short-term, investment-grade, interest-bearing securities. DIVIDEND POLICY The Company has not declared or paid any cash dividends on its Common Stock in the past and does not anticipate paying dividends in the foreseeable future. In addition, the Company's current credit agreements prohibit the payment of cash dividends. The Company currently intends to retain its earnings for the operation and development of its business. Any future payment of dividends is within the discretion of the Company's Board of Directors and will depend, among other factors, upon the capital requirements, operating results and financial condition of the Company from time to time and restrictions under credit agreements existing from time to time. 11 13 CAPITALIZATION The following table sets forth the consolidated cash and cash equivalents, short-term debt and capitalization of the Company as of June 28, 1998, and as adjusted to reflect (i) the sale of the shares of Common Stock offered by the Company hereby, (ii) the conversion into Common Stock of the Preferred Stock and the Deferred Purchase Price Liability, assuming an initial public offering price of $ per share and (iii) the application of the net proceeds from the offering. This table should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus. See "Use of Proceeds."
JUNE 28, 1998 ------------------------- ACTUAL AS ADJUSTED(1) (IN THOUSANDS) Cash and cash equivalents................................... $ 1,802 $ ======= ======= Revolving line of credit and current portion of long-term debt...................................................... $ 9,441 $ 441 ======= ======= Deferred Purchase Price Liability(2)........................ $ 2,426 $ -- Long-term debt, less current portion........................ 2,159 Convertible Redeemable Preferred Stock; $0.001 par value; 10,000,000 shares authorized; 3,475,854 shares issued and outstanding, actual; no shares issued and outstanding, as adjusted.................................................. 18,285 -- Common stockholders' equity (deficit): Common stock; $0.001 par value; 20,000,000 shares authorized; 2,500,000 shares issued and outstanding, actual; shares issued and outstanding, as adjusted(3)............................................ 3 Additional paid-in capital............................. 2 Accumulated deficit.................................... (4,081) (4,081) ------- ------- Total common stockholders' equity (deficit).......... (4,076) ------- ------- Total capitalization................................. $18,794 $ ======= =======
- ------------------------------ (1) Adjusted to give effect as of June 28, 1998 to (i) the receipt by the Company of the estimated net proceeds of $ from the sale of shares of Common Stock offered hereby by the Company, assuming an initial public offering price of $ per share, (ii) application of a portion of the net proceeds of this offering to repay the Company's revolving line of credit and (iii) the conversion into Common Stock of the Preferred Stock and the Deferred Purchase Price Liability, assuming an initial public offering price of $ per share. (2) See Note 1 of Notes to Consolidated Financial Statements. (3) Based on shares outstanding at June 28, 1998, which includes (i) 3,475,854 shares issuable on conversion of outstanding Preferred Stock, (ii) 82,130 shares of Common Stock issuable as paid-in-kind dividends to holders of Series A Preferred Stock of the Company prior to consummation of the offering and (iii) shares issuable upon consummation of this offering upon conversion of the Deferred Purchase Price Liability, assuming an initial public offering price of $ . Excludes (i) 1,009,635 shares reserved as of such date for issuance upon the exercise of outstanding stock options at a weighted average price of $3.87 per share, (ii) an aggregate of 680,000 shares reserved for future grant under the Company's stock option and stock purchase plans and (iii) 62,190 shares reserved for issuance upon the exercise of outstanding warrants at an exercise price of $4.00 per share. See "Management -- Benefit Plans" and "Description of Capital Stock." 12 14 DILUTION At June 28, 1998, the Company had a net tangible book value of $8.5 million, or $ per share of Common Stock. "Net tangible book value" per share represents the amount of total tangible assets of the Company reduced by the amount of its total liabilities and divided by the total number of outstanding shares of Common Stock, giving effect to the conversion into Common Stock of the Preferred Stock and the Deferred Purchase Price Liability, assuming an initial public offering price of $ per share. The pro forma net tangible book value of the Company as of June 28, 1998, giving effect to the sale by the Company of the shares offered hereby, assuming an initial public offering price of $ per share, would have been approximately $ , or $ per share. This represents an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate dilution in net tangible book value of $ per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $ ------ Net tangible book value per share before the offering..... $ ------ Increase attributable to new investors.................... ------ Pro forma net tangible book value per share after the offering.................................................. ------ Dilution per share to new investors......................... $ ======
The following table summarizes, on a pro forma basis as of June 28, 1998, the differences between the existing stockholders (including persons who will receive Common Stock upon conversion of the Deferred Purchase Price Liability) and the new investors with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid by existing stockholders and new investors:
SHARES PURCHASED TOTAL CONSIDERATION ------------------- ------------------------- AVERAGE NUMBER PERCENT AMOUNT PERCENT PRICE (IN THOUSANDS) PER SHARE Existing stockholders(1)....... % $ % $ New investors(1)............... -------- ----- ---- ----- Total................ 100.0% $ 100.0% ======== ===== ==== =====
- ------------------------------ (1) Sales by Selling Stockholders in this offering will reduce the number of shares held by existing stockholders to , or % of the total number of shares of Common Stock outstanding, and will increase the number of shares held by new investors to , or % of the total number of shares of Common Stock outstanding after the offering. 13 15 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA The selected statements of operations data set forth below for the fiscal year ended December 31, 1995, the period from January 1, 1996 to February 28, 1996, the period from February 29, 1996 to December 29, 1996 and the fiscal year ended December 28, 1997 and the consolidated balance sheet data set forth below as of December 29, 1996 and December 28, 1997 have been derived from the financial statements of the Company and the Predecessors audited by Ernst & Young LLP, independent auditors, which are included elsewhere in this Prospectus. The selected combined statements of operations data for the fiscal years ended December 31, 1993 and December 31, 1994 and the combined balance sheet data set forth below as of December 31, 1993, December 31, 1994 and December 31, 1995 are derived from the unaudited combined financial statements of the Predecessors. The selected consolidated financial data as of June 28, 1998 and for the six months ended June 28, 1998 and June 29, 1997 has been derived from the unaudited consolidated financial statements of the Company included elsewhere in this Prospectus. In the opinion of management, all adjustments, consisting of only normal recurring accruals, considered necessary for a fair presentation have been made. The results of operations for the six months ended June 28, 1998 are not necessarily indicative of the results to be expected for the entire fiscal year. The following table is qualified by reference to and should be read in conjunction with the consolidated financial statements, related notes thereto and other financial data included elsewhere herein. The Company's fiscal quarters typically consist of thirteen week periods ending on the Sunday closest to the last day of the calendar quarter, and its fiscal year ends on the Sunday closest to December 31 in each year.
PREDECESSORS(1) COMPANY ------------------------------------- ---------------------------------------------------- PERIOD PERIOD SIX MONTHS ENDED FISCAL FISCAL FISCAL FROM FROM TOTAL FISCAL ------------------- YEAR YEAR YEAR 1/1/96 TO 2/29/96 TO YEAR YEAR JUNE 29, JUNE 28, 1993 1994 1995 2/28/96 12/29/96 1996(2) 1997 1997 1998 (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) STATEMENTS OF OPERATIONS DATA: Revenues........................ $1,478 $5,348 $10,465 $2,815 $15,630 $18,445 $39,768 $17,703 $32,937 Costs and expenses: Restaurant operating costs: Cost of sales............. 368 1,422 2,957 772 4,454 5,226 11,317 5,029 9,099 Labor..................... 516 1,728 3,347 918 4,736 5,654 11,683 5,228 9,400 Operating................. 243 917 1,528 527 2,944 3,471 6,727 2,871 5,440 Occupancy................. 134 454 1,059 205 1,279 1,484 2,743 1,206 2,357 ------ ------ ------- ------ ------- ------- ------- ------- ------- Total restaurant operating costs...... 1,261 4,521 8,891 2,422 13,413 15,835 32,470 14,334 26,296 General and administrative............ 7 57 192 17 1,368 1,385 4,276 1,823 2,753 Depreciation and amortization.............. 26 70 322 82 352 434 1,102 451 1,013 Preopening.................. 204 249 400 17 765 782 1,922 399 1,217 ------ ------ ------- ------ ------- ------- ------- ------- ------- Income (loss) from operations... (20) 451 660 277 (268) 9 (2) 696 1,658 Interest income (expense), net........................... (1) (10) (13) (4) (127) (131) (317) (127) (455) ------ ------ ------- ------ ------- ------- ------- ------- ------- Income (loss) before elimination of minority interests and provision for income taxes.... (21) 441 647 273 (395) (122) (319) 569 1,203 Elimination of minority interests..................... -- -- -- -- (720) (993) (1,308) (758) (345) ------ ------ ------- ------ ------- ------- ------- ------- ------- Income (loss) before provision for income taxes.............. (21) 441 647 273 (1,115) (1,115) (1,627) (189) 858 Provision for income taxes...... -- -- -- -- (30) (30) (69) (52) (11) ------ ------ ------- ------ ------- ------- ------- ------- ------- Net income (loss)............... $ (21) $ 441 $ 647 $ 273 (1,145) (1,145) (1,696) (241) 847 ====== ====== ======= ====== Convertible Redeemable Preferred Stock accretion....................... (504) (504) (876) (396) (477) ------- ------- ------- ------- ------- Net income (loss) available to common stockholders..................... $(1,649) $(1,649) $(2,572) $ (637) $ 370 ======= ======= ======= ======= ======= Basic net income (loss) per share...................................... $ (0.66) $ (1.03) $ (0.25) $ 0.15 ======= ======= ======= ======= Diluted net income (loss) per share.................................... $ (0.66) $ (1.03) $ (0.25) $ 0.13 ======= ======= ======= ======= Shares used in calculation of basic net income (loss) per share(3)..... 2,500 2,500 2,500 2,500 ======= ======= ======= ======= Shares used in calculation of diluted net income (loss) per share(3)... 2,500 2,500 2,500 6,655 ======= ======= ======= =======
14 16
SIX MONTHS ENDED ------------------- FISCAL YEAR FISCAL YEAR FISCAL YEAR JUNE 29, JUNE 28, 1995(1) 1996(2) 1997 1997 1998 PRO FORMA DATA:(4) Pro forma diluted net income (loss) per share.............. -- $ $ $ $ Shares used in calculation of pro forma diluted net income (loss) per share......................................... -- OPERATING DATA: Comparable restaurant sales increase(5).................... 25.1% 13.0% 13.8% 12.6% 11.7% Average weekly restaurant sales............................ $81,122 $81,976 $90,383 $91,250 $93,839 Return on investment(6).................................... 25.2% 34.4% 34.9% -- -- Restaurants open at end of period.......................... 4 7 13 8 14
PREDECESSORS COMPANY ------------------------------------------ -------------------------------------- AS OF AS OF ------------------------------------------ -------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 29, DECEMBER 28, JUNE 28, 1993 1994 1995 1996 1997 1998 BALANCE SHEET DATA: Cash and cash equivalents............. $153 $ 347 $ 480 $ 1,877 $ 2,739 $ 1,802 Total assets.......................... 716 1,692 2,997 13,044 28,489 34,265 Short- and long-term debt............. 33 222 350 1,763 8,372 11,600 Deferred Purchase Price Liability..... -- -- -- -- 2,426 2,426 Convertible Redeemable Preferred Stock............................... -- -- -- 10,517 17,808 18,285 Common stockholders' and members' equity (deficit).................... 500 1,217 1,295 (1,874) (4,446) (4,076)
- ------------------------------ (1) Information for fiscal years 1993, 1994 and 1995 and the period beginning January 1, 1996 and ending February 28, 1996 as well as information as of December 31, 1993, December 31, 1994 and December 31, 1995 relate to the Predecessors. See "Certain Transactions" and Note 1 of Notes to Consolidated Financial Statements. (2) Total fiscal year 1996 information reflects the combined results of the Predecessors for the period beginning January 1, 1996 and ending February 28, 1996 and of the Company for the period beginning February 29, 1996 and ending December 29, 1996. See "Certain Transactions" and Note 1 of Notes to Consolidated Financial Statements. (3) See Notes 2, 6 and 8 of Notes to Consolidated Financial Statements. (4) Pro forma information gives effect as of the beginning of each period to (i) the purchase of substantially all of the minority interests in the Predecessors, (ii) the repayment of the Company's revolving line of credit through the application of the net proceeds from the sale of a sufficient number of shares of Common Stock, assuming an initial public offering price of $ per share and (iii) the conversion into Common Stock of the Preferred Stock and the Deferred Purchase Price Liability, assuming an initial public offering price of $ per share. (5) A new restaurant is included in the calculation of the change in comparable restaurant sales in the eighteenth month of that restaurant's operation. (6) Return on investment for each restaurant is determined as the quotient of earnings of such restaurant before interest, taxes and rent divided by the Company's total investment in restaurant assets. The information presented in the table is the aggregate return on investment for all restaurants open during the respective periods. See "Business--Unit Economics." 15 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW P.F. Chang's owns and operates 15 full service restaurants that feature a unique blend of high quality, authentic Chinese cuisine and American hospitality in a sophisticated, contemporary bistro setting. The Company was formed in early 1996 with the acquisition of the four original P.F. Chang's restaurants and the hiring of an experienced management team, led by Richard Federico and Robert Vivian, the Company's Chief Executive Officer and Chief Financial Officer, respectively, to support the Company's founder, Paul Fleming. Utilizing a partnership management philosophy, the Company embarked on a strategic expansion of the concept targeted at major metropolitan areas throughout the United States and opened three additional restaurants in 1996 and six in 1997. The Company intends to open ten new restaurants in 1998 (two of which are open and eight of which are under development) and 13 restaurants in 1999. The 23 units that the Company intends to develop in 1998 and 1999 will be situated in approximately 15 new cities across the United States. The Company has signed lease agreements for six of the 13 units planned for 1999 and has signed letters of intent for all of the remaining planned restaurants. The Company intends to continue to develop restaurants that typically range in size from 6,000 square feet to 7,000 square feet, and that require, on average, a total cash investment of between $1.5 million and $2.0 million and a total capitalized investment of between $2.5 million and $3.0 million per restaurant. This total investment includes the capitalized lease value of the property, which can vary greatly depending on the specific trade area. See "Risk Factors--Development and Construction Risks." Prior to February 29, 1996, the Company's business was conducted by four business entities controlled by Paul Fleming: Fleming Chinese Restaurants, Inc. (Scottsdale), P.F. Chang's II, Inc. (Newport Beach), P.F. Chang's III, L.L.C. (La Jolla) and P.F. Chang's IV, L.L.C. (Irvine)(collectively, the "Predecessors"). In February 1996, the Company acquired from Paul Fleming and certain other investors in the Predecessors approximately 70% of the Scottsdale restaurant, 43% of the Newport Beach restaurant, 50% of the La Jolla restaurant and 54% of the Irvine restaurant. In May 1996, the Company acquired the remaining minority interests in the Irvine restaurant, and in October 1997, the Company acquired all of the outstanding minority interests in the Scottsdale and Newport Beach restaurants and all but 2.5% of the La Jolla restaurant. As a result of the ownership structure in place from February 29, 1996 to October 1997, historical financial results for that period reflect a reduction in the Company's net income attributable to those ownership interests which is reflected in the elimination of minority interests. The acquisitions of minority interests in February 1996 and October 1997 were accounted for using the purchase method of accounting and resulted in goodwill of $4.1 million and $4.6 million, respectively, which is being amortized over 20 years on a straight-line basis. See "Certain Transactions." In addition, elimination of minority interests for all periods subsequent to 1996 includes the effect of the Company's partnership management structure. The Company has entered into a series of partnership agreements with each of its regional managers ("Market Partners") and certain of its general managers ("Operating Partners") and certain of its executive chefs ("Culinary Partners"). These partnership agreements typically provide that the Market Partner is entitled to a specified percentage of the cash flows from the restaurants that partner has developed and oversees as the regional manager. Similarly, the Operating Partners and Culinary Partners receive a percentage of the cash flows from the restaurant in which they work. See "Business--Operations." 16 18 RESULTS OF OPERATIONS The operating results of the Company for fiscal years 1995, 1996 and 1997 and for the six months ended June 29, 1997 and June 28, 1998 expressed as a percentage of revenues were as follows:
SIX MONTHS ENDED -------------------- FISCAL YEAR TOTAL YEAR FISCAL YEAR JUNE 29, JUNE 28, 1995 1996(1) 1997 1997 1998 STATEMENTS OF OPERATIONS DATA: Revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0% Costs and expenses: Restaurant operating costs: Cost of sales................... 28.3 28.3 28.4 28.4 27.6 Labor........................... 32.0 30.7 29.4 29.5 28.5 Operating....................... 14.6 18.8 16.9 16.2 16.5 Occupancy....................... 10.1 8.0 6.9 6.8 7.2 ----- ----- ----- ----- ----- Total restaurant operating costs...................... 85.0 85.8 81.6 80.9 79.8 General and administrative........ 1.8 7.5 10.8 10.3 8.4 Depreciation and amortization..... 3.1 2.4 2.8 2.6 3.1 Preopening........................ 3.8 4.3 4.8 2.3 3.7 ----- ----- ----- ----- ----- Income (loss) from operations.......... 6.3 -- -- 3.9 5.0 Interest income (expense), net......... (0.1) (0.7) (0.8) (0.7) (1.4) Elimination of minority interests...... -- (5.3) (3.3) (4.3) (1.0) ----- ----- ----- ----- ----- Income (loss) before provision for income taxes......................... 6.2 (6.0) (4.1) (1.1) 2.6 Provision for income taxes............. -- (0.2) (0.2) (0.3) -- ----- ----- ----- ----- ----- Net income (loss)...................... 6.2% (6.2)% (4.3)% (1.4)% 2.6% ===== ===== ===== ===== =====
- ------------------------------ (1) Total fiscal year 1996 information reflects the combined results of the Predecessors and the Company. See "Selected Consolidated Financial and Operating Data." SIX MONTHS ENDED JUNE 28, 1998 COMPARED TO SIX MONTHS ENDED JUNE 29, 1997 REVENUES The Company's revenues are derived entirely from food and beverage sales. Revenues increased by $15.2 million, or 86.1%, to $32.9 million in the six months ended June 28, 1998 from $17.7 million in the six months ended June 29, 1997. The increase was primarily attributable to revenues of $12.2 million generated by new restaurants opened in the second half of 1997 and the first half of 1998. Increased customer visits produced comparable restaurant sales gains of 11.7% in the first half of 1998. The Company did not implement any meaningful price increases in the first six months of 1998. COSTS AND EXPENSES Cost of sales. Cost of sales is composed of the cost of food and beverages. Cost of sales decreased as a percentage of revenues to 27.6% in the six months ended June 28, 1998 from 28.4% in the six months ended June 29, 1997, primarily as a result of favorable commodity costs and purchasing efficiencies. Labor. Labor expenses consist of restaurant management salaries, front of the house and back of the house payroll costs and other payroll-related items. Labor expenses as a percentage of revenues decreased to 28.5% in the six months ended June 28, 1998 from 29.5% in the six months ended June 29, 1997. The decrease in labor expenses was primarily due to increased labor efficiency in the restaurants that opened in 1996. These improved efficiencies more than offset the increase in hourly wages mandated by the federal government and the State of California. The Company expects that the increase in minimum wage will continue to exert 17 19 upward pressure on its labor costs on a year-over-year basis for the remainder of 1998 and the first quarter of 1999. Operating. Operating expenses consist primarily of various restaurant-level costs, which are generally variable and are expected to fluctuate directly with revenues. Operating expenses increased as a percentage of revenues to 16.5% in the six months ended June 28, 1998 from 16.2% in the six months ended June 29, 1997, due primarily to increases in restaurant supplies costs, facility costs and restaurant administration costs. Occupancy. Occupancy costs include both fixed and variable portions of rent, common area maintenance charges, property insurance and property taxes. Occupancy costs increased as a percentage of revenues to 7.2% in the six months ended June 28, 1998 from 6.8% in the six months ended June 29, 1997, due primarily to the increase in common area maintenance charges in some of the Company's mall locations and a general increase in property tax levels. General and administrative. General and administrative expenses are composed of expenses associated with corporate and administrative functions that support development and restaurant operations and provide an infrastructure to support future growth, including management and staff salaries, employee benefits, travel, legal and professional fees, technology and market research. General and administrative expenses increased to $2.8 million (8.4% of revenues) in the six months ended June 28, 1998 from $1.8 million (10.3% of revenues) in the six months ended June 29, 1997, due primarily to the addition of corporate management personnel as well as additional costs to support a larger restaurant base. The decrease as a percentage of revenues was due primarily to the Company's expanding revenue base and its ability to leverage the duties and responsibilities of its Market Partners. Depreciation and amortization. Depreciation and amortization expenses include the depreciation of fixed assets and the amortization of goodwill costs associated with the acquisition of the ownership interests in the original restaurants. Depreciation and amortization increased to $1.0 million in the six months ended June 28, 1998 from $451,000 in the six months ended June 29, 1997. This increase was primarily due to depreciation on new restaurants and amortization of the goodwill associated with the acquisition in October 1997 of the remaining minority interests in three of the four original restaurants. Preopening. Preopening costs, which are expensed as incurred, consist of expenses incurred prior to opening a new restaurant and are comprised principally of manager salaries and relocation, advertising and employee payroll and related training costs. Preopening expenses in the six months ended June 28, 1998 increased to $1.2 million from $399,000 in the six months ended June 29, 1997 due to the greater number of restaurants opened or under development during the 1998 period. Interest income (expense), net. Net interest expense increased to $455,000 in the six months ended June 28, 1998 from $127,000 in the six months ended June 29, 1997 principally due to borrowings under the Company's line of credit. ELIMINATION OF MINORITY INTERESTS Elimination of minority interests for the six months ended June 29, 1997 includes approximately $717,000 attributable to the minority interests in the Scottsdale, Newport Beach and La Jolla restaurants. As a result of the acquisition of substantially all of these minority interests in October 1997, elimination of minority interests for the six months ended June 28, 1998 declined to $345,000. Approximately $41,000 and $332,000 was attributable to the collective minority interests of Market Partners, Operating Partners and Culinary Partners in the six months ended June 29, 1997 and June 28, 1998, respectively. 18 20 PROVISION FOR INCOME TAXES The provision for income taxes for the six months ended June 28, 1998 and June 29, 1997 represents certain minimum state taxes based on taxable factors other than earnings. The Company did not record a tax benefit for the losses generated for the six months ended June 29, 1997 as utilization of such losses in future periods was deemed uncertain. The income tax provision for the six months ended June 28, 1998 differs from the expected provision for income taxes derived by applying the statutory income tax rate as a result of a reduction in the previously provided deferred income tax asset valuation allowance. YEAR ENDED DECEMBER 28, 1997 COMPARED TO YEAR ENDED DECEMBER 29, 1996 The following discussion of the Company's results of operations for the year ended December 29, 1996 relates to the combined operating results of the Company and the Predecessors. The Company has not presented separate analyses regarding the two month period ended February 28, 1996 relating to the Predecessors or the ten month period ended December 29, 1996 relating to the Company because the Company believes that such discussion would not be meaningful. REVENUES Revenues increased by $21.3 million, or 115.6%, to $39.8 million in 1997 from $18.4 million in 1996. The increase was primarily attributable to $19.0 million of additional revenues generated by new restaurants opened in 1997 and the increase in revenues in 1997 for restaurants opened in 1996. Comparable restaurant sales, driven by increased customer visits, increased 13.8% in 1997. The Company did not implement any meaningful price increases in 1997. COSTS AND EXPENSES Cost of sales. Cost of sales increased nominally as a percentage of revenues to 28.4% in 1997 from 28.3% in 1996. Labor. Labor costs decreased as a percentage of revenues to 29.4% in 1997 from 30.7% in 1996. This decrease was primarily the result of labor efficiencies in new and existing restaurants. Operating. Operating expenses decreased as a percentage of revenues to 16.9% in 1997 from 18.8% in 1996, due primarily to the expanded revenue base in 1997. Occupancy. Occupancy costs decreased as a percentage of revenues to 6.9% in 1997 from 8.0% in 1996. This decrease was primarily the result of the increase in revenues and more favorable lease terms associated with the new restaurants opened in 1997. General and administrative. General and administrative expenses increased in 1997 to $4.3 million, or 10.8% of revenues, from $1.4 million, or 7.5% of revenues in 1996. This increase was primarily the result of the addition of corporate management personnel in 1996 and 1997 as well as the increased cost of supporting a larger restaurant base. Depreciation and amortization. Depreciation and amortization increased to $1.1 million in 1997 from $434,000 in 1996. This increase was primarily the result of depreciation recognized on capital expenditures for new restaurants and amortization of goodwill associated with the purchase of minority interests in October 1997. Preopening. Preopening expenses in 1997 increased to $1.9 million from $782,000 in 1996 due to a greater number of restaurants which were developed in 1997 compared to 1996. Interest income (expense), net. Net interest expense increased to $317,000 in 1997 from $131,000 in 1996 due to borrowings on the Company's line of credit and an increase in long-term debt. 19 21 ELIMINATION OF MINORITY INTERESTS Elimination of minority interests increased to $1.3 million in 1997 from $993,000 in 1996 primarily due to the increased income generated by the Scottsdale, Newport Beach and La Jolla restaurants. Elimination of minority interests in 1997 was also higher due to approximately $110,000 attributable in 1997 to the collective minority interests of Market Partners, Operating Partners and Culinary Partners; such partnership arrangements were not in place in 1996. These increases were offset in part by the repurchase in October 1997 of the minority interests in the Scottsdale, Newport Beach and La Jolla restaurants. PROVISION FOR INCOME TAXES The provision for income taxes for 1997 and 1996 represents certain minimum state taxes based on taxable factors other than earnings. The Company did not record a tax benefit for the losses generated for fiscal years 1997 and 1996 as utilization of such losses in future periods was deemed uncertain. At December 28, 1997, the Company had a net operating loss carryforward of approximately $1.9 million which will expire for federal tax purposes in 2011 and for state tax purposes in 2001. The expected income tax benefit derived by applying the statutory income tax rate has been eliminated as a result of an increase in the deferred income tax asset valuation allowance. YEAR ENDED DECEMBER 29, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 The following discussion of the Company's results of operations for the year ended December 29, 1996 relates to the combined operating results of the Company and the Predecessors. The Company has not presented separate analyses regarding the two month period ended February 28, 1996 relating to the Predecessors or the ten month period ended December 29, 1996 relating to the Company because the Company believes that such discussion would not be meaningful. REVENUES Revenues increased by $8.0 million, or 76.3%, to $18.4 million in 1996 from $10.5 million in 1995. The increase was primarily attributable to revenues of $6.9 million generated by new restaurants opened in 1996 and the increase in revenues in 1996 for restaurants opened in 1995. Increased customer visits generated comparable restaurant sales gains of 13.0% in 1996. The Company did not implement any meaningful price increases in 1996. COSTS AND EXPENSES Cost of sales. Cost of sales remained constant as a percentage of revenues at 28.3% in both 1996 and 1995. Labor. Labor costs decreased as a percentage of revenues to 30.7% in 1996 from 32.0% in 1995. This decrease was primarily the result of labor efficiencies in new and existing restaurants. Operating. Operating costs increased as a percentage of revenues to 18.8% in 1996 from 14.6% in 1995. This increase was primarily the result of new restaurant openings in the last quarter of 1996. Occupancy. Occupancy costs decreased as a percentage of revenues to 8.0% in 1996 from 10.1% in 1995. This decrease was primarily the result of the increased revenue base and more favorable lease terms associated with the new restaurants opened in 1996. General and administrative. General and administrative expenses increased in 1996 to $1.4 million, or 7.5% of revenues, from $192,000, or 1.8% of revenues, in 1995. This increase was primarily attributable to the initial formation of the Company, including the addition of management personnel. Depreciation and amortization. Depreciation and amortization expenses increased to $434,000 in 1996 from $322,000 in 1995. This increase was principally the result of depreciation recognized on capital expenditures on new restaurants opened in 1996 and the amortization of goodwill associated with the February 1996 acquisition. See "Certain Transactions." 20 22 Preopening. Preopening expenses increased to $782,000 in 1996 from $400,000 in 1995, due to a greater number of restaurants under development in 1996. Interest income (expense), net. Net interest expense increased to $131,000 in 1996 from $13,000 in 1995 due to interest expense incurred on notes payable to minority stockholders in connection with the February 1996 acquisition. See "Certain Transactions." ELIMINATION OF MINORITY INTERESTS The elimination of minority interests of $993,000 in 1996 was the result of the formation of the Company in February 1996 and the related acquisition of the majority of the interests in the original restaurants. In 1995, because the operating results of the Predecessors are presented on a combined basis, there were no minority interests. PROVISION FOR INCOME TAXES The provision for income taxes in 1996 represents certain minimum state taxes based on taxable factors other than earnings. The Company did not record a tax benefit for the losses generated for fiscal year 1996 as utilization of such losses in future periods was deemed uncertain. The expected income tax benefit derived by applying the statutory income tax rate has been eliminated as a result of a deferred income tax asset valuation allowance. The Company's taxable income for the year ended December 31, 1995 was allocated and taxed directly to the stockholders and members of the Predecessors resulting in no tax provision. 21 23 QUARTERLY RESULTS The following tables set forth certain unaudited quarterly information for each of the eight fiscal quarters in the two year period ended June 28, 1998. This quarterly information has been prepared on a consistent basis with the audited financial statements and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented. The Company's quarterly operating results may fluctuate significantly as a result of a variety of factors, and operating results for any quarter are not necessarily indicative of results for a full fiscal year. See "Risk Factors--Fluctuations in Operating Results."
FISCAL 1996 FISCAL 1997 FISCAL 1998 ----------------- ------------------------------------- ----------------- THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST SECOND QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER (DOLLARS IN THOUSANDS) Revenues........................ $4,363 $5,458 $8,175 $9,528 $9,935 $12,130 $15,728 $17,209 Costs and expenses: Restaurant operating costs: Cost of sales............. 1,239 1,575 2,324 2,705 2,798 3,490 4,394 4,705 Labor..................... 1,290 1,713 2,384 2,844 2,885 3,570 4,556 4,844 Operating................. 850 1,063 1,284 1,587 1,705 2,151 2,579 2,861 Occupancy................. 348 491 564 642 681 856 1,103 1,254 ------ ------ ------ ------ ------ ------- ------- ------- Total restaurant operating costs...... 3,727 4,842 6,556 7,778 8,069 10,067 12,632 13,664 General and administrative.... 416 642 760 1,063 1,162 1,291 1,348 1,405 Depreciation and amortization................ 147 159 209 242 262 389 489 524 Preopening.................... 268 467 146 253 683 840 432 785 ------ ------ ------ ------ ------ ------- ------- ------- Income (loss) from operations... (195) (652) 504 192 (241) (457) 827 831 Interest income (expense), net........................... (10) (72) (81) (46) (38) (152) (210) (245) ------ ------ ------ ------ ------ ------- ------- ------- Income (loss) before elimination of minority interests and provision for income taxes.... (205) (724) 423 146 (279) (609) 617 586 Elimination of minority interests..................... (319) (103) (383) (375) (335) (215) (156) (189) ------ ------ ------ ------ ------ ------- ------- ------- Income (loss) before provision for income taxes.............. (524) (827) 40 (229) (614) (824) 461 397 Provision for income taxes...... (4) (1) (32) (20) (10) (7) (4) (7) ------ ------ ------ ------ ------ ------- ------- ------- Net income (loss)............... $ (528) $ (828) $ 8 $ (249) $ (624) $ (831) $ 457 $ 390 ====== ====== ====== ====== ====== ======= ======= ======= Restaurants open at end of period........................ 4 7 7 8 9 13 13 14
22 24 The operating results of the Company for such eight fiscal quarters expressed as a percentage of revenues were as follows:
FISCAL 1996 FISCAL 1997 FISCAL 1998 ----------------- ------------------------------------- ----------------- THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST SECOND QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER Revenues.............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Costs and expenses: Restaurant operating costs: Cost of sales................... 28.4 28.8 28.4 28.4 28.2 28.8 27.9 27.4 Labor........................... 29.5 31.4 29.2 29.8 29.0 29.4 29.0 28.1 Operating....................... 19.5 19.5 15.7 16.7 17.1 17.7 16.4 16.6 Occupancy....................... 8.0 9.0 6.9 6.7 6.9 7.1 7.0 7.3 ----- ----- ----- ----- ----- ----- ----- ----- Total restaurant operating costs...................... 85.4 88.7 80.2 81.6 81.2 83.0 80.3 79.4 General and administrative.......... 9.5 11.8 9.3 11.2 11.7 10.6 8.6 8.2 Depreciation and amortization....... 3.4 2.9 2.5 2.5 2.6 3.2 3.1 3.0 Preopening.......................... 6.1 8.6 1.8 2.7 6.9 6.9 2.7 4.6 ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) from operations......... (4.4) (12.0) 6.2 2.0 (2.4) (3.7) 5.3 4.8 Interest income (expense), net........ (0.3) (1.3) (1.0) (0.5) (0.4) (1.3) (1.4) (1.4) ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) before elimination of minority interests and provision for income taxes........................ (4.7) (13.3) 5.2 1.5 (2.8) (5.0) 3.9 3.4 Elimination of minority interests..... (7.3) (1.9) (4.7) (3.9) (3.4) (1.8) (1.0) (1.1) ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) before provision for income taxes........................ (12.0) (15.2) 0.5 (2.4) (6.2) (6.8) 2.9 2.3 Provision for income taxes............ (0.1) -- (0.4) (0.2) (0.1) (0.1) -- -- ----- ----- ----- ----- ----- ----- ----- ----- Net income (loss)..................... (12.1)% (15.2)% 0.1% (2.6)% (6.3)% (6.9)% 2.9% 2.3% ===== ===== ===== ===== ===== ===== ===== =====
Historically, the Company has experienced variability in the amount and percentage of revenues attributable to preopening expenses. The Company typically incurs the most significant portion of preopening expenses associated with a given restaurant within the two months immediately preceding and the month of the opening of the restaurant. In addition, the Company's experience to date has been that labor and operating costs associated with a newly opened restaurant (for approximately its first four to six months of operation) are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Accordingly, the volume and timing of new restaurant openings has had and is expected to have a meaningful impact on preopening expenses, labor and operating costs until such time as a larger base of restaurants in operation mitigates such impact. LIQUIDITY AND CAPITAL RESOURCES The Company has funded its capital requirements since its inception through private sales of equity securities, debt financing, sale-leaseback arrangements and cash flow from operations. Net cash provided by operating activities was $625,000, $139,000 and $4.6 million for total year 1996, fiscal year 1997 and the six months ended June 28, 1998, respectively. Net cash provided by operating activities exceeded the net losses for the periods due principally to the effect of minority interests and depreciation. The Company uses cash primarily to fund the development and construction of new restaurants. Net cash used in investing activities in total year 1996, fiscal year 1997 and the six months ended June 28, 1998 was $8.2 million, $11.5 million and $8.5 million, respectively, which included payments of $4.2 million and $2.5 million in total year 1996 and fiscal year 1997, respectively, made in connection with the acquisition of minority interests. Capital expenditures were $4.0 million, $8.7 million and $8.6 million in total year 1996, fiscal year 1997 and the six months ended June 28, 1998, respectively. The Company intends to open ten restaurants in 1998 (two of which are open) and 13 in 1999. Total capital expenditures are expected to be approximately $21 million in 1998. The Company expects that its planned future restaurants will require, on average, a total cash investment per restaurant, exclusive of landlord contributions, of approximately $1.5 million to $2.0 million. 23 25 Net cash provided by financing activities in 1996, 1997 and the six months ended June 28, 1998 was $9.0 million, $12.2 million, and $3.0 million, respectively. Financing activities in 1996 and 1997 consisted principally of sales of Preferred Stock. The Company has a line of credit agreement which permits borrowings of up to $20 million and bears interest at LIBOR plus 3.5% (9.16% at June 28, 1998). As of June 28, 1998, the Company had $9.0 million outstanding under this facility. Pursuant to its terms, all borrowings under the credit agreement must be repaid upon the consummation of this offering; however, the Company will continue to be eligible to borrow funds under such line of credit after repayment. The Company's future capital requirements and the adequacy of its available funds will depend on many factors, including the pace of expansion, real estate markets, site locations and the nature of the arrangements negotiated with landlords. Although no assurance can be given, the Company believes that anticipated cash flow from operations together with the proceeds from this offering will be sufficient to fund the majority of its capital requirements through 1999. In the event that additional capital is required, the Company may seek to raise such capital through public or private equity or debt financings. Future capital funding transactions may result in dilution to purchasers in this offering. There can be no assurance that such capital will be available on favorable terms, if at all. The Company leases restaurant and office facilities and equipment and certain real property under operating leases expiring between 2000 and 2019. Future minimum lease payments under operating leases, including restaurant facilities currently under construction or yet to be constructed as of June 28, 1998 were as follows: remainder of 1998 - $1.9 million; 1999 - $5.2 million; 2000 - $5.4 million; 2001 - $5.4 million; 2002 - $5.4 million; and thereafter - $53.5 million. PREFERRED STOCK AND ACCRETION In February 1996 and September 1996, the Company issued a total of 2,677,135 shares of its Series A Preferred Stock at $4.00 per share, and in May 1997, the Company issued 758,566 shares of its Series B Preferred Stock at $8.70 per share. The Series A Preferred Stock has an annual six percent dividend payable quarterly on March 31, June 30, September 30, and December 31 in shares of Series A Preferred Stock on a cumulative basis beginning January 1, 1998. The Series B Preferred Stock has an annual six percent dividend payable quarterly on March 31, June 30, September 30, and December 31 in shares of Series B Preferred Stock on a cumulative basis beginning April 1, 1999. Dividend accretion on the Series A and Series B Preferred Stock was approximately $504,000 for the year ended December 29, 1996, $876,000 for the year ended December 28, 1997, and $477,000 for the six month ended June 28, 1998, respectively. At June 28, 1998, the carrying basis of the Preferred Stock was $18.3 million. As a result of this offering, all shares of Series A Preferred Stock and Series B Preferred Stock will be automatically converted into shares of Common Stock. INFLATION The primary inflationary factors affecting the Company's operations are food and labor costs. A large number of the Company's restaurant personnel are paid at rates based on the applicable minimum wage, and increases in the minimum wage directly affect the Company's labor costs. To date, inflation has not had a material impact on the Company's results of operations. See "Risk Factors--Changes in Food Costs." YEAR 2000 COMPLIANCE The Company is aware of the issues associated with the programming code in existing computer systems as the year 2000 approaches. The "year 2000 problem" is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to "00". This issue is whether computer systems will properly recognize date-sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company is in the process of working with its software vendors to ensure that the Company is prepared for the year 2000 problem. The Company believes that it will not be required to make any material expenditure to address the year 2000 problem. However, uncertainty exists concerning the potential costs and effects associated with any year 2000 compliance. Any year 2000 compliance problem of either the Company or its vendors could materially adversely affect the Company's business, financial condition or operating results. 24 26 BUSINESS P.F. Chang's owns and operates 15 full service restaurants that feature a unique blend of high quality, authentic Chinese cuisine and American hospitality in a sophisticated, contemporary bistro setting. The Company's restaurants offer intensely flavored, highly memorable culinary creations, prepared from fresh ingredients, including premium herbs and spices imported directly from China. The menu is focused on select dishes created to capture the distinct flavors and styles of the five major culinary regions of China: Canton, Hunan, Mongolia, Shanghai and Szechwan. By adhering to the Chinese culinary precepts of fan and t'sai, a balancing of rice, noodles and grains with meat, seafood and vegetables, the P.F. Chang's menu offers an array of taste, texture, color and aroma. The menu is highlighted by signature dishes such as Chang's Spicy Chicken, Orange Peel Beef, Peking Ravioli, Chicken in Soothing Lettuce Wrap, Szechwan-Style Long Beans and Dan Dan Noodles. The authentic cuisine is complemented by a full service bar offering an extensive selection of wines, specialty drinks, Asian beers, cappuccino and espresso. The average check per customer, including beverage, is approximately $17.00. The Company offers superior customer service in a high energy atmosphere featuring a display kitchen, exhibition wok cooking and a decor that includes wood and slate floors, mounted life-size terra cotta replicas of Xi'an warriors and narrative murals depicting 12th century China. The Company was formed in early 1996 with the acquisition of the four original P.F. Chang's restaurants and the hiring of an experienced management team led by Richard Federico and Robert Vivian, the Company's Chief Executive Officer and Chief Financial Officer, respectively, to support the Company's founder, Paul Fleming. P.F. Chang's opened three additional restaurants in 1996, six in 1997 and expects to open ten restaurants in 1998 (two of which are open) and 13 in 1999. Key to the Company's expansion strategy and success at the restaurant level is the P.F. Chang's management philosophy utilizing Market, Operating and Culinary Partners. The Company has demonstrated the viability of the P.F. Chang's concept in a wide variety of markets across the United States, including the Southwest, southern California, Texas and southern Florida. P.F. CHANG'S CHINA BISTRO CONCEPT AND STRATEGY The P.F. Chang's concept was developed in 1993 by Paul Fleming, a highly successful Phoenix-based restaurateur, in collaboration with Philip Chiang, the owner of the acclaimed Mandarin restaurant in Beverly Hills, California. The Company's objectives are to (i) develop and operate a nationwide system of restaurants that offer guests a unique, sophisticated dining experience, (ii) create a loyal customer base that generates a high level of repeat business and (iii) provide superior returns to its investors. To achieve its objectives, the Company has developed the following strategies: Offer High Quality Chinese Cuisine. P.F. Chang's seeks to differentiate itself from other Chinese restaurants by offering only premium products made from scratch upon order, from original regional Chinese recipes. The Company utilizes traditional Hong Kong preparation techniques, which combine high temperature wok cooking, fresh ingredients and reduced oil to produce dishes with a distinct, outstanding and highly memorable flavor. A core menu is served at both lunch and dinner featuring a variety of freshly prepared wok-fired creations, roasted duck and chicken, fresh seafood, homemade soups, signature salads and desserts. All products are served family-style allowing the guests to build a meal of complementary flavors, colors and aromas. Create a Memorable Atmosphere. The Company seeks to design a unique atmosphere for each restaurant that it operates. Common design elements of the restaurants include natural wood and slate floors, custom millwork, special light fixtures, hand-painted murals depicting ancient Chinese history and life-size terra cotta soldiers, all of which create a warm and elegant ambiance. Exhibition-style kitchens, featuring the Company's classically trained wok chefs, reinforce the perceptions of quality, freshness, authenticity and cleanliness and add flash and fire to the energy of the restaurant. Deliver Superior Customer Service. Significant time and resources are spent in the development and implementation of a comprehensive service system at each restaurant. The Company offers guests prompt, friendly and efficient service, keeping waitstaff-to-table ratios high, and staffing each restaurant with an 25 27 experienced management team to ensure consistent and attentive customer service. The Company employs food runners to ensure prompt delivery of fresh food at the appropriate temperature, allowing the waitstaff to focus on overall customer satisfaction. All service personnel are thoroughly trained in the subtle flavors of each dish. Using a thorough knowledge and understanding of the Company's menu, the waitperson assists guests in selecting a meal that balances the principles of fan and t'sai foods to attain a harmony of taste, texture, color and aroma. Provide Excellent Dining Value. The Company believes it provides its guests with an exceptional value by serving high quality Chinese cuisine in a memorable atmosphere with superior customer service, all for an average check of approximately $17.00. This price-value relationship helps create the long-term bond between P.F. Chang's and its guests. Because of the superior level of customer satisfaction it delivers, the Company believes it enjoys a high level of repeat business, which serves as a solid foundation from which to grow incremental sales. In 1997 and the first six months of 1998, the Company generated comparable restaurant sales growth of approximately 13.8% and 11.7%, respectively. Achieve Exceptional Restaurant Economics. In the first six months of 1998, the Company's restaurants produced average weekly sales of $93,839 and restaurant operating income of 20.2% of sales. In addition, for the 12 month period ended June 28, 1998, the Company's restaurants have achieved restaurant pre-tax return on investment of 38.2%. The Company believes that it has been able to achieve these results due to the broad appeal of the P.F. Chang's concept, careful site selection and consistent application of its management and training concepts. Pursue Accelerated, Disciplined Restaurant Expansion. The Company plans to develop restaurants in both existing and new markets nationwide where the Company believes it can generate attractive unit-level economics. The Company targets high traffic, high visibility locations in affluent urban and suburban markets. The flexibility of the P.F. Chang's concept enables the Company to open successful restaurants in a wide variety of locations, including residential neighborhoods, shopping centers, office buildings and hotels. The Company expects to open ten new restaurants in 1998 (two of which are open) and 13 in 1999. The Company intends to continue to develop restaurants that typically range in size from 6,000 square feet to 7,000 square feet, and that require, on average, a total cash investment of approximately $1.5 million to $2.0 million and a total capitalized investment of between $2.5 million and $3.0 million per restaurant. This total investment includes the capitalized lease value of the property, which can vary greatly depending on the specific trade area. Leverage P.F. Chang's Partnership Management Philosophy. The Company believes that economic participation by management at the operating level is a key to the long-term success of its restaurants. The Company has developed a partnership management philosophy based on a three person team at each restaurant: the Market Partner (regional manager), Operating Partner (restaurant manager) and Culinary Partner (chef). Each of these partners is provided an opportunity to invest in and to participate in the cash flows of the restaurants for which they are responsible. As a result of this structure, the Company believes it is able to (i) attract and retain highly experienced and motivated managers with powerful incentives to execute the Company's strategy and maximize stockholder value, (ii) provide stable restaurant management which reduces staff turnover and increases customer satisfaction and (iii) leverage the specific market knowledge of its partners to facilitate the rapid expansion of the concept. 26 28 UNIT ECONOMICS The following table depicts the pre-tax return on investment for the fiscal years 1995, 1996 and 1997, as well as the 12 months ended June 28, 1998. Return on investment is calculated as the quotient of restaurant income (loss) before interest, taxes and rent divided by the total restaurant investment. RETURN ON INVESTMENT (DOLLARS IN THOUSANDS, EXCEPT AVERAGE WEEKLY SALES)
FISCAL FISCAL FISCAL 12 MONTHS ENDED 1995 1996 1997 JUNE 28, 1998 TOTAL RESTAURANTS Sales weeks................................... 129 225 440 597 Average weekly sales.......................... $81,122 $81,976 $90,383 $ 92,133 Sales......................................... 10,465 18,445 39,768 55,003 Restaurant income (loss) before income taxes(1).................................... $ 585 $ 1,502 $ 4,482 $ 7,175 Interest expense.............................. 13 67 214 230 Rent expense(2)............................... 656 1,297 2,124 2,944 ------- ------- ------- ---------- Restaurant EBIT + rent(a)..................... $ 1,254 $ 2,866 $ 6,820 $ 10,349 ======= ======= ======= ========== Average restaurant assets employed (net)(3)... $ 1,522 $ 2,448 $ 8,243 $ 11,794 Present value of remaining lease obligations(4).............................. 3,461 5,891 11,272 15,283 ------- ------- ------- ---------- Total restaurant investment(b)................ $ 4,983 $ 8,339 $19,515 $ 27,077 ======= ======= ======= ========== Return on investment(a)/(b)................... 25.2% 34.4% 34.9% 38.2% RESTAURANTS OPENED IN 1998 Sales weeks.................................................................. 13 Average weekly sales......................................................... $ 108,392 Sales........................................................................ 1,409 Restaurant income (loss) before income taxes(1).............................. $ (231) Interest expense............................................................. -- Rent expense(2).............................................................. 96 ---------- Restaurant EBIT + rent(a).................................................... $ (135) ========== Average restaurant assets employed (net)(3).................................. $ 307 Present value of remaining lease obligations(4).............................. 476 ---------- Total restaurant investment(b)............................................... $ 783 ========== Return on investment(a)/(b).................................................. (17.2)% RESTAURANTS OPENED IN 1997 Sales weeks....................................................... 76 220 Average weekly sales.............................................. $73,675 $ 77,381 Sales............................................................. 5,599 17,024 Restaurant income (loss) before income taxes(1)................... $(1,727) $ 54 Interest expense.................................................. -- -- Rent expense(2)................................................... 282 881 ------- ---------- Restaurant EBIT + rent(a)......................................... $(1,445) $ 935 ======= ========== Average restaurant assets employed (net)(3)....................... $ 2,230 $ 5,787 Present value of remaining lease obligations(4)................... 2,068 5,795 ------- ---------- Total restaurant investment(b).................................... $ 4,298 $ 11,582 ======= ========== Return on investment(a)/(b)....................................... (33.6)% 8.1%
27 29
FISCAL FISCAL FISCAL 12 MONTHS ENDED 1995 1996 1997 JUNE 28, 1998 RESTAURANTS OPENED IN 1996 Sales weeks............................................ 17 156 156 Average weekly sales................................... $63,527 $92,930 $ 101,974 Sales.................................................. 1,080 14,497 15,908 Restaurant income (loss) before income taxes(1)........ $ (850) $ 1,866 $ 2,744 Interest expense....................................... 10 193 213 Rent expense(2)........................................ 65 717 787 ------- ------- ---------- Restaurant EBIT + rent(a).............................. $ (775) $ 2,776 $ 3,744 ======= ======= ========== Average restaurant assets employed (net)(3)............ $ 402 $ 4,060 $ 3,849 Present value of remaining lease obligations(4)........ 704 4,294 4,267 ------- ------- ---------- Total restaurant investment (b)........................ $ 1,106 $ 8,354 $ 8,116 ======= ======= ========== Return on investment (a)/(b)........................... (70.1)% 33.2% 46.1% RESTAURANTS OPENED PRIOR TO 1996 Sales weeks................................... 129 208 208 208 Average weekly sales.......................... $81,122 $83,484 $94,578 $ 99,339 Sales......................................... 10,465 17,365 19,672 20,663 Restaurant income (loss) before income taxes(1).................................... $ 585 $ 2,352 $ 4,343 $ 4,608 Interest expense.............................. 13 57 21 17 Rent expense(2)............................... 656 1,232 1,125 1,180 ------- ------- ------- ---------- Restaurant EBIT + rent(a)..................... $ 1,254 $ 3,641 $ 5,489 $ 5,805 ======= ======= ======= ========== Average restaurant assets employed (net)(3)... $ 1,522 $ 2,046 $ 1,953 $ 1,851 Present value of remaining lease obligations(4).............................. 3,461 5,187 4,910 4,745 ------- ------- ------- ---------- Total restaurant investment(b)................ $ 4,983 $ 7,233 $ 6,863 $ 6,596 ======= ======= ======= ========== Return on investment(a)/(b)................... 25.2% 50.3% 80.0% 88.0%
- --------------- (1) Restaurant income (loss) before income taxes represents restaurant revenues less all restaurant-specific operating costs, depreciation, preopening costs, and interest expense. Preopening costs are aggregated in the month in which a restaurant opens. General and administrative expenses, interest expense on general corporate debt, depreciation on general corporate assets, and amortization of goodwill are excluded from the calculation. (2) Rent expense consists of minimum contractual rents plus contingent rents. (3) Average restaurant assets employed (net) represents the 12 month average of all restaurant-specific long-term assets, net of any accumulated depreciation, determined on a prorated basis for restaurants opened within the period. (4) Present value of remaining lease obligations represents the 12 month average discounted present value of restaurant lease payments to the date of lease expiration using a 10% discount rate, determined on a prorated basis for restaurants opened within the period. 28 30 LOCATIONS The following table depicts existing restaurants and restaurants expected to open in 1998:
APPROXIMATE SQUARE INTERIOR EXISTING LOCATIONS OPENING DATE FOOTAGE SEATING* - ------------------ ------------ ------------------ -------- Scottsdale, AZ (Fashion Square) July 1993 6,050 177 Newport Beach, CA (Fashion Island) June 1994 5,050 155 La Jolla, CA (UTC) August 1995 7,400 257 Irvine, CA (Spectrum Center) November 1995 7,000 208 Las Vegas, NV (Paradise & Flamingo) October 1996 7,000 220 Houston, TX (Highland Village) December 1996 6,500 182 Littleton, CO (Park Meadows) December 1996 7,600 245 Metarie, LA (Lakeside) April 1997 5,850 201 Miami, FL (The Falls) September 1997 5,800 206 Charlotte, NC (Phillips Place) October 1997 6,900 211 N. Miami, FL (Aventura) October 1997 7,000 244 Tempe, AZ (Centerpoint) December 1997 6,600 228 McLean, VA (Tysons Corner) December 1997 6,500 204 Dallas, TX (North Tollway) March 1998 6,900 192 El Segundo, CA (Manhattan Beach) June 1998 6,950 220 PLANNED LOCATIONS ANTICIPATED OPENING DATE - --------------------------------------------- ------------------------------------------- Austin, TX (Jollyville Road) Third Quarter 1998 Dallas, TX (NorthPark) Third Quarter 1998 Atlanta, GA (Ashwood & Perimeter) Fourth Quarter 1998 Birmingham, AL (The Summit) Fourth Quarter 1998 Denver, CO (Lodo) Fourth Quarter 1998 Northbrook, IL (Northbrook Court) Fourth Quarter 1998 Troy, MI (Somerset) Fourth Quarter 1998 Los Angeles, CA (Beverly Center) Fourth Quarter 1998
- ------------------------------ * Many of the Company's restaurants have outdoor seating in addition to interior seating. In 1999, the Company intends to open 13 new restaurants in approximately seven new markets, including New York, Boston, Orlando, San Francisco, Salt Lake City, Raleigh and Cincinnati. EXPANSION STRATEGY AND SITE SELECTION The Company is actively developing restaurants in both new and existing markets and has planned an expansion strategy targeted at major metropolitan areas throughout the United States. Within each targeted metropolitan area, the Company identifies specific trade areas with high traffic patterns and suitable demographic characteristics, including population density, consumer attitudes and affluence. Within an appropriate trade area, the Company evaluates specific sites that provide visibility, accessibility and exposure to traffic volume. The Company's site criteria are flexible, as is evidenced by the variety of environments and facilities in which the Company currently operates. These facilities include freestanding buildings, regional malls and entertainment centers. Each restaurant is designed to convey a unique expression of local styles incorporated into the P.F. Chang's decor that maximizes the value and visibility of the site. The Company intends to continue to develop restaurants that typically range in size from 6,000 square feet to 7,000 square feet, and that require, on average, a total capitalized investment of between $2.5 million and $3.0 million per restaurant. This total investment includes the capitalized lease value of the property, which can vary greatly depending on the specific trade area. The Company expects that its planned future restaurants will require, on average, a total cash investment per restaurant, exclusive of landlord contributions, 29 31 of approximately $1.5 million to $2.0 million. The Company currently leases the sites for all of its restaurants and does not intend to purchase real estate for its sites in the future. MENU The P. F. Chang's menu offers a harmony of taste, texture, color and aroma by balancing the principles of fan and t'sai foods. Fan foods include rice, noodles, grains and dumplings, while vegetables, meat, poultry and seafood are t'sai foods. The Company's chefs are trained to produce distinctive Chinese cuisine with traditional recipes from the five major culinary regions of China: Canton, Hunan, Mongolia, Shanghai and Szechwan. The intense heat of Mandarin-style wok cooking sears in the clarity and distinct flavor of fresh ingredients. Slow roasted Cantonese-style ducklings, chickens, BBQ spare ribs and BBQ pork are prepared in vertical ovens, while handmade shrimp, pork and vegetable dumplings, as well as flavorful fish and vegetables, are prepared in custom-made steamer cabinets. MSG is not added or used in any P.F. Chang's menu items. In addition to the core menu, P.F. Chang's also offers special lunch and dinner selections. These menus offer specials developed by the Company's Culinary Partners around the country and are changed two to three times a year. Individual items that are received well by guests migrate to the core menu. The fresh produce, seafood, meat, poultry and specialty items that are specific to a certain region of the United States or to a specific season are featured on a daily basis. Extensive research and development, including annual trips to China by the P.F. Chang's corporate executive chef, continually reinforce the Company's commitment to training the P.F. Chang's chefs and enhancing the menu offerings. The Company's entrees range in price from $8.00 to $13.00, and its appetizers range in price from $4.00 to $7.00. The Company's average check per guest, including alcoholic beverages, is approximately $17.00. Sales of alcoholic beverages, featuring an extensive selection of wines, all of which are offered by the glass, constitute approximately 20% of revenues. Lunch and dinner contribute roughly 30% and 70% of revenues, respectively. DECOR AND ATMOSPHERE The Company believes that ambiance plays a critical role in the dining experience. By combining the influences of Chinese and American cultures, each restaurant is uniquely designed to create a warm, sophisticated environment that is intended to be suitable for a variety of occasions. Each restaurant incorporates certain elements of local styles and common design elements, including hand-painted murals depicting 12th century China, sculptures of Xi'an warriors, hardwood and slate flooring, decorative lighting and custom millwork, all of which provide continuity of the brand. Seating is a comfortable combination of tables, booths and banquettes. Bistro-style counter seating is also available, frequently with a view of the exhibition-style kitchen in order to accommodate peak-period demand and the preferences of single or time-pressed diners. OPERATIONS In order to provide incentive to key management personnel, the Company has entered into a series of partnership agreements with its regional managers ("Market Partners") and certain of its general managers ("Operating Partners") and certain of its executive chefs ("Culinary Partners"). These partnership agreements entitle the Market Partner to a specified percentage of the cash flows from the restaurants that partner has developed and oversees as the regional manager. Similarly, the general manager and the executive chef at most of the Company's restaurants are offered the opportunity to become Operating Partners and Culinary Partners, respectively, and to receive a percentage of the cash flows from the restaurant in which they work. At the time an individual becomes a Market Partner, Operating Partner or Culinary Partner, that person is required to make an equity investment in the partnership and to enter into a five year employment agreement with the Company. The Company has the right, in its sole discretion, to terminate the employment of any Market Partner, Operating Partner or Culinary Partner, and, upon such termination, to repurchase that partner's interest in the partnership at such partner's then-current basis in the partnership. If an individual continues to serve as Market Partner, Operating Partner or Culinary Partner for five years, then the Company has the right to repurchase that person's interest in the partnership for a value which is determined by 30 32 reference to trailing cash flows. The Company has implemented this partnership structure to facilitate the development and operation of its restaurants. By requiring this level of commitment and by providing the Market, Operating and Culinary Partners with a significant stake in the success of the restaurant, the Company believes that it is able to attract and retain experienced and highly motivated managers. Each of the Company's seven Market Partners oversees a territory that can support seven to ten restaurants. The Market Partner's role is to ensure that each restaurant within his or her territory achieves a competitive return on investment through the successful execution of the concept. The typical Market Partner is an individual who has achieved a leadership position (such as Director of Operations) at a multi-unit, full-service restaurant company. The Company anticipates adding six to eight Market Partners over the next five years for its domestic development. The Company strives to create a sophisticated dining experience through the careful selection, training and supervision of personnel. The staff of a typical restaurant consists of an Operating Partner, two or three managers, a Culinary Partner, one or two sous chefs and approximately 125 hourly employees, many of whom work part-time. The Operating Partner of each restaurant is responsible for the day-to-day operation of that restaurant, including hiring, training and development of personnel, as well as operating results. The Culinary Partner is responsible for product quality, purchasing, food costs and kitchen labor costs. The Company requires its Operating Partners and Culinary Partners to have significant experience in the full-service restaurant industry. The Company has a comprehensive 12 week management development program. This program consists of six weeks of culinary training including both culinary job functions and culinary management. The remaining six weeks focus on service strategies, guest relations, office management and shift management. All management and culinary personal are required to successfully complete all sections of this program. The training program is comprised of a series of projects and skill assessments. Each trainee is formally evaluated at the end of each week in writing by the Operating Partner and Culinary Partner. This feedback is forwarded to the program's administrators, the Director of Training and the Director of Culinary Development. Upon the completion of each six week section each trainee must successfully complete a comprehensive certification administered by the Market Partner, Director of Culinary Development or the Director of Training. A trainee cannot advance or complete the program without being certified. The Operating Partners and Culinary Partners are responsible for selecting employees for their restaurants. The Partners are accountable for administering the Company's staff training programs that are developed by the training and culinary departments. The employee development program lasts between one and two weeks and focuses on both technical and cultural knowledge. MARKETING The Company focuses its business strategy on providing high quality, traditional Chinese cuisine served by an attentive staff in a distinctive environment at an affordable price. By focusing on the food, service and ambiance of the restaurant, the Company has created an environment that fosters repeat patronage and encourages word-of-mouth recommendations. The Company believes that word-of-mouth advertising is a key component in driving guest trial and usage. To attract new customers, the Company has also implemented a local, regional and national marketing strategy through paid advertising, public relations efforts and community involvement to maintain and build awareness throughout each community in which it operates. In order to increase local awareness of its restaurants, the Company builds relationships with local radio personalities who provide testimonials to their listening audiences. The partnered stations are consistently among the highest rated stations in their markets. Likewise, the radio personalities are very well recognized in their communities, not only on their station, but also in the market as a whole. In most cases, the commercials are endorsed, live reads that are typically longer than a normal 60 second commercial. The Company also undertakes specialty programs such as concierge and accommodation programs targeted to build relationships with the local hotel concierges, who offer personal recommendations to the 31 33 guests of their establishments. Community involvement with local organizations, participation in non-profit benefits and auctions, chef demonstrations and cooking classes also increase consumer awareness. A national advertising campaign comprised of advertisements in inflight magazines of Southwest Airlines and America West Airlines, which carry a high level of traffic in the Company's markets, is designed to make frequent travelers aware of P.F. Chang's locations across the country. MANAGEMENT INFORMATION SYSTEMS The Company utilizes an integrated information system to manage the flow of information within each restaurant and between the restaurants and the corporate office. This system includes a point-of-sales ("POS") local area network that helps facilitate the operations of the restaurant by recording sales transactions and printing orders in the appropriate locations within the restaurant. Additionally, the POS system is utilized to authorize, batch and transmit credit card transactions, to record employee time clock information, to schedule labor and to produce a variety of management reports. Select information that is captured from the POS system is transmitted to the corporate office on a daily basis, which enables senior management to continually monitor operating results. The Company believes that its current POS system will be an adequate platform to support its planned expansion. The Company uses software and hardware developed by reputable vendors and commonly used in the restaurant industry. These systems are integrated to provide senior management with daily and weekly sales and cost analysis, monthly detailed profit statements and comparisons between actual and budgeted operating results. PURCHASING The Company's purchasing programs provide its restaurants with high quality ingredients at competitive prices from reliable sources. Consistent menu specifications as well as purchasing and receiving guidelines ensure freshness and quality. Because the Company utilizes only fresh ingredients in all of its menu offerings, inventory is maintained at a modest level. The Company negotiates short-term and long-term contracts depending on demand for its products. These contracts range in duration from two to twelve months. With the exception of produce, which is purchased locally, the Company utilizes the Distributors Marketing Alliance as the primary distributor of product to all of its restaurants. The Company believes that competitively priced alternative distribution sources are available should such channels be necessary. Chinese-specific ingredients are usually sourced directly from Hong Kong, China and Taiwan. The Company has developed an extensive network of importers in order to maintain an adequate supply of items that conform to the Company's brand and product specifications. COMPETITION The restaurant business is intensely competitive with respect to food quality, price-value relationships, ambiance, service and location, and many existing restaurants compete with the Company at each of its locations. Key competitive factors in the industry include the quality and value of the food, quality of service, price, dining experience, restaurant location and the ambiance of the facilities. The Company's primary competitors include mid-price, full service casual dining restaurants and locally-owned and operated Chinese restaurants. There are many well-established competitors with substantially greater financial, marketing, personnel and other resources than the Company. In addition, many of the Company's competitors are well established in the markets where the Company's operations are, or in which they may be, located. While the Company believes that its restaurants are distinctive in design and operating concept, other companies may develop restaurants that operate with similar concepts. PROPERTIES All of the Company's restaurants are located in leased facilities. Current restaurant leases have expiration dates ranging from 2002 to 2019, with the majority of the leases providing for five-year options to renew for at least one additional term. All of the Company's leases provide for a minimum annual rent, and most leases 32 34 require additional percentage rent based on sales volume in excess of minimum levels at the particular location. Most of the leases require the Company to pay the costs of insurance, taxes, and a portion of the lessor's operating costs. The Company does not anticipate any difficulties renewing existing leases as they expire. The Company's executive offices are located in approximately 4,400 square feet of leased space in Phoenix, Arizona. EMPLOYEES At June 28, 1998, the Company employed approximately 1,900 persons, 30 of whom were executive office personnel, 144 of whom were unit management personnel and the remainder of whom were hourly restaurant personnel. The Company's employees are not covered by a collective bargaining agreement. The Company considers its employee relations to be good. GOVERNMENTAL REGULATION The Company's restaurants are subject to regulation by federal agencies and to licensing and regulation by state and local health, sanitation, building, zoning, safety, fire and other departments relating to the development and operation of restaurants. These regulations include matters relating to environmental, building construction, zoning requirements and the preparation and sale of food and alcoholic beverages. The Company's facilities are licensed and subject to regulation under state and local fire, health and safety codes. The development and construction of additional restaurants will be subject to compliance with applicable zoning, land use and environmental regulations. There can be no assurance that the Company will be able to obtain necessary licenses or other approvals on a cost-effective and timely basis in order to construct and develop restaurants in the future. Various federal and state labor laws govern the Company's operations and its relationship with its employees, including minimum wage, overtime, working conditions, fringe benefit and citizenship requirements. In particular, the Company is subject to the regulations of the INS. Given the location of many of the Company's restaurants, even if the Company's operation of those restaurants is in strict compliance with INS requirements, the Company's employees may not all meet federal citizenship or residency requirements, which could lead to disruptions in its work force. Approximately 20% of the Company's revenues are attributable to the sale of alcoholic beverages. The Company is required to comply with the alcohol licensing requirements of the federal government, states and municipalities where its restaurants are located. Alcoholic beverage control regulations require applications to state authorities and, in certain locations, county and municipal authorities for a license and permit to sell alcoholic beverages. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the restaurants, including minimum age of guests and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages. Failure to comply with federal, state or local regulations could cause the Company's licenses to be revoked or force it to terminate the sale of alcoholic beverages at one or more of its restaurants. The Company is subject to state "dram shop" laws and regulations, which generally provide that a person injured by an intoxicated person may seek to recover damages from an establishment that wrongfully served alcoholic beverages to such person. While the Company carries liquor liability coverage as part of its existing comprehensive general liability insurance, there can be no assurance that it will not be subject to a judgment in excess of such insurance coverage or that it will be able to obtain or continue to maintain such insurance coverage at reasonable costs, or at all. The federal Americans With Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment. The Company is required to comply with the Americans With Disabilities Act and regulations relating to accommodating the needs of the disabled in connection with the construction of new facilities and with significant renovations of existing facilities. 33 35 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information as of June 28, 1998 concerning each of the Company's directors and executive officers:
NAME AGE POSITION Chief Executive Officer, President and Richard L. Federico....................... 44 Director Robert T. Vivian.......................... 40 Chief Financial Officer and Secretary Frank Ziska............................... 51 Chief Development Officer Paul M. Fleming........................... 44 Director and Founder J. Michael Chu(2)......................... 40 Director Gerald R. Gallagher(1).................... 57 Director R. Michael Welborn(1)(2).................. 47 Director James G. Shennan.......................... 57 Director Yves Sisteron............................. 43 Director
- ------------------------------ (1) Compensation Committee Member. (2) Audit Committee Member. Richard L. Federico joined the Company as President and a director in February 1996 and in September 1997 succeeded Paul M. Fleming as Chief Executive Officer. From February 1989 to January 1996 Mr. Federico served as President of the Italian Concepts division of Brinker International, Inc. where he was responsible for concept development and operations. Under his direction, this division grew from one unit in 1989 to more than 70 units by 1996. Robert T. Vivian has served as Chief Financial Officer and Secretary since April 1996. From January 1991 to April 1996 Mr. Vivian served in a variety of positions at Brinker International, Inc., the most recent of which was Vice President of Investor Relations. In this capacity, Mr. Vivian was responsible for dissemination of financial information and corporate communications to Brinker's stockholders. Frank Ziska has served as Chief Development Officer since June 1998. Prior to joining the Company, from 1994 to June 1998, Mr. Ziska served as Managing Director of United States and Canadian Operations for Cushman & Wakefield Worldwide, a real estate brokerage firm. Prior to that time, beginning in 1989, Mr. Ziska served as Managing Director and Branch Manager of Arizona Operations for Cushman & Wakefield of Arizona, Inc. Paul M. Fleming founded the Company in January 1996 and has served as a director of the Company since that time. Mr. Fleming also served as Chief Executive Officer of the Company from January 1996 to September 1997. From November 1992 to February 1996, Mr. Fleming served as President of Fleming Chinese Restaurants, Inc., the entity which opened, developed and managed the first four P.F. Chang's restaurants, each of which were owned by separate entities and were located in Scottsdale, Arizona and Irvine, Newport Beach and La Jolla, California. In addition, from 1983 to 1997, Mr. Fleming was also a franchisee of Ruth's Chris Steakhouse, Inc. J. Michael Chu has served as a director of the Company since February 1996. Mr. Chu has been President and Managing Director of Catterton-Simon Partners, a venture capital firm, since 1990. Mr. Chu also serves on the boards of directors of Halston, Inc., Fine Host Corp and several private companies. Gerald R. Gallagher has served as a director of the Company since February 1996. He has been a General Partner of Oak Investment Partners, a venture capital firm, since May 1987. Mr. Gallagher also serves on the boards of directors of several private companies. 34 36 R. Michael Welborn has served as a director of the Company since August 1996. Mr. Welborn has served as the Chairman of Bank One, Arizona, N.A., a commercial bank, since January 1996. From September 1993 to December 1995 he served as Managing Director of The Venture West Group, a merchant bank. From May 1988 to September 1993 Mr. Welborn served as Chairman of Citibank of Arizona. Mr. Welborn also serves on the boards of directors of Bank One, Arizona, N.A. and a private company. James G. Shennan, Jr. has served as a director of the Company since May 1997. He has been a principal of Trinity Ventures, a venture capital firm, since June 1989. Mr. Shennan also serves on the boards of directors of Starbuck's Corporation and a number of privately-held, consumer-oriented companies in which Trinity Ventures is an investor. Yves Sisteron has served as a director of the Company since May 1997. Mr. Sisteron has been a Principal of Global Retail Partners, L.P. since January 1996 and a Manager, U.S. Investments of Carrefour S.A. since March 1993. Mr. Sisteron has a J.D. and an L.L.M. from Lyon Law School and an L.L.M. in Comparative Law from New York University School of Law. Mr. Sisteron also serves on the boards of directors of CitySearch, Inc., InterWorld Technology Ventures, Inc. and several private companies. Currently, all directors hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. Officers are elected by and serve at the discretion of the Company's Board of Directors. There are no family relationships among the directors or officers of the Company. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS The Compensation Committee of the Company's Board of Directors is comprised of Michael Welborn and Gerald Gallagher. Neither of these individuals was at any time during the 1997 fiscal year or at any other time an officer or employee of the Company. No executive officer of the Company serves as a member of the board of directors or compensation committee of any entity which has one or more executive officers serving as a member of the Company's Board of Directors or Compensation Committee. LIMITATION OF LIABILITY AND INDEMNIFICATION Pursuant to provisions of the Delaware General Corporation Law ("DGCL"), the Company has adopted provisions in its Charter, which provide that directors of the Company shall not be personally liable for monetary damages to the Company or its stockholders for a breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under Section 174 of the DGCL relating to improper dividends or distributions; or (iv) for any transaction from which the director derived an improper personal benefit. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. The Certificate also authorizes the Company to indemnify its current and former officers, directors, employees or agents against certain liabilities that may arise by reason of their status or service as directors, officers, employees or agents of the Company (other than liabilities arising from acts or omissions not in good faith or willful misconduct). The Company's By-laws authorize the Company to indemnify its officers, directors, employees and agents to the extent permitted by the DGCL. Pursuant to Section 145 of the DGCL, which empowers the Company to enter into indemnification agreements with its officers, directors, employees and agents, the Company has entered into separate indemnification agreements with its directors and executive officers which may, in some cases, be broader than the specific indemnification provisions contained in the DGCL. The indemnification agreements may require the Company, among other things, to indemnify such executive officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from acts or omissions not in good faith or willful misconduct) and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. At present, there is no pending litigation or proceeding involving a director, officer, employee or agent of the Company where indemnification will be required or permitted and the Company is not aware of any threatened litigation or proceeding that may result in a claim for such indemnification. 35 37 EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth information concerning the compensation paid to each person who served as the Company's Chief Executive Officer during the fiscal year ended December 28, 1997 and each other executive officer whose combined salary and bonus for the fiscal year ended December 28, 1997 exceeded $100,000 for services rendered in all capacities to the Company and its subsidiaries for that fiscal year. The executive officers named below are referred to herein as the "Named Executive Officers." SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION/ AWARDS ------------------ ANNUAL COMPENSATION SHARES OF -------------------- COMMON STOCK NAME AND PRINCIPAL POSITION(S) SALARY BONUS UNDERLYING OPTIONS - ------------------------------ -------- -------- ------------------ Richard L. Federico.................................. $270,000 $115,000 50,000 Chief Executive Officer and President Robert T. Vivian..................................... 106,000 23,000 7,500 Chief Financial Officer and Secretary Paul M. Fleming...................................... 167,000 50,000 -- Founder and former Chief Executive Officer
OPTION GRANTS The following table sets forth certain information concerning the grant of options to purchase the Company's Common Stock made during the fiscal year ended December 28, 1997 to each of the Named Executive Officers: OPTION GRANTS IN FISCAL YEAR 1997
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF NUMBER OF SHARES PERCENT OF TOTAL STOCK PRICE OF COMMON STOCK OPTIONS GRANTED EXERCISE APPRECIATION FOR UNDERLYING TO EMPLOYEES OR BASE OPTION TERM(3) OPTIONS IN FISCAL PRICE EXPIRATION -------------------- NAME AND PRINCIPAL POSITION(S) GRANTED(1) YEAR 1997(2) ($/SH) DATE 5% 10% - ------------------------------ ---------------- ---------------- -------- ---------- -------- -------- Richard L. Federico........ 50,000 29.4% $6.00 08/14/07 $188,688 $478,123 Chief Executive Officer and President Robert T. Vivian........... 7,500 4.4 6.00 11/25/07 28,300 71,718 Chief Financial Officer and Secretary Paul M. Fleming............ -- -- -- -- -- -- Founder and former Chief Executive Officer
- ------------------------------ (1) Options generally vest over a period of five years with 20% of the options vesting one year after the date of grant and the balance vesting in equal monthly installments. (2) In 1997, the Company granted options to purchase an aggregate of 170,000 shares. (3) Potential Realizable Value is based on certain assumed rates of appreciation pursuant to rules prescribed by the Securities and Exchange Commission ("SEC"). Actual gains, if any, on stock option exercises are dependent upon future performance of the Company and related Common Stock price levels during the terms of the options. There can be no assurance that the amounts reflected in this table will be achieved. 36 38 FISCAL YEAR-END VALUES OF STOCK OPTIONS The following table sets forth certain information concerning the 1997 fiscal year-end value of unexercised options held by the Named Executive Officers. None of the Named Executive Officers exercised any options during fiscal 1997. AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT 12/28/97 12/28/97(2) ------------------------------- ------------------------------- NAME EXERCISABLE(1) UNEXERCISABLE EXERCISABLE(1) UNEXERCISABLE ---- -------------- ------------- -------------- ------------- Richard L. Federico................... 393,965 0 $2,814,134 -- Robert T. Vivian...................... 93,490 0 653,524 -- Paul M. Fleming....................... 286,640 0 1,719,840 --
- ------------------------------ (1) All options issued to the Named Executive Officers are immediately exercisable. However, unvested shares are subject to a right of repurchase on behalf of the Company in the event of the Named Executive Officer's termination of service with the Company. (2) Calculated by determining the difference between the fair market value of the securities underlying the option at December 28, 1997 ($10.00 as determined by the Company's Board of Directors) and the exercise price of the Named Executive Officer's options. BENEFIT PLANS 1998 Stock Option Plan. A total of 280,000 shares of the Company's Common Stock (the "Share Reserve") have been reserved for issuance under the Company's 1998 Stock Option Plan (the "1998 Option Plan"). In addition, the Share Reserve will be increased if any outstanding options issued under the 1997 Restaurant Management Plan and the 1996 Employee Stock Option Plan (collectively, the "Prior Plans") expire or are canceled, or if the Company exercises its right to repurchase unvested shares of stock which were acquired upon exercise of options granted under the Prior Plans. As of June 28, 1998, no shares of Common Stock have been issued upon exercise of options and an aggregate of 1,009,635 shares were subject to outstanding options under the Prior Plans. The 1998 Option Plan provides for discretionary grants of incentive stock options and nonqualified stock options to the Company's employees, officers, directors, consultants, advisors, and/or other independent contractors. The option price per share for an incentive stock option may not be less than 100% of the fair market value of a share of Common Stock on the grant date. The option price per share for a nonstatutory stock option may not be less than 85% of the fair market value of a share of Common Stock on the grant date. The option price per share for an incentive stock option granted to a person owning stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (or a parent or subsidiary) may not be less than 110% of the fair market value of a share of Common Stock on the grant date. The Company's Compensation Committee has the authority to, among other things, determine the vesting schedule for each option granted. All options expire within ten years. The 1998 Option Plan includes an automatic grant program for outside directors. Pursuant to this program, each outside director will be granted an option to purchase 10,000 shares of Common Stock at the time he or she is first elected or appointed a director of the Company. In addition, Michael Welborn and each outside director elected after the consummation of this offering remaining in office on the day following each annual meeting of stockholders will be granted an option to purchase 2,500 shares. With respect to the other outside directors in office prior to consummation of this offering (Messrs. Chu, Gallagher and Sisteron), each such director remaining in office 18 months after the consummation of this offering shall be granted an option to purchase 2,500 shares on the day following each annual meeting of stockholders thereafter. 1997 Restaurant Management Stock Option Plan. As of June 28, 1998, 56,875 shares were authorized under the Company's 1997 Restaurant Management Plan (the "Restaurant Management Plan"). All of such shares were subject to outstanding options and were exercisable as of such date. The Company will not issue additional options under the Restaurant Management Plan. The Restaurant Management Plan provides for 37 39 grants of incentive stock options and nonqualified stock options to employees of the Company who hold the position of general manager or assistant manager or a position of similar importance to the Company. The option price per share for an incentive stock option may not be less than 100% of the fair market value of a share of Common Stock on the grant date. The option price per share for nonqualified stock option may not be less than 85% of the fair market value of a share of Common Stock on the grant date. The option price per share for an option granted to a person owning stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (or a parent or subsidiary) or 10% of the total combined value of all such classes of stock may not be less than 110% of the fair market value of a share of Common Stock on the grant date. Generally, options vest over five years with 20% of the options vesting one year after the grant date and the balance vesting in equal monthly installments over the remaining term of the options. Options expire within ten years. 1996 Employee Stock Option Plan. As of June 28, 1998, 952,760 shares were authorized under the Company's 1996 Employee Stock Option Plan (the "Employee Plan"). All of such shares were subject to outstanding options and were exercisable as of such date. The Company will not issue any additional options under the Employee Plan. The Employee Plan provides for grants of incentive stock options and nonqualified stock options to the Company's employees (including officers), directors, consultants, advisors, and/or other independent contractors. The option price per share for an incentive stock option may not be less than 100% of the fair market value of a share of Common Stock on the grant date. The option price per share for a nonqualified stock option may not be less than 85% of the fair market value of a share of Common Stock on the grant date. The option price per share for an option granted to a person owning stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (or a parent or subsidiary) or 10% of the total combined value of all such classes of stock may not be less than 110% of the fair market value of a share of Common Stock on the grant date. Generally, options vest over five years with 20% of the options vesting one year after the grant date and the balance vesting in equal monthly installments over the remaining term of the options. Options expire within ten years. 1998 Employee Stock Purchase Plan. A total of 400,000 shares of the Company's Common Stock have been reserved for issuance under the Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan"), none of which have been issued. The Purchase Plan permits eligible employees to purchase Common Stock at a discount, but only through payroll deductions, during concurrent 24 month offering periods. Each offering period will be divided into four consecutive six month purchase periods. The price at which stock is purchased under the Purchase Plan is equal to 85% of the lower of the fair market value of the Common Stock on the first day of the offering period and the fair market value of the Common Stock on the last day of the purchase period. The initial offering period will commence on the effective date of this offering. EMPLOYMENT AGREEMENT The Company entered into an employment agreement with Paul M. Fleming on January 31, 1996. Pursuant to the terms of the agreement, Mr. Fleming served as Chief Executive Officer of the Company from January 1996 until September 1997 and is currently serving as a director and an employee of the Company for a term which expires January 31, 1999. The term of Mr. Fleming's employment will be automatically renewed for successive one year terms unless either Mr. Fleming or the Company provides notice of an intention not to renew the agreement. In the event that Mr. Fleming's employment is terminated by the Company without cause or by Mr. Fleming for good reason (as defined in the agreement), Mr. Fleming is entitled to receive as severance compensation (i) his base salary until the earlier of (a) one year from the date of termination or (b) the expiration of the initial term of the agreement, (ii) a lump sum payment of the average annual bonuses paid over the term of the agreement and (iii) the right to exercise in full all unvested stock options granted to him in accordance with the terms of the Employee Plan under the agreement. In addition to his base salary, Mr. Fleming is eligible to receive discretionary bonuses, when and if declared by the Board of Directors. The agreement prohibits Mr. Fleming from competing with the Company during the term of the agreement and for two years after the termination thereof. 38 40 CERTAIN TRANSACTIONS Since December 31, 1995, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which the Company or its Predecessors was or is to be a party in which the amount involved exceeds $60,000 and in which any director, executive officer or beneficial holder of more than 5% of any class of voting securities of the Company or members of such person's immediate family had or will have a direct or indirect material interest other than the transactions described below. Formation and Series A Preferred Financing. The Company was formed on January 31, 1996, through the issuance of 500 shares of Common Stock to Paul Fleming for a purchase price of $100. In February 1996, the Company sold 2,487,500 shares of Series A Preferred Stock at a price of $4.00 per share and related warrants for an aggregate purchase price of $9,950,000. Contemporaneously, the Company acquired Paul and Kelly Fleming's 52% interest in Fleming Chinese Restaurants, Inc., which operated the first P.F. Chang's restaurant in Scottsdale, Arizona, for $1,037,000 in cash and $954,000 in notes payable. The Company also acquired from the Flemings (i) a 43% interest in P.F. Chang's II, Inc., which operated a P.F. Chang's restaurant in Newport Beach, California, (ii) a 50% ownership in P.F. Chang's III, L.L.C., which operated a P.F. Chang's restaurant in La Jolla, California and (iii) a 54% ownership interest in P.F. Chang's IV, L.L.C., which operated a P.F. Chang's restaurant in Irvine, California, all for an aggregate purchase price of $2,006,000 in cash and 2,499,500 shares of Common Stock of the Company. In September 1996, the Company issued an additional 189,635 shares of Series A Preferred Stock at a price of $4.00 per share for an aggregate purchase price of $758,540. Pursuant to the terms of the Company's Charter, on March 31, 1998 and June 30, 1998 the Company issued, and upon the consummation of this offering will issue, paid-in-kind dividends ("PIK Dividends") to the stockholders of the Company who hold Series A Preferred Stock. PIK Dividends are cumulative and are equal to 6% of the number of shares of Series A Preferred Stock owned by each stockholder payable in quarterly installments. Upon completion of this offering, all shares of the Series A Preferred Stock will convert into shares of Common Stock. The following executive officers, directors and beneficial holders of more than 5% of a class of the Company's capital stock purchased shares of the Series A Preferred Stock having an aggregate purchase price of at least $60,000.
SHARES EXECUTIVE OFFICERS, DIRECTORS AND 5% STOCKHOLDERS(1) PURCHASED(4) - ---------------------------------------------------- ------------ Oak Investment Partners VI, Limited Partnership(2).......... 906,085 Catterton-Simon Partners, L.P.(2)........................... 625,000 Trinity Ventures V, L.P.(2)................................. 475,000 Silver Creek Investments Limited(2)......................... 437,500 Global Retail Partners, L.P.(2)............................. 40,450 Richard L. Federico(3)...................................... 50,000
- ------------------------------ (1) See notes to "Principal and Selling Stockholders" for information relating to the beneficial ownership of shares and identification of affiliated stockholders. (2) A beneficial owner of more than 5% of a class of the Company's capital stock. Gerald R. Gallagher, J. Michael Chu, James G. Shennan and Yves Sisteron, each a director of the Company, are affiliated with Oak Investment Partners VI, Limited Partnership, Catterton-Simon Partners, L.P., Trinity Ventures V, L.P. and Global Retail Partners, L.P., respectively. (3) An officer and director of the Company. (4) Excludes shares issued and issuable as PIK Dividends. 39 41 Series B Preferred Financing. In May 1997, the Company issued 758,565 shares of Series B Preferred Stock at a price of $8.70 per share, for an aggregate purchase price of $6,599,519. The following executive officers, directors and beneficial holders of more than 5% of a class of the Company's capital stock purchased shares of Series B Preferred Stock having an aggregate purchase price of at least $60,000.
SHARES EXECUTIVE OFFICERS, DIRECTORS AND 5% STOCKHOLDERS(1) PURCHASED - ---------------------------------------------------- --------- Global Retail Partners, L.P.(2)............................. 322,018 Oak Investment Partners VI, Limited Partnerships(2)......... 114,942 Catterton-Simon Partners, L.P.(2)........................... 114,942 Trinity Ventures V, L.P.(2)................................. 114,942 Silver Creek Investments Limited(2)......................... 54,959
- ------------------------------ (1) See notes to table of beneficial ownership in "Principal and Selling Stockholders" for information relating to the beneficial ownership of shares and identification of affiliated stockholders. (2) A beneficial owner of more than 5% of a class of the Company's Capital Stock. Gerald R. Gallagher, J. Michael Chu, James G. Shennan and Yves Sisteron, each a director of the Company, are affiliated with Oak Investment Partners VI, Limited Partnership, Catterton-Simon Partners, L.P., Trinity Ventures V, L.P. and Global Retail Partners, L.P., respectively. Purchase of Remaining Minority Interests. During 1997, the Company purchased substantially all the remaining outstanding minority interests in the Scottsdale, La Jolla and Newport Beach restaurants for approximately $2,520,000 in cash and $2,426,000 in Common Stock of the Company to be issued upon consummation of this offering upon conversion of the Deferred Purchase Price Liability. The number of shares of Common Stock to be issued will be determined by dividing $2,426,000 by the initial offering per share price. In the event the offering is not completed by October 23, 1998, the Company will be obligated (upon demand of the individual holders) to pay the minority interest holders an aggregate amount of $2,426,000 in cash. Promissory Notes. Prior to the formation of the Company, Paul Fleming, the founder and a director of the Company, personally guaranteed several promissory notes entered into by the Predecessors to pay for improvements to the Scottsdale, La Jolla and Newport Beach restaurants. The aggregate original principal amount of the notes was $472,000. In connection with the Company's acquisition of the interests in the Predecessors, the Company assumed the promissory notes. Mr. Fleming remains a guarantor of the notes. As of June 28, 1998, the aggregate outstanding principal amount of the notes was approximately $120,000. 40 42 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information concerning the beneficial ownership of the Company's Common Stock as of June 28, 1998, and as adjusted to reflect the sale of the shares offered hereby, assuming no exercise of the Underwriters' over-allotment option, by (i) each person who is known by the Company to be the beneficial owner of more than 5% of the Company's Common Stock; (ii) each of the Named Executive Officers; (iii) each director of the Company; (iv) all executive officers and directors of the Company as a group; and (v) each of the Selling Stockholders. Except pursuant to applicable community property laws or as indicated in the footnotes to this table, the Company believes that each stockholder identified in the table possesses sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by such stockholder. The address of the individuals listed below is the address of the Company appearing on the cover of this registration statement.
SHARES SHARES BENEFICIALLY OWNED BENEFICIALLY OWNED PRIOR TO THE OFFERING(1) SHARES AFTER THE OFFERING(1) ------------------------- BEING ----------------------- NUMBER PERCENT(2) OFFERED NUMBER PERCENT(2) Oak Investment Partners VI, Limited Partnership(3)...................... 1,062,415 Gerald R. Gallagher 4550 Norwest Center Minneapolis, MN 55402 Catterton-Simon Partners, L.P.(4)..... 768,491 J. Michael Chu 9 Greenwich Office Park Greenwich, CT 06830 Trinity Ventures V, L.P.(5)........... 611,639 James G. Shennan, Jr. 3000 Sand Hill Road Building 1, Suite 240 Menlo Park, CA 94025 Global Retail Partners, L.P.(6)....... 364,316 Yves Sisteron 2121 Avenue of the Stars, Suite 1600 Los Angeles, CA 90067 Silver Creek Investments Limited(7)... 512,443 61 Purchase Street, Suite #2R Rye, NY 10580 Paul M. Fleming(8).................... 2,774,170 R. Michael Welborn(9)................. 30,172 Richard L. Federico(10)............... 446,249 Robert T. Vivian(11).................. 93,490 All officers and directors as a group (9 persons)(12)..................... 6,150,912
- ------------------------------ * Less than one percent. (1) Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended, a person has beneficial ownership of any securities over which such person directly or indirectly, through any contract, arrangement, undertaking, relationship or otherwise has or shares voting power and/or investment power, or as to which such person has the right to acquire such voting and/or investment power within 60 days. (2) Percentage ownership is based on: (i) before the offering, shares of Common Stock (which includes (a) shares outstanding on June 28, 1998, (b) 82,130 shares issuable as PIK Dividends 41 43 to holders of Series A Preferred Stock prior to consummation of the offering, and (c) shares issuable upon completion of this offering upon conversion of the Deferred Purchase Price Liability (assuming an initial public offering price of $ per share)); and (ii) after the offering, shares of Common Stock outstanding (assuming no exercise of the Underwriter's over-allotment option). Percentage of beneficial ownership as to any person as of a particular date is calculated by dividing the number of shares beneficially owned by such person by the sum of the number of shares outstanding as of such date and the number of shares as to which such person has the right to acquire voting and/or investment power within 60 days of such date. (3) Includes 27,797 shares issuable as PIK Dividends to the named stockholder and its affiliates who hold Series A Preferred Stock prior to consummation of the offering. Includes 1,038,191 shares held by Oak Investment Partners VI, Limited Partnership and 24,224 shares held by Oak VI Affiliates Fund, Limited Partnership. Gerald Gallagher, a director of the Company, is a partner of Oak Investment Partners with certain voting and investment power over such shares. Although Mr. Gallagher may be deemed to be a beneficial owner of such shares, he disclaims all such beneficial ownership except to the extent of any pecuniary interest therein which he may have. (4) Includes 19,174 shares issuable as PIK Dividends to the named stockholder and its affiliates who hold Series A Preferred Stock prior to consummation of the offering. Includes 457,484 shares held by Catterton-Simon Partners, L.P., 224,800 shares held by Catterton-PFC, L.L.C. and 86,207 shares held by Catterton-PFC Partners II, L.L.C. Michael Chu, a director of the Company, is President and Managing Director of Catterton-Simon Partners with certain voting and investment power over such shares. Although Mr. Chu may be deemed to be a beneficial owner of such shares, he disclaims all such beneficial ownership except to the extent of any pecuniary interest therein which he may have. (5) Includes 14,572 shares issuable as PIK Dividends to the named stockholder and its affiliates who hold Series A Preferred Stock prior to consummation of the offering. Includes 575,993 shares held by Trinity Ventures V, L.P. and 35,645 shares held by Trinity Ventures V Side-by-Side Fund, L.P. James G. Shennan, Jr., a director of the Company, is a partner of Trinity Ventures with certain voting and investment power over such shares. Although Mr. Shennan may be deemed to be a beneficial owner of such shares, he disclaims all such beneficial ownership except to the extent of any pecuniary interest therein which he may have. (6) Includes 1,242 shares issuable as PIK Dividends to the named stockholder and its affiliates who hold Series A Preferred Stock prior to consummation of the offering. Includes 8,047 shares held by Mr. Sisteron, 199,490 shares held by Global Retail Partners, L.P., 14,607 shares held by Global Retail Partners Funding, Inc., 15,664 shares held by GRP Partners, L.P., 82,678 shares held by DLJ Diversified Partners, L.P., 3,652 shares held by DLJ First ESC, L.P., and 40,177 shares held by certain individuals affiliated with DLJ. Each of such persons is affiliated with Global Retail Partners, L.P. and Global Retail Partners, L.P. and such affiliates are each affiliates of DLJ. Yves Sisteron, a director of the Company, is a Principal of Global Retail Partners L.P. with certain voting and investment power over such shares. Although Mr. Sisteron may be deemed to be a beneficial owner of such shares, he disclaims all such beneficial ownership except to the extent of any pecuniary interest therein which he may have. (7) Includes 13,422 shares issuable as PIK Dividends to the named stockholder who holds Series A Preferred Stock prior to consummation of the offering. (8) Includes 286,640 shares subject to options which are exercisable within 60 days of September 30, 1998. (9) Includes 25,000 shares subject to options which are exercisable within 60 days of September 30, 1998. (10) Includes 1,534 shares issuable as PIK Dividends to the named stockholder who holds Series A Preferred Stock prior to consummation of the offering. Includes 393,965 shares subject to options which are exercisable within 60 days of September 30, 1998. (11) Includes 93,490 shares subject to options which are exercisable within 60 days of September 30, 1998. (12) Includes 799,095 shares subject to options which are exercisable within 60 days of September 30, 1998 and 64,319 shares issuable as PIK Dividends. 42 44 DESCRIPTION OF CAPITAL STOCK The following description of the capital stock of the Company and certain provisions of the Company's Charter and By-laws is a summary and is qualified in its entirety by the provisions of the Charter and By-laws, which have been filed as exhibits to the Company's Registration Statement, of which this Prospectus is a part. Upon the closing of the offering, the authorized capital stock of the Company will consist of 20,000,000 shares of Common Stock, $0.001 par value, and 10,000,000 shares of Preferred Stock, $0.001 par value. COMMON STOCK As of June 28, 1998, there were shares of Common Stock (after giving effect to the conversion into Common Stock of the Preferred Stock and the Deferred Purchase Price Liability upon the closing of this offering) outstanding held of record by fifty-nine (59) stockholders. Holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available thereof. In the event of a liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior liquidation rights of preferred stock, if any, then outstanding. The Common Stock has no preemptive or conversion rights or other subscriptive rights. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are fully paid and non-assessable, and the shares of Common Stock to be outstanding upon completion of the offering contemplated by this Prospectus will be fully paid and non-assessable. The Charter does not provide for cumulative voting, and accordingly, the holders of a majority of the shares of Common Stock entitled to vote in any election of directors may elect all of the directors standing for election. PREFERRED STOCK Upon consummation of the offering there will be no outstanding shares of preferred stock of the Company. The Board of Directors has the authority, without action by the stockholders, to designate and issue preferred stock in one or more series and to designate the dividend rate, voting rights and other rights, preferences and restrictions of each series, any or all of which may be greater than the rights of the Common Stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock upon the rights of holders of the Common Stock until the Board of Directors determines the specific rights of the holders of such preferred stock. However, the effects might include, among other things, restricting dividends on the Common Stock, diluting the voting power of the Common Stock, impairing the liquidation rights of the Common Stock and delaying or preventing a change in control of the Company without further action by the stockholders. The Company has no present plans to issue any shares of preferred stock. REGISTRATION RIGHTS Pursuant to the Amended and Restated Registration Rights Agreement dated May 1, 1997, between the Company and certain stockholders, certain investors holding an aggregate of 3,557,984 shares (the "Registrable Securities") will have certain "demand" rights to register those shares under the Securities Act. Beginning 180 days after the date of this Prospectus, if requested by holders of more than 50% of the Registrable Securities then outstanding and assuming a reasonably anticipated aggregate price to the public of at least $5 million, then, subject to certain limitations, the Company must file a registration statement under the Securities Act covering all Registrable Securities requested to be included by holders of Registrable Securities. The Company is required to effect up to three such "demand" registrations. The Company has the right to delay any such registration for up to 90 days under certain circumstances. All fees, costs and expenses of such registrations other than underwriting discounts and commissions, will be borne by the Company. In addition, holders of Registrable Securities have certain "piggyback" registration rights. If the Company proposes to register any of its securities under the Securities Act other than in connection with the 43 45 Company's employee benefit plans or a corporate reorganization, then, subject to certain limitations, the holders of Registrable Securities may require the Company to include all or a portion of their shares in such registration, although the managing underwriter of any such offering has certain rights to limit the number of shares in such registration. Subject to certain limitations, expenses incurred in connection with the above registrations (other than underwriters' and brokers' discounts and commissions) will be borne by the Company. DEFERRED PURCHASE PRICE LIABILITY In connection with the repurchase by the Company of minority interests in the Scottsdale, La Jolla and Newport Beach restaurants, certain of the former minority interest holders have the right to receive a number of shares of restricted Common Stock of the Company upon completion of the offering determined by dividing $2,426,000 by the initial public offering price per share. In the event the offering is not completed by October 23, 1998, the Company will be obligated (upon demand of the individual holders) to pay the holders of such rights the aggregate amount of $2,426,000 in cash. LIMITATION OF LIABILITY AND INDEMNIFICATION Section 102(b)(7) of the DGCL authorizes corporations to limit or eliminate the personal liability of directors to corporations and their stockholders for monetary damages for a breach of a director's fiduciary duty of care. Although Section 102(b)(7) does not change a director's duty of care, it enables corporations to limit available relief to equitable remedies such as injunction or rescission. The Company's Charter limits the liability of directors to the Company and its stockholders. Specifically, directors of the Company are not personally liable for monetary damages to the Company or its stockholders for a breach of fiduciary duty as a director, except for liability: (i) for any breach of the director's duty of loyalty to the Company or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under Section 174 of the DGCL; or (iv) for any transaction from which the director derived an improper personal benefit. ANTI-TAKEOVER PROVISIONS General. Certain provisions of the DGCL and the Company's Charter and By-laws may discourage or make it more difficult for a third-party to acquire control of the Company. Such provisions may limit the price that certain investors are willing to pay in the future for shares of the Company's Common Stock. These certain provisions may also have the effect of discouraging or preventing certain types of transactions involving an actual or threatened change of control of the Company (including unsolicited takeover attempts), even though such a transaction may offer the Company's stockholders the opportunity to sell their stock at a price above the prevailing market price. The Charter allows the Company to issue preferred stock with rights senior to those of the Common Stock and other rights that could adversely affect the interests of holders of shares of Common Stock without any further vote or action by the stockholders. The issuance of preferred stock, for example, could decrease the amount of earnings or assets available for distribution to the holders of shares of Common Stock or could adversely affect the rights and powers, including voting rights, of the holders of shares of Common Stock. In certain circumstances, such issuance could have the effect of decreasing the market price of the Common Stock, as well as having the anti-takeover effects discussed above. Delaware Takeover Statute. The Company is subject to Section 203 of the DGCL, which prohibits a Delaware corporation from engaging in a "business combination" with certain persons ("Interested Stockholders") for three years following the time any such person becomes an Interested Stockholder. Interested Stockholders generally include (i) persons who are the beneficial owners of 15% or more of the outstanding voting stock of the corporation, and (ii) persons who are affiliates or associates of the corporation and who hold 15% or more of the corporation's outstanding voting stock at any time within three years before the date on which such person's status as an Interested Stockholder is determined. Subject to certain exceptions, a business combination includes, among other things, (i) mergers or consolidations, (ii) the sale, lease, exchange, mortgage, pledge, transfer or other disposition of assets having an aggregate market value equal to 44 46 10% or more of either the aggregate market value of all assets of the corporation determined on a consolidated basis or the aggregate market value of all the outstanding stock of the corporation, (iii) transactions that result in, among other things, the issuance or transfer by the corporation of any stock of the corporation to the Interested Stockholder, except pursuant to a transaction that effects a pro rata distribution to all stockholders of the corporation, (iv) any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series, or securities convertible into the stock of any class or series, of the corporation that is owned directly or indirectly by the Interested Stockholder, or (v) any receipt by the Interested Stockholder of the benefit (except proportionately as a stockholder) of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. Section 203 does not apply to a business combination if (i) before a person becomes an Interested Stockholder, the board of directors of the corporation approved either the business combination or the transaction which resulted in the Interested Stockholder becoming an Interested Stockholder, (ii) upon consummation of the transaction which resulted in the stockholder becoming an Interested Stockholder, the Interested Stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, other than certain excluded shares, or (iii) at or subsequent to such time the business combination is (a) approved by the board of directors of the corporation and (b) authorized at a regular or special meeting of stockholders, and not by written consent, by the affirmative vote of the holders of at least two-thirds of the outstanding voting stock of the corporation not owned by the Interested Stockholder. CHARTER AND BY-LAWS The Company's By-laws provide that special meetings of the stockholders of the Company may be called only by the President of the Company, and shall be called by the President or Secretary of the Company upon the written request of a majority of the Board of Directors or by any person or persons holding shares representing a majority of the outstanding capital stock entitled to vote. The Company's Bylaws also require advance written notice of a special meeting to each stockholder of the Company entitled to vote at such meeting not less than 10, nor more than 60, days prior to the meeting. The Company's Charter does not include a provision for cumulative voting in the election of directors. Under cumulative voting, a minority stockholder holding a sufficient number of shares may be able to ensure the election of one or more directors. The absence of cumulative voting may have the effect of limiting the ability of minority stockholders to effect changes in the Board of Directors and, as a result, may have the effect of deterring a hostile takeover or delaying or preventing changes in control or management of the Company. The Company's By-laws provide that the authorized number of directors may be changed by an amendment to the By-laws adopted by the Board of Directors or by the stockholders. Vacancies in the Board of Directors may be filled either by holders of a majority of the Company's directors then in office, though less than a quorum, or by a sole remaining director, or if there are no directors in office, in the manner provided by statute. If the directors then in office constitute less than a majority of the whole board, any stockholder or stockholders holding at least ten percent (10%) of the outstanding capital stock entitled to vote may apply to the Court of Chancery to order an election. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is . 45 47 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for the Common Stock. Future sales of substantial amounts of Common Stock in the public market could adversely affect market prices prevailing from time to time. Furthermore, since only a limited number of shares will be available for sale shortly after the offering because of certain contractual and legal restrictions on resale (as described below), sales of substantial amounts of Common Stock in the public market after such restrictions lapse could adversely affect the prevailing market price at such time and the ability of the Company to raise equity capital in the future. Upon completion of this offering, the Company will have outstanding an aggregate of shares of Common Stock, assuming no exercise of the Underwriters' over-allotment option and no exercise of outstanding options or warrants to purchase Common Stock. Of these shares, the shares of Common Stock to be sold in this Offering will be freely tradable without restriction or further registration under the Securities Act, unless such shares are held by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act (the "Affiliates"). The remaining shares held by existing stockholders of the Company were sold by the Company in reliance on exemptions from the registration requirements of the Securities Act and are "restricted" securities within the meaning of Rule 144 under the Securities Act (the "Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 promulgated under the Securities Act, which rules are summarized below. As a result of the contractual restrictions described below and the provisions of Rule 144 Rule and 701, the Restricted Shares will be available for sale in the public market as follows (based on the number of shares outstanding as of June 28, 1998): (i) Restricted Shares will be eligible for sale 90 days after the date of this Prospectus; and (ii) all Restricted Shares will be eligible for sale upon expiration of the lock-up agreements 180 days after the date of this Prospectus. All officers and directors, and certain stockholders and option holders of the Company have agreed not to sell, make any short sale of, grant any option for the purchase of, or otherwise transfer or dispose of, any shares of Common Stock or any securities convertible into or exercisable for Common Stock held by such persons for a period of 180 days after the date of this Prospectus, without the prior written consent of DLJ. When determining whether or not to release shares from the lock-up agreements, DLJ will consider, among other factors, the stockholder's reasons for requesting the release, the number of shares for which the release is being requested and market conditions at the time. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including an Affiliate, who has beneficially owned shares for at least one year is entitled to sell, within any three-month period commencing 90 days after the date of this Prospectus, a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock (approximately shares immediately after the offering) or (ii) the average weekly trading volume of the Common Stock on the Nasdaq National Market during the four calendar weeks preceding such sale, subject to the filing of a Form 144 with respect to such sale. Sales under rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. In addition, a person who is not deemed to have been an Affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, would be entitled to sell such shares under Rule 144(k) without regard to the requirements described above. Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately following completion of the offering. In general, under Rule 701 of the Securities Act as currently in effect, any employee, consultant or advisor of the Company who purchased shares from the Company in connection with a compensatory stock or option plan or written employment agreement is eligible to resell such shares 90 days after the effective date of the offering in reliance on Rule 144, but without compliance with certain restrictions, including the holding period conditions, contained in Rule 144. Within 90 days of the date of this Prospectus, the Company intends to file a registration statement under the Securities Act to register shares of Common Stock reserved for issuance under its equity incentive plans, thus permitting the resale of such shares by non-affiliates in the public market without restriction under the Securities Act. Such registration statements will become effective immediately upon filing. As of June 28, 1998, 1,009,635 options to purchase shares of Common Stock were outstanding under the Company's stock option plans and agreements, all of which are subject to the lock-up agreements described above. 46 48 UNDERWRITING Subject to the terms and conditions of an Underwriting Agreement dated , 1998 (the "Underwriting Agreement"), the Underwriters named below, who are represented by Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), NationsBanc Montgomery Securities LLC ("NationsBanc Montgomery") and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated ("Dain Rauscher Wessels") (the "Representatives"), have severally agreed to purchase from the Company and the Selling Stockholders the respective number of shares of Common Stock set forth opposite their names below.
NUMBER OF UNDERWRITERS SHARES - ------------ ----------- Donaldson, Lufkin & Jenrette Securities Corporation......... NationsBanc Montgomery Securities LLC....................... Dain Rauscher Wessels....................................... ----------- Total............................................. ===========
The Underwriting Agreement provides that the obligations of the several Underwriters to purchase and accept delivery of the shares of Common Stock offered hereby are subject to approval by their counsel of certain legal matters and to certain other conditions. The Underwriters are obligated to purchase and accept delivery of all the shares of Common Stock offered hereby (other than those shares covered by the over-allotment option described below) if any are purchased. The Underwriters initially propose to offer the shares of Common Stock in part directly to the public at the initial public offering price set forth on the cover page of this Prospectus and in part to certain dealers (including the Underwriters) at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may re-allow, to certain other dealers a concession not in excess of $ per share. After the initial offering of the Common Stock, the public offering price and other selling terms may be changed by the Representatives at any time without notice. The Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. The Company and the Selling Stockholders have granted to the Underwriters an option, exercisable within 30 days after the date of this Prospectus, to purchase, from time to time, in whole or in part, up to an aggregate of additional shares of Common Stock at the initial public offering price less underwriting discounts and commissions. The Underwriters may exercise such option solely to cover over-allotments, if any, made in connection with the offering. To the extent that the Underwriters exercise such option, each Underwriter will become obligated, subject to certain conditions, to purchase its pro rata portion of such additional shares based on such Underwriter's percentage underwriting commitment as indicated in the preceding table. The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. Each of the Company, its executive officers and directors and certain stockholders of the Company (including the Selling Stockholders) has agreed, subject to certain exceptions, not to (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any Common Stock (regardless of whether any of the transactions described in clause (i) or (ii) is to be settled by the delivery of Common Stock, or such other securities, in cash or otherwise) for a period of 180 days after the date of this Prospectus without the prior written consent of DLJ. In addition, during such period, the Company has also agreed not to file any registration statement with respect to, and each of its executive officers, directors and certain stockholders of the Company (including the Selling Stockholders) has agreed not to make any demand for, or exercise any right with respect to, the 47 49 registration of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock other than registrations relating to equity compensation plans without DLJ's prior written consent. Prior to the offering, there has been no established trading market for the Common Stock. The initial public offering price for the shares of Common Stock offered hereby will be determined by negotiation among the Company, representatives of the Selling Stockholders and the Representatives. The factors to be considered in determining the initial public offering price include the history of and the prospects for the industry in which the Company competes, the past and present operations of the Company, the historical results of operations of the Company, the prospects for future earnings of the Company, the recent market prices of securities of generally comparable companies and the general condition of the securities markets at the time of the offering. Global Retail Partners, L.P. ("GRP") and its affiliates (together, the "GRP Related Entities"), each an affiliate of DLJ, Yves Sisteron, a Principal of GRP, and two other individual affiliates of DLJ (collectively, the "DLJ Affiliates") are stockholders of the Company. Mr. Sisteron, a director of the Company has been elected to the Board of Directors pursuant to the provisions of a stockholder agreement which entitles Global Retail Partners, L.P., as a holder of Series B Preferred Stock and so long as it continues to hold at least a specified percentage of the Series B Preferred Stock, to elect one of the seven directors of the Company. Such stockholder agreement will terminate upon consummation of this offering. See "Management," "Certain Transactions" and "Principal and Selling Stockholders." In May 1997, Global Retail Partners, L.P. and certain other DLJ affiliates, including Mr. Sisteron, acquired an aggregate of 322,018 shares of the Company's Series B Preferred Stock. Previously, in February 1996, Mr. Sisteron and two other individual affiliates of DLJ, acquired an aggregate of 40,450 shares of the Company's Series A Preferred Stock and have since received and will receive scheduled PIK Dividends thereon. In addition, certain individuals who are associated with NationsBanc Montgomery acquired an aggregate of 90,762 shares of Series A Preferred Stock in February 1996, and such individuals and one other individual associated with NationsBanc Montgomery acquired an aggregate of 24,404 shares of Series B Preferred Stock in May 1997. In February 1996, NationsBanc Montgomery also received a five-year warrant to purchase up to 62,190 shares of Series A Preferred Stock at an exercise price of $4.00 per share in connection with placement agent and other services it performed for the Company. Other than in the United States, no action has been taken by the Company, the Selling Stockholders or the Underwriters that would permit a public offering of the shares of Common Stock offered hereby in any jurisdiction where action for that purpose is required. The shares of Common Stock offered hereby may not be offered or sold, directly or indirectly, nor may this Prospectus or any other offering material or advertisements in connection with the offer and sale of any such shares of Common Stock be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of such jurisdiction. Persons into whose possession this Prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering of the Common Stock and the distribution of this Prospectus. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any shares of Common Stock offered hereby in any jurisdiction in which such an offer or a solicitation is unlawful. In connection with the offering, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may over-allot the offering, creating a syndicate short position. The Underwriters may bid for and purchase shares of Common Stock in the open market to cover such syndicate short position or to stabilize the price of the Common Stock. In addition, the underwriting syndicate may reclaim selling concessions from syndicate members and selected dealers if they repurchase previously distributed Common Stock in syndicate covering transactions, in stabilizing transactions or otherwise. These activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. 48 50 LEGAL MATTERS The validity of the securities offered hereby has been and general corporate legal matters will be passed upon for the Company by Gray Cary Ware & Freidenrich LLP, San Diego, California. Certain legal matters will be passed upon for the Underwriters by Akin, Gump, Strauss, Hauer & Feld, L.L.P., San Antonio, Texas. EXPERTS The consolidated financial statements of P.F. Chang's China Bistro, Inc. at December 28, 1997 and December 29, 1996 and for the year ended December 28, 1997, the period from February 29, 1996 to December 29, 1996, the combined results of operations of its Predecessors for the period from January 1, 1996 to February 28, 1996 and the year ended December 31, 1995 appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission a Registration Statement (which term shall include any amendments thereto) on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement. As used herein, the term "Registration Statement" means the initial Registration Statement (including the exhibits, schedules, financial statements and notes filed as part thereof) and any and all amendments thereto. This Prospectus omits certain information contained in the Registration Statement as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement. Statements herein concerning the contents of any contract or other document are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed with the Commission as an exhibit to the Registration Statement, each such statement being qualified by and subject to such reference in all respects. With respect to each such document filed with the Commission as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved. As a result of this offering, the Company will become subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith, will file reports and other information with the Commission. Reports, registration statements, proxy statements, and other information filed by the Company with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the Commission's Regional Offices: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New York, New York 10048. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the site is http://www.sec.gov. The Company intends to furnish holders of the Common Stock with annual reports containing, among other information, audited financial statements certified by an independent audited accounting firm and quarterly reports containing unaudited condensed financial information for the first three quarters of each fiscal year. The Company intends to furnish such other reports as it may determine or as may be required by law. 49 51 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE P.F. CHANG'S CHINA BISTRO, INC. Report of Independent Auditors.............................. F-2 Consolidated Financial Statements: Consolidated Balance Sheets at December 29, 1996, December 28, 1997, and June 28, 1998 (unaudited)................ F-3 Consolidated Statements of Operations for the Year Ended December 31, 1995, the Period from January 1, 1996 to February 28, 1996, the Period from February 29, 1996 to December 29, 1996, the Year Ended December 28, 1997, and the Six Months Ended June 29, 1997 and June 28, 1998 (unaudited)....................................... F-4 Consolidated Statements of Convertible Redeemable Preferred Stock and Common Stockholders' and Members' Equity (Deficit) for the Year Ended December 31, 1995, the Period from January 1, 1996 to February 28, 1996, the Period from February 29, 1996 to December 29, 1996, the Year Ended December 28, 1997, and the Six Months Ended June 28, 1998 (unaudited)........................ F-5 Consolidated Statements of Cash Flows for the Year Ended December 31, 1995, the Period from January 1, 1996 to February 28, 1996, the Period from February 29, 1996 to December 29, 1996, the Year Ended December 28, 1997, and the Six Months Ended June 29, 1997 and June 28, 1998 (unaudited)....................................... F-6 Notes to Consolidated Financial Statements................ F-7
F-1 52 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders P.F. Chang's China Bistro, Inc. We have audited the accompanying consolidated balance sheets of P.F. Chang's China Bistro, Inc. (Company) as of December 29, 1996 and December 28, 1997, and the related consolidated statements of operations, convertible redeemable preferred stock and common stockholders' and members' equity (deficit), and cash flows for the period from February 29, 1996 to December 29, 1996 and for the year ended December 28, 1997. We have also audited the combined statements of operations, stockholders' and members' equity (deficit), and cash flows of the corporations and limited liability companies listed in Note 2 for the year ended December 31, 1995 and for the period from January 1, 1996 to February 28, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of P.F. Chang's China Bistro, Inc. at December 29, 1996 and December 28, 1997 and the results of its operations and its cash flows for the period from February 29, 1996 to December 29, 1996 and for the year ended December 28, 1997, and the combined results of operations and cash flows of the corporations and limited liability companies listed in Note 2 for the year ended December 31, 1995 and for the period from January 1, 1996 to February 28, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Phoenix, Arizona January 26, 1998, except for Note 11 as to which the date is , 1998 - -------------------------------------------------------------------------------- The foregoing report is in the form that will be signed upon completion of the one-for-two reverse stock split described in Note 11 to the consolidated financial statements. /s/ ERNST & YOUNG LLP Phoenix, Arizona July 22, 1998 F-2 53 P.F. CHANG'S CHINA BISTRO, INC. CONSOLIDATED BALANCE SHEETS
PRO FORMA DECEMBER 29, DECEMBER 28, JUNE 28, JUNE 28, 1996 1997 1998 1998 ------------ ------------ -------- --------- (UNAUDITED) (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents......................... $ 1,877 $ 2,739 $ 1,802 $ 1,802 Receivables....................................... 659 2,062 825 825 Inventories....................................... 194 363 362 362 Current portion of notes receivable from related parties......................................... -- 130 69 69 Prepaids and other current assets................. 79 417 766 766 ------- ------- ------- ------- Total current assets................................ 2,809 5,711 3,824 3,824 Construction-in-progress............................ 3,202 3,787 7,522 7,522 Property and equipment, net......................... 2,954 10,207 14,234 14,234 Goodwill, net of accumulated amortization of $154,000, $398,000 and $616,000 in 1996, 1997 and 1998, respectively................................ 3,971 8,307 8,089 8,089 Notes receivable from related parties, less current portion........................................... -- 162 187 187 Other assets........................................ 108 315 409 409 ------- ------- ------- ------- Total assets........................................ $13,044 $28,489 $34,265 $34,265 ======= ======= ======= ======= LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Revolving line of credit.......................... $ -- $ 5,500 $ 9,000 $ 9,000 Accounts payable.................................. 1,049 1,658 2,789 2,789 Accrued payroll................................... 624 1,214 1,266 1,266 Other accrued expenses............................ 536 988 1,470 1,470 Unearned revenue.................................. 133 305 269 269 Current portion of long-term debt................. 432 481 441 441 Deferred purchase price........................... -- 2,426 2,426 -- Accrued minority members' distributions........... 281 -- -- -- ------- ------- ------- ------- Total current liabilities........................... 3,055 12,572 17,661 15,235 Long-term debt...................................... 1,331 2,391 2,159 2,159 Interests of minority members and partners in consolidated limited liability companies and partnerships...................................... 15 164 236 236 Commitments and contingencies....................... Convertible redeemable preferred stock, $0.001 par value, 10,000,000 shares authorized: Series A--2,677,135 shares issued and outstanding at December 29, 1996 and December 28, 1997 and 2,717,289 shares issued and outstanding at June 28, 1998, liquidation preference of $10,709,000 at December 29, 1996 and December 28, 1997 and $10,869,000 at June 28, 1998.................... 10,517 11,175 11,432 -- Series B--758,565 shares issued and outstanding, liquidation preference of $6,600,000 at December 28, 1997 and June 28, 1998...................... -- 6,633 6,853 -- Common stockholders' equity (deficit): Common stock, $0.001 par value, 20,000,000 shares authorized: 2,500,000 shares issued and outstanding..................................... 3 3 3 6 Additional paid-in capital........................ 2 2 2 20,710 Accumulated deficit............................... (1,879) (4,451) (4,081) (4,081) ------- ------- ------- ------- Total common stockholders' equity (deficit)......... (1,874) (4,446) (4,076) 16,635 ------- ------- ------- ------- Total liabilities, convertible redeemable preferred stock and common stockholders' equity (deficit)... $13,044 $28,489 $34,265 $34,265 ======= ======= ======= =======
See accompanying notes. F-3 54 P.F. CHANG'S CHINA BISTRO, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
PREDECESSORS COMPANY ------------------------------ ------------------------------------------------- PERIOD FROM PERIOD FROM JANUARY 1, 1996 FEBRUARY 29, SIX MONTHS ENDED YEAR ENDED TO 1996 TO YEAR ENDED ------------------- DECEMBER 31, FEBRUARY 28, DECEMBER 29, DECEMBER 28, JUNE 29, JUNE 28, 1995 1996 1996 1997 1997 1998 ------------ --------------- ------------ ------------ -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues.......................... $10,465 $2,815 $15,630 $39,768 $17,703 $32,937 Costs and expenses: Restaurant operating costs: Cost of sales................. 2,957 772 4,454 11,317 5,029 9,099 Labor......................... 3,347 918 4,736 11,683 5,228 9,400 Operating..................... 1,528 527 2,944 6,727 2,871 5,440 Occupancy..................... 1,059 205 1,279 2,743 1,206 2,357 ------- ------ ------- ------- ------- ------- Total restaurant operating costs........ 8,891 2,422 13,413 32,470 14,334 26,296 General and administrative...... 192 17 1,368 4,276 1,823 2,753 Depreciation and amortization... 322 82 352 1,102 451 1,013 Preopening...................... 400 17 765 1,922 399 1,217 ------- ------ ------- ------- ------- ------- Income (loss) from operations..... 660 277 (268) (2) 696 1,658 Interest income (expense): Interest expense................ (13) (4) (163) (380) (150) (520) Interest income................. - - 36 63 23 65 ------- ------ ------- ------- ------- ------- Income (loss) before elimination of minority members' and partners' interests and provision for income taxes...... 647 273 (395) (319) 569 1,203 Elimination of minority members' and partners' interests......... - - (720) (1,308) (758) (345) ------- ------ ------- ------- ------- ------- Income (loss) before provision for income taxes.................... 647 273 (1,115) (1,627) (189) 858 Provision for income taxes........ - - (30) (69) (52) (11) ------- ------ ------- ------- ------- ------- Net income (loss)................. $ 647 $ 273 (1,145) (1,696) (241) 847 ======= ====== Redeemable preferred stock accretion....................... (504) (876) (396) (477) ------- ------- ------- ------- Net income (loss) available to common stockholders............. $(1,649) $(2,572) $ (637) $ 370 ======= ======= ======= ======= Net income (loss) per share: Basic........................... $ (0.66) $ (1.03) $ (0.25) $ 0.15 ======= ======= ======= ======= Diluted......................... $ (0.66) $ (1.03) $ (0.25) $ 0.13 ======= ======= ======= ======= Weighted average shares used in computation: Basic........................... 2,500 2,500 2,500 2,500 ======= ======= ======= ======= Diluted......................... 2,500 2,500 2,500 6,655 ======= ======= ======= ======= Pro forma data (unaudited): Net income (loss) per share: Basic......................... $ (0.30) $ 0.14 ======= ======= Diluted....................... $ (0.30) $ 0.13 ======= ======= Weighted average shares used in computation: Basic......................... 5,706 6,099 ======= ======= Diluted....................... 5,706 6,798 ======= =======
See accompanying notes. F-4 55 P.F. CHANG'S CHINA BISTRO, INC. CONSOLIDATED STATEMENTS OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND COMMON STOCKHOLDERS' AND MEMBERS' EQUITY (DEFICIT)
CONVERTIBLE REDEEMABLE PREFERRED STOCK ----------------------------------------- SERIES A SERIES B ------------------- ------------------ SHARES AMOUNT SHARES AMOUNT ------- -------- ------- ------- (IN THOUSANDS) PREDECESSORS Balances, January 1, 1995......................... -- $ -- -- $ -- Members' contributions............................ -- -- -- -- Distributions..................................... -- -- -- -- Net income (loss)................................. -- -- -- -- ----- ------- --- ------ Balances, December 31, 1995....................... -- -- -- -- Distributions..................................... -- -- -- -- Net income (loss)................................. -- -- -- -- ----- ------- --- ------ Balances, February 28, 1996....................... -- -- -- -- COMPANY Conversion of S corporations to limited liability companies....................................... -- -- -- -- Purchase of members' interests.................... -- -- -- -- Reclassification to minority interest upon consolidation in connection with acquisition of interests....................................... -- -- -- -- Issuance of common stock.......................... -- -- -- -- Issuance of Series A preferred stock, net of issuance costs of $695,000...................... 2,677 10,013 -- -- Redeemable preferred stock accretion.............. -- 504 -- -- Net loss.......................................... -- -- -- -- ----- ------- --- ------ Balances, December 29, 1996....................... 2,677 10,517 Issuance of Series B preferred stock, net of issuance costs of $184,000...................... -- -- 759 6,415 Redeemable preferred stock accretion.............. -- 658 -- 218 Net loss.......................................... -- -- -- -- ----- ------- --- ------ Balances, December 28, 1997....................... 2,677 11,175 759 6,633 Series A preferred stock dividend paid (unaudited)..................................... 40 -- -- -- Redeemable preferred stock accretion (unaudited)..................................... -- 257 -- 220 Net income (unaudited)............................ -- -- -- -- ----- ------- --- ------ Balances, June 28, 1998 (unaudited)............... 2,717 $11,432 759 $6,853 ===== ======= === ====== COMMON STOCKHOLDERS' AND MEMBERS' EQUITY (DEFICIT) -------------------------------------------------------------------- COMMON STOCK ADDITIONAL ---------------- PAID-IN MEMBERS' ACCUMULATED SHARES AMOUNT CAPITAL CAPITAL DEFICIT TOTAL ------ ------ ---------- -------- ----------- ------- (IN THOUSANDS) PREDECESSORS Balances, January 1, 1995......................... 20 $-- $1,419 $ -- $ (202) $ 1,217 Members' contributions............................ -- -- -- 710 -- 710 Distributions..................................... -- -- (706) (50) (523) (1,279) Net income (loss)................................. -- -- -- (18) 665 647 ----- -- ------ ------- ------- ------- Balances, December 31, 1995....................... 20 -- 713 642 (60) 1,295 Distributions..................................... -- -- (112) -- (228) (340) Net income (loss)................................. -- -- -- (12) 285 273 ----- -- ------ ------- ------- ------- Balances, February 28, 1996....................... 20 -- 601 630 (3) 1,228 COMPANY Conversion of S corporations to limited liability companies....................................... (20) -- (601) 601 -- -- Purchase of members' interests.................... -- -- -- (1,231) -- (1,231) Reclassification to minority interest upon consolidation in connection with acquisition of interests....................................... -- -- -- -- (227) (227) Issuance of common stock.......................... 2,500 3 2 -- -- 5 Issuance of Series A preferred stock, net of issuance costs of $695,000...................... -- -- -- -- -- -- Redeemable preferred stock accretion.............. -- -- -- -- (504) (504) Net loss.......................................... -- -- -- -- (1,145) (1,145) ----- -- ------ ------- ------- ------- Balances, December 29, 1996....................... 2,500 3 2 -- (1,879) (1,874) Issuance of Series B preferred stock, net of issuance costs of $184,000...................... -- -- -- -- -- -- Redeemable preferred stock accretion.............. -- -- -- -- (876) (876) Net loss.......................................... -- -- -- -- (1,696) (1,696) ----- -- ------ ------- ------- ------- Balances, December 28, 1997....................... 2,500 3 2 -- (4,451) (4,446) Series A preferred stock dividend paid (unaudited)..................................... -- -- -- -- -- -- Redeemable preferred stock accretion (unaudited)..................................... -- -- -- -- (477) (477) Net income (unaudited)............................ -- -- -- -- 847 847 ----- -- ------ ------- ------- ------- Balances, June 28, 1998 (unaudited)............... 2,500 $3 $ 2 $ -- $(4,081) $(4,076) ===== == ====== ======= ======= =======
See accompanying notes. F-5 56 P.F. CHANG'S CHINA BISTRO, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
PREDECESSORS COMPANY ------------------------------ ------------------------------------------------------ PERIOD FROM PERIOD FROM SIX MONTHS ENDED YEAR ENDED JANUARY 1, 1996 FEBRUARY 29, 1996 YEAR ENDED ------------------- DECEMBER 31, TO FEBRUARY 28, TO DECEMBER 29, DECEMBER 28, JUNE 29, JUNE 28, 1995 1996 1996 1997 1997 1998 ------------ --------------- ----------------- ------------ -------- -------- (UNAUDITED) (IN THOUSANDS) OPERATING ACTIVITIES: Net income (loss)....................... $ 647 $ 273 $(1,145) $(1,696) $ (241) $ 847 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation.......................... 322 82 198 858 348 795 Amortization.......................... -- -- 154 244 103 218 Minority members' and partners' interests........................... -- -- 720 1,308 758 345 Change in operating assets and liabilities: Receivables......................... (127) 134 (658) (1,403) 659 1,237 Inventories......................... (54) (5) (75) (169) (10) 1 Prepaids and other current assets... (56) (6) 17 (338) (310) (349) Other assets........................ (40) 8 (63) (207) 3 (94) Accounts payable.................... 489 (65) 395 609 (331) 1,131 Accrued payroll..................... 50 80 385 590 (433) 52 Other accrued expenses.............. 299 (143) 289 452 214 482 Unearned revenue.................... 67 (13) 63 172 (3) (36) Accrued minority members' distributions..................... -- -- -- (281) (281) -- ------- ----- ------- ------- ------- ------- Net cash provided by operating activities............................ 1,597 345 280 139 476 4,629 INVESTING ACTIVITIES: Capital expenditures.................... (824) -- (4,008) (8,696) (2,769) (8,557) Decrease (increase) in notes receivable from related parties.................. -- -- -- (292) (119) 36 Payment for members' interests.......... -- -- (4,175) (2,520) -- -- ------- ----- ------- ------- ------- ------- Net cash used in investing activities... (824) -- (8,183) (11,508) (2,888) (8,521) FINANCING ACTIVITIES: Net proceeds from revolving line of credit................................ -- -- -- 5,500 -- 3,500 Proceeds from issuance of long-term debt.................................. -- -- -- 1,600 1,600 -- Repayments of long-term debt............ (71) (7) (267) (491) (246) (272) Proceeds from issuance of common stock................................. -- -- 5 -- -- -- Proceeds from issuance of redeemable preferred stock, net of issuance costs................................. -- -- 10,013 6,415 6,415 -- Proceeds from minority partners' contributions......................... -- -- -- 441 183 92 Proceeds from members' contributions.... 710 -- -- -- -- -- Distributions to members and stockholders.......................... (1,279) (340) -- -- -- -- Distributions to minority members and partners.............................. -- -- (449) (1,234) (321) (365) ------- ----- ------- ------- ------- ------- Net cash provided by (used in) financing activities............................ (640) (347) 9,302 12,231 7,631 2,955 ------- ----- ------- ------- ------- ------- Net increase (decrease) in cash and cash equivalents........................... 133 (2) 1,399 862 5,219 (937) Cash and cash equivalents at the beginning of the period............... 347 480 478 1,877 1,877 2,739 ------- ----- ------- ------- ------- ------- Cash and cash equivalents at the end of the period............................ $ 480 $ 478 $ 1,877 $ 2,739 $ 7,096 $ 1,802 ======= ===== ======= ======= ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest.................. $ 13 $ 4 $ 108 $ 319 $ 112 $ 494 Cash paid for income taxes.............. -- -- 30 69 52 11 Purchase of members' interests through issuance of long-term debt............ -- -- 1,266 -- -- -- Purchase of property and equipment through issuance of long-term debt.... 200 -- 421 -- -- -- Purchase of members' and partners' interest through deferred purchase price................................. -- -- -- 2,426 -- --
See accompanying notes. F-6 57 P.F. CHANG'S CHINA BISTRO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 28, 1997 AND JUNE 28, 1998 (THE INFORMATION AS OF JUNE 28, 1998 AND FOR THE SIX MONTHS ENDED JUNE 29, 1997 AND JUNE 28, 1998 IS UNAUDITED) 1. BASIS OF PRESENTATION P.F. Chang's China Bistro, Inc. (Company) operates restaurants in Arizona, California, Colorado, Texas, Nevada, Florida, North Carolina, Louisiana, and Virginia under the name of "P.F. Chang's China Bistro." The Company was formed in January, 1996 through the issuance of 500 shares of common stock to Mr. Paul Fleming for $100 in cash. In February 1996, the Company sold 2,487,500 shares of Series A convertible preferred stock and warrants for $9,950,000 in cash. Contemporaneously, the Company acquired Mr. Fleming's 52 percent interest in Fleming Chinese Restaurants, Inc., which operates a restaurant in Scottsdale, Arizona (Scottsdale), for $1,037,000 in cash and $954,000 in notes payable. The Company also acquired Mr. Fleming's 43 percent interest in P.F. Chang's II, Inc., which operates a restaurant in Newport Beach, California (Newport Beach); 49.85 percent ownership in P.F. Chang's III, L.L.C., which operates a restaurant in La Jolla, California (La Jolla); and 54.2 percent ownership interest in P.F. Chang's IV, L.L.C., which operates a restaurant in Irvine, California (Irvine), for $2,006,000 in cash and 2,499,500 shares of common stock of the Company. In addition, in 1996 the Company acquired an additional 18 percent ownership in Scottsdale and the remaining 45.8 percent ownership of Irvine in various transactions for an aggregate of $1,132,000 in cash and $312,000 in notes payable. The acquisition of the ownership interests in the various entities during 1996 have been accounted for under the purchase method of accounting for business combinations. Accordingly, the purchase price was allocated to the proportional assets acquired and liabilities assumed based on their relative fair values, with $4,125,000 allocated to goodwill. As a result of the start-up nature of the operations of the Company, the significant prior claims of the preferred stockholders of the Company, and the minority interests in Scottsdale, Newport Beach and La Jolla, no significant value was assigned to the common stock issued in the acquisitions. During 1997, the Company purchased substantially all the remaining outstanding minority interests in the Scottsdale, La Jolla and Newport Beach restaurants for approximately $2,520,000 in cash and $2,426,000 in common stock of the Company to be issued in connection with a contemplated initial public offering (IPO). Upon consummation of an IPO, the number of common shares to be issued will be the fixed purchase price of $2,426,000 divided by the price per share of the common stock sold in the IPO. Should the IPO not be completed by a stipulated date as defined, the Company will be obligated (upon demand of the individual holders) to pay the minority interest holders the $2,426,000 in cash. The acquisition of the ownership interests in the various entities during 1997 has been accounted for under the purchase method of accounting for business combinations. Accordingly, the purchase price was allocated to the proportional assets acquired and liabilities assumed based on their relative fair values, with $4,581,000 allocated to goodwill. Two of the predecessor entities, Fleming Chinese Restaurants, Inc. and P.F. Chang's II, Inc. were dissolved and their operations transferred to two new entities, PFCCB Scottsdale, L.L.C. and PFCCB Newport Beach, L.L.C. Accordingly, at December 29, 1996, each of the existing restaurants was structured as a limited liability corporation, and the Company's ownership of these restaurants is through its membership in each limited liability corporation. The Company's new restaurants are generally organized as partnerships with the Company as general partner. The operations of the predecessor entities which operated the restaurants have been presented in the accompanying combined financial statements for 1995 and through the date of acquisition at historical cost due to the common ownership. The allocation of the purchase price resulted in no material adjustment to the historical recorded basis in the assets and liabilities except for goodwill. Therefore, the effect to the statement of operations is primarily amortization subsequent to the date of acquisition. F-7 58 P.F. CHANG'S CHINA BISTRO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company has incurred successive losses and has negative working capital at December 28, 1997, and its capital requirements, including start-up costs, related to the opening of additional restaurants have been, and will continue to be significant. The Company has experienced positive operating cash flows since its inception. To date, the Company has been substantially dependent upon loans from lending institutions and private equity funding to develop its restaurants. The Company will be required to seek significant amounts of additional debt and/or equity capital in order to fund its planned development activities. Although there is no assurance that the Company will be able to obtain adequate financing for its future development, management believes that such capital will be available to the Company. In the event the Company is unsuccessful in obtaining additional funds for development, management may need to take steps to continue to operate within the available cash flow. Such steps may include, among others, the postponement of planned future development. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The 1996 and 1997 consolidated financial statements include the accounts and operations of the Company and its subsidiaries or partnerships in which it owns more than a 50 percent interest. All material balances and transactions between the consolidated entities have been eliminated. The 1995 combined statements of operations and cash flows includes the accounts of Fleming Chinese Restaurants, Inc., P.F. Chang's II, Inc., P.F. Chang's III, L.L.C., and P.F. Chang's IV, L.L.C. All material balances and transactions between the combined entities have been eliminated. INTERIM FINANCIAL INFORMATION The consolidated financial statements for the six months ended June 29, 1997 and June 28, 1998 are unaudited and have been prepared on the same basis as the audited consolidated financial statements included herein. In the opinion of management, such unaudited consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of financial position and results of operations. The results of operation for such interim periods are not necessarily indicative of the results that may be expected for any future periods. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity date of three months or less when purchased to be cash equivalents. RECEIVABLES Receivables consist primarily of amounts due from landlords or other parties for the reimbursement of leasehold improvements paid by the Company. INVENTORIES Inventories consist of food and beverages and are stated at the lower of cost or market using the first-in, first-out method. NOTES RECEIVABLE FROM RELATED PARTIES Notes receivable from related parties represent amounts due the Company from limited partners of affiliated partnerships. Payments of principal and interest of 11.0 percent amortized over a five year period are due monthly with a balloon payment for the outstanding principal and interest due at the end of two years. F-8 59 P.F. CHANG'S CHINA BISTRO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSTRUCTION-IN-PROGRESS The Company capitalizes all direct costs in the construction of new restaurants. Upon opening, these costs are depreciated over their useful lives based upon the property classifications. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Furniture, fixtures, and equipment are depreciated on a straight line basis over the estimated useful service lives of the related assets which approximate seven years. Leasehold improvements are amortized over the shorter of the useful life of the asset or the length of the related lease term. China and smallwares are depreciated over two years up to 50 percent of their original cost, after which subsequent additions are expensed as purchased. GOODWILL Goodwill represents the excess of cost over net assets acquired in the purchase of interests in various restaurants (see Note 1) and is being amortized over 20 years on a straight-line basis. The Company assesses the recoverability of goodwill based upon expected future undiscounted cash flows resulting from the acquired interests in the restaurants. UNEARNED REVENUE Unearned revenue represents gift certificates sold but not yet redeemed. Revenues are recognized upon redemption of the gift certificates. ADVERTISING The Company expenses advertising as incurred. Advertising expense during the year ended December 31, 1995, the period from January 1, 1996 to February 28, 1996, the period from February 29, 1996 to December 29, 1996, and for the year ended December 28, 1997 was approximately $328,000, $10,000, $232,000, and $901,000, respectively. During the six months ended June 29, 1997 and June 28, 1998, advertising expense was approximately $432,000 and $550,000, respectively. PREOPENING Preopening expenses, consisting primarily of manager salaries and relocation, advertising, and employee payroll and related training costs incurred prior to the opening of a restaurant, are expensed as incurred. INCOME TAXES The Company utilizes the liability method of accounting for income taxes as set forth in Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under the liability method, deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Recognition of deferred tax assets is limited to amounts considered by management to be more likely than not of realization in future periods. Minority members' and partners' interests in income or loss of limited liability corporations and partnerships includes no provision for income taxes as any tax liability related thereto is the responsibility of the individual minority members. The predecessor entities are S corporations and limited liability corporations under the Internal Revenue Code. Accordingly, the taxable income and losses are allocated and taxed directly to the stockholders and F-9 60 P.F. CHANG'S CHINA BISTRO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) members resulting in no tax provision for the year ended December 31, 1995 or the period from January 1, 1996 to February 28, 1996. STOCK BASED COMPENSATION The Company grants stock options for a fixed number of shares to certain employees with an exercise price equal to or greater than the fair value of the shares at the date of grant. The Company accounts for stock option grants to employees in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and, accordingly, recognizes no compensation expense for the stock option grants. NET INCOME (LOSS) PER SHARE Net income (loss) per share is computed in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share." Pro forma basic and diluted net income per share has been computed giving effect to the conversion of all the outstanding shares of convertible redeemable preferred stock and deferred purchase price liability into common stock upon closing of the Company's IPO (determined using the if-converted method). PRO FORMA BALANCE SHEET (UNAUDITED) As discussed in Notes 1 and 6, the convertible redeemable preferred stock and deferred purchase price liability will be automatically converted upon the closing of the public offering contemplated herein. The accompanying pro forma balance sheet gives effect to this conversion as if such event occurred on June 28, 1998. FISCAL YEAR The Company's fiscal year ends on the Sunday closest to the end of December and includes 52 weeks in 1995, 1996 and 1997. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash and cash equivalents, receivables, accounts payable, and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. The fair value of long-term debt is determined using current applicable rates for similar instruments and collateral as of the balance sheet date and approximates the carrying value of such debt. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash investments and receivables. The Company maintains cash and cash equivalents, restricted funds on deposit and certain other financial instruments with financial institutions that are considered in the Company's investment strategy. Concentrations of credit risk with respect to receivables are limited as the Company's receivables are primarily with its landlords for the reimbursement of tenant improvements. F-10 61 P.F. CHANG'S CHINA BISTRO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RECLASSIFICATIONS Certain amounts shown in the prior period combined and consolidated financial statements have been reclassified to conform with the current year consolidated financial statements presentation. 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 29, DECEMBER 28, JUNE 28, 1996 1997 1998 ------------ ------------ ----------- (IN THOUSANDS) (UNAUDITED) Leasehold improvements........................ $1,551 $ 6,904 $10,380 Furniture, fixtures and equipment............. 1,946 4,386 5,576 China and smallwares.......................... 142 423 575 ------ ------- ------- 3,639 11,713 16,531 Less accumulated depreciation................. 685 1,506 2,297 ------ ------- ------- $2,954 $10,207 $14,234 ====== ======= =======
4. REVOLVING LINE OF CREDIT On October 24, 1997, the Company entered into a $10,000,000 revolving line of credit agreement with a finance corporation. The line of credit bears interest at LIBOR plus 4.0 percent, payable monthly, and expires on November 1, 1998. At December 28, 1997, amounts available under the line of credit were approximately $4,500,000. In June 1998, the Company amended its revolving line of credit to provide for a $20,000,000 line with interest at LIBOR plus 3.5 percent and expires on July 1, 1999. At June 28, 1998, amounts available under the line of credit were $11,000,000. The weighted average interest rate under the line of credit was 9.5 percent in 1997 and 1998, respectively. The line of credit requires the Company to maintain a net worth of at least $10,000,000 including convertible redeemable preferred stock. The line of credit agreement also contains covenants which place various restrictions on sales of properties, transactions with affiliates, creation of additional debt, and other nonfinancial covenants, as defined. The line of credit agreement is collateralized by the Company's interests in certain affiliated partnerships. F-11 62 P.F. CHANG'S CHINA BISTRO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 29, DECEMBER 28, JUNE 28, 1996 1997 1998 ------------ ------------ ------------ (IN THOUSANDS) (UNAUDITED) $1,100,000 promissory note, collateralized by leasehold improvements, payable in monthly installments of $11,354 including interest at 11.0 percent, until March 1, 2017, when all remaining principal and interest is due and payable. Additional payments may be required under the promissory note based on a percentage of gross sales. ............... $ -- $1,088 $1,080 $500,000 promissory note, collateralized by equipment, payable in monthly installments of $8,561 including interest at 11.0 percent until March 1, 2004 when all remaining principal and interest is due and payable. ................................... -- 463 436 $1,266,000 unsecured promissory notes to related parties, payable in quarterly installments of $96,967 including interest at 10.0 percent, until March 1, 2000, when all remaining principal and interest is due and payable. ............................... 1,065 762 606 $421,000 equipment loan, collateralized by furniture, fixtures and equipment, payable in monthly installments of $7,202 including interest at 11.0 percent, until January 1, 2004, when all remaining principal and interest is due and payable. ............... 421 382 358 $200,000 unsecured promissory note, payable in monthly installments of $3,333 plus interest at prime plus one percent, until April 2001, when all remaining principal and interest is due and payable. The note is guaranteed by a stockholder of the Company. ................ 173 133 114 Other......................................... 104 44 6 ------ ------ ------ 1,763 2,872 2,600 Less current portion.......................... 432 481 441 ------ ------ ------ $1,331 $2,391 $2,159 ====== ====== ======
The aggregate annual payments of long-term debt outstanding at December 28, 1997, for the next five years and thereafter, are summarized as follows: 1998--$481,000; 1999--$523,000; 2000--$281,000; 2001--$178,000; 2002--$184,000; and thereafter--$1,225,000. F-12 63 P.F. CHANG'S CHINA BISTRO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY PREFERRED STOCK In February 1996, the Company issued 2,487,500 shares of Series A convertible redeemable preferred stock (Series A preferred stock), and warrants exercisable for 621,875 shares of Series A preferred stock, for an aggregate purchase price of approximately $9,950,000, less issuance costs of $695,000. In September 1996, the Company issued an additional 189,635 shares of Series A preferred stock for $758,000 in order to purchase the remaining minority interests in the Irvine restaurant. The Series A preferred stock has a $0.001 par value and an annual six percent dividend payable quarterly on March 31, June 30, September 30, and December 31 in shares of such Series A preferred stock on a cumulative basis beginning January 1, 1998. The Company may also declare, upon unanimous consent of the Non-Investor Directors as defined, a cash dividend equal to ten percent of the liquidation price of the Series A preferred stock in lieu of the Series A preferred stock dividend. In May 1997, the Company issued 758,565 shares of Series B convertible redeemable preferred stock (Series B preferred stock) for an aggregate purchase price of $6,599,000, less issuance costs of approximately $184,000. The Series B preferred stock has a $0.001 par value and an annual six percent dividend payable quarterly on March 31, June 30, September 30, and December 31 in shares of such Series B preferred stock on a cumulative basis beginning April 1, 1999. The Company may also declare, upon unanimous consent of the Non-Investor Directors as defined, a cash dividend equal to ten percent of the liquidation price of the Series B preferred stock in lieu of the Series B preferred stock dividend. Each share of Series A and Series B preferred stock is convertible at any time into one share of common stock, subject to dilution adjustments as defined, at the option of the holder and is automatically converted into common stock at the date of a qualified IPO. The Series A preferred stock is mandatorily redeemable at a minimum of 50 percent of the shares outstanding in May 2003 with the remaining outstanding shares becoming mandatorily redeemable in May 2004 at $4.00 per share plus accrued and unpaid dividends. The Series A preferred stock has a liquidation preference equal to the greater of $4.00 per share or such amount per share as would have been payable had each share of Series A preferred stock been converted into common stock. The Series B preferred stock is mandatorily redeemable at a minimum of 50 percent of the shares outstanding in May 2003 with the remaining in May 2004 at $8.70 per share plus accrued and unpaid dividends. The Series B preferred stock has a liquidation preference equal to the greater of $8.70 per share or such amount per share as would have been payable had each share of Series B preferred stock been converted into common stock. Upon voluntary or involuntary liquidation, the holders of the Series A and Series B preferred stock shall be entitled to be paid out of the assets of the Company with the common stockholders being entitled to all remaining assets of the Company to be distributed. The holders of the Series A and Series B preferred stock have the right to vote based on the number of shares of common stock into which each share of Series A and Series B preferred stock would thus be converted. The difference between the redemption amount and the carrying amount of the Series A and Series B preferred stock and dividends thereon calculated on a straight-line basis beginning with the date of issuance is being recorded through periodic accretions charged to accumulated deficit. Effective April 30, 1997, 1,116,990 and 233,578 shares of Series A and Series B preferred stock, respectively, have been reserved for issuance upon the exercise of warrants previously issued and upon issuance of "payment-in-kind" dividends of Series A and Series B preferred stock. The 621,875 warrants issued during 1996 were cancelable by the Company should the Irvine restaurant achieve certain operating goals. During 1997, the Irvine restaurant achieved such goals, and the warrants were consequently canceled. In connection with the original capitalization of the Company, an additional 62,190 warrants were issued to an investment bank to purchase Series A preferred stock at $4.00 per share. The warrants expire February 28, 2001. F-13 64 P.F. CHANG'S CHINA BISTRO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SHAREHOLDERS' AGREEMENT The Company's common and preferred stock is subject to a shareholders' agreement which provides to the stockholders a right of first refusal to purchase the other stockholders' interests. Before any such shares of common and preferred stock may be sold, assigned, transferred, pledged, encumbered, or disposed in any way, such shares shall first be offered to the Company and other stockholders party to the shareholders' agreement. In addition, such stockholders have certain bring-along and tag-along rights with respect to sales of common stock by certain other stockholders. Upon a qualified IPO, all rights and obligations under the shareholders' agreement terminate. PARTNERSHIP AGREEMENTS The Company has entered into a series of partnership agreements with each of its regional managers (Market Partners), certain of its general managers (Operating Partners) and certain of its executive chefs (Culinary Partners). These partnership agreements entitle the Market Partner to a specified percentage of the cash flows from the restaurants that partner has developed and oversees as the regional manager. Similarly, the general manager and the executive chef at most of the Company's restaurants are offered the opportunity to become Operating Partners and Culinary Partners, respectively, and to receive a percentage of the cash flows from the restaurant in which they work. At the time an individual becomes a Market Partner, Operating Partner or Culinary Partner, that person is required to make an equity investment in the partnership and to enter into a five year employment agreement with the Company. The Company has the right, in its sole discretion, to terminate the employment of any Market Partner, Operating Partner or Culinary Partner, and, upon such termination, to repurchase that partner's interest in the partnership at such partners then-current basis in the partnership. If an individual continues to serve as Market Partner, Operating Partner or Culinary Partner for five years, then the Company has the right to repurchase that person's interest in the partnership for a value, which is determined by reference to trailing cash flows. COMMON STOCK The Company has reserved 5,912,920 shares of common stock for issuance upon the exercise of options and warrants to purchase such shares, and upon the conversion of Series A and Series B preferred stock into such shares. STOCK OPTION PLAN The Company has elected to follow APB 25 and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," (Statement 123) requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals or exceeds the fair value of the underlying stock on the date of grant, no compensation expense is recognized. In August 1996, the Company adopted the 1996 Stock Option Plan (1996 Plan), and in July 1997, the Company adopted the 1997 Restaurant Management Stock Option Plan (1997 Plan). Options under the 1996 Plan may be granted to employees, consultants and directors to purchase the Company's common stock at an exercise price that equals or exceeds the fair value of such shares on the date such option is granted. Options under the 1997 Plan may be granted to key employees of the Company who are actively engaged in the management and operation of the Company's restaurants to purchase the Company's common stock at an exercise price that equals or exceeds the fair value of such shares on the date such option is granted. Vesting periods are determined at the discretion of the board of directors, and options currently outstanding at December 28, 1997 vest over five years. Options may be exercised immediately upon grant subject to a right by the Company to repurchase any unvested shares at the exercise price. Any options granted shall not be F-14 65 P.F. CHANG'S CHINA BISTRO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) exercisable after ten years. Incentive options granted to individuals who own more than ten percent of the total combined voting power of all classes of stock shall not be exercisable after five years and options granted to prospective employees, consultants or directors may not become exercisable prior to the date on which such person commences services with the Company. Upon certain changes in control of the Company, the Plan provides for two additional years of immediate vesting. The Company has reserved a total of 1,086,500 shares of common stock for issuance under the 1996 and 1997 Plans. Pro forma information regarding net income (loss) is required by Statement 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1996 and 1997: risk-free interest rate of 5.5 percent; a dividend yield of -0-percent; volatility factors of the expected market price of the Company's common stock of .01 and .122, respectively; and a weighted-average expected life of the option of five years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Because Statement 123 is applicable to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until approximately 2002. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
PERIOD FROM FEBRUARY 29, 1996 TO YEAR ENDED DECEMBER 29, DECEMBER 28, 1996 1997 ------------ ------------ (IN THOUSANDS) Net loss, as reported.............................. $1,145 $1,696 Pro forma compensation expense for stock options... 48 82 ------ ------ Pro forma net loss................................. $1,193 $1,778 ====== ======
F-15 66 P.F. CHANG'S CHINA BISTRO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Information regarding activity for stock options outstanding under the Plans are as follows:
OUTSTANDING OPTIONS ---------------------- SHARES WEIGHTED- AVAILABLE AVERAGE FOR EXERCISE OPTIONS SHARES PRICE --------- --------- --------- Outstanding at December 31, 1995................... -- -- $ -- Authorized....................................... 890,000 -- -- Granted.......................................... (791,510) 791,510 2.98 Exercised........................................ -- -- -- Forfeited (canceled)............................. -- -- -- -------- --------- ----- Outstanding at December 29, 1996................... 98,490 791,510 2.98 Authorized....................................... 196,500 -- -- Granted.......................................... (170,000) 170,000 5.40 Exercised........................................ -- -- -- Forfeited (canceled)............................. -- -- -- -------- --------- ----- Outstanding at December 28, 1997................... 124,990 961,510 3.40 Authorized (unaudited)........................... -- -- -- Granted (unaudited).............................. (48,125) 48,125 13.09 Exercised (unaudited)............................ -- -- -- Forfeited (canceled) (unaudited)................. -- -- -- -------- --------- ----- Outstanding at June 28, 1998 (unaudited)........... 76,865 1,009,635 $3.87 ======== ========= =====
Information regarding options outstanding and exercisable at December 28, 1997 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------ ---------------------------- WEIGHTED- AVERAGE REMAINING WEIGHTED- WEIGHTED- RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - ------------------------------------------------------------------------------------------- $2.40 504,872 8.16 years $ 2.40 176,672 $2.40 $4.00-$6.00 445,388 5.38 years 4.38 105,510 4.00 $10.00 11,250 9.90 years 10.00 -- --
Since options are generally exercisable upon date of grant, options exercisable included in the above table represent vested options that are not subject to repurchase by the Company. The weighted-average fair value of options granted during the period from February 29, 1996 to December 29, 1996 and for the year ended December 28, 1997 was $0.56 and $1.38, respectively. F-16 67 P.F. CHANG'S CHINA BISTRO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. INCOME TAXES Income tax expense consisted of the following:
PERIOD FROM FEBRUARY 29, 1996 TO YEAR ENDED DECEMBER 29, DECEMBER 28, 1996 1997 ------------ ------------ (IN THOUSANDS) Federal: Current.......................................... $-- $-- Deferred......................................... -- -- --- --- -- -- State: Current.......................................... 30 69 Deferred......................................... -- -- --- --- 30 69 --- --- $30 $69 === ===
The Company's effective tax rate differs from the federal statutory rate for the following reasons:
PERIOD FROM FEBRUARY 29, 1996 TO YEAR ENDED DECEMBER 29, DECEMBER 28, 1996 1997 ------------ ------------ (IN THOUSANDS) Income tax benefit at federal statutory rate....... $(379) $(553) State taxes, net of federal benefit................ 30 69 Increase in valuation allowance.................... 398 426 Other, net......................................... (19) 127 ----- ----- $ 30 $ 69 ===== =====
The Company's net income for the year ended December 31, 1995 and for the period from January 1, 1996 to February 28, 1996 included earnings attributable to the Scottsdale, Newport Beach, La Jolla and Irvine restaurants. These restaurants were organized as limited liability companies or had elected under Subchapter S of the Internal Revenue Code to have their stockholders pay any federal and state income tax due on their earnings. Although income prior to the consolidation attributable to the acquired restaurants is included in the Company's consolidated financial statements, the Company is not required to pay income taxes on the income since they are the responsibility of the members and stockholders of the acquired companies. F-17 68 P.F. CHANG'S CHINA BISTRO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The income tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows:
DECEMBER 29, DECEMBER 28, 1996 1997 ------------ ------------ (IN THOUSANDS) Deferred tax assets: Bonus accrual.................................... $ 47 $ -- Depreciation on property and equipment........... 44 2 Preopening expenses.............................. 80 267 Goodwill amortization............................ 7 -- Net operating loss carryforwards................. 290 760 ----- ------ 468 1,029 Deferred tax liabilities: Goodwill amortization............................ -- 136 ----- ------ 468 893 Valuation allowance................................ (468) (893) ----- ------ Net deferred tax assets............................ $ -- $ -- ===== ======
During the period from January 1, 1996 to December 29, 1996 and for the year ended December 28, 1997, the valuation allowance increased $468,000 and $425,000, respectively. At December 28, 1997, the Company has a net operating loss carryforward of approximately $1,900,000 which begins to expire for federal purposes in 2011 and for state purposes in 2001. F-18 69 P.F. CHANG'S CHINA BISTRO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. NET INCOME (LOSS) PER SHARE AND PRO FORMA NET INCOME (LOSS) PER SHARE The following table sets forth the computation of basic and diluted net income (loss) per share:
PERIOD FROM FEBRUARY 29, SIX MONTHS ENDED 1996 TO YEAR ENDED -------------------- DECEMBER 29, DECEMBER 28, JUNE 29, JUNE 28, 1996 1997 1997 1998 ------------ ------------ -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Numerator: Net income (loss).................... $(1,145) $(1,696) $ (241) $ 847 Convertible redeemable preferred stock accretion................... (504) (876) (396) (477) ------- ------- ------ ------ Numerator for basic net income (loss) per share--income available to common stockholders............... (1,649) (2,572) (637) 370 Effect of dilutive securities: Convertible redeemable preferred stock accretion................. -- -- -- 477 ------- ------- ------ ------ Numerator for diluted net income (loss) per share--income available to common stockholders after assumed conversions............... $(1,649) $(2,572) $ (637) $ 847 ======= ======= ====== ====== Denominator: Denominator for basic net income (loss) per share--weighted-average shares............................ 2,500 2,500 2,500 2,500 Effect of dilutive securities: Employee and director stock options........................... -- -- -- 660 Warrants............................. -- -- -- 39 Convertible redeemable preferred stock............................. -- -- -- 3,456 ------- ------- ------ ------ Denominator for diluted net income (loss) per share--adjusted weighted average shares and assumed conversions.......................... 2,500 2,500 2,500 6,655 ======= ======= ====== ====== Net income (loss) per share: Basic................................ $ (0.66) $ (1.03) $(0.25) $ 0.15 ======= ======= ====== ====== Diluted.............................. $ (0.66) $ (1.03) $(0.25) $ 0.13 ======= ======= ====== ======
Warrants of 62,190 and options to purchase 961,510 shares of common stock ranging from $2.40 to $10.00 per share were outstanding during the year ended December 28, 1997, but were not included in the computation of diluted net income (loss) per share because the effect would be antidilutive. The Series A and B preferred stock convertible to common stock is not included in the computation of diluted net income (loss) per share during the year ended December 28, 1997, because the assumed conversions would be antidilutive. As discussed in Note 1 and should the Company complete an IPO, contingently issuable shares based on the IPO common stock price will be issued. As the conditions for the shares to be issued have not been satisfied, the contingent shares are not included in diluted net income (loss) per share. F-19 70 P.F. CHANG'S CHINA BISTRO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth the computation of basic and diluted pro forma net income (loss) per share giving effect to the conversion of the preferred stock and the deferred purchase price to common stock as of the beginning of each period presented:
YEAR ENDED SIX MONTHS DECEMBER 28, ENDED JUNE 28, 1997 1998 ------------ -------------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Numerator for basic pro forma net income (loss) per share: Net income (loss)....................................... $(1,696) $ 847 ======= ====== Denominator: Weighted-average shares................................. 2,500 2,500 Conversion of convertible preferred stock and deferred purchase price....................................... 3,206 3,599 ------- ------ Denominator for basic pro forma net income (loss) per share................................................ 5,706 6,099 Effect of dilutive securities: Employee and director stock options.................. -- 660 Warrants............................................. -- 39 ------- ------ Denominator for dilutive pro forma net income (loss) per share -- adjusted weighted average shares and assumed conversions.......................................... 5,706 6,798 ======= ====== Pro forma net income (loss) per share: Basic................................................... $ (0.30) $ 0.14 ======= ====== Diluted................................................. $ (0.30) $ 0.13 ======= ======
9. COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases restaurant and office facilities and equipment and certain real property under operating leases having terms expiring between 2000 and 2019. The restaurant facility and real property leases primarily have renewal clauses of five to 15 years exercisable at the option of the Company and rent escalation clauses stipulating specific rent increases, some of which are based on the consumer price index. Certain of these leases require the payment of contingent rentals based on a percentage of gross revenues, as defined. Rent expense during the year ended December 31, 1995, the period from January 1, 1996 to February 28, 1996, the period from February 29, 1996 to December 29, 1996 and for the year ended December 28, 1997 was approximately $656,000, $121,000, $1,176,000 and $2,203,000, respectively. During the six months ended June 29, 1997 and June 28, 1998, rent expense was approximately $698,000 and $1,311,000, respectively. Contingent rent included in rent expense during the year ended December 31, 1995, the period from January 1, 1996 to February 28, 1996, the period from February 29, 1996 to December 29, 1996 and for the year ended December 28, 1997 was approximately $152,000, $76,000, $225,000 and $605,000, respectively. During the six months ended June 29, 1997 and June 28, 1998, contingent rent included in rent expense was approximately $270,000 and $493,000, respectively. At December 28, 1997, the Company had entered into other lease agreements for restaurant facilities currently under construction or yet to be constructed. In addition, the leases also contain provisions for F-20 71 P.F. CHANG'S CHINA BISTRO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) additional contingent rent based upon gross sales, as defined in the leases. Future minimum lease payments under operating leases (including restaurants to be opened in 1998) are as follows (in thousands): 1998............................................... $ 3,158 1999............................................... 4,161 2000............................................... 4,220 2001............................................... 4,172 2002............................................... 4,145 Thereafter......................................... 38,537 ------- Total minimum lease payments....................... $58,393 =======
The Company leases a building and certain furniture and equipment from a partnership in which the Company owns an approximate six percent interest. Annual rent payments are contingent based on a percentage of gross revenues. The respective period rent expense are included in the above disclosed amounts. 10. BENEFIT PLAN Effective July 1, 1997, the Company adopted the 401(k) Defined Contribution Benefit Plan, which covers substantially all employees of the Company that have completed one year of service and have attained the age of 21 years old. The plan permits participants to contribute to the plan, subject to Internal Revenue Code restrictions, and the plan also permits the Company to make discretionary matching contributions. During the year ended December 28, 1997 and for the six months ended June 28, 1998, the Company did not make any contributions to the Plan. 11. SUBSEQUENT EVENTS On June 2, 1998, the Company's Board of Directors approved, subject to stockholder approval, a one-for-two reverse stock split of the common and preferred stock and made conforming adjustments on the terms of all outstanding common stock equivalents except for the par value and authorized shares. All shares and per share information in the accompanying consolidated financial statements has been retroactively adjusted to reflect the reverse split. During 1998, the Company's Board of Directors approved, subject to stockholder approval, the 1998 Stock Option Plan (1998 Plan) which provides for discretionary grants of incentive stock options and nonqualified stock options to the Company's employees including officers, directors, consultants, advisors, and other independent contractors. A total of 280,000 shares have been reserved for issuance under the 1998 Plan. The option price per share for an incentive stock option may not be less than 100% of the fair market value of a share of common stock on the grant date. The option price per share for a nonstatutory stock option may not be less than 85 percent of the fair market value of a share of common stock on the grant date. The option price per share for an incentive stock option granted to a person owning stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company (or a parent or subsidiary) may not be less than 110 percent of the fair market value of a share of common stock on the grant date. The Company's Compensation Committee has the authority to, among other things, determine the vesting schedule for each option granted. All options expire within 10 years. The 1998 Plan includes an automatic grant program for outside directors. Pursuant to this program, each outside director will be granted an option to purchase 10,000 shares of common stock at the time he or she is first elected or appointed a director of the Company. In addition, each outside director remaining in office will be granted an option to purchase 2,500 shares on the day following each annual meeting of stockholders. During 1998, the Company's Board of Directors approved, subject to stockholder approval, the 1998 Employee Stock Purchase Plan (Purchase Plan) and reserved 400,000 shares for issuance thereunder. The Purchase Plan permits eligible employees to purchase common stock at a discount, but only through payroll deductions, during concurrent 24 month offering periods. Each offering period will be divided into four consecutive 6 month purchase periods. The price at which stock is purchased under the Purchase Plan is equal to 85 percent of the lower of the fair market value of the common stock on the first day of the offering period and the fair market value of the common stock on the last day of the purchase period. F-21 72 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE Prospectus Summary......................... 3 Risk Factors............................... 6 Use of Proceeds............................ 11 Dividend Policy............................ 11 Capitalization............................. 12 Dilution................................... 13 Selected Consolidated Financial and Operating Data........................... 14 Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 16 Business................................... 25 Management................................. 34 Certain Transactions....................... 39 Principal and Selling Stockholders......... 41 Description of Capital Stock............... 43 Shares Eligible for Future Sale............ 46 Underwriting............................... 47 Legal Matters.............................. 49 Experts.................................... 49 Additional Information..................... 49 Index to Financial Statements.............. F-1
------------------ UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ SHARES [P.F. CHANG'S LOGO] COMMON STOCK ------------------------- PROSPECTUS ------------------------- DONALDSON, LUFKIN & JENRETTE NATIONSBANC MONTGOMERY SECURITIES LLC DAIN RAUSCHER WESSELS a division of Dain Rauscher Incorporated , 1998 - ------------------------------------------------------ - ------------------------------------------------------ 73 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all expenses, other than the underwriting discounts and commissions, payable by the Registrant in connection with the sale of the Common Stock being registered. The Company is paying all of the expenses incurred on behalf of the Selling Stockholders (other than underwriting discounts and commissions). All amounts shown are estimates except for the registration fee and the NASD filing fee. Registration fee............................................ $ 16,963 NASD filing fee............................................. 6,250 Nasdaq National Market fee.................................. 41,250 Blue sky qualification fees and expenses.................... 5,000 Printing and engraving expenses............................. 100,000 Legal fees and expenses..................................... 250,000 Accounting fees and expenses................................ 100,000 Transfer agent and registrar fees........................... 10,000 Fee for Custodian for Selling Stockholders.................. 10,000 Miscellaneous............................................... 15,537 -------- Total............................................. $550,000 ========
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. Section 145 of the DGCL permits indemnification of officers, directors, and other corporate agents under certain circumstances and subject to certain limitations. The Registrant's Amended and Restated Certificate of Incorporation and By-laws provide that the Registrant shall indemnify its directors, officers, employees and agents to the full extent permitted by the DGCL, including circumstances in which indemnification is otherwise discretionary under Delaware law. In addition, the Registrant has entered into separate indemnification agreements with its directors and executive officers which require the Registrant, among other things, to indemnify them against certain liabilities which may arise by reason of their status or service (other than liabilities arising from acts or omissions not in good faith or willful misconduct). These indemnification provisions and the indemnification agreements entered into between the Registrant and its executive officers and directors may be sufficiently broad to permit indemnification of the Registrant's executive officers and directors for liabilities (including reimbursement of expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). The Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement provides for indemnification by the Underwriters of the Registrant and its officers and directors for certain liabilities arising under the Securities Act, or otherwise. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since July 31, 1995, the Registrant and its Predecessors have sold and issued the following unregistered securities: (a) Issuances of Shares of Common Stock. On January 31, 1996, the Registrant issued a total of 500 shares of Common Stock to Paul Fleming in exchange for an aggregate purchase price of $100.00, or $0.20 per share. On February 28, 1996, the Registrant issued a total of 2,499,500 shares of Common Stock to Paul and Kelly Fleming in exchange for their interests in the Predecessors. (b) Issuances of Shares of Preferred Stock. On February 1, 1996, the Registrant issued a total of 2,487,500 shares of Series A Convertible Redeemable Preferred Stock ("Series A Preferred Stock") and Warrants exercisable for a total of 621,875 shares of Series A Preferred Stock to accredited investors for an aggregate purchase price of $9,950,000. II-1 74 In September 1996, the Company issued an additional 189,635 shares of Series A Preferred Stock to accredited investors for an aggregate purchase price of $758,540. On March 31, 1998 and June 30, 1998, the Company issued an aggregate of 80,913 shares of Series A Preferred Stock as paid-in-kind dividends to holders of Series A Preferred Stock. On May 1, 1997, the Registrant issued a total of 758,565 shares of Series B Convertible Redeemable Preferred Stock to accredited investors for an aggregate offering price of $6,599,519. (c) Option Issuances to, and Exercises by, Employees and Directors. From June 28, 1996 to June 28, 1998, the Registrant issued options to purchase a total of 1,009,635 shares of Common Stock at a weighted-average exercise price of $3.87 per share to 45 employees. No consideration was paid to the Registrant by any recipient of any of the foregoing options for the grant of any such options. As of June 28, 1998, no employees had exercised their options. (d) Warrants In connection with the original capitalization of the Company, warrants to purchase 62,190 shares of Series A Preferred Stock at $4.00 per share were issued to an investment bank. The warrants expire February 28, 2001. There were no underwriters employed in connection with any of the transactions set forth in Item 15. The issuances described in Items 15(a) and 15(b) were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. In addition, the issuances described in Item 15(c) were deemed exempt from registration under the Securities Act in reliance on Rule 701 promulgated thereunder as transactions pursuant to compensatory benefit plans and contracts relating to compensation. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. All recipients either received adequate information about the Registrant or had access, through employment or other relationships, to such information. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT 1.1* Form of Underwriting Agreement. 3.1 Certificate of Incorporation of the Company. 3.2 By-laws. 4.1* Specimen Common Stock Certificate. 4.2 Amended and Restated Registration Rights Agreement dated May 1, 1997. 5.1* Opinion of Gray Cary Ware & Freidenrich LLP. 10.1 Form of Indemnification Agreement for directors and executive officers. 10.2 1998 Stock Option Plan and forms of agreement thereunder. 10.3 1997 Restaurant Manager Stock Option Plan and forms of Agreement thereunder. 10.4 1996 Stock Option Plan and forms of Agreement thereunder. 10.5 1998 Employee Stock Purchase Plan. 10.6* Employment Agreement between Paul M. Fleming and the Company dated January 31, 1996. 10.7 Series A Preferred Stock Purchase Agreement dated February 1, 1996. 10.8 Series B Preferred Stock Purchase Agreement dated May 1, 1997. 10.9 Amended and Restated Revolving Line of Credit Loan Agreement between the Company and FFCA dated June 20, 1998. 10.10 Office Lease between the Company and U.S. West Business Resources, Inc. dated February 15, 1997. 21.1 List of Subsidiaries. 23.1 Consent of Independent Auditors (see page II-5). 23.2* Consent of Counsel (included in Exhibit 5.1).
II-2 75
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT 24.1 Power of Attorney (see page II-4). 27.1 Financial Data Schedule.
- ------------------------------ * To be filed by amendment. (b) Financial Statement Schedules. None. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, employee or agent of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer, employee or agent in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; and (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. II-3 76 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Scottsdale, County of Maricopa, State of Arizona, on the 23rd day of July 1998. P.F. Chang's China Bistro, Inc. By: /s/ RICHARD L. FEDERICO ------------------------------------ Richard L. Federico Chief Executive Officer and President (Principal Executive Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Richard L. Federico and Robert T. Vivian, or either of them, as his attorney-in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Registration Statement, including post-effective amendments and any and all new registration statements filed pursuant to Rule 462 under the Securities Act in connection with or related to the offering contemplated by this Registration Statement as amended, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorney-in-fact or his substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE /s/ RICHARD L. FEDERICO Chief Executive Officer, President July 23, 1998 - --------------------------------------------------- and Director (Principal Richard L. Federico Executive Officer) /s/ ROBERT T. VIVIAN Chief Financial Officer and July 23, 1998 - --------------------------------------------------- Secretary (Principal Financial Robert T. Vivian and Accounting Officer) /s/ PAUL M. FLEMING Director July 23, 1998 - --------------------------------------------------- Paul M. Fleming /s/ J. MICHAEL CHU Director July 23, 1998 - --------------------------------------------------- J. Michael Chu /s/ GERALD R. GALLAGHER Director July 23, 1998 - --------------------------------------------------- Gerald R. Gallagher /s/ R. MICHAEL WELBORN Director July 23, 1998 - --------------------------------------------------- R. Michael Welborn /s/ JAMES G. SHENNAN, JR. Director July 23, 1998 - --------------------------------------------------- James G. Shennan, Jr. /s/ YVES SISTERON Director July 23, 1998 - --------------------------------------------------- Yves Sisteron
II-4 77 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS CONSENT OF ERNST & YOUNG LLP We consent to the reference to our firm under the captions "Selected Consolidated Financial and Operating Data" and "Experts" and to the use of our report dated January 26, 1998, except Note 11 as to which the date is , 1998, in the Registration Statement (Form S-1 No. ) and related Prospectus of P.F. Chang's China Bistro, Inc. for the registration of shares of its common stock ERNST & YOUNG LLP Phoenix, Arizona , 1998 - -------------------------------------------------------------------------------- The foregoing consent is in the form that will be signed upon the completion of the one-for-two reverse stock split described in Note 11 to the consolidated financial statements. /s/ ERNST & YOUNG LLP Phoenix, Arizona July 22, 1998 II-5 78 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 1.1* Form of Underwriting Agreement 3.1 Certificate of Incorporation of the Company 3.2 By-laws 4.1* Specimen Common Stock Certificate 4.2 Amended and Restated Registration Rights Agreement dated May 1, 1997 5.1* Opinion of Gray Cary Ware & Freidenrich LLP 10.1 Form of Indemnification Agreement for directors and executive officers 10.2 1998 Stock Option Plan and forms of agreement thereunder 10.3 1997 Restaurant Manager Stock Option Plan and forms of Agreement thereunder 10.4 1996 Stock Option Plan and forms of Agreement thereunder 10.5 1998 Employee Stock Purchase Plan 10.6* Employment Agreement between Paul M. Fleming and the Company dated January 31, 1996 10.7 Series A Preferred Stock Purchase Agreement dated February 1, 1996 10.8 Series B Preferred Stock Purchase Agreement dated May 1, 1997 10.9 Amended and Restated Revolving Line of Credit Loan Agreement between the Company and FFCA dated June 20, 1998 10.10 Office Lease between the Company and U.S. West Business Resources, Inc. dated February 15, 1997 21.1 List of Subsidiaries 23.1 Consent of Independent Auditors (see page II-5) 23.2* Consent of Counsel (included in Exhibit 5.1) 24.1 Power of Attorney (see page II-4) 27.1 Financial Data Schedule
- ------------------------------ * To be filed by amendment. EX-3.1 2 EX-3.1 1 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF P.F. CHANG'S CHINA BISTRO, INC. FIRST: The name of the corporation (hereinafter referred to as the "Corporation") is: P.F. CHANG'S CHINA BISTRO, INC. SECOND: The address of the registered office of the Corporation in the State of Delaware is 1013 Centre Road, Wilmington, New Castle County, Delaware 19805-1297. The name of its registered agent at such address is The Prentice-Hall Corporation System, Inc. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The aggregate number of all classes of shares which the Corporation shall have authority to issue is Ten Million (10,000,000) shares divided into two classes of which Two Million (2,000,000) shares of par value $.01 per share shall be designated Preferred Stock and Eight Million (8,000,000) shares of par value $.01 per share shall be designated Common Stock. At all times, each holder of common stock of the Corporation shall be entitled to one vote for each share of common stock held by such stockholder standing in the name of such stockholder on the books of the Corporation. The Board of Directors is authorized, subject to limitations prescribed by law, to provide for the issuance of shares of Preferred Stock in one or more series, to establish the 1 2 number of shares to be included in each such series, and to fix the designations, powers, preferences, and rights of the shares of each such series, and any qualifications, limitations or restrictions thereof. FIFTH: The name and address of the Incorporator is as follows: Paul M. Fleming 2201 E. Camelback Road Phoenix, Arizona 85016 SIXTH: In furtherance and not in limitation of the power conferred by statute, the Board of Directors is expressly authorized to make, alter or repeal the Bylaws of the Corporation. SEVENTH: No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for the breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involved intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is amended to authorize corporate actions further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of this Article SEVENTH by the shareholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. The Corporation may adopt such provisions with respect to indemnification of 2 3 directors, officers, or employees of the Corporation, consistent with this Article SEVENTH, as may be set forth from time to time in the Bylaws of the Corporation or a resolution adopted by the Board of Directors. EIGHTH: Election of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide. NINTH: The Corporation reserves the right to amend, alter, change or repeal any provisions contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by the law of the State of Delaware. All rights conferred upon stockholders herein are granted subject to this reservation. I, THE UNDERSIGNED, being the sole incorporator hereinbefore named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware, do make this certificate, herein declaring and certifying that this is my act and deed and the facts herein stated are true, and accordingly have hereunto set my hand this 30th day of January, 1996. /s/ Paul M. Fleming ------------------------- Paul M. Fleming, Sole Incorporator 3 4 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF P.F. CHANG'S CHINA BISTRO, INC. P.F. Chang's China Bistro, Inc., a corporation organized and existing under and by virtue of the General Corporation's Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That the Board of Directors of the corporation, by unanimous written consent, adopted a resolutions proposing and declaring advisable the following amendments to the Certificate of Incorporation of the corporation: RESOLVED, that Article IV of the Certificate of Incorporation of P.F. Chang's China Bistro, Inc., a Delaware corporation (the "Corporation"), is amended in its entirety to read as follows: FOURTH: The aggregate number of all classes of shares which the Corporation shall have authority to issue is Thirty Million (30,000,000) shares divided into two classes of which Ten Million (10,000,000) shares of par value $.001 per share shall be designated Preferred Stock and Twenty Million (20,000,000) shares of par value $.001 per share shall be designated Common Stock. At all times, each holder of Common Stock of the Corporation shall be entitled to one vote for each share of Common Stock held by such stockholder standing in the name of such stockholder on the books of the Corporation. The Board of Directors is authorized, subject to limitations prescribed by law, to provide for the issuance of shares of Preferred Stock in one or more series, to establish the number of shares to be included in each such series, and to fix the designations, powers, preferences, and rights of the 5 shares of each such series, and any qualifications, limitations, or restrictions thereof. FURTHER RESOLVED that the resolutions of the Board of Directors as set forth in the Certificate of Designations, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof of Series A Convertible Preferred Stock of P.F. Chang's China Bistro, Inc. are amended to increase the number of shares designated as "Series A Convertible Preferred Stock" to 7,500,000 shares and to change the par value of such shares to $.001 per share. FURTHER RESOLVED that in order to effect a 10:1 stock split of the outstanding capital stock of the Corporation, effective upon the date of filing (the "Effective Date") of a Certificate of Amendment with the Secretary of State of the State of Delaware, each issued and outstanding share of the Corporation's capital stock, including without limitation all issued and outstanding shares of Common Stock and Series A Convertible Preferred Stock and options and warrants exercisable for such shares, shall be divided into 10 shares of validly issued, fully paid and non-assessable stock of the same class or series. As soon as practicable after the Effective Date, the Corporation shall request in writing the holders of its capital stock outstanding as of the Effective Date to surrender certificates representing the Corporation's capital stock to the Corporation and each such shareholder shall receive upon such surrender a stock certificate or certificates to evidence and represent the number of shares of post-split capital stock to which such shareholder is entitled. SECOND: That in lieu of a meeting and vote of stockholders, the stockholders have given written consent to the amendments in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware and written notice of the adoption of the amendments has been given as provided in Section 228 of the General Corporation Law of the State of Delaware to every stockholder entitled to such notice. 6 THIRD: That the amendments were duly adopted in accordance with the applicable provisions of Sections 242 and 228 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, P.F. Chang's China Bistro, Inc. has caused this certificate to be signed by Richard L. Federico, its President, this 24th day of April, 1997. P.F. Chang's China Bistro, Inc. By /s/ R. L. Federico ------------------------------- Richard L. Federico, President 7 AMENDED AND RESTATED CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF PREFERRED STOCK AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF OF SERIES A CONVERTIBLE PREFERRED STOCK OF P.F. CHANG'S CHINA BISTRO, INC. Pursuant to Section 151 of the General Corporation Law of the State of Delaware P.F. CHANG'S CHINA BISTRO, INC., a Delaware corporation (the "Corporation"), certifies that pursuant to the authority contained in Article FOURTH of its Certificate of Incorporation (the "Certificate of Incorporation") and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware (the "DGCL"), the Board of Directors of the Corporation by written consent dated as of April 30, 1997, duly adopted the following resolution, which resolution (i) amended and restated prior resolutions of the Board of Directors of the Corporation adopted by written consent as of February 22, 1996 pursuant to which the Corporation had originally established the Series A Preferred Stock (as defined below), (ii) was approved by written consent of the holders of the Series A Preferred Stock, and (iii) remains in full force and effect on the date hereof: RESOLVED, that, pursuant to the authority expressly granted to and vested in the Board of Directors of the Corporation in accordance with the provisions of its Certificate of Incorporation, a series of Preferred Stock of the Corporation be and hereby is established, consisting of 7,700,000 shares, $.001 par value per share, to be designated the "Series A Convertible Preferred Stock" (hereinafter, "Series A Preferred Stock"); that the Board of Directors be and hereby is authorized to issue such shares of Series A Preferred Stock from time to time and for such consideration and on such terms as the Board of Directors shall determine; and that, subject to the limitations provided by law and by the Certificate of Incorporation, the voting powers, preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof shall be as follows: 8 1. Certain Definitions. Unless the context otherwise requires, the terms defined in this paragraph 1 shall have, for all purposes of this resolution, the meanings herein specified (with terms defined in the singular having comparable meanings when used in the plural). "Affiliate" shall have the meaning given to such term under Rule 12b-2 of the rules promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934. "Annual Per Share Cash Dividend Amount" shall mean a cash payment equal to ten percent (10%) per annum of the Liquidation Price of one share of the Series A Preferred Stock. "Annual Per Share PIK Dividend Amount" shall mean a fraction of one share of Series A Preferred Stock equal to six percent (6%) per annum of one share of the Series A Preferred Stock. "Business Day" shall mean a day other than a Saturday, a Sunday or any other day on which banking institutions in New York, New York are authorized or obligated by law to close. "Common Equity" shall mean all shares now or hereafter authorized of any class of common stock of the Corporation, however, designated, including the Comon Stock, and any other stock of the Corporation, howsoever designated, authorized after the Initial Issue Date, which has the right (subject always to prior rights of any class or series of preferred stock) to participate in the distribution of the assets and earnings of the Corporation without limit as to per share amount. "Common Stock" shall mean the common stock, par value $.001 per share, of the Corporation. "Corporation's Affiliates" shall mean (i) PFCCB Scottsdale, L.L.C., an Arizona limited liability company; (ii) PFCCB Newport Beach, L.L.C., an Arizona limited liability company; (iii) P.F. Chang's III, L.L.C., an Arizona limited liability company; (iv) P.F. Chang's IV, L.L.C., an Arizona limited liability company; (v) PFC Building III Limited Partnership, an Arizona limited partnership; (vi) PFCCB LouTex Joint Venture, an Arizona general partnership; and (vii) PFCCB NUC LLC, an Arizona limited liability company. "Conversion Date" shall have the meaning set forth in subparagraph 4.1(b) below. 2 9 "Debt" shall mean any indebtedness, contingent or otherwise, of any person in respect of borrowed money (whether or not the recourse of the lender is to the whole of the assets of such person or only to a portion thereof) or evidenced by bonds, notes, debentures or similar instruments or letters of credit or representing the balance deferred and unpaid of the purchase price of any property or interest therein, except any such balance that constitutes a trade payable, if and to the extent such indebtedness would appear as a liability upon a balance sheet of such person prepared on a consolidated basis in accordance with generally accepted accounting principles. "Debt to Equity Ratio" shall mean the ratio of (i) the total Indebtedness to (ii) Total Stockholders' Equity. "Delinquent Mandatory Redemption Price" shall mean, with respect to each share of Series A Preferred Stock, $2.00 (adjusted for stock splits, subdivisions, combinations and similar transactions), plus all accrued and unpaid dividends payable in respect of such a share of the Series A Preferred Stock, plus an amount thereon accruing from the Mandatory Redemption Date relating thereto at the Increasing Rate. "Final Mandatory Redemption Date" shall mean May 1, 2004 or, if such day is not a Business Day, the next succeeding Business Day. "Increasing Rate" shall mean, with respect to any obligation, an annual rate equal to the Prime Rate, plus (i) two percent, plus (ii) one percent after the first completed six-month period that the obligation subject to the Increasing Rate has been outstanding and has not been paid in full. "Indebtedness" shall mean the Debt of the Corporation or a subsidiary of the Corporation plus, to the extent not otherwise included, (i) the guaranty of any Debt of any other person; and (ii) obligations in respect of borrowed money secured by any Lien to which any property or asset owned or held by the Corporation or a subsidiary is subject, whether or not the obligations secured thereby shall have been assumed by the Corporation or such subsidiary; and (iii) capitalized lease obligations. "Initial Issue Date" shall mean the date that shares of Series A Preferred Stock are first issued by the Corporation. "Initial Mandatory Redemption Date" shall mean May 1, 2003 or, if such day is not a Business Day, the next succeeding Business Day. "Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment, encumbrance, lien (statutory or other) or other security interest of any kind or nature whatsoever (excluding preferred stock or equity related preferences) including, without limitation, those created by, arising under or evidenced by any conditional sale or other title retention agreement, the interest of a lessor under a capital 3 10 lease obligation, or any financing lease having substantially the same economic effect as any of the foregoing. "Liquidation Price" shall mean $2.00 per share of Series A Preferred Stock (adjusted for stock splits, subdivisions, combinations and similar transactions), plus all accrued and unpaid dividends payable in respect of such share of Series A Preferred Stock pursuant to subparagraph 2(c). "Mandatory Redemption Date" shall mean the Initial Mandatory Redemption Date and the Final Mandatory Redemption Date. "Mandatory Redemption Obligation" shall have the meaning set forth in subparagraph 5(c) below. "Non-Investor Directors" shall mean those directors elected to the Corporation's Board of Directors other than those directors that are elected solely by the holders of Series A Preferred Stock or Parity Stock pursuant to the Shareholders Agreement. "Parity Stock" shall mean any class or series of capital stock of the Corporation ranking on a parity with the Series A Preferred Stock as to (i) priority of payment of cash and stock dividends and other distributions, (ii) priority of payment upon liquidation, dissolution or winding up of the Corporation, and (iii) the time of, and priority of payment upon, any mandatory redemption. For purposes of this definition, differences between any class or series of capital stock and the Series A Preferred Stock as to the amount of the liquidation price (or other fixed amount) to which any cash dividend rate is applied, the amount of the liquidation price payable upon liquidation, dissolution or winding up of the Corporation, the amount of the redemption price payable upon any mandatory redemption, or the time when cash or stock dividends or other distributions shall begin to accrue, shall not be considered in determining whether such class or series of capital stock is on a parity with the Series A Preferred Stock. "PIK Dividends" shall mean the "paid-in-kind" dividends as set forth in subparagraph 2(a) below. "PIK Dividend Payment Date" shall mean March 31, June 30, September 30, and December 31, of each year during the PIK Dividend Payment Period. "PIK Dividend Payment Period" shall mean the period from, and including, January 1, 1998, to and including the Final Mandatory Redemption Date. "PIK Dividend Period" shall mean the period from, and including, January 1, 1998, to, but not including, the first PIK Dividend Payment Date and thereafter, each quarterly period, including any PIK Dividend Payment Date to, but not including, the next PIK Dividend Payment Date. 4 11 "PIK Record Date" shall mean the date that is ten Business Days prior to any PIK Dividend Payment Date. "Preferred Cash Dividends" shall mean the cash dividends as set forth in subparagraph 2(f) below. "Prime Rate" shall mean the rate announced as the "prime rate" by NationsBank, N.A. whether or not such rate is actually charged. "Pro Rata" shall mean, in the case of stock dividends, stock dividends of the same class or series as the stock upon which the dividends are being paid and that are proportionate to the number of outstanding shares of such stock, and, in the case of cash dividends or dividends in property, cash dividends or dividends in property that are proportionate to the liquidation price of the class or series of stock upon which the dividends are being paid. "Qualified Initial Public Offering" shall mean an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933 of shares of the Common Stock, (i) the aggregate gross proceeds of which equal or exceed $15,000,000 and (ii) the per share offering price of which equals or exceeds $10.00; provided, however, that the per share offering price referred to in clause (ii) shall be adjusted to reflect the effect of any stock split or any subdivision, reclassification, combination or like event of or with respect to outstanding shares of Common Stock occurring after May 1, 1997. "Quoted Price" shall mean with respect to any security the arithmetic mean of the last bid and ask price for one (1) share of the applicable security as reported by the National Association of Securities Dealers, Inc., Automatic Quotations System, National Market System ("NASDAQ"), or, if the applicable security is listed or admitted for trading on a securities exchange, the arithmetic mean of the high and low trading prices during the relevant trading day for one (1) share of the applicable security on the principal exchange on which the applicable security is listed or admitted for trading (which shall be for consolidated trading if applicable to such exchange), in each case, on the Trading Day in question. "Redemption Price" shall mean, with respect to each share of Series A Preferred Stock, $2.00 (adjusted for stock splits, subdivisions, combinations and similar transactions) plus all accrued and unpaid dividends payable in respect of such share of the Series A Preferred Stock. "Series A Directors" shall mean those members of the Board of Directors of the Corporation elected solely by the holders of the Series A Preferred Stock pursuant to the Shareholders Agreement. 5 12 "Shareholders Agreement" shall mean the Amended and Restated Shareholders Agreement among the Corporation and the holders of the Common Stock, Series A Preferred Stock and Parity Stock dated as of May 1, 1997, as the same may be amended from time to time. "Stock Purchase Agreement" shall mean the Stock Purchase Agreement among the Corporation, Paul Fleming and the Purchasers listed therein dated as of February 1, 1996, as the same may be amended from time to time. "Subordinate Stock" shall mean the Common Equity and any class or series of capital stock of the Corporation, however designated, which is not entitled to receive (i) any dividends unless all dividends required to have been paid or declared and set apart for payment on the Series A Preferred Stock shall have been so paid or declared and set apart for payment or (ii) any assets upon liquidation, dissolution or winding up of the affairs of the Corporation until the Series A Preferred Stock shall have received the entire amount to which such stock is entitled upon such liquidation, dissolution or winding up. "Total Stockholders' Equity" shall mean the stockholders' equity of the Corporation as it appears in the monthly balance sheet of the Corporation. "Trading Days" shall mean any day on which any market in which the applicable security is then traded and in which a Quoted Price may be ascertained is open for business. 2. Dividends. (a) The record holders of Series A Preferred Stock on each PIK Record Date shall receive on each PIK Dividend Payment Date during the PIK Dividend Payment Period per share dividends in additional fully paid and nonassessable shares of Series A Preferred Stock legally available for such purpose (such dividends being herein called "PIK Dividends"). PIK Dividends shall be paid by delivering to the record holders of Series A Preferred Stock a number of shares of Series A Preferred Stock equal to (i) the number of shares of Series A Preferred Stock held by such holder on the applicable PIK Record Date, multiplied by (ii) twenty-five percent (25%) of the Annual Per Share PIK Dividend Amount. Except as set forth in subparagraph 2(b) below, the Corporation shall not issue fractional shares of Series A Preferred Stock to which holders may become entitled pursuant to this subparagraph, but in lieu thereof, the Corporation shall at the option of the holder either (i) deliver its check in an amount equal to the applicable fraction of one (1) share of Series A Preferred Stock multiplied by $2.00 (adjusted for stock splits, subdivisions, combinations or other similar transactions) (the "PIK Cash Dividend Payment") or (ii) defer delivery of the fractional PIK Cash Dividend Payment to the holder and apply such amount to PIK Dividends issued to such holder on the subsequent PIK Dividend Date. Any additional shares of Series A Preferred Stock issued pursuant to this paragraph shall be governed by this 6 13 resolution and shall be subject in all respects, except as to the date of issuance and date from which PIK Dividends accrue and cumulate as set forth below, to the same terms as the shares of Series A Preferred Stock originally issued hereunder; provided, however, in no event shall any PIK Dividends accrue prior to January 1, 1998. (b) Prior to each PIK Record Date immediately preceding each PIK Dividend Payment Date, the Board of Directors of the Corporation shall declare PIK Dividends on the Series A Preferred Stock in accordance with subparagraph 2(a) above, payable on the next PIK Dividend Payment Date. PIK Dividends (which shall include, for purposes of this subparagraph, any PIK Cash Dividend Payment due pursuant to subparagraph 2(a)) on shares of Series A Preferred Stock shall accrue and be cumulative from the later of (i) January 1, 1998 and (ii) the date of issuance of such shares, notwithstanding the failure of the Board of Directors to declare and/or issue PIK Dividends with respect to any PIK Dividend Period. PIK Dividends shall be payable in arrears during the PIK Dividend Payment Period on each PIK Dividend Payment Date, commencing on the first PIK Dividend Payment Date subsequent to January 1, 1998, and for shares issued as PIK Dividends, commencing on the first PIK Dividend Payment Date after such shares are issued. If any PIK Dividend Payment Date occurs on a day that is not a Business Day, any accrued PIK Dividends otherwise payable on such PIK Dividend Payment Date shall be paid on the next succeeding Business Day. PIK Dividends shall be paid on each PIK Dividend Payment Date to the holders of record of the Series A Preferred Stock as their names shall appear on the share register of the Corporation on the PIK Record Date immediately preceding such PIK Dividend Payment Date. If a PIK Cash Dividend Payment on account of PIK Dividends that would otherwise be issued as fractional shares may not legally be paid in the full amount to which shares of Series A Preferred Stock are entitled with respect to any PIK Dividend Period, dividends in the full preferential amount hereby provided shall be, to the extent legally and contractually permissible, declared and paid as PIK Dividends in the form of shares of Series A Preferred Stock (including fractional shares thereof). PIK Dividends on account of arrears for any past PIK Dividend Periods may be declared and paid at any time to the holders of record on the PIK Record Dates applicable to such past PIK Dividend Periods. (c) In addition to the PIK Dividends and the PIK Cash Dividend Payments referred to in subparagraph 2(a) hereof and the Preferred Cash Dividends referred to in subparagraph 2(f), at any time during which any shares of Series A Preferred Stock remain outstanding, the Corporation may declare, pay or set apart for payment cash and/or property to be distributed or paid as a dividend in respect of shares of Series A Preferred Stock. The foregoing notwithstanding, no dividends may be declared or paid on the Series A Preferred Stock pursuant to this subparagraph 2(c) unless Pro Rata dividends are contemporaneously declared or paid on any then outstanding Parity Stock. (d) So long as any shares of Series A Preferred Stock shall be outstanding: 7 14 (i) the Corporation shall not declare, pay or set apart for payment on any Subordinate Stock any dividends or distributions whatsoever, whether in cash, property or otherwise (other than dividends payable in shares of the class or series upon which such dividends are declared or paid, or payable in shares of Common Stock with respect to Subordinate Stock other than Common Stock, together with cash in lieu of fractional shares), nor shall any Subordinate Stock be purchased, redeemed or otherwise acquired by the Corporation or any of its subsidiaries of which it owns not less than a majority of the outstanding voting power, nor shall any monies be paid or made available for a sinking fund for the purchase or redemption of any Subordinate Stock, without the prior written consent of the holders of at least a majority of the outstanding shares of Series A Preferred Stock and unless all dividends to which the holders of Series A Preferred Stock shall have been entitled for all previous PIK Dividend Periods shall have been (A) paid or (B) declared and a sum of money, in the case of dividends payable in cash, sufficient for the payment thereof has been set apart; (ii) the Corporation shall not declare, pay or set apart for payment on any Parity Stock any dividends or distributions whatsoever, whether in cash, property or otherwise, unless Pro Rata dividends are contemporaneously declared, paid or set apart for payment on the Series A Preferred Stock; and (iii) neither the Corporation nor any of its subsidiaries of which it owns not less than a majority of the outstanding voting power shall purchase, redeem or otherwise acquire any Parity Stock, nor pay any monies to or make any monies available for a sinking fund for the purchase or redemption of any Parity Stock, without the prior written consent of the holders of at least a majority of the outstanding shares of Series A Preferred Stock and unless all dividends to which the holders of Series A Preferred Stock shall have been entitled for all previous PIK Dividend Periods shall have been (A) paid or (B) declared and a sum of money, in the case of dividends payable in cash, sufficient for the payment thereof has been set apart, except that the Corporation may redeem Parity Stock so long as it contemporaneously redeems a proportionate percentage of the outstanding Series A Preferred Stock, ratably among the holders thereof. (e) In the event that full dividends, in cash or property, if declared, are not paid or made available to the holders of all outstanding shares of Series A Preferred Stock and Parity Stock and funds or property available for payment of dividends shall be insufficient to permit payment in full to holders of all such stock of the full preferential amounts to which they are then entitled, then the entire amount available for payment of dividends shall be distributed ratably among all such holders of Series A Preferred Stock and Parity Stock in proportion to the full amount to which they would otherwise be respectively entitled. 8 15 (f) Notwithstanding anything to the contrary set forth herein, with respect to any PIK Dividend otherwise payable on any PIK Dividend Payment Date pursuant to this paragraph 2, the Corporation may, upon the unanimous approval of the Non-Investor Directors by vote on or prior to the applicable PIK Record Date, declare on such PIK Record Date and pay on such PIK Dividend Payment Date a cash dividend (a "Preferred Cash Dividend") to all record holders of Series A Preferred Stock on such PIK Record Date in an amount per share equal to twenty-five percent (25%) of the Annual Per Share Cash Dividend Amount. Payment of such Preferred Cash Dividend on such PIK Dividend Payment Date shall be in lieu of the payment of the PIK Dividend on such PIK Dividend Payment Date. The foregoing notwithstanding, no Preferred Cash Dividend may be declared and paid on the Series A Preferred Stock unless Pro Rata cash dividends are contemporaneously declared and then paid on any then outstanding Parity Stock. (g) Notwithstanding anything contained herein to the contrary, no dividends on shares of Series A Preferred Stock shall be declared by the Board of Directors of the Corporation or paid or set apart for payment by the Corporation at such time if such declaration or payment shall be restricted or prohibited by law. 3. Distributions Upon Liquidation, Dissolution or Winding Up. (a) In the event of any voluntary or involuntary liquidation, dissolution or other winding up of the affairs of the Corporation, before any payment or distribution shall be made to the holders of Subordinate Stock and contemporaneously with any payment or distribution to the holders of Parity Stock, the holders of Series A Preferred Stock shall be entitled to be paid out of the assets of the Corporation in cash, or, if the Corporation does not have sufficient cash on hand to pay such amounts, property of the Corporation at its fair market value as determined by the Board of Directors of the Corporation, the greater of (i) the Liquidation Price per share of Series A Preferred Stock, or (ii) such amount per share of Series A Preferred Stock as would have been payable had each such share been converted into Common Stock pursuant to paragraph 4 immediately prior to such liquidation, dissolution or other winding up of the affairs of the Corporation. Immediately preceding such liquidation, dissolution or winding up, adjustment shall be made for accrued but unpaid dividends (including, without limitation, PIK Dividends). (b) If, upon any such liquidation, dissolution or other winding up of the affairs of the Corporation, the assets of the Corporation shall be insufficient to permit the payment in full of the Liquidation Price for each share of the Series A Preferred Stock and the applicable liquidation price for each share of any Parity Stock then outstanding, then the assets of the Corporation shall be ratably distributed among the holders of Series A Preferred Stock and Parity Stock in proportion to the full amounts to which they would otherwise be respectively entitled if all amounts thereon were paid in full. Neither the consolidation or merger of the Corporation into or with another corporation or corporations, nor the sale, lease, transfer or conveyance of all or any 9 16 portion of the assets of the Corporation to another corporation or any other entity shall be deemed a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of this paragraph 3. 4. Conversion Rights. 4.1 Conversion at the Option of the Holder. (a) At any time before the close of business on the Final Mandatory Redemption Date (unless the Corporation shall default in payment of the Redemption Price or the Delinquent Mandatory Redemption Price, in which case, the conversion rights set forth in this paragraph shall continue until the cure of any such default), each holder of Series A Preferred Stock may, at its option, convert each share of Series A Preferred Stock held by such holder into one (1) share of Common Stock subject to adjustment pursuant to paragraph 4.3. Upon such conversion, the rights of the holders of converted Series A Preferred Stock with respect to the shares of Series A Preferred Stock so converted shall cease. (b) To convert Series A Preferred Stock in accordance with this paragraph 4.1, a holder must (i) surrender the certificate or certificates evidencing the shares of Series A Preferred Stock to be converted (or a duly executed affidavit of lost certificate in accordance with the bylaws of the Corporation), duly endorsed in a form satisfactory to the Corporation, at the office of the Corporation or transfer agent for the Series A Preferred Stock, (ii) notify the Corporation at such office in writing that it elects to convert Series A Preferred Stock, and the number of shares it wishes to convert, (iii) state in writing the name or names in which it wishes the certificate or certificates for shares of Common Stock to be issued, and (iv) pay any transfer or similar tax with respect to the transfer of the shares of Series A Preferred Stock converted, if required. The date on which the holder satisfies the foregoing requirements shall be the "Conversion Date." As soon as practical but in any event within five (5) Business Days of the Conversion Date, the Corporation shall deliver a certificate for the number of shares of Common Stock issuable upon the conversion, a check for the amount payable in respect of any fractional share pursuant to subparagraph 4.1(c) and a new certificate representing the unconverted portion, if any, of the shares of Series A Preferred Stock represented by the certificate or certificates surrendered for conversion. The person in whose name the Common Stock certificate is registered shall be treated as the stockholder of record on and after the Conversion Date. Adjustment (or cash payment, if applicable) shall be made for accrued and unpaid dividends (including, without limitation, PIK Dividends), as of the Conversion Date, on converted shares of Series A Preferred Stock. PIK Dividends will be paid on any PIK Dividend Payment Date with respect to Series A Preferred Stock surrendered for conversion at any time on or after a PIK Record Date for the payment of a PIK Dividend to the registered holder of Series A Preferred Stock on such PIK Record Date. If the last day on which Series A Preferred Stock may be converted is not a Business 10 17 Day, Series A Preferred Stock may be surrendered for conversion on the next succeeding day that is a Business Day. (c) The Corporation will not issue a fractional share of Common Stock upon conversion of Series A Preferred Stock. Instead the Corporation will deliver its check in an amount equal to the applicable fraction multiplied by the fair market value of the Common Stock. (d) If a holder converts shares of Series A Preferred Stock, the Corporation shall pay any documentary, stamp or similar issue or transfer tax due on the issue of shares of Common Stock upon the conversion; provided, however, that pursuant to subparagraph 4.1(b) the holder shall pay any such tax which is due because the shares are issued in a name other than the holder's name. 4.2 Mandatory Conversion. Subject to the adjustments set forth in paragraph 4.3, each share of the Series A Preferred Stock shall be automatically converted into one (1) share of Common Stock on the date a Qualified Initial Public Offering is consummated ("Mandatory Conversion Date"). Upon such occurrence resulting in a Mandatory Conversion Date, the Corporation shall (i) notify all holders of the Series A Preferred Stock not later than five (5) Business Days subsequent to approval by the Board of Directors of the Corporation to undertake a Qualified Initial Public Offering, (ii) demand that all shares representing the Series A Preferred Stock be returned to the Corporation's offices or to the designated transfer agent, and (iii) pay any transfer or similar tax with respect to the conversion, if any. As soon as practical but in any event within thirty (30) days of the Mandatory Conversion Date, the Corporation shall deliver a certificate to and in the name of the holder of the Series A Preferred Stock for the number of shares of Common Stock issuable upon the conversion and a check in an amount calculated in accordance with subparagraph 4.1(c) for any fractional shares, if any, for the shares of Series A Preferred Stock represented by the certificate. The name of the person in which the Series A Preferred Stock was issued shall be treated as the stockholder of record of the Common Stock in which the Series A Preferred Stock was converted on and after the Mandatory Conversion Date. Adjustment (or cash payment, if applicable) shall be made for accrued and unpaid dividends (including, without limitation, PIK Dividends), as of the Mandatory Conversion Date, on shares of Series A Preferred Stock converted pursuant to this paragraph 4.2. PIK Dividends will be paid on any PIK Dividend Payment Date with respect to Series A Preferred Stock converted pursuant to this paragraph 4.2 on or after a PIK Record Date to the registered holder of Series A Preferred Stock on such PIK Record Date, and the shares of Series A Preferred Stock received in payment of such PIK Dividend shall be deemed automatically converted to one (1) share of Common Stock, subject to adjustment in accordance with paragraph 4.3, effective as of the Mandatory Conversion Date. Upon such conversion, the rights of the holders of converted Series A Preferred Stock with respect to the shares of Series A Preferred Stock so converted shall cease. 11 18 4.3 Certain Matters With Respect to Conversion. (a) The Corporation has reserved and shall continue to reserve out of its authorized but unissued Common Stock enough shares of Common Stock to permit the conversion of the Series A Preferred Stock in full. All shares of Common Stock which are issued upon conversion of Series A Preferred Stock shall be duly authorized, validly issued, fully paid and nonassessable. The Corporation shall comply with all securities laws regulating the offer and delivery of shares of common stock upon conversion of Series A Preferred Stock and will list such shares on each national securities exchange on which the common stock is listed. (b) If the Corporation: (i) pays a dividend or makes a distribution on its Common Stock or any other class of the Corporation's stock other than the Series A Preferred Stock in shares of its Common Stock; (ii) subdivides its outstanding shares of Common Stock into a greater number of shares; (iii) combines its outstanding shares of Common Stock into a smaller number of shares; (iv) issues by reclassification of its Common Stock any shares of its capital stock; then an appropriate and proportionate adjustment shall be made to the number of shares into which each share of Series A Preferred Stock is convertible so that immediately after the occurrence of such event the holders of Series A Preferred Stock shall be entitled to receive the same percentage of the issued and outstanding Common Stock upon conversion of the Series A Preferred Stock as such holders would have received if converted immediately prior to such dividend, distribution, subdivision, combination or reclassification. The adjustment shall become effective immediately after the record date in the case of a dividend or distribution and immediately after the effective date of a subdivision, combination or reclassification. Such adjustment shall be made successively whenever any event listed above shall occur. (c) If the Corporation distributes any rights, options or warrants to all holders of its Common Stock entitling them for a period expiring within sixty (60) days after the record date referenced in subparagraph (l) below to purchase additional shares of Common Stock at a price per share less than $2.00 per share (as adjusted to reflect any stock split or any subdivision, reclassification, combination of or with respect to outstanding shares of Common Stock or any similar transaction) on that record date, the number of shares of Common Stock into which each share of Series A Preferred Stock is convertible shall be adjusted, in accordance with the following formula: 12 19 N x (O+A) -------- N' = O + AxP --- M where: N' = the number of shares of Common Stock into which each share of Series A Preferred Stock is convertible after such distribution. O = the number of shares of Common Stock outstanding on the record date. N = the number of shares of Common Stock into which each share of Series A Preferred Stock was convertible prior to such distribution. P = the offering price per share of the additional shares of Common Stock. M = the current market price per share of Common Stock on the record date. A = the number of additional shares of Common Stock offered. The adjustment shall be made successively whenever any such rights, options or warrants are issued and shall become effective immediately after the record date for the determination of stockholders entitled to receive the rights, options or warrants. If at the end of the period during which such warrants, options or rights are exercisable, not all warrants, options or rights shall have been exercised, the number of shares of Common Stock into which each share of Series A Preferred Stock is convertible shall be immediately readjusted to what it would have been if "A" in the above formula had been the number of shares actually issued. (d) If the Corporation issues shares of Common Stock for a consideration per share less than $2.00 per share (as adjusted to reflect the effect of any stock split or any subdivision, reclassification, combination of or with respect to outstanding shares of Common Stock or any similar transaction) on the date the Corporation fixes the offering price of such additional shares, the number of shares of Common Stock into which each share of Series A Preferred Stock is convertible shall be adjusted in accordance with the following formula: N x A ----- N' = O + P - M 13 20 where: N' = the number of shares of Common Stock into which each share of Series A Preferred Stock is convertible after such issuance. N = the number of shares of Common Stock into which each share of Series A Preferred Stock was convertible prior to such issuance. O = the number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares. P = the aggregate consideration received for the issuance of such additional shares. M = the current market price per share of Common Stock on the date of issuance of such additional shares. A = the number of shares outstanding immediately after the issuance of such additional shares. The adjustment shall be made successively whenever any such issuance is made, and shall become effective immediately after such issuance. This subparagraph 4.3(d) does not apply to (i) any transaction or issuance described in subparagraphs 4.3(b) or 4.3(c) above or subparagraph 4.3(e) below, including issuances of Common Stock pursuant to warrants, options, rights or other convertible securities described in subparagraphs 4.3(c) and 4.3(e), (ii) the conversion of Series A Preferred Stock, or the conversion, exchange or exercise of other securities convertible into or exchangeable or exercisable for Common Stock, (iii) Common Stock issued to the Corporation's employees under bona fide employee benefit plans adopted by the Board of Directors of the Corporation and approved by the holders of Common Stock when required by law, if such Common Stock would otherwise be covered by this subparagraph 4.3(d) (but only to the extent that the aggregate number of shares excluded hereby (together with the aggregate number of shares issuable upon conversion, exchange or exercise of the securities excluded by clause (iii) of subparagraph 4.3(e) below) and issued shall not exceed 15% of the Common Stock of the Corporation on a fully diluted basis at the time of any such issuance excluding options to purchase Common Stock held by directors of the Corporation), or (iv) Common Stock issued in a bona fide public offering pursuant to a firm commitment underwriting. (e) If the Corporation issues any options, warrants or other securities convertible into or exchangeable or exercisable for Common Stock (other than Series A Preferred Stock or securities issued in transactions described in subparagraph 4.3(c) above) for a consideration per share of Common Stock initially deliverable upon 14 21 conversion, exchange or exercise of such securities of less than $2.00 per share of Common Stock (as adjusted to reflect the effect of any stock split or any subdivision, reclassification, combination of or with respect to outstanding shares of Common Stock or any similar transaction) on the date of issuance of such securities, the number of shares of Common Stock into which each share of Series A Preferred Stock is convertible shall be adjusted in accordance with the following formula: N x (O+D) --------- N' = O + P - M where: N' = the number of shares of Common Stock into which each share of Series A Preferred Stock is convertible immediately after such issuance. N = the number of shares of Common Stock into which each share of Series A Preferred Stock was convertible immediately prior to such issuance. O = the number of shares of Common Stock outstanding immediately prior to the issuance of such securities. P = the aggregate consideration received for the issuance of such securities. M = the current market price per share of Common Stock on the date of issuance of such securities. D = the maximum number of shares deliverable upon conversion or in exchange for or upon exercise of such securities at the initial conversion, exchange or exercise rate. The adjustment shall be made successively whenever any such issuance is made, and shall become effective immediately after such issuance. If all of the Common Stock deliverable upon conversion, exchange or exercise of such securities has not been issued when such securities are no longer outstanding, then the number of shares of Common Stock into which each share of Series A Preferred Stock is convertible shall promptly be readjusted to the basis of the actual number of shares of Common Stock issued upon conversion, exchange or exercise of such securities. This subparagraph 4.3(e) does not apply to (i) the issuance of any such securities in a bona fide public offering pursuant to a firm commitment underwriting, (ii) the issuance of any such securities to the Corporation's employees under bona fide employee benefit plans adopted by the Board of Directors of the Corporation and approved by the holders of Common Stock when required by law, if such securities would otherwise be covered 15 22 by this subparagraph 4.3(e) (but only to the extent that the aggregate number of shares issuable upon the conversion, exchange or exercise of the aggregate number of securities excluded hereby (together with the aggregate number of shares excluded by clause (iii) of subparagraph 4.3(d) above) and issued shall not exceed 15% of the Common Stock of the Corporation on a fully diluted basis at the time of any such issuance excluding options to purchase Common Stock held by directors of the Corporation), or (iii) shares issued as PIK Dividends or as "paid-in-kind" dividends on any Parity Stock provided such dividends are required by the terms of such Parity Stock. (f) If the Corporation (i) distributes any rights, options or warrants to all holders of its Common Stock entitling them for a period expiring within sixty (60) days after the record date referenced in subparagraph (l) herein to purchase additional shares of Common Stock; (ii) issues shares of Common Stock; or (iii) issues any options, warrants or other securities convertible into or exchangeable or exercisable for Common Stock (other than Series A Preferred Stock or securities issued in transactions described in (i) above) at a price reflecting an implied price per share less than $2.00 per share, the number of shares of Common Stock into which each share of Series A Preferred Stock is convertible shall be reduced proportionally to reflect the price at which the Corporation issued or sold such shares of Common Stock pursuant to this subparagraph 4.3(f). (g) For the purpose hereof, the current market price per share of any security on any date is the average of the Quoted Prices for thirty (30) consecutive Trading Days commencing forty-five (45) Trading Days before the date in question. If the Quoted Price is not ascertainable, the current market price per share of any security on any date shall be the current market price as determined by the Board of Directors of the Corporation in its reasonable judgment exercised in good faith. Notwithstanding the foregoing, the current market price per share of any security shall be deemed to be the greater of (i) the current market price as determined above and (ii) the Liquidation Price. (h) For purposes of any computation respecting consideration received pursuant to subparagraphs 4.3(d) and 4.3(e) above, the following shall apply: (i) in case of the issuance of shares of Common Stock for cash, the consideration shall be the amount of such cash, provided that in no case shall any deduction be made for any commissions, discounts or other expenses incurred by the Corporation for any underwriting of the issue or otherwise in connection therewith; (ii) in the case of the issuance of shares of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair market value thereof as determined by the Board of 16 23 Directors of the Corporation in its reasonable judgment exercised in good faith (irrespective of the accounting treatment thereof); and (iii) in the case of the issuance of options, warrants or other securities convertible into or exchangeable or exercisable for shares of Common Stock, the aggregate consideration received therefor shall be deemed to be the consideration received by the Corporation for the issuance of such options, warrants or other securities plus the additional minimum consideration, if any, to be received by the Corporation upon the conversion or exchange or exercise thereof (the consideration in each case to be determined in the same manner as provided in clauses (i) and (ii) of this subparagraph 4.3(h)). (i) No adjustment in the number of shares of Common Stock into which each share of Series A Preferred Stock is convertible need be made unless the adjustment would require an increase or decrease of at least one-half of one percent (.5%) in the number of shares of Common Stock into which each share of Series A Preferred Stock is convertible. Any adjustments that are not made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this paragraph 4.3 shall be made to the nearest cent or to the nearest 1/100th of a share, as the case may be. (j) No adjustment in the number of shares of Common Stock into which each share of Series A Preferred Stock is convertible need be made under this paragraph 4.3 for (i) rights to purchase Common Stock pursuant to a Corporation plan for reinvestment of dividends or interest, or (ii) any change in the par value or change from no par value to par value of the Common Stock. If an adjustment is made to the number of shares of Common Stock into which each share of Series A Preferred Stock is convertible upon a record date established for a distribution subject to this paragraph 4.3 and if such distribution is subsequently cancelled, the number of shares of Common Stock into which each share of Series A Preferred Stock is convertible then in effect shall be readjusted, effective as of the date when the Board of Directors of the Corporation determines to cancel such distribution, to the number of shares of Common Stock into which each share of Series A Preferred Stock is convertible as would have been in effect if such record date had not been fixed. No adjustment need be made under paragraph 4.3 if the Corporation issues or distributes to each holder of Series A Preferred Stock the shares of Common Stock, evidences of indebtedness, assets, rights, options or warrants referred to in such paragraph which each holder would have been entitled to receive had Series A Preferred Stock been converted into Common Stock prior to or simultaneously with the happening of such event or the record date with respect thereto. (k) Whenever the number of shares of Common Stock into which each share of Series A Preferred Stock is convertible is adjusted, the Corporation shall promptly mail to holders of Series A Preferred Stock, first class, postage prepaid, a notice of the adjustment. The Corporation shall file with the transfer agent, if any, for 17 24 Series A Preferred Stock a certificate from the Corporation's independent public accountants briefly stating the facts requiring the adjustment and the manner of computing it. Subject to subparagraph 4.3(o) below, the certificate shall be conclusive evidence that the adjustment is correct. (l) If: (i) the Corporation takes any action that would require an adjustment pursuant to paragraph 4.3; (ii) the Corporation consolidates or merges with, or transfers all or substantially all of its assets to, another corporation, and stockholders of the Corporation must approve the transaction; or (iii) there is a dissolution or liquidation of the Corporation; a holder of Series A Preferred Stock may want to convert such stock into shares of Common Stock prior to the record date for or the effective date of the transaction so that it may receive the rights, warrants, securities or assets which a holder of shares of Common Stock on that date may receive. Therefore, the Corporation shall mail to such holders, first class, postage prepaid, a notice stating the proposed record or effective date, as the case may be. The Corporation shall mail the notice at least thirty (30) days before such date. (m) If the Corporation is party to a consolidation or merger which reclassifies or changes its Common Stock or to the sale of all or substantially all of the assets of the Corporation, upon consummation of such transaction the Series A Preferred Stock shall automatically become convertible at the option of their respective holders into the kind and amount of securities, cash or other assets which the holder of Series A Preferred Stock would have owned immediately after the sale, consolidation or merger, if such holder had converted Series A Preferred Stock immediately before the effective date of the transaction, and an appropriate adjustment (as determined by the Board of Directors of the Corporation) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of Series A Preferred Stock, to the end that the provisions set forth herein (including provisions with respect to liquidation preferences and changes in and other adjustment of the number of shares of Common Stock into which each share of Series A Preferred Stock is convertible) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other securities or property thereafter deliverable upon the conversion of Series A Preferred Stock. The Corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor corporation (if other than the Corporation) resulting from such consolidation or merger or the corporation purchasing such assets assumes by written instrument (in a form reasonably satisfactory to the holders of a majority of the Series A Preferred Stock then outstanding), the obligation to deliver to each such holder such 18 25 shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. If this subparagraph 4.3(m) applies, subparagraphs 4.3(b), 4.3(c), 4.3(d) and 4.3(e) do not apply. (n) In any case in which this paragraph 4.3 shall require that an adjustment as a result of any event become effective from and after a record date, the Corporation may elect to defer until after the occurrence of such event (i) the issuance to the holder of any shares of Series A Preferred Stock converted after such record date and before the occurrence of such event of the additional shares of Common Stock issuable upon such conversion over and above the shares issuable immediately prior to adjustment and (ii) the delivery of a check for any remaining fractional shares as provided in subparagraph 4.1(c) above. (o) Whenever the Corporation or its Board of Directors shall be required to make a determination under this paragraph 4.3, such determination shall be made in good faith and may be challenged in good faith by the holders of a majority of the Series A Preferred Stock, and any dispute shall be resolved promptly (and in no event later than ninety (90) days after any challenge), at the Corporation's expense, by an investment banking firm of recognized national standing selected by the Corporation and acceptable to such holders of Series A Preferred Stock. Any such determination shall be deemed approved if the requisite holders have not notified the Corporation of any challenge within thirty (30) days after receiving notice (including a statement in reasonable detail of the bases therefor) of such determination. (p) If any event occurs of the type contemplated by the provisions of this paragraph 4.3 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Corporation's Board of Directors shall make an appropriate adjustment to the number of shares of Common Stock into which each share of Series A Preferred Stock is convertible so as to protect the rights of the holders of Series A Preferred Stock; provided that no such adjustment shall increase the number of shares of Common Stock into which a share of Series A Preferred Stock is convertible if otherwise adjusted pursuant to another provision of this paragraph 4.3 or decrease the number of shares of Common Stock issuable upon conversion of each share of Series A Preferred Stock. 19 26 5. Mandatory Redemption by the Corporation. (a) To the extent the Corporation shall have funds legally available for such payment under the DGCL, the Corporation shall redeem on the Initial Mandatory Redemption Date at least fifty percent (50%) of the then outstanding shares of Series A Preferred Stock at the Redemption Price, ratably among the holders thereof. In addition, to the extent the Corporation shall have funds legally available for such payment under the DGCL, the Corporation shall redeem on the Final Mandatory Redemption Date all of the then outstanding shares of Series A Preferred Stock at the Redemption Price, plus an amount accruing thereon at the Increasing Rate from the Initial Mandatory Redemption Date. (b) Shares of Series A Preferred Stock which have been issued and converted or reacquired in any manner, including as a result of redemption, shall (upon compliance with any applicable provisions of the DGCL) have the status of authorized and unissued shares of the class of preferred stock of the Corporation undesignated as to series, and may be redesignated and reissued as part of any series of preferred stock of the Corporation; provided, however, that no such issued and reacquired shares of Series A Preferred Stock shall be reissued as Series A Preferred Stock. (c) If on any Mandatory Redemption Date the Corporation is unable or shall fail to discharge its obligation to redeem all outstanding shares of Series A Preferred Stock required to be redeemed on such date pursuant to subparagraph 5(a) and all outstanding shares of Parity Stock required to be redeemed on such date (the "Mandatory Redemption Obligation"), the Corporation shall redeem on such Mandatory Redemption Date the number of shares of Series A Preferred Stock and Parity Stock which it is able to redeem, ratably among the holders of Series A Preferred Stock and Parity Stock in proportion to the full amounts to which they would otherwise be respectively entitled if all shares of Series A Preferred Stock and Parity Stock required to be redeemed on such date were redeemed. In such a case, the remainder of the Redemption Price payable but not paid at the Mandatory Redemption Date shall be converted into the Delinquent Mandatory Redemption Price and shall be discharged as soon as the Corporation is able to discharge such Delinquent Mandatory Redemption Price out of funds legally available therefor. If and so long as any Mandatory Redemption Obligation (or any obligation in respect of the Delinquent Mandatory Redemption Price) with respect to the Series A Preferred Stock and any Parity Stock shall not be fully discharged and paid, the Corporation shall not declare or pay any dividend or make any distribution on, or, directly or indirectly, purchase, redeem or satisfy any mandatory redemption, sinking fund or other similar obligation in respect of Subordinate Stock (other than repurchases of shares of Subordinate Stock in accordance with the terms of restricted stock vesting agreements with employees of the Corporation approved by the Board of Directors of the Corporation). (d) Notwithstanding the foregoing provisions of this paragraph 5, unless the full cumulative dividends on all outstanding shares of Series A Preferred Stock and 20 27 Parity Stock have been paid or contemporaneously are declared and paid for all dividend periods to and including the Mandatory Redemption Date, none of the shares of Series A Preferred Stock or Parity Stock shall be redeemed or set aside for redemption, unless such shares of Series A Preferred Stock and Parity Stock are redeemed pro rata based upon the full amounts to which the holders thereof would otherwise be respectively entitled. (e) Notice of any redemption shall be sent by or on behalf of the Corporation not more than sixty (60) days nor less than thirty (30) days prior to any Mandatory Redemption Date, by first class mail, postage prepaid, to all holders of record of the Series A Preferred Stock at their respective last addresses as they shall appear on the books of the Corporation; provided, however, that no failure to give notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any shares of Series A Preferred Stock except as to the holder to whom the Corporation has failed to give notice or except as to the holder to whom notice was defective. In addition to any information required by law or by the applicable rules of any exchange upon which Series A Preferred Stock may be listed or admitted to trading, such notice shall state: (i) the Mandatory Redemption Date; (ii) the Redemption Price; (iii) the number of shares of Series A Preferred Stock to be redeemed; (iv) the place or places where certificates for such shares are to be surrendered for payment of the Redemption Price; (v) that dividends on the shares to be redeemed will cease to accrue on the Mandatory Redemption Date; (vi) the number of shares of Common Stock into which each share of Series A Preferred Stock is convertible as of the notice date and, if any transactions are contemplated to occur between the notice date and the Mandatory Redemption Date which would cause such number of shares of Common Stock to be adjusted, the number of shares of Common Stock into which each share of Series A Preferred Stock would be convertible after giving effect to such transaction(s); (vii) that Series A Preferred Stock called for redemption may be converted at any time before the close of business on the Mandatory Redemption Date; and (viii) that holders of Series A Preferred Stock must satisfy the requirements of subparagraph 4.1(b) above if such holders desire to convert such shares. Upon the mailing of any such notices of redemption, the Corporation shall become obligated to redeem at the time of redemption specified therein all shares called for redemption other than shares converted into Common Stock prior to the Mandatory Redemption Date. (f) If notice has been mailed in accordance with subparagraph 5(e) above and provided that on or before the Mandatory Redemption Date specified in such notice, all funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds in trust for the pro rata benefit of the holders of the shares so called for redemption, so as to be, and to continue to be available therefor, then, from and after the Mandatory Redemption Date, dividends on the shares of the Series A Preferred Stock so called for redemption shall cease to accrue, and said shares shall no longer be deemed to be outstanding and shall not have the status of shares of Series A Preferred Stock, and all rights of the holders thereof as 21 28 shareholders of the Corporation (except the right to receive from the Corporation the Redemption Price) shall cease, irrespective of whether any certificates for shares called for redemption have been surrendered to the Corporation. Upon surrender, in accordance with said notice, of the certificates for any shares so redeemed (properly endorsed or assigned for transfer), such shares shall be redeemed by the Corporation at the Redemption Price and no holder of shares called for redemption shall be entitled to receive payment of the Redemption Price therefor until such surrender to the Corporation has been accomplished or a duly executed affidavit of lost certificate shall have been delivered to the Corporation. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate or certificates shall be issued representing the unredeemed shares without cost to the holder thereof (so long as such certificate is issued to the holder). (g) Any funds deposited with a bank or trust company for the purpose of redeeming Series A Preferred Stock shall be irrevocable except that: (i) the Corporation shall be entitled to receive from such bank or trust company the interest or other earnings, if any, earned on any money so deposited in trust, and the holders of any shares redeemed shall have no claim to such interest or other earnings; and (ii) any balance of monies so deposited by the Corporation and unclaimed by the holders of the Series A Preferred Stock entitled thereto at the expiration of two (2) years from the applicable Mandatory Redemption Date shall be repaid, together with any interest or other earnings earned thereon, to the Corporation, and after any such repayment, the holders of the shares entitled to the funds so repaid to the Corporation shall look only to the Corporation for payment without interest or other earnings. (h) Notwithstanding anything to the contrary herein, no shares of Series A Preferred Stock may be redeemed except with funds legally available for the payment of the Redemption Price. 6. Voting Rights. (a) Except as otherwise set forth in this paragraph 6 and the Shareholders Agreement or as otherwise required by law, each share of Series A Preferred Stock issued and outstanding shall have the right to vote on all matters presented to the holders of the Common Stock for vote in the number of votes equal at any time to the number of shares of Common Stock into which each share of Series A Preferred Stock would then be convertible, and the holders of the Series A Preferred Stock and Parity Stock shall vote with the holders of the Common Stock as a single class. 22 29 (b) In addition to any vote or consent of shareholders required by law or the Certificate of Incorporation of the Corporation, the affirmative consent of the holders of a majority of the issued and outstanding shares of Series A Preferred Stock at the time outstanding, voting as a single class, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating: (i) (x) Any amendment, alteration or repeal of any of the provisions of the Certificate of Incorporation (including without limitation this Certificate of Designation) of the Corporation or (y) any amendment of the by-laws of the Corporation that materially affects the rights of the holders of the Series A Preferred Stock; (ii) Any action by the Corporation or any of its subsidiaries not approved in advance by all Series A Directors to effect any amendment, alteration or repeal of any of the provisions of the articles of organization, operating agreements, certificates of limited partnership, or partnership agreements of any of the Corporation's Affiliates or subsidiaries (except such amendments, alterations or repeals that are ministerial in nature or required to effect a transfer of ownership interests in the Corporation's Affiliates or subsidiaries (other than any ownership interest beneficially owned by the Corporation)); (iii) Any authorization, issuance or creation of, or increase in the authorized amount of, (x) any shares of any class or any security of any class ranking senior to the shares of Series A Preferred Stock in the distribution of assets on any liquidation, dissolution or winding up of the Corporation or in the payment of dividends or requiring redemption at any time any shares of Series A Preferred Stock are still outstanding, or (y) any shares of Parity Stock (except shares issued as "paid-in-kind" dividends on Parity Stock provided Pro Rata dividends have also been declared and paid on the Series A Preferred Stock); (iv) Any action by the Corporation or any of its subsidiaries not approved in advance by all Series A Directors to effect the authorization, issuance or creation of, or increase in the authorized amount of, any membership interests, limited partnership interests or other equity security interests of any of the Corporation's Affiliates or subsidiaries; (v) Any increase or decrease (other than by redemption or conversion) in the total number of authorized shares of Series A Preferred Stock or any issuance of the currently authorized shares of the Series A Preferred Stock other than the issuance of shares of Series A Preferred Stock pursuant to the Stock Purchase Agreement or as PIK Dividends; (vi) Any transaction or series of related transactions that entails the sale, lease, assignment, transfer or other conveyance of assets having a value 23 30 greater than $10 million (measured by the book value at the date of such transaction) of the Corporation and its subsidiaries (determined on a consolidated basis); any sale or issuance of shares of capital stock of any subsidiary (other than such sales or issuance approved in advance by all Series A Directors), any consolidation or merger involving the Corporation or any of such subsidiaries other than a consolidation or merger in which the Corporation or subsidiary, as the case may be, is the surviving entity and no change in the capital stock or ownership of the Corporation or the subsidiary, as the case may be, occurs, or any reclassification or recapitalization of any capital stock of the Corporation, or any dissolution, liquidation, or winding up of the Corporation, or any agreement to become so obligated; (vii) Any acquisition or series of related acquisitions of a business, businesses or assets involving aggregate consideration of $10 million or more; (viii) The incurrence of, or agreement to incur, any Indebtedness which would result in a Debt to Equity Ratio at the time the Indebtedness is incurred (after giving effect to such incurrence) of greater than 1:1, as measured based upon the balance sheet of the Corporation prepared as of the last day of the immediately preceding month, with a pro forma adjustment for the Indebtedness incurred and any equity invested in the Corporation since such date, other than such incurrences or agreements to incur Indebtedness that have been approved in advance by all Series A Directors; (ix) Any action by the Corporation or any of its subsidiaries not approved in advance by all Series A Directors to effect the incurrence of, or agreement to incur, any Indebtedness by any of the Corporation's Affiliates or subsidiaries; (x) Any loan, advance or guarantee to, or for the benefit of, or any sale, lease, transfer or disposition of any of the properties or assets of the Corporation or its subsidiaries to, or for the benefit of, or any purchase or lease of any property or assets from, or the execution, performance or amendment of any contract, agreement or understanding with, or for the benefit of, any Affiliate of the Corporation or its subsidiaries; (xi) Any declaration or payment of any dividends on or any declaration or making of any other distribution, directly or indirectly, through subsidiaries (excluding dividends and distributions made to all owners of the Corporation's Affiliates in proportion to their respective ownership interests) or otherwise, on account of any Parity Stock (unless Pro Rata dividends have also been declared or paid on the Series A Preferred Stock) or Subordinate Stock or the setting apart of any sum for any such purpose; 24 31 (xii) The appointment or involuntary termination of the Chairman of the Board, Chief Executive Officer, Chief Financial Officer, Chief Operating Officer or other senior officers of the Corporation or its subsidiaries; (c) The rights of the holders of the Series A Preferred Stock may be exercised in writing without a meeting or by proxy or in person at a special meeting of the holders of Series A Preferred Stock, called as hereinafter provided, or at any annual meeting of stockholders held for the purpose of electing directors, and thereafter at such annual meetings or by a holder of Series A Preferred Stock designated in writing by the written consent of the holders of Series A Preferred Stock. (d) A special meeting of the holders of Series A Preferred Stock for purposes of voting on matters with respect to which the holders of such shares are entitled to vote as a class may be called by the Secretary of the Corporation or by a holder of Series A Preferred Stock designated in writing by the holders of ten percent (10%) of the shares of Series A Preferred Stock then outstanding. Such meeting may be called at the expense of the Corporation by either such person. At any meeting of the holders of Series A Preferred Stock, the presence in person or by proxy of the holders of a majority of the shares of Series A Preferred Stock then outstanding shall constitute a quorum of the Series A Preferred Stock for the purpose of voting on matters to be acted upon by holders of the Series A Preferred Stock. 7. Exclusion of Other Rights. Except as may otherwise be required by law, the shares of Series A Preferred Stock shall not have any voting powers, preferences and relative, participating, optional or other special rights, other than those specifically set forth in this resolution (as such resolution may be amended from time to time) and in the Certificate of Incorporation of the Corporation. 8. Headings of Subdivisions. The headings of the various subdivisions hereof are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. 25 32 9. Severability of Provisions. If any voting powers, preferences and relative, participating, optional and other special rights of the Series A Preferred Stock and qualifications, limitations and restrictions thereof set forth in this resolution (as such resolution may be amended from time to time) are invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of Series A Preferred Stock and qualifications, limitations and restrictions thereof set forth in this resolution (as so amended) which can be given effect without the invalid, unlawful or unenforceable voting powers, preferences and relative, participating, optional and other special rights of Series A Preferred Stock and qualifications, limitations and restrictions thereof shall, nevertheless, remain in full force and effect, and no voting powers, preferences and relative, participating, optional or other special rights of Series A Preferred Stock and qualifications, limitations and restrictions thereof herein set forth shall be deemed dependent upon any other such voting powers, preferences and relative, participating, optional or other special rights of Series A Preferred Stock and qualifications, limitations and restrictions thereof unless so expressed herein. IN WITNESS WHEREOF, the Corporation has caused this Certificate to be duly executed by an authorized officer and attested by its Secretary, this _________ day of ______________________, 1997. P.F. CHANG'S CHINA BISTRO, INC. By: ------------------------------------ Richard L. Federico, President Attest: - ------------------------------------ Robert T. Vivian, Secretary 26 33 CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF PREFERRED STOCK AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF OF SERIES B CONVERTIBLE PREFERRED STOCK OF P.F. CHANG'S CHINA BISTRO, INC. Pursuant to Section 151 of the General Corporation Law of the State of Delaware P.F. CHANG'S CHINA BISTRO, INC., a Delaware corporation (the "Corporation"), certifies that pursuant to the authority contained in Article FOURTH of its Certificate of Incorporation (the "Certificate of Incorporation") and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware (the "DGCL"), the Board of Directors of the Corporation by written consent dated as of April 30, 1997, duly adopted the following resolution, which resolution was approved by written consent of the holders of the Series A Convertible Preferred Stock of the Corporation and remains in full force and effect on the date hereof: RESOLVED, that, pursuant to the authority expressly granted to and vested in the Board of Directors of the Corporation in accordance with the provisions of its Certificate of Incorporation, a series of Preferred Stock of the Corporation be and hereby is established, consisting of 2,300,000 shares, $.001 par value per share, to be designated the "Series B Convertible Preferred Stock" (hereinafter, "Series B Preferred Stock"); that the Board of Directors be and hereby is authorized to issue such shares of Series B Preferred Stock from time to time and for such consideration and on such terms as the Board of Directors shall determine; and that, subject to the limitations provided by law and by the Certificate of Incorporation, the voting powers, preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof shall be as follows: 1. Certain Definitions. 34 Unless the context otherwise requires, the terms defined in this paragraph 1 shall have, for all purposes of this resolution, the meanings herein specified (with terms defined in the singular having comparable meanings when used in the plural). "Affiliate" shall have the meaning given to such term under Rule 12b-2 of the rules promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934. "Annual Per Share Cash Dividend Amount" shall mean a cash payment equal to ten percent (10%) per annum of the Liquidation Price of one share of the Series B Preferred Stock. "Annual Per Share PIK Dividend Amount" shall mean a fraction of one share of Series B Preferred Stock equal to six percent (6%) per annum of one share of the Series B Preferred Stock. "Business Day" shall mean a day other than a Saturday, a Sunday or any other day on which banking institutions in New York, New York are authorized or obligated by law to close. "Common Equity" shall mean all shares now or hereafter authorized of any class of common stock of the Corporation, however, designated, including the Comon Stock, and any other stock of the Corporation, howsoever designated, authorized after the Initial Issue Date, which has the right (subject always to prior rights of any class or series of preferred stock) to participate in the distribution of the assets and earnings of the Corporation without limit as to per share amount. "Common Stock" shall mean the common stock, par value $.001 per share, of the Corporation. "Corporation's Affiliates" shall mean (i) PFCCB Scottsdale, L.L.C., an Arizona limited liability company; (ii) PFCCB Newport Beach, L.L.C., an Arizona limited liability company; (iii) P.F. Chang's III, L.L.C., an Arizona limited liability company; (iv) P.F. Chang's IV, L.L.C., an Arizona limited liability company; (v) PFC Building III Limited Partnership, an Arizona limited partnership; (vi) PFCCB LouTex Joint Venture, an Arizona general partnership; and (vii) PFCCB NUC LLC, an Arizona limited liability company. "Conversion Date" shall have the meaning set forth in subparagraph 4.1(b) below. "Debt" shall mean any indebtedness, contingent or otherwise, of any person in respect of borrowed money (whether or not the recourse of the lender is to the whole of the assets of such person or only to a portion thereof) or evidenced by bonds, notes, debentures or similar instruments or letters of credit or representing the balance deferred 2 35 and unpaid of the purchase price of any property or interest therein, except any such balance that constitutes a trade payable, if and to the extent such indebtedness would appear as a liability upon a balance sheet of such person prepared on a consolidated basis in accordance with generally accepted accounting principles. "Debt to Equity Ratio" shall mean the ratio of (i) the total Indebtedness to (ii) Total Stockholders' Equity. "Delinquent Mandatory Redemption Price" shall mean, with respect to each share of Series B Preferred Stock, $4.35 (adjusted for stock splits, subdivisions, combinations and similar transactions), plus all accrued and unpaid dividends payable in respect of such a share of the Series B Preferred Stock, plus an amount thereon accruing from the Mandatory Redemption Date relating thereto at the Increasing Rate. "Final Mandatory Redemption Date" shall mean May 1, 2004 or, if such day is not a Business Day, the next succeeding Business Day. "Increasing Rate" shall mean, with respect to any obligation, an annual rate equal to the Prime Rate, plus (i) two percent, plus (ii) one percent after the first completed six-month period that the obligation subject to the Increasing Rate has been outstanding and has not been paid in full. "Indebtedness" shall mean the Debt of the Corporation or a subsidiary of the Corporation plus, to the extent not otherwise included, (i) the guaranty of any Debt of any other person; and (ii) obligations in respect of borrowed money secured by any Lien to which any property or asset owned or held by the Corporation or a subsidiary is subject, whether or not the obligations secured thereby shall have been assumed by the Corporation or such subsidiary; and (iii) capitalized lease obligations. "Initial Issue Date" shall mean the date that shares of Series B Preferred Stock are first issued by the Corporation. "Initial Mandatory Redemption Date" shall mean May 1, 2003 or, if such day is not a Business Day, the next succeeding Business Day. "Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment, encumbrance, lien (statutory or other) or other security interest of any kind or nature whatsoever (excluding preferred stock or equity related preferences) including, without limitation, those created by, arising under or evidenced by any conditional sale or other title retention agreement, the interest of a lessor under a capital lease obligation, or any financing lease having substantially the same economic effect as any of the foregoing. "Liquidation Price" shall mean $4.35 per share of Series B Preferred Stock (adjusted for stock splits, subdivisions, combinations and similar transactions), plus all 3 36 accrued and unpaid dividends payable in respect of such share of Series B Preferred Stock pursuant to subparagraph 2(c). "Mandatory Redemption Date" shall mean the Initial Mandatory Redemption Date and the Final Mandatory Redemption Date. "Mandatory Redemption Obligation" shall have the meaning set forth in subparagraph 5(c) below. "Non-Investor Directors" shall mean those directors elected to the Corporation's Board of Directors other than those directors that are elected solely by the holders of Series B Preferred Stock or Parity Stock pursuant to the Shareholders Agreement. "Parity Stock" shall mean any class or series of capital stock of the Corporation ranking on a parity with the Series B Preferred Stock as to (i) priority of payment of cash and stock dividends and other distributions, (ii) priority of payment upon liquidation, dissolution or winding up of the Corporation, and (iii) the time of, and priority of payment upon, any mandatory redemption. For purposes of this definition, differences between any class or series of capital stock and the Series B Preferred Stock as to the amount of the liquidation price (or other fixed amount) to which any cash dividend rate is applied, the amount of the liquidation price payable upon liquidation, dissolution or winding up of the Corporation, the amount of the redemption price payable upon any mandatory redemption, or the time when cash or stock dividends or other distributions shall begin to accrue, shall not be considered in determining whether such class or series of capital stock is on a parity with the Series B Preferred Stock. "PIK Dividends" shall mean the "paid-in-kind" dividends as set forth in subparagraph 2(a) below. "PIK Dividend Payment Date" shall mean March 31, June 30, September 30, and December 31, of each year during the PIK Dividend Payment Period. "PIK Dividend Payment Period" shall mean the period from, and including, April 1, 1999, to and including the Final Mandatory Redemption Date. "PIK Dividend Period" shall mean the period from, and including, April 1, 1999, to, but not including, the first PIK Dividend Payment Date and thereafter, each quarterly period, including any PIK Dividend Payment Date to, but not including, the next PIK Dividend Payment Date. "PIK Record Date" shall mean the date that is ten Business Days prior to any PIK Dividend Payment Date. 4 37 "Preferred Cash Dividends" shall mean the cash dividends as set forth in subparagraph 2(f) below. "Prime Rate" shall mean the rate announced as the "prime rate" by NationsBank, N.A. whether or not such rate is actually charged. "Pro Rata" shall mean, in the case of stock dividends, stock dividends of the same class or series as the stock upon which the dividends are being paid and that are proportionate to the number of outstanding shares of such stock, and, in the case of cash dividends or dividends in property, cash dividends or dividends in property that are proportionate to the liquidation price of the class or series of stock upon which the dividends are being paid. "Qualified Initial Public Offering" shall mean an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933 of shares of the Common Stock, (i) the aggregate gross proceeds of which equal or exceed $15,000,000 and (ii) the per share offering price of which equals or exceeds $10.00; provided, however, that the per share offering price referred to in clause (ii) shall be adjusted to reflect the effect of any stock split or any subdivision, reclassification, combination or like event of or with respect to outstanding shares of Common Stock occurring after the Initial Issue Date. "Quoted Price" shall mean with respect to any security the arithmetic mean of the last bid and ask price for one (1) share of the applicable security as reported by the National Association of Securities Dealers, Inc., Automatic Quotations System, National Market System ("NASDAQ"), or, if the applicable security is listed or admitted for trading on a securities exchange, the arithmetic mean of the high and low trading prices during the relevant trading day for one (1) share of the applicable security on the principal exchange on which the applicable security is listed or admitted for trading (which shall be for consolidated trading if applicable to such exchange), in each case, on the Trading Day in question. "Redemption Price" shall mean, with respect to each share of Series B Preferred Stock, $4.35 (adjusted for stock splits, subdivisions, combinations and similar transactions) plus all accrued and unpaid dividends payable in respect of such share of the Series B Preferred Stock. "Series B Director" shall mean that member of the Board of Directors of the Corporation elected solely by the holders of the Series B Preferred Stock pursuant to the Shareholders Agreement. "Shareholders Agreement" shall mean the Amended and Restated Shareholders Agreement among the Corporation and the holders of the Common Stock, Series B Preferred Stock and Parity Stock dated as of May 1, 1997, as the same may be amended from time to time. 5 38 "Stock Purchase Agreement" shall mean the Stock Purchase Agreement among the Corporation and the Purchasers listed therein dated as of April 28, 1997, as the same may be amended from time to time. "Subordinate Stock" shall mean the Common Equity and any class or series of capital stock of the Corporation, however designated, which is not entitled to receive (i) any dividends unless all dividends required to have been paid or declared and set apart for payment on the Series B Preferred Stock shall have been so paid or declared and set apart for payment or (ii) any assets upon liquidation, dissolution or winding up of the affairs of the Corporation until the Series B Preferred Stock shall have received the entire amount to which such stock is entitled upon such liquidation, dissolution or winding up. "Total Stockholders' Equity" shall mean the stockholders' equity of the Corporation as it appears in the monthly balance sheet of the Corporation. "Trading Days" shall mean any day on which any market in which the applicable security is then traded and in which a Quoted Price may be ascertained is open for business. 2. Dividends. (a) The record holders of Series B Preferred Stock on each PIK Record Date shall receive on each PIK Dividend Payment Date during the PIK Dividend Payment Period per share dividends in additional fully paid and nonassessable shares of Series B Preferred Stock legally available for such purpose (such dividends being herein called "PIK Dividends"). PIK Dividends shall be paid by delivering to the record holders of Series B Preferred Stock a number of shares of Series B Preferred Stock equal to (i) the number of shares of Series B Preferred Stock held by such holder on the applicable PIK Record Date, multiplied by (ii) twenty-five percent (25%) of the Annual Per Share PIK Dividend Amount. Except as set forth in subparagraph 2(b) below, the Corporation shall not issue fractional shares of Series B Preferred Stock to which holders may become entitled pursuant to this subparagraph, but in lieu thereof, the Corporation shall at the option of the holder either (i) deliver its check in an amount equal to the applicable fraction of one (1) share of Series B Preferred Stock multiplied by $4.35 (adjusted for stock splits, subdivisions, combinations or other similar transactions) (the "PIK Cash Dividend Payment") or (ii) defer delivery of the fractional PIK Cash Dividend Payment to the holder and apply such amount to PIK Dividends issued to such holder on the subsequent PIK Dividend Date. Any additional shares of Series B Preferred Stock issued pursuant to this paragraph shall be governed by this resolution and shall be subject in all respects, except as to the date of issuance and date from which PIK Dividends accrue and cumulate as set forth below, to the same terms as the shares of Series B Preferred Stock originally issued hereunder; provided, however, in no event shall any PIK Dividends accrue prior to April 1, 1999. 6 39 (b) Prior to each PIK Record Date immediately preceding each PIK Dividend Payment Date, the Board of Directors of the Corporation shall declare PIK Dividends on the Series B Preferred Stock in accordance with subparagraph 2(a) above, payable on the next PIK Dividend Payment Date. PIK Dividends (which shall include, for purposes of this subparagraph, any PIK Cash Dividend Payment due pursuant to subparagraph 2(a)) on shares of Series B Preferred Stock shall accrue and be cumulative from the later of (i) April 1, 1999 and (ii) the date of issuance of such shares, notwithstanding the failure of the Board of Directors to declare and/or issue PIK Dividends with respect to any PIK Dividend Period. PIK Dividends shall be payable in arrears during the PIK Dividend Payment Period on each PIK Dividend Payment Date, commencing on the first PIK Dividend Payment Date subsequent to April 1, 1999, and for shares issued as PIK Dividends, commencing on the first PIK Dividend Payment Date after such shares are issued. If any PIK Dividend Payment Date occurs on a day that is not a Business Day, any accrued PIK Dividends otherwise payable on such PIK Dividend Payment Date shall be paid on the next succeeding Business Day. PIK Dividends shall be paid on each PIK Dividend Payment Date to the holders of record of the Series B Preferred Stock as their names shall appear on the share register of the Corporation on the PIK Record Date immediately preceding such PIK Dividend Payment Date. If a PIK Cash Dividend Payment on account of PIK Dividends that would otherwise be issued as fractional shares may not legally be paid in the full amount to which shares of Series B Preferred Stock are entitled with respect to any PIK Dividend Period, dividends in the full preferential amount hereby provided shall be, to the extent legally and contractually permissible, declared and paid as PIK Dividends in the form of shares of Series B Preferred Stock (including fractional shares thereof). PIK Dividends on account of arrears for any past PIK Dividend Periods may be declared and paid at any time to the holders of record on the PIK Record Dates applicable to such past PIK Dividend Periods. (c) In addition to the PIK Dividends and the PIK Cash Dividend Payments referred to in subparagraph 2(a) hereof and the Preferred Cash Dividends referred to in subparagraph 2(f), at any time during which any shares of Series B Preferred Stock remain outstanding, the Corporation may declare, pay or set apart for payment cash and/or property to be distributed or paid as a dividend in respect of shares of Series B Preferred Stock. The foregoing notwithstanding, no dividends may be declared or paid on the Series B Preferred Stock pursuant to this subparagraph 2(c) unless Pro Rata dividends are contemporaneously declared or paid on any then outstanding Parity Stock. (d) So long as any shares of Series B Preferred Stock shall be outstanding: (i) the Corporation shall not declare, pay or set apart for payment on any Subordinate Stock any dividends or distributions whatsoever, whether in cash, property or otherwise (other than dividends payable in shares of the 7 40 class or series upon which such dividends are declared or paid, or payable in shares of Common Stock with respect to Subordinate Stock other than Common Stock, together with cash in lieu of fractional shares), nor shall any Subordinate Stock be purchased, redeemed or otherwise acquired by the Corporation or any of its subsidiaries of which it owns not less than a majority of the outstanding voting power, nor shall any monies be paid or made available for a sinking fund for the purchase or redemption of any Subordinate Stock, without the prior written consent of the holders of at least a majority of the outstanding shares of Series B Preferred Stock and unless all dividends to which the holders of Series B Preferred Stock shall have been entitled for all previous PIK Dividend Periods shall have been (A) paid or (B) declared and a sum of money, in the case of dividends payable in cash, sufficient for the payment thereof has been set apart; (ii) the Corporation shall not declare, pay or set apart for payment on any Parity Stock any dividends or distributions whatsoever, whether in cash, property or otherwise, unless Pro Rata dividends are contemporaneously declared, paid or set apart for payment on the Series B Preferred Stock, except that, prior to the commencement of the PIK Dividend Payment Period, the Corporation may declare and pay dividends on the Series A Convertible Preferred Stock of the Corporation as required by the terms thereof as in effect on the Initial Issue Date of the Series B Preferred Stock; and (iii) neither the Corporation nor any of its subsidiaries of which it owns not less than a majority of the outstanding voting power shall purchase, redeem or otherwise acquire any Parity Stock, nor pay any monies to or make any monies available for a sinking fund for the purchase or redemption of any Parity Stock, without the prior written consent of the holders of at least a majority of the outstanding shares of Series B Preferred Stock and unless all dividends to which the holders of Series B Preferred Stock shall have been entitled for all previous PIK Dividend Periods shall have been (A) paid or (B) declared and a sum of money, in the case of dividends payable in cash, sufficient for the payment thereof has been set apart, except that the Corporation may redeem Parity Stock so long as it contemporaneously redeems a proportionate percentage of the outstanding Series B Preferred Stock, ratably among the holders thereof. (e) In the event that full dividends, in cash or property, if declared, are not paid or made available to the holders of all outstanding shares of Series B Preferred Stock and Parity Stock and funds or property available for payment of dividends shall be insufficient to permit payment in full to holders of all such stock of the full preferential amounts to which they are then entitled, then the entire amount available for payment of dividends shall be distributed ratably among all such holders of Series B Preferred Stock and Parity Stock in proportion to the full amount to which they would otherwise be respectively entitled. 8 41 (f) Notwithstanding anything to the contrary set forth herein, with respect to any PIK Dividend otherwise payable on any PIK Dividend Payment Date pursuant to this paragraph 2, the Corporation may, upon the unanimous approval of the Non-Investor Directors by vote on or prior to the applicable PIK Record Date, declare on such PIK Record Date and pay on such PIK Dividend Payment Date a cash dividend (a "Preferred Cash Dividend") to all record holders of Series B Preferred Stock on such PIK Record Date in an amount per share equal to twenty-five percent (25%) of the Annual Per Share Cash Dividend Amount. Payment of such Preferred Cash Dividend on such PIK Dividend Payment Date shall be in lieu of the payment of the PIK Dividend on such PIK Dividend Payment Date. The foregoing notwithstanding, no Preferred Cash Dividend may be declared and paid on the Series B Preferred Stock unless Pro Rata cash dividends are contemporaneously declared and then paid on any then outstanding Parity Stock. (g) Notwithstanding anything contained herein to the contrary, no dividends on shares of Series B Preferred Stock shall be declared by the Board of Directors of the Corporation or paid or set apart for payment by the Corporation at such time if such declaration or payment shall be restricted or prohibited by law. 3. Distributions Upon Liquidation, Dissolution or Winding Up. (a) In the event of any voluntary or involuntary liquidation, dissolution or other winding up of the affairs of the Corporation, before any payment or distribution shall be made to the holders of Subordinate Stock and contemporaneously with any payment or distribution to the holders of Parity Stock, the holders of Series B Preferred Stock shall be entitled to be paid out of the assets of the Corporation in cash, or, if the Corporation does not have sufficient cash on hand to pay such amounts, property of the Corporation at its fair market value as determined by the Board of Directors of the Corporation, the greater of (i) the Liquidation Price per share of Series B Preferred Stock, or (ii) such amount per share of Series B Preferred Stock as would have been payable had each such share been converted into Common Stock pursuant to paragraph 4 immediately prior to such liquidation, dissolution or other winding up of the affairs of the Corporation. Immediately preceding such liquidation, dissolution or winding up, adjustment shall be made for accrued but unpaid dividends (including, without limitation, PIK Dividends). (b) If, upon any such liquidation, dissolution or other winding up of the affairs of the Corporation, the assets of the Corporation shall be insufficient to permit the payment in full of the Liquidation Price for each share of the Series B Preferred Stock and the applicable liquidation price for each share of any Parity Stock then outstanding, then the assets of the Corporation shall be ratably distributed among the holders of Series B Preferred Stock and Parity Stock in proportion to the full amounts to which they would otherwise be respectively entitled if all amounts thereon were paid in full. Neither the consolidation or merger of the Corporation into or with another corporation or corporations, nor the sale, lease, transfer or conveyance of all or any 9 42 portion of the assets of the Corporation to another corporation or any other entity shall be deemed a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of this paragraph 3. 4. Conversion Rights. 4.1 Conversion at the Option of the Holder. (a) At any time before the close of business on the Final Mandatory Redemption Date (unless the Corporation shall default in payment of the Redemption Price or the Delinquent Mandatory Redemption Price, in which case, the conversion rights set forth in this paragraph shall continue until the cure of any such default), each holder of Series B Preferred Stock may, at its option, convert each share of Series B Preferred Stock held by such holder into one (1) share of Common Stock subject to adjustment pursuant to paragraph 4.3. Upon such conversion, the rights of the holders of converted Series B Preferred Stock with respect to the shares of Series B Preferred Stock so converted shall cease. (b) To convert Series B Preferred Stock in accordance with this paragraph 4.1, a holder must (i) surrender the certificate or certificates evidencing the shares of Series B Preferred Stock to be converted (or a duly executed affidavit of lost certificate in accordance with the bylaws of the Corporation), duly endorsed in a form satisfactory to the Corporation, at the office of the Corporation or transfer agent for the Series B Preferred Stock, (ii) notify the Corporation at such office in writing that it elects to convert Series B Preferred Stock, and the number of shares it wishes to convert, (iii) state in writing the name or names in which it wishes the certificate or certificates for shares of Common Stock to be issued, and (iv) pay any transfer or similar tax with respect to the transfer of the shares of Series B Preferred Stock converted, if required. The date on which the holder satisfies the foregoing requirements shall be the "Conversion Date." As soon as practical but in any event within five (5) Business Days of the Conversion Date, the Corporation shall deliver a certificate for the number of shares of Common Stock issuable upon the conversion, a check for the amount payable in respect of any fractional share pursuant to subparagraph 4.1(c) and a new certificate representing the unconverted portion, if any, of the shares of Series B Preferred Stock represented by the certificate or certificates surrendered for conversion. The person in whose name the Common Stock certificate is registered shall be treated as the stockholder of record on and after the Conversion Date. Adjustment (or cash payment, if applicable) shall be made for accrued and unpaid dividends (including, without limitation, PIK Dividends), as of the Conversion Date, on converted shares of Series B Preferred Stock. PIK Dividends will be paid on any PIK Dividend Payment Date with respect to Series B Preferred Stock surrendered for conversion at any time on or after a PIK Record Date for the payment of a PIK Dividend to the registered holder of Series B Preferred Stock on such PIK Record Date. If the last day on which Series B Preferred Stock may be converted is not a Business 10 43 Day, Series B Preferred Stock may be surrendered for conversion on the next succeeding day that is a Business Day. (c) The Corporation will not issue a fractional share of Common Stock upon conversion of Series B Preferred Stock. Instead the Corporation will deliver its check in an amount equal to the applicable fraction multiplied by the fair market value of the Common Stock. (d) If a holder converts shares of Series B Preferred Stock, the Corporation shall pay any documentary, stamp or similar issue or transfer tax due on the issue of shares of Common Stock upon the conversion; provided, however, that pursuant to subparagraph 4.1(b) the holder shall pay any such tax which is due because the shares are issued in a name other than the holder's name. 4.2 Mandatory Conversion. Subject to the adjustments set forth in paragraph 4.3, each share of the Series B Preferred Stock shall be automatically converted into one (1) share of Common Stock on the date a Qualified Initial Public Offering is consummated ("Mandatory Conversion Date"). Upon such occurrence resulting in a Mandatory Conversion Date, the Corporation shall (i) notify all holders of the Series B Preferred Stock not later than five (5) Business Days subsequent to approval by the Board of Directors of the Corporation to undertake a Qualified Initial Public Offering, (ii) demand that all shares representing the Series B Preferred Stock be returned to the Corporation's offices or to the designated transfer agent, and (iii) pay any transfer or similar tax with respect to the conversion, if any. As soon as practical but in any event within thirty (30) days of the Mandatory Conversion Date, the Corporation shall deliver a certificate to and in the name of the holder of the Series B Preferred Stock for the number of shares of Common Stock issuable upon the conversion and a check in an amount calculated in accordance with subparagraph 4.1(c) for any fractional shares, if any, for the shares of Series B Preferred Stock represented by the certificate. The name of the person in which the Series B Preferred Stock was issued shall be treated as the stockholder of record of the Common Stock in which the Series B Preferred Stock was converted on and after the Mandatory Conversion Date. Adjustment (or cash payment, if applicable) shall be made for accrued and unpaid dividends (including, without limitation, PIK Dividends), as of the Mandatory Conversion Date, on shares of Series B Preferred Stock converted pursuant to this paragraph 4.2. PIK Dividends will be paid on any PIK Dividend Payment Date with respect to Series B Preferred Stock converted pursuant to this paragraph 4.2 on or after a PIK Record Date to the registered holder of Series B Preferred Stock on such PIK Record Date, and the shares of Series B Preferred Stock received in payment of such PIK Dividend shall be deemed automatically converted to one (1) share of Common Stock, subject to adjustment in accordance with paragraph 4.3, effective as of the Mandatory Conversion Date. Upon such conversion, the rights of the holders of converted Series B Preferred Stock with respect to the shares of Series B Preferred Stock so converted shall cease. 11 44 4.3 Certain Matters With Respect to Conversion. (a) The Corporation has reserved and shall continue to reserve out of its authorized but unissued Common Stock enough shares of Common Stock to permit the conversion of the Series B Preferred Stock in full. All shares of Common Stock which are issued upon conversion of Series B Preferred Stock shall be duly authorized, validly issued, fully paid and nonassessable. The Corporation shall comply with all securities laws regulating the offer and delivery of shares of common stock upon conversion of Series B Preferred Stock and will list such shares on each national securities exchange on which the common stock is listed. (b) If the Corporation: (i) pays a dividend or makes a distribution on its Common Stock or any other class of the Corporation's stock other than the Series B Preferred Stock in shares of its Common Stock; (ii) subdivides its outstanding shares of Common Stock into a greater number of shares; (iii)combines its outstanding shares of Common Stock into a smaller number of shares; (iv) issues by reclassification of its Common Stock any shares of its capital stock; then an appropriate and proportionate adjustment shall be made to the number of shares into which each share of Series B Preferred Stock is convertible so that immediately after the occurrence of such event the holders of Series B Preferred Stock shall be entitled to receive the same percentage of the issued and outstanding Common Stock upon conversion of the Series B Preferred Stock as such holders would have received if converted immediately prior to such dividend, distribution, subdivision, combination or reclassification. The adjustment shall become effective immediately after the record date in the case of a dividend or distribution and immediately after the effective date of a subdivision, combination or reclassification. Such adjustment shall be made successively whenever any event listed above shall occur. (c) If the Corporation distributes any rights, options or warrants to all holders of its Common Stock entitling them for a period expiring within sixty (60) days after the record date referenced in subparagraph (l) below to purchase additional shares of Common Stock at a price per share less than $4.35 per share (as adjusted to reflect any stock split or any subdivision, reclassification, combination of or with respect to outstanding shares of Common Stock or any similar transaction) on that record date, the number of shares of Common Stock into which each share of Series B Preferred Stock is convertible shall be adjusted, in accordance with the following formula: 12 45 N x (O+A) --------- N' = O + AxP --- M where: N' = the number of shares of Common Stock into which each share of Series B Preferred Stock is convertible after such distribution. O = the number of shares of Common Stock outstanding on the record date. N = the number of shares of Common Stock into which each share of Series B Preferred Stock was convertible prior to such distribution. P = the offering price per share of the additional shares of Common Stock. M = the current market price per share of Common Stock on the record date. A = the number of additional shares of Common Stock offered. The adjustment shall be made successively whenever any such rights, options or warrants are issued and shall become effective immediately after the record date for the determination of stockholders entitled to receive the rights, options or warrants. If at the end of the period during which such warrants, options or rights are exercisable, not all warrants, options or rights shall have been exercised, the number of shares of Common Stock into which each share of Series B Preferred Stock is convertible shall be immediately readjusted to what it would have been if "A" in the above formula had been the number of shares actually issued. 13 46 (d) If the Corporation issues shares of Common Stock for a consideration per share less than $4.35 per share (as adjusted to reflect the effect of any stock split or any subdivision, reclassification, combination of or with respect to outstanding shares of Common Stock or any similar transaction) on the date the Corporation fixes the offering price of such additional shares, the number of shares of Common Stock into which each share of Series B Preferred Stock is convertible shall be adjusted in accordance with the following formula: N x A ----- N' = O + P - M where: N' = the number of shares of Common Stock into which each share of Series B Preferred Stock is convertible after such issuance. N = the number of shares of Common Stock into which each share of Series B Preferred Stock was convertible prior to such issuance. O = the number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares. P = the aggregate consideration received for the issuance of such additional shares. M = the current market price per share of Common Stock on the date of issuance of such additional shares. A = the number of shares outstanding immediately after the issuance of such additional shares. The adjustment shall be made successively whenever any such issuance is made, and shall become effective immediately after such issuance. This subparagraph 4.3(d) does not apply to (i) any transaction or issuance described in subparagraphs 4.3(b) or 4.3(c) above or subparagraph 4.3(e) below, including issuances of Common Stock pursuant to warrants, options, rights or other convertible securities described in subparagraphs 4.3(c) and 4.3(e), (ii) the conversion of Series B Preferred Stock, or the conversion, exchange or exercise of other securities convertible into or exchangeable or exercisable for Common Stock, (iii) Common Stock issued to the Corporation's employees under bona fide employee benefit plans adopted by the Board of Directors of the Corporation and approved by the holders of Common Stock when required by law, if such Common Stock would otherwise be covered by this subparagraph 4.3(d) (but only to the extent that the aggregate number of shares excluded hereby (together with 14 47 the aggregate number of shares issuable upon conversion, exchange or exercise of the securities excluded by clause (iii) of subparagraph 4.3(e) below) and issued shall not exceed 15% of the Common Stock of the Corporation on a fully diluted basis at the time of any such issuance excluding options to purchase Common Stock held by directors of the Corporation), or (iv) Common Stock issued in a bona fide public offering pursuant to a firm commitment underwriting. (e) If the Corporation issues any options, warrants or other securities convertible into or exchangeable or exercisable for Common Stock (other than Series B Preferred Stock or securities issued in transactions described in subparagraph 4.3(c) above) for a consideration per share of Common Stock initially deliverable upon conversion, exchange or exercise of such securities of less than $4.35 per share of Common Stock (as adjusted to reflect the effect of any stock split or any subdivision, reclassification, combination of or with respect to outstanding shares of Common Stock or any similar transaction) on the date of issuance of such securities, the number of shares of Common Stock into which each share of Series B Preferred Stock is convertible shall be adjusted in accordance with the following formula: N x (O+D) --------- N' = O + P - M where: N' = the number of shares of Common Stock into which each share of Series B Preferred Stock is convertible immediately after such issuance. N = the number of shares of Common Stock into which each share of Series B Preferred Stock was convertible immediately prior to such issuance. O = the number of shares of Common Stock outstanding immediately prior to the issuance of such securities. P = the aggregate consideration received for the issuance of such securities. M = the current market price per share of Common Stock on the date of issuance of such securities. D = the maximum number of shares deliverable upon conversion or in exchange for or upon exercise of such securities at the initial conversion, exchange or exercise rate. 15 48 The adjustment shall be made successively whenever any such issuance is made, and shall become effective immediately after such issuance. If all of the Common Stock deliverable upon conversion, exchange or exercise of such securities has not been issued when such securities are no longer outstanding, then the number of shares of Common Stock into which each share of Series B Preferred Stock is convertible shall promptly be readjusted to the basis of the actual number of shares of Common Stock issued upon conversion, exchange or exercise of such securities. This subparagraph 4.3(e) does not apply to (i) the issuance of any such securities in a bona fide public offering pursuant to a firm commitment underwriting, (ii) the issuance of any such securities to the Corporation's employees under bona fide employee benefit plans adopted by the Board of Directors of the Corporation and approved by the holders of Common Stock when required by law, if such securities would otherwise be covered by this subparagraph 4.3(e) (but only to the extent that the aggregate number of shares issuable upon the conversion, exchange or exercise of the aggregate number of securities excluded hereby (together with the aggregate number of shares excluded by clause (iii) of subparagraph 4.3(d) above) and issued shall not exceed 15% of the Common Stock of the Corporation on a fully diluted basis at the time of any such issuance excluding options to purchase Common Stock held by directors of the Corporation), or (iii) shares issued as PIK Dividends, shares issued as "paid-in-kind" dividends on the Series A Convertible Preferred Stock of the Corporation as required by the terms thereof as in effect on the Initial Issue Date of the Series B Preferred Stock, or shares issued as "paid-in-kind" dividends on Parity Stock provided such dividends are required by the terms of such Parity Stock. (f) If the Corporation (i) distributes any rights, options or warrants to all holders of its Common Stock entitling them for a period expiring within sixty (60) days after the record date referenced in subparagraph (l) herein to purchase additional shares of Common Stock; (ii) issues shares of Common Stock; or (iii) issues any options, warrants or other securities convertible into or exchangeable or exercisable for Common Stock (other than Series B Preferred Stock or securities issued in transactions described in (i) above) at a price reflecting an implied price per share less than $4.35 per share, the number of shares of Common Stock into which each share of Series B Preferred Stock is convertible shall be reduced proportionally to reflect the price at which the Corporation issued or sold such shares of Common Stock pursuant to this subparagraph 4.3(f). (g) For the purpose hereof, the current market price per share of any security on any date is the average of the Quoted Prices for thirty (30) consecutive Trading Days commencing forty-five (45) Trading Days before the date in question. If the Quoted Price is not ascertainable, the current market price per share of any security on any date shall be the current market price as determined by the Board of Directors of the Corporation in its reasonable judgment exercised in good faith. Notwithstanding the foregoing, the current market price per share of any security shall be deemed to be the greater of (i) the current market price as determined above and (ii) the Liquidation Price. 16 49 (h) For purposes of any computation respecting consideration received pursuant to subparagraphs 4.3(d) and 4.3(e) above, the following shall apply: (i) in case of the issuance of shares of Common Stock for cash, the consideration shall be the amount of such cash, provided that in no case shall any deduction be made for any commissions, discounts or other expenses incurred by the Corporation for any underwriting of the issue or otherwise in connection therewith; (ii) in the case of the issuance of shares of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair market value thereof as determined by the Board of Directors of the Corporation in its reasonable judgment exercised in good faith (irrespective of the accounting treatment thereof); and (iii) in the case of the issuance of options, warrants or other securities convertible into or exchangeable or exercisable for shares of Common Stock, the aggregate consideration received therefor shall be deemed to be the consideration received by the Corporation for the issuance of such options, warrants or other securities plus the additional minimum consideration, if any, to be received by the Corporation upon the conversion or exchange or exercise thereof (the consideration in each case to be determined in the same manner as provided in clauses (i) and (ii) of this subparagraph 4.3(h)). (i) No adjustment in the number of shares of Common Stock into which each share of Series B Preferred Stock is convertible need be made unless the adjustment would require an increase or decrease of at least one-half of one percent (.5%) in the number of shares of Common Stock into which each share of Series B Preferred Stock is convertible. Any adjustments that are not made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this paragraph 4.3 shall be made to the nearest cent or to the nearest 1/100th of a share, as the case may be. (j) No adjustment in the number of shares of Common Stock into which each share of Series B Preferred Stock is convertible need be made under this paragraph 4.3 for (i) rights to purchase Common Stock pursuant to a Corporation plan for reinvestment of dividends or interest, or (ii) any change in the par value or change from no par value to par value of the Common Stock. If an adjustment is made to the number of shares of Common Stock into which each share of Series B Preferred Stock is convertible upon a record date established for a distribution subject to this paragraph 4.3 and if such distribution is subsequently cancelled, the number of shares of Common Stock into which each share of Series B Preferred Stock is convertible then in effect shall be readjusted, effective as of the date when the Board of Directors of the Corporation determines to cancel such distribution, to the number of shares of Common 17 50 Stock into which each share of Series B Preferred Stock is convertible as would have been in effect if such record date had not been fixed. No adjustment need be made under paragraph 4.3 if the Corporation issues or distributes to each holder of Series B Preferred Stock the shares of Common Stock, evidences of indebtedness, assets, rights, options or warrants referred to in such paragraph which each holder would have been entitled to receive had Series B Preferred Stock been converted into Common Stock prior to or simultaneously with the happening of such event or the record date with respect thereto. (k) Whenever the number of shares of Common Stock into which each share of Series B Preferred Stock is convertible is adjusted, the Corporation shall promptly mail to holders of Series B Preferred Stock, first class, postage prepaid, a notice of the adjustment. The Corporation shall file with the transfer agent, if any, for Series B Preferred Stock a certificate from the Corporation's independent public accountants briefly stating the facts requiring the adjustment and the manner of computing it. Subject to subparagraph 4.3(o) below, the certificate shall be conclusive evidence that the adjustment is correct. (l) If: (i) the Corporation takes any action that would require an adjustment pursuant to paragraph 4.3; (ii) the Corporation consolidates or merges with, or transfers all or substantially all of its assets to, another corporation, and stockholders of the Corporation must approve the transaction; or (iii) there is a dissolution or liquidation of the Corporation; a holder of Series B Preferred Stock may want to convert such stock into shares of Common Stock prior to the record date for or the effective date of the transaction so that it may receive the rights, warrants, securities or assets which a holder of shares of Common Stock on that date may receive. Therefore, the Corporation shall mail to such holders, first class, postage prepaid, a notice stating the proposed record or effective date, as the case may be. The Corporation shall mail the notice at least thirty (30) days before such date. (m) If the Corporation is party to a consolidation or merger which reclassifies or changes its Common Stock or to the sale of all or substantially all of the assets of the Corporation, upon consummation of such transaction the Series B Preferred Stock shall automatically become convertible at the option of their respective holders into the kind and amount of securities, cash or other assets which the holder of Series B Preferred Stock would have owned immediately after the sale, consolidation or merger, if such holder had converted Series B Preferred Stock immediately before the effective date of the transaction, and an appropriate adjustment (as determined by the 18 51 Board of Directors of the Corporation) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of Series B Preferred Stock, to the end that the provisions set forth herein (including provisions with respect to liquidation preferences and changes in and other adjustment of the number of shares of Common Stock into which each share of Series B Preferred Stock is convertible) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other securities or property thereafter deliverable upon the conversion of Series B Preferred Stock. The Corporation shall not affect any such consolidation, merge or sale, unless prior to the consummation thereof, the successor corporation (if other than the Corporation) resulting from such consolidation or merger or the corporation purchasing such assets assumes by written instrument (in a form reasonably satisfactory to the holders of a majority of the Series B Preferred Stock then outstanding), the obligation to deliver to each such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. If this subparagraph 4.3(m) applies, subparagraphs 4.3(b), 4.3(c), 4.3(d) and 4.3(e) do not apply. (n) In any case in which this paragraph 4.3 shall require that an adjustment as a result of any event become effective from and after a record date, the Corporation may elect to defer until after the occurrence of such event (i) the issuance to the holder of any shares of Series B Preferred Stock converted after such record date and before the occurrence of such event of the additional shares of Common Stock issuable upon such conversion over and above the shares issuable immediately prior to adjustment and (ii) the delivery of a check for any remaining fractional shares as provided in subparagraph 4.1(c) above. (o) Whenever the Corporation or its Board of Directors shall be required to make a determination under this paragraph 4.3, such determination shall be made in good faith and may be challenged in good faith by the holders of a majority of the Series B Preferred Stock, and any dispute shall be resolved promptly (and in no event later than ninety (90) days after any challenge), at the Corporation's expense, by an investment banking firm of recognized national standing selected by the Corporation and acceptable to such holders of Series B Preferred Stock. Any such determination shall be deemed approved if the requisite holders have not notified the Corporation of any challenge within thirty (30) days after receiving notice (including a statement in reasonable detail of the bases therefor) of such determination. (p) If any event occurs of the type contemplated by the provisions of this paragraph 4.3 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Corporation's Board of Directors shall make an appropriate adjustment to the number of shares of Common Stock into which each share of Series B Preferred Stock is convertible so as to protect the rights of the holders of Series B Preferred Stock; provided that no such adjustment shall increase the number of shares of Common Stock into which a share of Series B Preferred Stock is 19 52 convertible if otherwise adjusted pursuant to another provision of this paragraph 4.3 or decrease the number of shares of Common Stock issuable upon conversion of each share of Series B Preferred Stock. 5. Mandatory Redemption by the Corporation. (a) To the extent the Corporation shall have funds legally available for such payment under the DGCL, the Corporation shall redeem on the Initial Mandatory Redemption Date at least fifty percent (50%) of the then outstanding shares of Series B Preferred Stock at the Redemption Price, ratably among the holders thereof. In addition, to the extent the Corporation shall have funds legally available for such payment under the DGCL, the Corporation shall redeem on the Final Mandatory Redemption Date all of the then outstanding shares of Series B Preferred Stock at the Redemption Price, plus an amount accruing thereon at the Increasing Rate from the Initial Mandatory Redemption Date. (b) Shares of Series B Preferred Stock which have been issued and converted or reacquired in any manner, including as a result of redemption, shall (upon compliance with any applicable provisions of the DGCL) have the status of authorized and unissued shares of the class of preferred stock of the Corporation undesignated as to series, and may be redesignated and reissued as part of any series of preferred stock of the Corporation; provided, however, that no such issued and reacquired shares of Series B Preferred Stock shall be reissued as Series B Preferred Stock. (c) If on any Mandatory Redemption Date the Corporation is unable or shall fail to discharge its obligation to redeem all outstanding shares of Series B Preferred Stock required to be redeemed on such date pursuant to subparagraph 5(a) and all outstanding shares of Parity Stock required to be redeemed on such date (the "Mandatory Redemption Obligation"), the Corporation shall redeem on such Mandatory Redemption Date the number of shares of Series B Preferred Stock and Parity Stock which it is able to redeem, ratably among the holders of Series B Preferred Stock and Parity Stock in proportion to the full amounts to which they would otherwise be respectively entitled if all shares of Series B Preferred Stock and Parity Stock required to be redeemed on such date were redeemed. In such a case, the remainder of the Redemption Price payable but not paid at the Mandatory Redemption Date shall be converted into the Delinquent Mandatory Redemption Price and shall be discharged as soon as the Corporation is able to discharge such Delinquent Mandatory Redemption Price out of funds legally available therefor. If and so long as any Mandatory Redemption Obligation (or any obligation in respect of the Delinquent Mandatory Redemption Price) with respect to the Series B Preferred Stock and any Parity Stock shall not be fully discharged and paid, the Corporation shall not declare or pay any dividend or make any distribution on, or, directly or indirectly, purchase, redeem or satisfy any mandatory redemption, sinking fund or other similar obligation in respect of Subordinate Stock (other than repurchases of shares of Subordinate Stock in accordance 20 53 with the terms of restricted stock vesting agreements with employees of the Corporation approved by the Board of Directors of the Corporation). (d) Notwithstanding the foregoing provisions of this paragraph 5, unless the full cumulative dividends on all outstanding shares of Series B Preferred Stock and Parity Stock have been paid or contemporaneously are declared and paid for all dividend periods to and including the Mandatory Redemption Date, none of the shares of Series B Preferred Stock or Parity Stock shall be redeemed or set aside for redemption, unless such shares of Series B Preferred Stock and Parity Stock are redeemed pro rata based upon the full amounts to which the holders thereof would otherwise be respectively entitled. (e) Notice of any redemption shall be sent by or on behalf of the Corporation not more than sixty (60) days nor less than thirty (30) days prior to any Mandatory Redemption Date, by first class mail, postage prepaid, to all holders of record of the Series B Preferred Stock at their respective last addresses as they shall appear on the books of the Corporation; provided, however, that no failure to give notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any shares of Series B Preferred Stock except as to the holder to whom the Corporation has failed to give notice or except as to the holder to whom notice was defective. In addition to any information required by law or by the applicable rules of any exchange upon which Series B Preferred Stock may be listed or admitted to trading, such notice shall state: (i) the Mandatory Redemption Date; (ii) the Redemption Price; (iii) the number of shares of Series B Preferred Stock to be redeemed; (iv) the place or places where certificates for such shares are to be surrendered for payment of the Redemption Price; (v) that dividends on the shares to be redeemed will cease to accrue on the Mandatory Redemption Date; (vi) the number of shares of Common Stock into which each share of Series B Preferred Stock is convertible as of the notice date and, if any transactions are contemplated to occur between the notice date and the Mandatory Redemption Date which would cause such number of shares of Common Stock to be adjusted, the number of shares of Common Stock into which each share of Series B Preferred Stock would be convertible after giving effect to such transaction(s); (vii) that Series B Preferred Stock called for redemption may be converted at any time before the close of business on the Mandatory Redemption Date; and (viii) that holders of Series B Preferred Stock must satisfy the requirements of subparagraph 4.1(b) above if such holders desire to convert such shares. Upon the mailing of any such notices of redemption, the Corporation shall become obligated to redeem at the time of redemption specified therein all shares called for redemption other than shares converted into Common Stock prior to the Mandatory Redemption Date. (f) If notice has been mailed in accordance with subparagraph 5(e) above and provided that on or before the Mandatory Redemption Date specified in such notice, all funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds in trust for the pro rata benefit of 21 54 the holders of the shares so called for redemption, so as to be, and to continue to be available therefor, then, from and after the Mandatory Redemption Date, dividends on the shares of the Series B Preferred Stock so called for redemption shall cease to accrue, and said shares shall no longer be deemed to be outstanding and shall not have the status of shares of Series B Preferred Stock, and all rights of the holders thereof as shareholders of the Corporation (except the right to receive from the Corporation the Redemption Price) shall cease, irrespective of whether any certificates for shares called for redemption have been surrendered to the Corporation. Upon surrender, in accordance with said notice, of the certificates for any shares so redeemed (properly endorsed or assigned for transfer), such shares shall be redeemed by the Corporation at the Redemption Price and no holder of shares called for redemption shall be entitled to receive payment of the Redemption Price therefor until such surrender to the Corporation has been accomplished or a duly executed affidavit of lost certificate shall have been delivered to the Corporation. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate or certificates shall be issued representing the unredeemed shares without cost to the holder thereof (so long as such certificate is issued to the holder). (g) Any funds deposited with a bank or trust company for the purpose of redeeming Series B Preferred Stock shall be irrevocable except that: (i) the Corporation shall be entitled to receive from such bank or trust company the interest or other earnings, if any, earned on any money so deposited in trust, and the holders of any shares redeemed shall have no claim to such interest or other earnings; and (ii) any balance of monies so deposited by the Corporation and unclaimed by the holders of the Series B Preferred Stock entitled thereto at the expiration of two (2) years from the applicable Mandatory Redemption Date shall be repaid, together with any interest or other earnings earned thereon, to the Corporation, and after any such repayment, the holders of the shares entitled to the funds so repaid to the Corporation shall look only to the Corporation for payment without interest or other earnings. (h) Notwithstanding anything to the contrary herein, no shares of Series B Preferred Stock may be redeemed except with funds legally available for the payment of the Redemption Price. 6. Voting Rights. (a) Except as otherwise set forth in this paragraph 6 and the Shareholders Agreement or as otherwise required by law, each share of Series B Preferred Stock issued and outstanding shall have the right to vote on all matters presented to the holders of the Common Stock for vote in the number of votes equal at any time to the number of shares of Common Stock into which each share of Series B 22 55 Preferred Stock would then be convertible, and the holders of the Series B Preferred Stock and Parity Stock shall vote with the holders of the Common Stock as a single class. (b) In addition to any vote or consent of shareholders required by law or the Certificate of Incorporation of the Corporation, the affirmative consent of the holders of a majority of the issued and outstanding shares of Series B Preferred Stock at the time outstanding, voting as a single class, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating: (i) (x) Any amendment, alteration or repeal of any of the provisions of the Certificate of Incorporation (including without limitation this Certificate of Designation) of the Corporation or (y) any amendment of the by-laws of the Corporation that materially affects the rights of the holders of the Series B Preferred Stock; (ii) Any action by the Corporation or any of its subsidiaries not approved in advance by the Series B Director to effect any amendment, alteration or repeal of any of the provisions of the articles of organization, operating agreements, certificates of limited partnership, or partnership agreements of any of the Corporation's Affiliates or subsidiaries (except such amendments, alterations or repeals that are ministerial in nature or required to effect a transfer of ownership interests in the Corporation's Affiliates or subsidiaries (other than any ownership interest beneficially owned by the Corporation)); (iii) Any authorization, issuance or creation of, or increase in the authorized amount of, (x) any shares of any class or any security of any class ranking senior to the shares of Series B Preferred Stock in the distribution of assets on any liquidation, dissolution or winding up of the Corporation or in the payment of dividends or requiring redemption at any time any shares of Series B Preferred Stock are still outstanding, or (y) any shares of Parity Stock (except shares issued as "paid-in-kind" dividends on Parity Stock provided Pro Rata dividends have also been declared and paid on the Series B Preferred Stock and except, prior to the commencement of the PIK Dividend Payment Period, shares issued as "paid-in-kind" dividends on the Series A Preferred Stock as required by the terms thereof as in effect on the Initial Issue Date of the Series B Preferred Stock); (iv) Any action by the Corporation or any of its subsidiaries not approved in advance by the Series B Director to effect the authorization, issuance or creation of, or increase in the authorized amount of, any membership interests, limited partnership interests or other equity security interests of any of the Corporation's Affiliates or subsidiaries; 23 56 (v) Any increase or decrease (other than by redemption or conversion) in the total number of authorized shares of Series B Preferred Stock or any issuance of the currently authorized shares of the Series B Preferred Stock other than the issuance of shares of Series B Preferred Stock pursuant to the Stock Purchase Agreement or as PIK Dividends; (vi) Any transaction or series of related transactions that entails the sale, lease, assignment, transfer or other conveyance of assets having a value greater than $10 million (measured by the book value at the date of such transaction) of the Corporation and its subsidiaries (determined on a consolidated basis); any sale or issuance of shares of capital stock of any subsidiary (other than such sales or issuance approved in advance by the Series B Director), any consolidation or merger involving the Corporation or any of such subsidiaries other than a consolidation or merger in which the Corporation or subsidiary, as the case may be, is the surviving entity and no change in the capital stock or ownership of the Corporation or the subsidiary, as the case may be, occurs, or any reclassification or recapitalization of any capital stock of the Corporation, or any dissolution, liquidation, or winding up of the Corporation, or any agreement to become so obligated; (vii) Any acquisition or series of related acquisitions of a business, businesses or assets involving aggregate consideration of $10 million or more; (viii) The incurrence of, or agreement to incur, any Indebtedness which would result in a Debt to Equity Ratio at the time the Indebtedness is incurred (after giving effect to such incurrence) of greater than 1:1, as measured based upon the balance sheet of the Corporation prepared as of the last day of the immediately preceding month, with a pro forma adjustment for the Indebtedness incurred and any equity invested in the Corporation since such date, other than such incurrences or agreements to incur Indebtedness that have been approved in advance by the Series B Director; (ix) Any action by the Corporation or any of its subsidiaries not approved in advance by the Series B Director to effect the incurrence of, or agreement to incur, any Indebtedness by any of the Corporation's Affiliates or subsidiaries; (x) Any loan, advance or guarantee to, or for the benefit of, or any sale, lease, transfer or disposition of any of the properties or assets of the Corporation or its subsidiaries to, or for the benefit of, or any purchase or lease of any property or assets from, or the execution, performance or amendment of any contract, agreement or understanding with, or for the benefit of, any Affiliate of the Corporation or its subsidiaries; 24 57 (xi) Any declaration or payment of any dividends on or any declaration or making of any other distribution, directly or indirectly, through subsidiaries (excluding dividends and distributions made to all owners of the Corporation's Affiliates in proportion to their respective ownership interests) or otherwise, on account of any Parity Stock (unless Pro Rata dividends have also been declared or paid on the Series B Preferred Stock and except that, prior to the commencement of the PIK Dividend Payment Period, "paid-in-kind" dividends on the Series A Convertible Preferred Stock of the Corporation may be paid thereon as required by the terms thereof as in effect on the Initial Issue Date of the Series B Preferred Stock) or Subordinate Stock or the setting apart of any sum for any such purpose; (xii) The appointment or involuntary termination of the Chairman of the Board, Chief Executive Officer, Chief Financial Officer, Chief Operating Officer or other senior officers of the Corporation or its subsidiaries; (c) The rights of the holders of the Series B Preferred Stock may be exercised in writing without a meeting or by proxy or in person at a special meeting of the holders of Series B Preferred Stock, called as hereinafter provided, or at any annual meeting of stockholders held for the purpose of electing directors, and thereafter at such annual meetings or by a holder of Series B Preferred Stock designated in writing by the written consent of the holders of Series B Preferred Stock. (d) A special meeting of the holders of Series B Preferred Stock for purposes of voting on matters with respect to which the holders of such shares are entitled to vote as a class may be called by the Secretary of the Corporation or by a holder of Series B Preferred Stock designated in writing by the holders of ten percent (10%) of the shares of Series B Preferred Stock then outstanding. Such meeting may be called at the expense of the Corporation by either such person. At any meeting of the holders of Series B Preferred Stock, the presence in person or by proxy of the holders of a majority of the shares of Series B Preferred Stock then outstanding shall constitute a quorum of the Series B Preferred Stock for the purpose of voting on matters to be acted upon by holders of the Series B Preferred Stock. 7. Exclusion of Other Rights. Except as may otherwise be required by law, the shares of Series B Preferred Stock shall not have any voting powers, preferences and relative, participating, optional or other special rights, other than those specifically set forth in this resolution (as such resolution may be amended from time to time) and in the Certificate of Incorporation of the Corporation. 8. Headings of Subdivisions. 25 58 The headings of the various subdivisions hereof are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. 9. Severability of Provisions. If any voting powers, preferences and relative, participating, optional and other special rights of the Series B Preferred Stock and qualifications, limitations and restrictions thereof set forth in this resolution (as such resolution may be amended from time to time) are invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of Series B Preferred Stock and qualifications, limitations and restrictions thereof set forth in this resolution (as so amended) which can be given effect without the invalid, unlawful or unenforceable voting powers, preferences and relative, participating, optional and other special rights of Series B Preferred Stock and qualifications, limitations and restrictions thereof shall, nevertheless, remain in full force and effect, and no voting powers, preferences and relative, participating, optional or other special rights of Series B Preferred Stock and qualifications, limitations and restrictions thereof herein set forth shall be deemed dependent upon any other such voting powers, preferences and relative, participating, optional or other special rights of Series B Preferred Stock and qualifications, limitations and restrictions thereof unless so expressed herein. 26 59 IN WITNESS WHEREOF, the Corporation has caused this Certificate to be duly executed by an authorized officer and attested by its Secretary, this ________ day of _________________, 1997. P.F. CHANG'S CHINA BISTRO, INC. By: ------------------------------------ Richard L. Federico, President Attest: - ------------------------------ Robert T. Vivian, Secretary 27 EX-3.2 3 EX-3.2 1 EXHIBIT 3.2 BY-LAWS OF P.F. CHANG'S CHINA BISTRO, INC. 2 ARTICLE I OFFICES Section 1. The registered office shall be in the City of Dover, County of Kent, State of Delaware. Section 2. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE 11 MEETINGS OF STOCKHOLDERS Section 1. Meetings of stockholders shall be held at any place within or outside the State of Delaware designated by the Board of Directors. In the absence of any such designation, stockholders' meetings shall be held at the principal executive office of the Corporation. Section 2. The annual meeting of stockholders shall be held each year on a date and a time designated by the Board of Directors. At each annual meeting directors shall be elected and any other proper business may be transacted. Section 3. A majority of the stock issued and outstanding and entitled to vote at any meeting of stockholders, the holders of which are present in person or represented by proxy, shall constitute a quorum for the transaction of business except as otherwise provided by law, by the Certificate of Incorporation, or by these By-Laws. A quorum, once established, shall not be broken by the withdrawal of enough votes to leave less than a quorum and the votes present may continue to transact business until adjournment. If, however, such quorum shall not be present or represented at any 1 3 meeting of the stockholders, a majority of the voting stock represented in person or by proxy may adjourn the meeting from time to time. without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote thereat. Section 4. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes, or the Certificate of Incorporation, or these By-Laws, a different vote is required in which case such express provision shall govern and control the decision of such question. Section 5. At each meeting of the stockholders, each stockholder having the right to vote may vote in person or may authorize another person or persons to act for him by proxy appointed by an instrument in writing subscribed by such stockholder and bearing a date not more than three years prior to said meeting, unless said instrument des for a longer period. All proxies must be filed with the Secretary of the Corporation at the beginning of each meeting in order to be counted in any vote at the meeting. Each stockholder shall have one vote for each share of stock having voting power, registered in his name on the books of the Corporation on the record date set by 2 4 the Board of Directors as provided in Article V, Section 6 hereof. All elections shall be had and all questions decided by a plurality vote. Section 6. Special meetings of the stockholders, for any purpose, or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the President and shall be called by the President or the Secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders owning a majority in amount of the entire capital stock of the Corporation, issued and outstanding, and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 7. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which notice shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. The written notice of any meeting shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. Section 8. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the 3 5 examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 9. Unless otherwise provided in the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders of the Corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III DIRECTORS Section 1. The number of directors which shall constitute the whole Board shall be not less than five (5) and not more than seven (7). The initial number of directors shall be five (5), and any increase from the initial number of directors shall require the unanimous consent of the directors. The directors need not be stockholders. The directors shall be elected at the annual meeting of the stockholders, except as 4 6 provided in Section 2 of this Article, and each director elected shall hold office until his successor is elected and qualified; provided, however, that unless otherwise restricted by the Certificate of Incorporation or by law, any director or the entire Board of Directors may be removed, either with or without cause, from the Board of Directors at any meeting of stockholders by two-thirds of the stock represented and entitled to vote thereat. Section 2. Vacancies on the Board of Directors by reason of death, resignation, retirement, disqualification, removal from office, or otherwise, and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. The directors so chosen shall hold office until the next annual election of directors and until their successors are duly elected and shall qualify, unless sooner replaced by a vote of the shareholders. If there are no directors in office, then an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole Board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. Section 3. The property and business of the Corporation shall be managed by or under the direction of its Board of Directors. In addition to the powers and 5 7 authorities by these By-Laws expressly conferred upon them, the Board may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. Section 4. The directors may hold their meetings and have one or more offices, and keep the books of the Corporation outside of the State of Delaware. Section 5. Regular meetings of the Board of Directors may be held without notice at such time and place as shall from time to time be determined by the Board. Section 6. Special meetings of the Board of Directors may be called by the President on forty-eight hours' notice to each director, either personally or by mail or by telegram; special meetings shall be called by the President or the Secretary in like manner and on like notice on the written request of two directors. Section 7. At all meetings of the Board of Directors a majority of the authorized number of directors shall be necessary and sufficient to constitute a quorum for the transaction of business, and the vote of a majority of the directors present at any meeting at which there is a quorum, shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute, by the Certificate of Incorporation or by these By-Laws. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. If only one director is authorized, such sole director shall constitute a quorum. At any meeting, a director shall have the right to be accompanied by counsel provided that such 6 8 counsel shall agree to any confidentiality restrictions reasonably imposed by the Corporation. Section 8. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 9. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting. Section 10. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each such committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such 7 9 committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the By-Laws of the Corporation; and, unless the resolution or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Section 11. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. Section 12. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. 8 10 Section 13. The Corporation shall indemnify every person who is or was a party or is or was threatened to be made a party to any action, suit, or proceeding, whether civil, criminal. administrative or investigative, by reason of the fact that he is or was a director or officer of the Corporation or, while a director or officer or employee of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee, agent or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including counsel fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, to the full extent permitted by applicable law. ARTICLE IV OFFICERS Section 1. The officers of this corporation shall be chosen by the Board of Directors and shall include a President, a Secretary, and a Treasurer. The Corporation may also have, at the discretion of the Board of Directors, such other officers as are desired, including a Chairman of the Board, Chief Executive Officer, one or more Vice Presidents, one or more Assistant Secretaries and Assistant Treasurers, and such other officers as may be appointed in accordance with the provisions of Section 3 hereof. In the event there are two or more Vice Presidents, then one or more may be designated as Executive Vice President, Senior Vice President, or other similar or dissimilar title. At the time of the election of officers, the directors may by resolution determine the order of their rank. Any number of offices may be held by the same person unless the Certificate of Incorporation or these By-Laws otherwise provide. 9 11 Section 2. The Board of Directors, at its first meeting after each annual meeting of stockholders, shall choose the officers of the Corporation. Section 3. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. Section 4. The salaries of all officers and agents of the Corporation shall be fixed by the Board of Directors. Section 5. The officers of the Corporation shall hold office until their successors are chosen and qualify in their stead. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. If the office of any officer or officers becomes vacant for any reason, the vacancy shall be filled by the Board of Directors. Section 6. Chairman of the Board. The Chairman of the Board, if such an officer be elected, shall, if present, preside at all meetings of the Board of Directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by these By-Laws. If there is no President, the Chairman of the Board shall in addition be the Chief Executive Officer of the Corporation and shall have the powers and duties prescribed in Section 8 of this Article IV. Section 7. Chief Executive Officer. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the Chief Executive Officer shall, subject to the control of the Board 10 12 of Directors, have general supervision, direction and control of the business and officers of the Corporation. He shall be an ex-officio member of all committees and shall have the general powers and duties of management usually vested in the office of the Chief Executive Officer of corporations, and shall have such other powers and duties as may be prescribed by the Board of Directors or these By-Laws. Section 8. President. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the Corporation. He shall preside at all meetings of the stockholders and, in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board of Directors. He shall be an ex-officio member of all committees and shall have the general powers and duties of management usually vested in the office of President of corporations, and shall have such other powers and duties as may be prescribed by the Board of Directors or these By-Laws. Section 9. Vice Presidents. In the absence or disability of the President, the Vice Presidents in order of their rank as fixed by the Board of Directors, or if not ranked, the Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of and be subject to all the restrictions upon the President. The Vice Presidents shall have such other duties as from time to time may be prescribed for them, respectively, by the Board of Directors. 11 13 Section 10. Secretary. The Secretary shall attend all sessions of the Board of Directors and all meetings of the stockholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose; and shall perform like duties for the standing committees when required by the Board of Directors. He shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or these By-Laws. He shall keep in safe custody the seal of the Corporation, and when authorized by the Board, affix the same to any instrument requiring it, and when so affixed it shall be attested by his signature or by the signature of an Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. Section 11. Assistant Secretary. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors, or if there be no such determination, the Assistant Secretary designated by the Board of Directors, shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Section 12. Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys, and other valuable effects in the name and to the credit of the Corporation, in such depositories as may be designated by the Board of Directors. He shall disburse the funds 12 14 of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, he shall give the Corporation a bond, in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors, for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. Section 13. Assistant Treasurer. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors, or if there be no such determination, the Assistant Treasurer designated by the Board of Directors, shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. ARTICLE V CERTIFICATES OF STOCK Section 1. Every holder of stock of the Corporation shall be entitled to have a certificate signed by, or in the name of the Corporation by, the Chairman or Vice Chairman of the Board of Directors, or the Chief Executive Officer, or the President or a Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer or an 13 15 Assistant Treasurer of the Corporation, certifying the number of shares represented by the certificate owned by such stockholder in the Corporation. Section 2. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Section 3. If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 4. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the 14 16 Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 5. Upon surrender to the Corporation, or the transfer agent of the Corporation, of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, the Corporation shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the certificate transaction upon its book. Section 6. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of the stockholders, or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall 15 17 apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 7. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of the State of Delaware. ARTICLE VI GENERAL PROVISIONS Section 1. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. Section 2. Before payment of any dividend there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall think conducive to the interests of the Corporation, and the directors may abolish any such reserve. 16 18 Section 3. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers as the Board of Directors may from time to time designate. Section 4. The fiscal year of the Corporation shall be the calendar year. Section 5. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware". Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. Section 6. Whenever, under the provisions of the statutes or of the Certificate of Incorporation or of these By-Laws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram or facsimile transmission. Section 7. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Section 8. The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the Corporation. 17 19 ARTICLE VII AMENDMENTS Section 1. These By-Laws may be altered, amended or repealed or new By-Laws may be adopted by the stockholders or by the Board of Directors at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new By-Laws be contained in the notice of such special meeting. If the power to adopt, amend or repeal By-Laws is conferred upon the Board of Directors by the Certificate of Incorporation it shall not divest or limit the power of the stockholders to adopt, amend or repeal By-Laws. 18 20 CERTIFICATE OF SECRETARY I, the undersigned, do hereby certify: (1) That I am the duly elected and acting Secretary of P.F. CHANG'S CHINA BISTRO, INC., a Delaware corporation; and (2) That the foregoing By-Laws, comprising seventeen pages, constitute the By-Laws of said corporation as duly adopted by the written consent of the Incorporator, and approved by the Board of Directors, of said corporation as of January 31 , 1996. IN WITNESS WHEREOF, I have hereunto subscribed my name this 31 day of January, 1996. /s/ MICHELLE D. PRATT ------------------------------------------- Michelle D. Pratt, Secretary 19 EX-4.2 4 EX-4.2 1 EXHIBIT 4.2 AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (the "Agreement") is entered into as of the 1st day of May, 1997 by and among P.F. CHANG'S CHINA BISTRO, INC., a Delaware corporation (the "Company"), and the PERSONS listed on Schedule 1 attached hereto. RECITALS WHEREAS, as a condition precedent to the consummation of the transactions contemplated by that certain Stock Purchase Agreement (the "Original Purchase Agreement") dated as of February 1, 1996 among the Company and certain of the shareholders of the Company (the "Original Investors"), the Company and the Original Investors entered into a Registration Rights Agreement (the "Original Registration Rights Agreement") dated as of February 28, 1996; WHEREAS, the Company has entered into a Stock Purchase Agreement (the "New Purchase Agreement") dated as of April 28, 1997 with certain of the Original Investors and additional investors (collectively, the "Purchasers"), pursuant to which the Company will issue shares of its Series B Convertible Preferred Stock to the Purchasers; and WHEREAS, in order to induce the Purchasers to enter into the New Purchase Agreement, the Company has agreed to amend and restate the Original Registration Rights Agreement to grant the benefits of the Original Registration Rights Agreement to the holders of the Series B Convertible Preferred Stock and to join those Purchasers not party to the Original Registration Rights Agreement. AGREEMENTS NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereby agree as follows: 1. (a) Definitions. As used in this Agreement, and unless the context requires a different meaning, the following terms shall have the meanings indicated: "Agent" means any Person authorized to act and who acts on behalf of any holder of Registrable Securities with respect to the transactions contemplated by this Agreement or the Stock Purchase Agreements. 2 "Agreement Year" means each consecutive twelve-month period beginning with the date of the Original Registration Rights Agreement. "Business Days" means all days other than Saturday or Sunday or any day on which banking institutions in New York, New York are authorized or obligated by law to close. "Common Stock" means capital stock of the Company, however designated, which is not limited as to the amount of dividends (except as subordinated to preferred stock in priority), or which is not limited as to the amount of distributions upon liquidation or dissolution of the Company (except as subordinated to preferred stock in priority), and shall include, without limitation, the Company's presently authorized Common Stock, par value $.001 per share. "Demand Registration" means a registration pursuant to Section 3(a). "Equivalent Transaction" means, with respect to any proposed Piggy-Back Registration, the sale, pursuant to Rule 144A or any successor rule thereto, of the Registrable Securities proposed to be sold in such Piggy-Back Registration, which sale, in the good faith judgment of the holders of a majority of such Registrable Securities after consultation with a reputable investment banking firm, is likely to result in sales proceeds of 95% or more of the greater of (i) the sales proceeds pursuant to such Piggy-Back Registration and (ii) if the class of securities of which the Registrable Securities is a part is traded on a national securities exchange or the Nasdaq National Market System, the market price thereof. "Exchange Act" means the Securities Exchange Act of 1934, and the rules and regulations thereunder as amended from time to time. "NASD" means National Association of Securities Dealers, Inc. "Person" means an individual, firm, partnership, corporation, limited liability company, trust, incorporated or unincorporated association, joint venture, joint stock company or other entity or a government or agency or political subdivision thereof. "Piggy-Back Registration" means a registration pursuant to Section 3(e). "Preferred Stock" means the Series A Convertible Preferred Stock and Series B Convertible Preferred Stock of the Company, par value $.001 per share, issued or sold pursuant to the Stock Purchase Agreements, or issued by way of stock dividend or stock split in respect thereof, together with any securities issued in substitution or exchange therefor. 2 3 "Priority Amount" means $16.6 million. "Prospectus" means the prospectus included in any Registration Statement, as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement and by all other amendments and supplements to the prospectus, including post-effective amendments and all material incorporated by reference in such prospectus. "Registrable Securities" means (a) the shares of Common Stock issued or issuable upon conversion of the Preferred Stock, whether owned by any Purchaser or not, and (b) any shares of Common Stock issued or issuable with respect to such Common Stock by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or reorganization; provided, however, that any such share or other security shall be deemed to be a Registrable Security only if and so long as it is a Transfer Restricted Security. "Registration Expenses" See Section 6 hereof. "Registration Statement" means any registration statement of the Company which covers Registrable Securities pursuant to the provisions of this Agreement, including the Prospectus, amendments and supplements to such Registration Statement, including post-effective amendments, and all exhibits and all material incorporated by reference in such Registration Statement. "Securities Act" means the Securities Act of 1933, as amended from time to time. "SEC" means the Securities and Exchange Commission. "Stock Purchase Agreements" means the Original Purchase Agreement and the New Purchase Agreement. "Transfer Restricted Securities" means securities acquired by the holder thereof other than pursuant to an effective registration under Section 5 of the Securities Act or pursuant to Rule 144; provided that a Registrable Security that has ceased to be a Transfer Restricted Security cannot thereafter become a Transfer Restricted Security. "Underwritten Registration or Underwritten Offering" means a registration in which securities of the Company are sold (whether by the Company or by selling stockholders) to an underwriter for reoffering to the public. 3 4 (b) Knowledge Standard. When used herein, the phrase "to the knowledge of" any Person, "to the best knowledge of" any Person or any similar phrase shall mean, (i) with respect to any individual, the actual knowledge of such Person (ii) with respect to any corporation (or a limited liability company), the actual knowledge of officers and directors, or Persons acting in similar capacities, of such corporation and the knowledge of such facts that such persons should have in the exercise of their duties after reasonable inquiry and (iii) with respect to a partnership, the actual knowledge of the officers and directors of the general partner of such partnership and the knowledge of such facts that such persons should have in the exercise of their duties after reasonable inquiry. When used herein, the phrase "to the knowledge of the Company," "to the best knowledge of the Company" or any similar phrase shall mean "to the best knowledge of the Company" using the standards set forth in the previous sentence. 2. Securities Subject to this Agreement. (a) Registrable Securities. The securities entitled to the benefits of this Agreement are the Registrable Securities. (b) Holders of Registrable Securities. A Person is deemed to be a holder of Registrable Securities whenever such Person owns Registrable Securities or has the right to acquire such Registrable Securities whether or not such acquisition has actually been effected and disregarding the legal restrictions upon the exercise of such right; provided, however, that a Person shall not be deemed to be a holder of Registrable Securities who, together with such Person's affiliates, then holds Registrable Securities constituting less than one percent (1%) of the then issued and outstanding Common Stock and who may then sell all Registrable Securities owned by such holder in reliance upon Rule 144 of the Securities Act within six months pursuant to the volume restrictions under said Rule based upon the average weekly reported trading volume (currently Rule 144(e)(1)(ii)). 3. Demand Registration and Piggy-Back Registration. (a) Request for Registration by Holders of Registrable Securities. At any time after the earlier of (i) the last day of the third Agreement Year or (ii) six months after the closing of the Company's initial public offering, if the Company receives from the holders of at least 50% of the then outstanding Registrable Securities then having a market value of at least $5 million, a written request that the Company effect any registration or qualification with respect to the Registrable Securities, the Company will: (1) within ten (10) days of receipt of such a request, give written notice of the proposed registration or qualification to all other holders of Registrable Securities; and 4 5 (2) as soon as reasonably practicable, use its best efforts to effect such registration or qualification (including, without limitation, the execution in the applicable Registration Statement of an undertaking to file required post-effective amendments, appropriate qualification under the applicable blue sky or other state securities laws and appropriate compliance with exemptive regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as are reasonably necessary to permit or facilitate the sale and distribution of all or such portion of such holder's or holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other holder or holders joining in such request, or the Company in the case of securities requested by the Company to be registered (provided, however, the Company shall be permitted to participate in such registration only to the extent that all Registrable Securities as are specified by any holder in a Demand Registration request have been included in such registration), as are specified in a written notice given to the Company within 20 days after the date of such written notice from the Company pursuant to Section 3(a)(1); provided, however that the Company will not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 3(a) after the completion of three Demand Registrations as set forth in Section 3(b). Subject to the foregoing provisions, the Company will file a Registration Statement covering the Registrable Securities so requested to be registered as soon as practicable, but in any event within one hundred twenty (120) days, after receipt of the request or requests of the initiating holders, and shall use its best efforts to cause such Registration Statement and Prospectus through which such Demand Registration is effected to remain effective for a period of not more than twelve (12) months; provided, however, that the Company may, for reasonable cause, by written notice to the holders requesting a Demand Registration within ten (10) business days after such request for a Demand Registration is given, elect to defer the Demand Registration for a period not to exceed ninety (90) days (only one such election to defer may be made in any 360-day period), whereupon at any time during such ninety (90) day period the holders requesting such Demand Registration may withdraw such request. (b) Effective Registration. A registration of Registrable Securities will not count as a Demand Registration until it has become effective and has been effective until all Registrable Securities included in such Demand Registration have been sold pursuant thereto, provided, that such period of effectiveness shall not exceed twelve (12) months. (c) Priority on Demand Registrations. If the holder or holders of a majority in number of the Registrable Securities to be registered in a Demand Registration under this Section 3 (or the holder or holders who initiated the Demand Registration) so elect, the offering of such Registrable Securities pursuant to such Demand Registration shall be in the form of an Underwritten Offering. In such event, if the managing underwriter or underwriters of such offering advise the Company and the 5 6 holders in writing that in their opinion the Registrable Securities requested to be included in such offering is sufficiently large so as to materially and adversely affect the success of the offering, the Company shall include in such registration the maximum amount of Registrable Securities which in the opinion of such managing underwriter or underwriters can be sold without any such material adverse effect. The Company shall include Registrable Securities in such registration as follows: (i) first, pro rata among the holders of Registrable Securities who have requested to be included in such registration pursuant to Section 3(a), including Section 3(a)(2) (based upon the number of shares requested to be included in such registration), (ii) second, all securities held by the Company for which the Company has requested inclusion pursuant to Section 3(a), and (iii) third, any other holders of securities of the Company who have requested to be included in such registration. (d) Selection of Underwriters. The investment banker or bankers and manager or managers that will administer the offering will be nationally recognized investment banking firm(s) selected by the Company with the prior written consent of the holders of a majority in number of Registrable Securities to be included in such offering, which consent shall not be unreasonably withheld. (e) Piggy-Back Registration. If the Company determines to file a registration statement under the Securities Act relating to a proposed sale to the public of its equity securities (but excluding registrations relating solely to employees' stock option or purchase plans or relating solely to a transaction employing SEC Form S-4 or Form S-8 or successor forms thereto), either for its own account or the account of a security holder or holders, the Company shall: (1) promptly give to each holder of Registrable Securities written notice thereof (which will include, to the extent known at the time, a list of the jurisdictions in which the Company intends to qualify such securities under the applicable blue sky or other state securities laws, the proposed offering price or price range, and the plan of distribution); (2) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within thirty (30) days after such written notice from the Company; and (3) use its best efforts to cause the managing underwriter or underwriters of such proposed Underwritten Offering to permit the Registrable Securities requested to be included in the registration statement for such offering to be included on the same terms and conditions as any similar securities of the Company included therein. Notwithstanding the foregoing, if the managing underwriter or underwriters of such offering deliver a written opinion to the Company and the holders of such Registrable Securities that marketing considerations require a limitation on the number of shares of Common Stock 6 7 offered pursuant to any Registration Statement filed under this Section 3(e), such limitation shall be imposed pro rata among all holders of Common Stock (other than such holders, if any, initiating the registration pursuant to registration rights granted by the Company, which holders shall receive priority with respect to inclusion in such registration in accordance with such contractual rights) and Registrable Securities who requested inclusion in the registration (based upon the number of shares requested to be included in the registration). The foregoing notwithstanding, the Company shall not be obligated to effect a Piggy-Back Registration pursuant to this Section 3(e) if at the time of the request for such Piggy-Back Registration an Equivalent Transaction is available. (f) Priority on All Registrations. If the Company (i) determines to file a registration statement under the Securities Act relating to a proposed sale to the public of its equity securities (but excluding registrations relating solely to employees' stock option or purchase plans or relating solely to a transaction employing SEC Form S-4 or Form S-8 or any successor forms thereto), either for its own account or the account of a security holder or holders or (ii) receives a written request to effect a Demand Registration, the Company shall promptly give written notification ("Priority Notice") of the proposed registration to all holders of Registrable Securities. Upon receipt of a Priority Notice, any holder of Registrable Securities may elect to join in any such proposed registration pursuant and subject to the terms of this Section 3(f) by providing the Company with written notice of such election and the number of shares for which registration is requested ("Priority Request") within thirty (30) days of receipt of the Priority Notice; provided, however, that the holders of at least a majority of outstanding Registrable Securities so elect. Notwithstanding anything to the contrary set forth in this Agreement, in connection with any registration of securities of the Company, upon receipt of a Priority Request, the Company shall include in such registration the Registrable Securities beneficially owned by such holders of Registrable Securities that request to be included in such registration, representing up to the Priority Amount in gross proceeds to such holders (less any amount of gross proceeds received by any holders of Registrable Securities in connection with a prior request pursuant to this Section 3(f)) (the "Priority Securities"), prior to including securities of any other holder in such registration. In connection with any registration in which more than one holder of Registrable Securities makes a request to include Priority Securities, the Company shall include Priority Securities in accordance with such holders' pro rata portion of the Priority Amount (less any amount of gross proceeds received by such holder in connection with a prior request pursuant to this Section 3(f)). Any request for registration made pursuant to Section 3(a) or 3(e) that is withdrawn by a majority of the holders of Registrable Securities who requested inclusion therein at any time prior to the date the Registration Statement has become effective, due to a request by the holders of a majority of outstanding Registrable 7 8 Securities pursuant to this Section 3(f), shall not be counted as a Demand Registration; provided, however, that the holder(s) effecting such withdrawal shall be required to pay any Registration Expenses unless the managing underwriter or underwriters shall have determined that the inclusion of the Priority Securities in such registration would impair the ability to include the Registrable Securities originally proposed for inclusion in such registration by such withdrawing holder(s) or the price at which such shares would be offered to the public. Any request for registration made pursuant to Section 3(f) shall not be counted as a Demand Registration. 4. Hold-Back Agreements. (a) Restrictions on Public Sale by the Company of Registrable Securities. Each holder of Registrable Securities whose Registrable Securities are covered by a Registration Statement filed pursuant to Section 3 hereof agrees, if requested in writing by the managing underwriters in an Underwritten Offering, not to effect any public sale or distribution of securities of the Company of the same class as the securities included in such Registration Statement, including a sale pursuant to Rule 144 under the Securities Act (except as part of such Underwritten Registration), during the ninety (90) day period subsequent to the filing of the Registration Statement for each Underwritten Offering pursuant to such Registration Statement and during such other period (not less than ninety (90) days) following such effective date as shall be reasonably agreed upon by the Company, the holders of the Registrable Securities whose Registrable Securities are covered by such registration and the managing underwriters. (b) Restrictions on Public Sale by the Company and Others. The Company agrees: (1) not to effect any public or private sale or distribution of its debt or equity securities, including a sale pursuant to Regulation D under the Securities Act, during the ninety (90) day period prior to the filing of a Registration Statement under Section 3 hereof, and during the one hundred twenty (120) day period beginning on, the closing date of each Underwritten Offering made pursuant to a Registration Statement filed under Section 3 hereof, to the extent timely requested in writing by the managing underwriters (except as part of such Underwritten Registration or pursuant to registrations on Forms S-4 or S-8 or any successor forms thereto), and (2) to cause each holder of its privately placed debt or equity securities issued by the Company at any time on or after the date of this Agreement (other than Registrable Securities or securities issued upon the exercise or conversion of securities outstanding as of the date hereof) to agree not to effect any public sale or distribution of any such securities, including a sale pursuant to Rule 144 under the Securities Act (except as part of such Underwritten Registration, if permitted), during the ninety (90) day period subsequent to the filing of the 8 9 Registration Statement for each Underwritten Offering and during the ninety (90) day period following the effective date of such Registration Statement, in each case to the extent the managing underwriter makes a timely written request that specifically identifies such holder(s). 5. Registration Procedures. In connection with the Company's registration obligations pursuant to Section 3 hereof, the Company will use its best efforts to effect such registration to permit the sale of such Registrable Securities in accordance with the intended method or methods of disposition thereof, and pursuant thereto the Company will as expeditiously as possible: (a) before filing a Registration Statement or Prospectus or any amendments or supplements thereto, furnish to the holders of the Registrable Securities covered by such Registration Statement and the managing underwriters, if any, copies of all such documents proposed to be filed, which documents will be made available for review by such holders and managing underwriters, and the Company will not file any Registration Statement or amendment thereto or any Prospectus or any supplement thereto which includes information provided by the holders of Registrable Securities to which the holders of a majority in number of the Registrable Securities covered by such Registration Statement or the underwriters, if any, shall reasonably object; (b) prepare and file with the SEC such amendments and post-effective amendments to any Registration Statement, and such supplements to the Prospectus, as may be reasonably requested by any holders of a majority of Registrable Securities covered by the Registration Statement or any managing underwriter of Registrable Securities or as may be required by the rules, regulations or instructions applicable to the registration form utilized by the Company or by the Securities Act or otherwise necessary to keep such Registration Statement effective for the applicable period and cause the Prospectus as so supplemented to be filed pursuant to Rule 424 under the Securities Act; and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended methods of disposition by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; (c) notify the counsel to the selling holders of Registrable Securities and the managing underwriters, if any, promptly, and (if requested by any such Person) confirm such advice in writing, (1) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective, 9 10 (2) of any request by the SEC for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (3) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose, (4) if at any time, to the knowledge of the Company, the representations and warranties of the Company contemplated by paragraph (n) below cease to be true and correct, (5) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, and (6) of the existence of any fact, to the knowledge of the Company, which results in the Registration Statement, the Prospectus or any document incorporated therein by reference containing an untrue statement of material fact or omitting to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (d) use every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible moment; (e) if reasonably requested by the managing underwriter or underwriters or a holder of Registrable Securities being sold in connection with an Underwritten Offering, immediately incorporate in a Prospectus supplement or post-effective amendment such necessary information as the managing underwriters and the holders of a majority of the Registrable Securities being sold reasonably request to have included therein relating to the plan of distribution with respect to such Registrable Securities, including, without limitation, information with respect to the amount of Registrable Securities being sold to such underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of the Underwritten (or best efforts underwritten) Offering of the Registrable Securities to be sold in such offering; and make all required filings of such Prospectus supplement or post-effective amendment within three (3) Business Days of the Company's knowledge of any matters that would require such Prospectus supplement or post-effective amendment; (f) at the request of any selling holder of Registrable Securities, furnish to such selling holder of Registrable Securities and each managing underwriter, without charge, such number of conformed copies of the Registration Statement and any post-effective amendment thereto, including financial statements and schedules, all 10 11 documents incorporated therein by reference and all exhibits (including those incorporated by reference) as such holder may reasonably request; (g) deliver to each selling holder of Registrable Securities and the underwriters, if any, without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Persons may reasonably request; the Company consents to the use of the Prospectus or any amendment or supplement thereto by each of the selling holders of Registrable Securities and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto; provided, however, the Company may revoke such consent at any time the continued use of such Prospectus or any amendment or supplement thereto would be in violation of applicable federal or state securities laws or regulations; (h) prior to any public offering of Registrable Securities, register or qualify or cooperate with the selling holders of Registrable Securities, the managing underwriters, if any, and their respective counsel in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or blue sky laws of such jurisdictions as any seller or underwriter reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the Registration Statement; provided that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process in any such jurisdiction where it is not then so subject; (i) cooperate with the selling holders of Registrable Securities and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and, if not required by applicable law, not bearing any restrictive legends; and enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriters may request at least two business days prior to any sale of Registrable Securities to the underwriters; (j) use its best efforts to cause, and cooperate with the holders of the Registrable Securities to cause, the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriters, if any, to consummate the disposition of such Registrable Securities; (k) if any fact contemplated by paragraph (c)(6) above shall exist, to the Company's knowledge, during the period that the Company shall be required hereunder to use its best efforts to maintain the effectiveness of the applicable Registration Statement, prepare a supplement or post-effective amendment to the Registration Statement or the related Prospectus or any document incorporated therein by reference 11 12 or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (l) use its best efforts to cause all Registrable Securities covered by the Registration Statement to be listed on each securities exchange on which similar securities issued by the Company are then listed if requested by the holders of a majority in number of such Registrable Securities or by the managing underwriters, if any; (m) not later than the effective date of the applicable Registration Statement, provide a CUSIP number for all Registrable Securities and, consistent with subparagraph (i) above, provide the applicable trustees or transfer agents with printed certificates for the Registrable Securities which are in a form eligible for deposit with Depositary Trust Company; (n) enter into agreements (including underwriting agreements) in a form reasonably satisfactory to the Company and take all other appropriate and reasonable actions in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, whether or not an underwriting agreement is entered into and whether or not the registration is an Underwritten Registration: (1) make such representations and warranties to the holders of such Registrable Securities and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in primary Underwritten Offerings, in a manner reasonably satisfactory to the Company; (2) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters, if any, and the counsel to the holders of Registrable Securities being sold) addressed to each selling holder and the underwriters, if any, covering the matters customarily covered in opinions requested in Underwritten Offerings, in a manner reasonably satisfactory to the Company; (3) obtain "cold comfort" letters and updates thereof from the Company's independent certified public accountants addressed to the selling holders of Registrable Securities and the underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters to underwriters in connection with primary Underwritten Offerings; (4) if an underwriting agreement is entered into, cause the same to set forth in full the indemnification provisions and procedures of Section 7 hereof (or such other substantially similar indemnification and contribution provisions and 12 13 procedures as the underwriters shall reasonably request) with respect to all parties to be indemnified pursuant to said Section; and (5) deliver such documents and certificates as may be reasonably requested by the holders of a majority of the Registrable Securities being sold and the managing underwriters, if any, to evidence compliance with paragraph (k) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The actions set forth in the above paragraph (n) shall be done at the effectiveness of such Registration Statement, each closing under any underwriting or similar agreement as and to the extent required thereunder and from time to time as may reasonably be requested by any selling holder in connection with the disposition of Registrable Securities pursuant to such Registration Statement, all in a manner consistent with customary industry practice; (o) make available to a representative of the holders of a majority in number of the Registrable Securities being sold, any managing underwriter participating in any disposition pursuant to such Registration Statement, and any attorney or accountant retained by the sellers or managing underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant reasonably related to the registration, with respect to each at such time or times as the Company shall reasonably determine; provided that any records, information or documents that are designated by the Company in writing as confidential shall be kept confidential by such Persons unless disclosure of such records, information or documents is required by court or administrative order; (p) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC and make generally available to its security holders, earnings statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 promulgated thereunder; (q) cooperate and assist in any filings required to be made with the NASD and in the performance of any due diligence investigation by any underwriter (including any "qualified independent underwriter" that is required to be retained in accordance with the rules and regulations of the NASD); and (r) promptly prior to the filing of any document which is to be incorporated by reference into the Registration Statement or the Prospectus (after initial filing of the Registration Statement) provide copies of such document to counsel to the selling holders of Registrable Securities and to the managing underwriters, if any, make the Company's representatives available for discussion of such document during business hours upon reasonable advance request and make such changes in such 13 14 document prior to the filing thereof as counsel for such selling holders or underwriters may reasonably request. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish to the Company such information regarding such seller and that distribution of such securities as the Company may from time to time reasonably request in writing. Each holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event of the kind described in paragraph (k) above, such holder will forthwith discontinue disposition of Registrable Securities until such holder's receipt of the copies of the supplemented or amended Prospectus contemplated by paragraph (k) above, or until it is advised in writing by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings which are incorporated by reference in the Prospectus, and, if so directed by the Company, such holder will deliver to the Company (at the Company's expense, unless such supplement or amendment is due to inaccurate information supplied by such holder to the Company in writing specifically for inclusion in the applicable Registration Statement) all copies, other than permanent file copies then in such holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the time periods mentioned in Section 4(a) hereof shall be extended by the number of days during the period from and including the date of the giving of such notice to and including the date when each seller of Registrable Securities covered by such Registration Statement either receives the copies of the supplemented or amended Prospectus contemplated by paragraph (k) above or is advised in writing by the Company that the use of the Prospectus may be resumed. 6. Registration Expenses. (a) All expenses incident to the Company's performance of or compliance with this Agreement will be paid by the Company, regardless whether the Registration Statement becomes effective including without limitation: (1) all registration and filing fees; (2) fees and expenses of compliance with securities or blue sky laws (including, without limitation, fees and disbursements of counsel for the underwriters or selling holders in connection with blue sky qualifications of the Registrable Securities and determination of their eligibility for investment under the laws of such jurisdictions as the managing underwriters or holders of a majority of the Registrable Securities being sold may reasonably designate); 14 15 (3) printing (including, without limitation, expenses of printing or engraving certificates for the Registrable Securities in a form eligible for deposit with Depositary Trust Company and of printing prospectuses), messenger, telephone and delivery expenses; (4) fees and disbursements of counsel (i) for the Company and (ii) for the selling holders of the Registrable Securities; (5) fees and disbursements of all independent certified public accountants of the Company (including, without limitation, the expenses of any special audit and "cold comfort" letters required by or incident to such performance); (6) fees and disbursements of underwriters as reasonably approved by the Company (excluding (x) discounts, commissions or fees of underwriters, selling brokers, dealer managers or similar securities industry professionals relating to the distribution of the Registrable Securities or (y) legal expenses of any Person other than the Company, the underwriters and the selling holders); (7) securities acts liability insurance if the Company so desires, and in such event, coverage for, selling holders of Registrable Securities should they so request and it is available; (8) fees and expenses associated of other Persons retained by the Company; and (9) fees and expenses associated with any NASD filing required to be made in connection with the Registration Statement, including, if applicable, the fees and expenses of any "qualified independent underwriter" (and its counsel) that is required to be retained in accordance with the rules and regulations of the NASD (all such expenses being herein called "Registration Expenses"). Notwithstanding the provisions of subsection (a)(4) above, the amount of legal fees reimbursable by the Company with respect to services rendered on behalf of the selling holders of Registrable Securities thereunder shall not, without the consent of the Company (which consent shall not be unreasonably withheld) exceed (i) $5,000 in connection with a registration on Form S-3 and (ii) $20,000 in connection with any other registration. The Company will, in any event, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed, and the fees and expenses of any Person, including special experts, retained by the Company. 15 16 (b) In connection with each Registration Statement required hereunder and pursuant to subsection (a)(4)(ii) above, the Company will reimburse the holders of Registrable Securities being registered (together with the holders of all other securities being registered) pursuant to such Registration Statement for the reasonable fees and disbursements of not more than one counsel (or more than one counsel if a conflict exists among such selling holders in the exercise of the reasonable judgment of counsel for the selling holders and counsel for the Company) chosen by the holders of a majority of such Registrable Securities and such other securities being registered under such Registration Statement. 7. Indemnification. (a) Indemnification by the Company. The Company agrees to indemnify and hold harmless each holder of Registrable Securities, its officers, directors, employees and Agents and each Person who controls such holder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act (each such person being sometimes hereinafter referred to as an "Indemnified Holder") from and against all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation and legal expenses) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus or in any amendment or supplement thereto or in any preliminary Prospectus, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon any such untrue statement or omission or allegation thereof based upon information furnished in writing to the Company by such holder expressly for use therein; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any preliminary Prospectus if (i) such holder failed to send or deliver a copy of the Prospectus with or prior to the delivery of written confirmation of the sale of Registrable Securities and (ii) the Prospectus would have corrected such untrue statement or omission; and provided, further, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission in the Prospectus, if such untrue statement or alleged untrue statement, omission or alleged omission is corrected in an amendment or supplement to the Prospectus and if, having previously been furnished by or on behalf of the Company with copies of the Prospectus as so amended or supplemented, such holder thereafter fails to deliver such Prospectus as so amended or supplemented prior to or concurrently with the sale of a Registrable Security to the person asserting such loss, claim, damage, liability or expense who purchased such Registrable Security which is the subject thereof from such holder. This indemnity will be in addition to any liability which the Company may otherwise have. 16 17 The Company will also provide customary indemnification to underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, their officers and directors and each Person who controls such Persons (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) to the same extent as provided above with respect to the indemnification of the Indemnified Holders of Registrable Securities. If any action or proceeding (including any governmental investigation or inquiry) shall be brought or asserted against an Indemnified Holder in respect of which indemnity may be sought from the Company, such Indemnified Holder shall promptly notify the Company in writing, and the Company shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Holder and the payment of all expenses. Such Indemnified Holder shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall be the expense of such Indemnified Holder unless (a) the Company has agreed to pay such fees and expenses or (b) the Company shall have failed to assume the defense of such action or proceeding or has failed to employ counsel reasonably satisfactory to such Indemnified Holder in any such action or proceeding or (c) if the representation of such Indemnified Holder by the counsel retained by the Company would be inappropriate due to actual or potential conflicts of interests between the Indemnified Holder and any other party represented by such counsel in such proceeding based on written advice of counsel made available to the Company (in which case, if such Indemnified Holder notifies the Company in writing that it elects to employ separate counsel at the expense of the Company, the Company shall not have the right to assume the defense of such action or proceeding on behalf of such Indemnified Holder, it being understood, however, that the Company shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for such Indemnified Holder and any other Indemnified Holders, which firm shall be designated in writing by such Indemnified Holders). The Company shall not be liable for any settlement of any such action or proceeding effected without its written consent, but if settled with its written consent, or if there be a final judgment for the plaintiff in any such action or proceeding, the Company agrees to indemnify and hold harmless such Indemnified Holders from and against any loss or liability by reason of such settlement or judgment. (b) Indemnification by Holder of Registrable Securities. Each holder of Registrable Securities agrees to indemnify and hold harmless the Company, its directors and officers and each Person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to such holder, but only with respect to information relating to such holder furnished in writing by such holder expressly for use in any Registration Statement or Prospectus, or any amendment or 17 18 supplement thereto, or any preliminary Prospectus. In case any action or proceeding shall be brought against the Company or its directors or officers or any such controlling person, in respect of which indemnity may be sought against a holder of Registrable Securities, such holder shall have the rights and duties given the Company and the Company or its directors, officers, employees, agents or such controlling person shall have the rights and duties given to each holder by Section 7(a). In no event shall the liability of any selling holder of Registrable Securities under this Section 7(b) be greater in amount than the dollar amount of the net proceeds received by such holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above with respect to information so furnished in writing by such Persons specifically for inclusion in any Prospectus or Registration Statement or any amendment or supplement thereto, or any preliminary Prospectus. (c) Contribution. If the indemnification provided for in this Section 7 is unavailable to an indemnified party under Section 7(a) or Section 7(b) hereof (other than by reason of exceptions provided in those Sections) in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand, and of the Indemnified Holder, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of the Company, on the one hand, and of the Indemnified Holder, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Indemnified Holder and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in the second paragraph of Section 7(a), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The Company and each holder of Registrable Securities agree that it would not be just and equitable if contribution pursuant to this Section 7(c) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 7(c), an Indemnified Holder shall not be required to contribute any amount in excess of the amount by which the total price at 18 19 which the Registrable Securities sold by such Indemnified Holder or its affiliated Indemnified Holders and distributed to the public were offered to the public exceeds the amount of any damages which such Indemnified Holder, or its affiliated Indemnified Holders, has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 8. Rule 144. The Company covenants that it will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder and, at all times after the effective date of the first registration filed by the Company which involves a sale of securities of the Company to the general public, will take such further action as any holder of Registrable Securities may reasonably request, all to the extent required from time to time to enable such holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time or (b) any similar rule or regulation hereafter adopted by the SEC. Upon the request of any holder of Registrable Securities, the Company will deliver to such holder a written statement as to whether it has complied with such information and requirements. 9. Participation in Underwritten Registrations. No holder of Registrable Securities (or its successors or assigns) may participate in any Underwritten Registration hereunder unless such Person (a) agrees to sell such Person's Registrable Securities on the basis provided in any underwriting arrangements approved by the underwriters and other Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. 10. Miscellaneous. (a) Remedies. Each holder of Registrable Securities, in addition to being entitled to exercise all rights provided herein, and as provided in the Transaction Agreements (as defined in the Stock Purchase Agreements), and granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) No Inconsistent Agreements. The Company will not on or after the date of this Agreement enter into any agreement, and as of the date of this Agreement the Company is not a party to any agreement, with respect to its securities which is 19 20 inconsistent with the rights granted to the holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof or impairs the rights granted hereunder. The Company has not previously entered into any agreement with respect to its securities granting any registration rights to any Person which has not been terminated on or prior to the date hereof. (c) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of holders of at least 50% of the then outstanding Registrable Securities. Notwithstanding the foregoing, a waiver or consent to departure from the provisions hereof that relates exclusively to the rights of holders of Registrable Securities whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of other holders of Registrable Securities may be given by the holders of 50% of the Registrable Securities being sold. (d) Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, courier service or personal delivery to the Company at its principal office and to the Shareholders at the addresses or facsimile numbers set forth on Schedule 1 hereto or to such other addresses or facsimile number, as applicable, as any party hereto may designate to the other in writing. All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; when delivered by courier, if delivered by commercial overnight courier service; when mailed, five business days after being deposited in the mail, postage prepaid. (e) Successors and Assigns. (i) Subject to subparagraph (ii) of this Section 10(e), this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including, without limitation, and without the need for an express assignment, subsequent holders of Registrable Securities. (ii) The rights to cause the Company to register securities granted to a holder of Registrable Securities by the Company pursuant to this Agreement may be assigned by such holder to a transferee or assignee of any of the holders' Registrable Securities; provided that (1) the Company is given written notice by the holder at the time of or within a reasonable time after said transfer, stating the name and address of said transferee or assignee and identifying the securities with respect to which such registration rights are being transferred or assigned; and (2) within sixty (60) days after being requested to do so by the Company, said transferee or assignee executes an agreement reasonably proposed by the Company by which the transferee or assignee agrees to be bound by the terms hereof. 20 21 (f) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (g) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (h) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. (i) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (j) Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings as to the subject matter, other than those set forth or referred to herein with respect to the registration rights granted by the Company with respect to the securities sold pursuant to the Stock Purchase Agreements. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. [signature pages follow] 21 22 P.F. CHANG'S CHINA BISTRO, INC. REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. P.F. CHANG'S CHINA BISTRO, INC. By: ___________________________________ Richard L. Federico, President 5090 North 40th Street Suite 160 Phoenix, Arizona 85018 Attention: Bert Vivian Telephone: 602-957-8986 Telecopy: 602-957-8998 22 23 P.F. CHANG'S CHINA BISTRO, INC. REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. CATTERTON-SIMON PARTNERS, L.P. By: CATTERTON INVESTMENT PARTNERS, its General Partner By: CATTERTON PARTNERS CORPORATION its Managing General Partner By:________________________________________ Name: Title: 115 East Putnam Avenue Greenwich, Connecticut 06830 Attention: J. Michael Chu Telephone: 203-629-4901 Telecopy: 203-629-4903 CATTERTON-PFC, L.L.C. By: CATTERTON PARTNERS CORPORATION its Managing Member By:________________________________________ Name: Title: 115 East Putnam Avenue Greenwich, Connecticut 06830 Attention: J. Michael Chu 23 24 Telephone: 203-629-4901 Telecopy: 203-629-4903 24 25 P.F. CHANG'S CHINA BISTRO, INC. REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. CATTERTON-PFC PARTNERS II, L.L.C. By: CATTERTON PARTNERS CORPORATION its Managing Member By:________________________________________ Name: Title: 115 East Putnam Avenue Greenwich, Connecticut 06830 Attention: J. Michael Chu Telephone: 203-629-4901 Telecopy: 203-629-4903 25 26 P.F. CHANG'S CHINA BISTRO, INC. REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. OAK INVESTMENT PARTNERS VI, LIMITED PARTNERSHIP By:________________________________________ Gerald R. Gallagher Managing Member of Oak Associates VI, LLC, the General Partner of Oak Investment Partners VI, Limited Partnership Oak Investment Partners 4550 Norwest Center Minneapolis, Minnesota 55402 Attention: Gerald Gallagher Telephone: 612-339-9322 Telecopy: 612-337-8017 OAK VI AFFILIATES FUND, LIMITED PARTNERSHIP By:________________________________________ Gerald R. Gallagher Managing Member of Oak VI Affiliates, LLC, the General Partner of Oak VI Affiliates Fund, Limited Partnership Oak Investment Partners 4550 Norwest Center Minneapolis, Minnesota 55402 Attention: Gerald Gallagher 26 27 Telephone: 612-339-9322 Telecopy: 612-337-8017 27 28 P.F. CHANG'S CHINA BISTRO, INC. REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. TRINITY VENTURES V, L.P. By:________________________________________ James G. Shennan, Jr. General Partner Trinity Ventures 155 Bovet Road, Suite 660 San Mateo, California 94402 Attention: James G. Shennan, Jr. Telephone: 415-358-9700 Telecopy: 415-358-9785 TRINITY VENTURES V SIDE-BY-SIDE FUND, L.P. By:________________________________________ James G. Shennan, Jr. General Partner Trinity Ventures 155 Bovet Road, Suite 660 San Mateo, California 94402 Attention: James G. Shennan, Jr. Telephone: 415-358-9700 Telecopy: 415-358-9785 28 29 P.F. CHANG'S CHINA BISTRO, INC. REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. ARABELLA S.A. By:________________________________________ Name: Title: c/o Scorpion Holdings 599 Lexington Avenue, Suite 2700 New York, New York 10022 Attention: Kevin McCarthy Telephone: (212) 207-9020 Telecopy: (212) 207-9050 ALBA, LTD. By:________________________________________ Name: Title: c/o Scorpion Holdings 599 Lexington Avenue, Suite 2700 New York, New York 10022 Attention: Kevin McCarthy Telephone: (212) 207-9020 Telecopy: (212) 207-9050 29 30 P.F. CHANG'S CHINA BISTRO, INC. REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. YVES SISTERON ___________________________________________ 602 North Crescent Avenue Beverly Hills, California 90210 Telephone: 310-858-8042 Telecopy: 310-550-1876 STEVEN LEBOW ___________________________________________ 150 North Cliffwood Los Angeles, California 90049 Telephone: 310-282-6165 Telecopy: 310-282-6178 30 31 P.F. CHANG'S CHINA BISTRO, INC. REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. SUSAN C. SCHNABEL AND EDWARD L. PLUMMER, JOINTLY ___________________________________________ Susan C. Schnabel ___________________________________________ Edward L. Plummer 40858 N. 109th Place Scottsdale, Arizona 85262 Telephone: (602) 595-1366 Telecopy: (602) 595-1041 31 32 P.F. CHANG'S CHINA BISTRO, INC. REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. JOSEPH SCHELL ___________________________________________ 3983 Happy Valley Road Lafayette, California 94549 Telephone: 415-627-2000 Telecopy: 415-249-5513 KARL MATTHIES ___________________________________________ 7 Bellagio Road P. O. Box 1322 Ross, California 94957 Telephone: 415-627-2250 Telecopy: 415-249-5513 MURRAY HUNEKE ___________________________________________ 315 Ambar Way Menlo Park, California 94025 Telephone: 415-627-2873 Telecopy: 415-249-5512 32 33 P.F. CHANG'S CHINA BISTRO, INC. REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. DAVID JACQUIN ___________________________________________ c/o Montgomery Securities 600 Montgomery Street San Francisco, California 94111 Telephone: (415) 627-2000 Telecopy: (415) 249-5513 PAUL S. MADERA AND JOAN K. MADERA, JTWROS ___________________________________________ Paul S. Madera ___________________________________________ Joan K. Madera 1205 Vancouver Avenue Burlingame, California 94010 Telephone: 415-627-3174 Telecopy: 413-249-5704 KENNETH LANG ___________________________________________ c/o Putnam Investments One Post Office Square 33 34 Boston, Massachusetts 02109 Telephone: (617) 760-7443 Telecopy: (617) 292-1784 34 35 P.F. CHANG'S CHINA BISTRO, INC. REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. RICHARD FEDERICO ___________________________________________ c/o P.F. Chang's China Bistro, Inc. 5090 North 40th Street Suite 160 Phoenix, Arizona 85018 Telephone: 602-957-8986 Telecopy: 602-957-8998 EDWARD J. MATHIAS ___________________________________________ 5120 Cammack Drive Bethesda, Maryland 20816 Telephone: 202-626-1228 Telecopy: 202-347-1818 A. WILLIAM ALLEN ___________________________________________ 7710 Sweetgum Avenue Los Colinas, Texas 75063 Telephone: (972) 401-0668 Telecopy: (972) 444-8375 35 36 P.F. CHANG'S CHINA BISTRO, INC. REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. J. RICHARD FREDERICKS ___________________________________________ 2395 Vallejo Street San Francisco, California 94010 Telephone: 415-627-2000 Telecopy: 413-249-5513 C. DONALD DORSEY ___________________________________________ 1225 E. Warner Road, Lot 18 Tempe, Arizona 85284-3245 Telephone: 602-491-3109 Telecopy: 602-491-1505 36 37 P.F. CHANG'S CHINA BISTRO, INC. REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. MICHAEL G. MUELLER AND CHRISTINE ELLEN CULLENS, TRUSTEES OF THE MUELLER-CULLENS FAMILY TRUST U/D/T/ DATED JULY 9, 1996 ___________________________________________ Michael G. Mueller, Trustee ___________________________________________ Christine Ellen Cullens, Trustee 2710 Filbert Street San Francisco, California 94112 Telephone: 415-775-4528 37 38 P.F. CHANG'S CHINA BISTRO, INC. REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. MICHAEL WELBORN ___________________________________________ c/o Bank One, Arizona 201 North Central Avenue 35th Floor Phoenix, Arizona 85004 Telephone: (602) 221-1674 Telecopy: (602) 221-2684 38 39 P.F. CHANG'S CHINA BISTRO, INC. REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. GLOBAL RETAIL PARTNERS, L.P. By: GLOBAL RETAIL PARTNERS, INC., its General Partner By:________________________________________ Name: Title: Global Retail Partners, L.P. 277 Park Avenue, 19th Floor New York, New York 10172 Attention: Nicole Arnaboldi/Theo Rand Telephone: (212) 892-3000 Telecopy: (212) 892-7552 Global Retail Partners, L.P. 2121 Avenue of the Stars, 30th Floor Los Angeles, California 90067 Attention: Osamu Watanabe Telephone: (310) 282-6100 Telecopy: (310) 282-6178 39 40 P.F. CHANG'S CHINA BISTRO, INC. REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. DLJ DIVERSIFIED PARTNERS, L.P. By: DLJ DIVERSIFIED PARTNERS, INC., its General Partner By:________________________________________ Name: Title: DLJ Diversified Partners, L.P. 277 Park Avenue, 19th Floor New York, New York 10172 Attention: Nicole Arnaboldi/Theo Rand Telephone: (212) 892-3000 Telecopy: (212) 892-7552 with copy to: DLJ Diversified Partners, L.P. 277 Park Avenue, 23rd Floor New York, New York 10172 Attention: Ivy Dodes Telephone: (212) 892-3000 Telecopy: (212) 892-2689 40 41 P.F. CHANG'S CHINA BISTRO, INC. REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. GRP PARTNERS, L.P. By: GLOBAL RETAIL PARTNERS, INC., its General Partner By:________________________________________ Name: Title: GRP Partners, L.P. 277 Park Avenue, 19th Floor New York, New York 10172 Attention: Nicole Arnaboldi/Theo Rand Telephone: (212) 892-3000 Telecopy: (212) 892-7552 with copy to: GRP Partners, L.P. 2121 Avenue of the Stars, 30th Floor Los Angeles, California 90067 Attention: Osamu Watanabe Telephone: (310) 282-6100 Telecopy: (310) 282-6178 41 42 P.F. CHANG'S CHINA BISTRO, INC. REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. GLOBAL RETAIL PARTNERS FUNDING, INC. By:________________________________________ Name: Title: Global Retail Partners Funding, Inc. 277 Park Avenue, 19th Floor New York, New York 10172 Attention: Nicole Arnaboldi/Theo Rand Telephone: (212) 892-3000 Telecopy: (212) 892-7552 with copy to: Global Retail Partners Funding, Inc. 2121 Avenue of the Stars Los Angeles, California 90067 Attention: Osamu Watanabe Telephone: (310) 282-6100 Telecopy: (310) 282-6178 42 43 P.F. CHANG'S CHINA BISTRO, INC. REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. DLJ FIRST ESC L.L.C. By: DLJ LBO PLANS MANAGEMENT CORPORATION, its Manager By:________________________________________ Name: Title: DLJ First ESC L.L.C. 277 Park Avenue, 19th Floor New York, New York 10172 Attention: Ed Poletti Telephone: (212) 892-3005 Telecopy: (212) 892-7272 with copy to: DLJ First ESC L.L.C. 277 Park Avenue, 23rd Floor New York, New York 10172 Attention: Ivy Dodes Telephone: (212) 892-3000 Telecopy: (212) 892-2689 43 44 P.F. CHANG'S CHINA BISTRO, INC. AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT Dated as of May 1, 1997 TABLE OF CONTENTS 1. (a) Definitions........................................................................ 1 (b) Knowledge Standard................................................................. 3 2. Securities Subject to this Agreement........................................................ 4 (a) Registrable Securities............................................................. 4 (b) Holders of Registrable Securities.................................................. 4 3. Demand Registration and Piggy-Back Registration............................................. 4 (a) Request for Registration by Holders of Registrable Securities...................... 4 (b) Effective Registration............................................................. 5 (c) Priority on Demand Registrations................................................... 5 (d) Selection of Underwriters. ........................................................ 6 (e) Piggy-Back Registration............................................................ 6 (f) Priority on All Registrations...................................................... 7 4. Hold-Back Agreements........................................................................ 7 (a) Restrictions on Public Sale by the Company of Registrable Securities............... 7 (b) Restrictions on Public Sale by the Company and Others.............................. 8 5. Registration Procedures..................................................................... 8
44 45 6. Registration Expenses....................................................................... 14 7. Indemnification............................................................................. 15 (a) Indemnification by the Company..................................................... 15 (b) Indemnification by Holder of Registrable Securities................................ 17 (c) Contribution....................................................................... 17 8. Rule 144.................................................................................... 18 9. Participation in Underwritten Registrations................................................. 18 10. Miscellaneous................................................................................ 19 (a) Remedies........................................................................... 19 (b) No Inconsistent Agreements......................................................... 19 (c) Amendments and Waivers............................................................. 19 (d) Notices............................................................................ 19 (e) Successors and Assigns............................................................. 20 (f) Counterparts....................................................................... 20 (g) Headings........................................................................... 20 (h) Governing Law...................................................................... 20 (i) Severability....................................................................... 20 (j) Entire Agreement................................................................... 20
45 EX-10.1 5 EX-10.1 1 EXHIBIT 10.1 FORM OF INDEMNITY AGREEMENT This Indemnity Agreement, dated as of ____________, 19__, is made by and between P.F. Chang's China Bistro, Inc., a Delaware corporation (the "Company"), and ______________ (the "Indemnitee"). RECITALS A. The Company is aware that competent and experienced persons are increasingly reluctant to serve as directors, officers or agents of corporations unless they are protected by comprehensive liability insurance or indemnification, due to increased exposure to litigation costs and risks resulting from their service to such corporations, and due to the fact that the exposure frequently bears no reasonable relationship to the compensation of such directors, officers and other agents. B. The statutes and judicial decisions regarding the duties of directors and officers are often difficult to apply, ambiguous, or conflicting, and therefore fail to provide such directors, officers and agents with adequate, reliable knowledge of legal risks to which they are exposed or information regarding the proper course of action to take. C. Plaintiffs often seek damages in such large amounts and the costs of litigation may be so enormous (whether or not the case is meritorious), that the defense and/or settlement of such litigation is often beyond the personal resources of directors, officers and other agents. D. The Company believes that it is unfair for its directors, officers and agents and the directors, officers and agents of its subsidiaries to assume the risk of huge judgments and other expenses which may occur in cases in which the director, officer or agent received no personal profit and in cases where the director, officer or agent was not culpable. E. The Company recognizes that the issues in controversy in litigation against a director, officer or agent of a corporation such as the Company or its subsidiaries are often related to the knowledge, motives and intent of such director, officer or agent, that he is usually the only witness with knowledge of the essential facts and exculpating circumstances regarding such matters, and that the long period of time which usually elapses before the trial or other disposition of such litigation often extends beyond the time that the director, officer or agent can reasonably recall such matters; and may extend beyond the normal time for retirement for such director, officer or agent with the result that he, after retirement or in the event of his death, his spouse, heirs, executors or administrators, may be faced with limited ability and undue hardship in maintaining an adequate defense, which may discourage such a director, officer or agent from serving in that position. 1 2 F. Based upon their experience as business managers, the Board of Directors of the Company (the "Board") has concluded that, to retain and attract talented and experienced individuals to serve as directors, officers and agents of the Company and its subsidiaries and to encourage such individuals to take the business risks necessary for the success of the Company and its subsidiaries, it is necessary for the Company to contractually indemnify its directors, officers and agents and the directors, officers and agents of its subsidiaries, and to assume for itself maximum liability for expenses and damages in connection with claims against such directors, officers and agents in connection with their service to the Company and its subsidiaries, and has further concluded that the failure to provide such contractual indemnification could result in great harm to the Company and its subsidiaries and the Company's stockholders. G. Section 145 of the General Corporation Law of Delaware, under which the Company is organized ("Section 145"), empowers the Company to indemnify its directors, officers, employees and agents by agreement and to indemnify persons who serve, at the request of the Company, as the directors, officers, employees or agents of other corporations or enterprises, and expressly provides that the indemnification provided by Section 145 is not exclusive. H. The Company desires and has requested the Indemnitee to serve or continue to serve as a director, officer or agent of the Company and/or one or more subsidiaries of the Company free from undue concern for claims for damages arising out of or related to such services to the Company and/or one or more subsidiaries of the Company. I. Indemnitee is willing to serve, or to continue to serve, the Company and/or one or more subsidiaries of the Company, provided that he is furnished the indemnity provided for herein. AGREEMENT NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Definitions. (a) Agent. For the purposes of this Agreement, "agent" of the Company means any person who is or was a director, officer, employee or other agent of the Company or a subsidiary of the Company; or is or was serving at the request of, for the convenience of, or to represent the interests of the Company or a subsidiary of the Company as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise; or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the Company or a subsidiary of the Company, or was a director, officer, employee or agent of another enterprise at the request of, for the convenience of, or to represent the interests of such predecessor corporation. 2 3 (b) Expenses. For purposes of this Agreement, "expenses" include all out-of-pocket costs of any type or nature whatsoever (including, without limitation, all attorneys' fees and related disbursements), actually and reasonably incurred by the Indemnitee in connection with either the investigation, defense or appeal of a proceeding or establishing or enforcing a right to indemnification under this Agreement or Section 145 or otherwise; provided, however, that "expenses" shall not include any judgments, fines, ERISA excise taxes or penalties, or amounts paid in settlement of a proceeding. (c) Proceeding. For the purposes of this Agreement, "proceeding" means any threatened, pending, or completed action, suit or other proceeding, whether civil, criminal, administrative, or investigative. (d) Subsidiary. For purposes of this Agreement, "subsidiary" means any corporation of which more than 50% of the outstanding voting securities is owned directly or indirectly by the Company, by the Company and one or more other subsidiaries, or by one or more other subsidiaries. 2. Agreement to Serve. The Indemnitee agrees to serve and/or continue to serve as agent of the Company, at its will (or under separate agreement, if such agreement exists), in the capacity Indemnitee currently serves as an agent of the Company, so long as he is duly appointed or elected and qualified in accordance with the applicable provisions of the By-laws of the Company or any subsidiary of the Company or until such time as he tenders his resignation in writing; provided, however, that nothing contained in this Agreement is intended to create any right to continued employment by Indemnitee. 3. Mandatory Indemnification. Subject to Section 8 below, the Company shall indemnify the Indemnitee as follows: (a) Successful Defense. To the extent the Indemnitee has been successful on the merits or otherwise in defense of any proceeding (including, without limitation, an action by or in the right of the Company) to which the Indemnitee was a party by reason of the fact that he is or was an agent of the Company at any time, against all expenses of any type whatsoever actually and reasonably incurred by him in connection with the investigation, defense or appeal of such proceeding. (b) Third Party Actions. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the Company) by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, the Company shall indemnify the Indemnitee against any and all expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) actually and reasonably incurred by him in connection with the investigation, defense, settlement or appeal of such proceeding, provided the Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and its stockholders, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. 3 4 (c) Derivative Actions. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding by or in the right of the Company by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, the Company shall indemnify the Indemnitee against all expenses actually and reasonably incurred by him in connection with the investigation, defense, settlement, or appeal of such proceeding, provided the Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and its stockholders; except that no indemnification under this subsection 3(c) shall be made in respect to any claim, issue or matter as to which such person shall have been finally adjudged to be liable to the Company by a court of competent jurisdiction unless and only to the extent that the court in which such proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such amounts which the court shall deem proper. (d) Actions where Indemnitee is Deceased. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, and if prior to, during the pendency of after completion of such proceeding Indemnitee becomes deceased, the Company shall indemnify the Indemnitee's heirs, executors and administrators against any and all expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) actually and reasonably incurred to the extent Indemnitee would have been entitled to indemnification pursuant to Sections 3(a), 3(b), or 3(c) above were Indemnitee still alive. (e) Notwithstanding the foregoing, the Company shall not be obligated to indemnify the Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) for which payment is actually made to or on behalf of Indemnitee under a valid and collectible insurance policy of D&O Insurance, or under a valid and enforceable indemnity clause, by-law or agreement. 4. Partial Indemnification. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) incurred by him in the investigation, defense, settlement or appeal of a proceeding, but not entitled, however, to indemnification for all of the total amount hereof, the Company shall nevertheless indemnify the Indemnitee for such total amount except as to the portion hereof to which the Indemnitee is not entitled. 5. Mandatory Advancement of Expenses. Subject to Section 7(a) below, the Company shall advance all expenses incurred by the Indemnitee in connection with the investigation, defense, settlement or appeal of any proceeding to which the Indemnitee is a party or is threatened to be made a party by reason of the fact that the Indemnitee is or was an agent of the Company. Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall be determined ultimately that the Indemnitee is not entitled to be indemnified 4 5 by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to the Indemnitee within twenty (20) days following delivery of a written request therefor by the Indemnitee to the Company. 6. Notice and Other Indemnification Procedures. (a) Promptly after receipt by the Indemnitee of notice of the commencement of or the threat of commencement of any proceeding, the Indemnitee shall, if the Indemnitee believes that indemnification with respect thereto may be sought from the Company under this Agreement, notify the Company of the commencement or threat of commencement thereof. (b) If, at the time of the receipt of a notice of the commencement of a proceeding pursuant to Section 6(a) hereof, the Company has D&O Insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. (c) In the event the Company shall be obligated to pay the expenses of any proceeding against the Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by the Indemnitee, upon the delivery to the Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by the Indemnitee and the retention of such counsel by the Company, the Company will not be liable to the Indemnitee under this Agreement for any fees of counsel subsequently incurred by the Indemnitee with respect to the same proceeding, provided that (i) the Indemnitee shall have the right to employ his counsel in any such proceeding at the Indemnitee's expense; and (ii) if (A) the employment of counsel by the Indemnitee has been previously authorized by the Company, (B) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of any such defense, or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 7. Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Claims Initiated by Indemnitee. To indemnify or advance expenses to the Indemnitee with respect to proceedings or claims initiated or brought voluntarily by the Indemnitee and not by way of defense, unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board, (iii) such indemnification is provided by the Company, in its sole discretion, pursuant to the powers vested in the Company under the General Corporation Law of Delaware or (iv) the proceeding is brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145. (b) Lack of Good Faith. To indemnify the Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by the Indemnitee to enforce 5 6 or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or (c) Unauthorized Settlements. To indemnify the Indemnitee under this Agreement for any amounts paid in settlement of a proceeding unless the Company consents to such settlement, which consent shall not be unreasonably withheld. 8. Non-exclusivity. The provisions for indemnification and advancement of expenses set forth in this Agreement shall not be deemed exclusive of any other rights which the Indemnitee may have under any provision of law, the Company's Certificate of Incorporation or By-laws, the vote of the Company's stockholders or disinterested directors, other agreements, or otherwise, both as to action in his official capacity and to action in another capacity while occupying his position as an agent of the Company, and the Indemnitee's rights hereunder shall continue after the Indemnitee has ceased acting as an agent of the Company and shall inure to the benefit of the heirs, executors and administrators of the Indemnitee. 9. Enforcement. Any right to indemnification or advances granted by this Agreement to Indemnitee shall be enforceable by or on behalf of Indemnitee in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. Indemnitee, in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. It shall be a defense to any action for which a claim for indemnification is made under this Agreement (other than an action brought to enforce a claim for expenses pursuant to Section 5 hereof, provided that the required undertaking has been tendered to the Company) that Indemnitee is not entitled to indemnification because of the limitations set forth in Sections 3 and 7 hereof. Neither the failure of the Company (including its Board of Directors or its stockholders) to have made a determination prior to the commencement of such enforcement action that indemnification of Indemnitee is proper in the circumstances, nor an actual determination by the Company (including its Board of Directors or its stockholders) that such indemnification is improper, shall be a defense to the action or create a presumption that Indemnitee is not entitled to indemnification under this Agreement or otherwise. 10. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 11. Survival of Rights. (a) All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is an agent of the Company and shall continue thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative, by reason of the fact that Indemnitee was serving in the capacity referred to herein. 6 7 (b) The Company shall require any successor to the Company (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. 12. Interpretation of Agreement. It is understood that the parties hereto intend this Agreement to be interpreted and enforced so as to provide indemnification to the Indemnitee to the fullest extent permitted by law including those circumstances in which indemnification would otherwise be discretionary. 13. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever, (i) the validity, legality and enforceability of the remaining provisions of the Agreement (including without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby, and (ii) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable and to give effect to Section 12 hereof. 14. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 15. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee or (ii) if mailed by certified or registered mail with postage prepaid, on the third business day after the mailing date. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 16. Governing Law. This Agreement shall be governed exclusively by and construed according to the laws of the State of Delaware as applied to contracts between Delaware residents entered into and to be performed entirely within Delaware. 7 8 The parties hereto have entered into this Indemnity Agreement effective as of the date first above written. THE COMPANY: P.F. CHANG'S CHINA BISTRO, INC. By: _______________________________ _____________________________________ (Printed Name) Title _______________________________ Address: ____________________________ _____________________________________ INDEMNITEE: By: _______________________________ _____________________________________ (Indemnitee's Printed Name) Address: ____________________________ _____________________________________ 8 EX-10.2 6 EX-10.2 1 EXHIBIT 10.2 P.F. CHANG'S CHINA BISTRO, INC. 1998 STOCK OPTION PLAN 1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN. 1.1 ESTABLISHMENT. The P.F. Chang's China Bistro, Inc. 1998 Stock Option Plan (the "PLAN") is hereby established effective as of the effective date of the initial registration by the Company of its Stock under Section 12 of the Exchange Act (the "EFFECTIVE DATE"). 1.2 PURPOSE. The purpose of the Plan is to advance the interests of the Participating Company Group and its stockholders by providing an incentive to attract, retain and reward persons performing services for the Participating Company Group and by motivating such persons to contribute to the growth and profitability of the Participating Company Group. 1.3 TERM OF PLAN. The Plan shall continue in effect until the earlier of its termination by the Board or the date on which all of the shares of Stock available for issuance under the Plan have been issued and all restrictions on such shares under the terms of the Plan and the agreements evidencing Options granted under the Plan have lapsed. However, all Incentive Stock Options shall be granted, if at all, within ten (10) years from the earlier of the date the Plan is adopted by the Board or the date the Plan is duly approved by the stockholders of the Company. 2. DEFINITIONS AND CONSTRUCTION. 2.1 DEFINITIONS. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "BOARD" means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, "BOARD" also means such Committee(s). (b) "CODE" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder. (c) "COMMITTEE" means the Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted herein, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. 1 2 (d) "COMPANY" means P.F. Chang's China Bistro, Inc., a Delaware corporation, or any successor corporation thereto. (e) "CONSULTANT" means any person, including an advisor, engaged by a Participating Company to render services other than as an Employee or a Director. (f) "DIRECTOR" means a member of the Board or of the board of directors of any other Participating Company. (g) "DISABILITY" means the permanent and total disability of the Optionee within the meaning of Section 22(e)(3) of the Code. (h) "EMPLOYEE" means any person treated as an employee (including an officer or a Director who is also treated as an employee) in the records of a Participating Company and, with respect to any Incentive Stock Option granted to such person, who is an employee for purposes of Section 422 of the Code; provided, however, that neither service as a Director nor payment of a director's fee shall be sufficient to constitute employment for purposes of the Plan. The Company shall determine in good faith and in the exercise of its discretion whether an individual has become or has ceased to be an Employee and the effective date of such individual's employment or termination of employment, as the case may be. For purposes of an individual's rights, if any, under the Plan as of the time of the Company's determination, all such determinations by the Company shall be final, binding and conclusive, notwithstanding that the Company or any governmental agency subsequently makes a contrary determination. (i) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (j) "FAIR MARKET VALUE" means, as of any date, the value of a share of Stock or other property as determined by the Board, in its sole discretion, or by the Company, in its sole discretion, if such determination is expressly allocated to the Company herein, subject to the following: (i) If, on such date, there is a public market for the Stock, the Fair Market Value of a share of Stock shall be the closing price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National Market, the Nasdaq Small-Cap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in the Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Board, in its sole discretion. 2 3 (ii) If, on such date, there is no public market for the Stock, the Fair Market Value of a share of Stock shall be as determined by the Board without regard to any restriction other than a restriction which, by its terms, will never lapse. (k) "INCENTIVE STOCK OPTION" means an Option intended to be (as set forth in the Option Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of the Code. (l) "INSIDER" means an officer or a Director of the Company or any other person whose transactions in Stock are subject to Section 16 of the Exchange Act. (m) "NONEMPLOYEE DIRECTOR" means a Director of the Company who is not an Employee. (n) "NONEMPLOYEE DIRECTOR OPTION" means a right to purchase Stock (subject to adjustment as provided in Section 4.2) granted to a Nonemployee Director pursuant to the terms and conditions of the Plan. Nonemployee Director Options shall be Nonstatutory Stock Options. (o) "NONSTATUTORY STOCK OPTION" means an Option not intended to be (as set forth in the Option Agreement) or which does not qualify as an Incentive Stock Option. (p) "OPTION" means a right to purchase Stock (subject to adjustment as provided in Section 4.2) pursuant to the terms and conditions of the Plan, including a Nonemployee Director Option. An Option may be either an Incentive Stock Option or a Nonstatutory Stock Option. (q) "OPTION AGREEMENT" means a written agreement between the Company and an Optionee setting forth the terms, conditions and restrictions of the Option granted to the Optionee and any shares acquired upon the exercise thereof. (r) "OPTIONEE" means a person who has been granted one or more Options. (s) "PARENT CORPORATION" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. (t) "PARTICIPATING COMPANY" means the Company or any Parent Corporation or Subsidiary Corporation. (u) "PARTICIPATING COMPANY GROUP" means, at any point in time, all corporations collectively which are then Participating Companies. (v) "PRIOR PLANS" means the Company's 1996 Stock Option Plan and 1997 Restaurant Management Stock Option Plan. 3 4 (w) "RULE 16b-3" means Rule 16b-3 under the Exchange Act, as amended from time to time, or any successor rule or regulation. (x) "SECTION 162(m)" means Section 162(m) of the Code. (y) "SECURITIES ACT" means the Securities Act of 1933, as amended. (z) "SERVICE" means an Optionee's employment or service with the Participating Company Group, whether in the capacity of an Employee, a Director or a Consultant. An Optionee's Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionee renders Service to the Participating Company Group or a change in the Participating Company for which the Optionee renders such Service, provided that there is no interruption or termination of the Optionee's Service. Furthermore, an Optionee's Service with the Participating Company Group shall not be deemed to have terminated if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company; provided, however, that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and instead shall be treated thereafter as a Nonstatutory Stock Option unless the Optionee's right to return to Service with the Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining vesting under the Optionee's Option Agreement. An Optionee's Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Optionee performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its sole discretion, shall determine whether an Optionee's Service has terminated and the effective date of such termination. (aa) "STOCK" means the common stock of the Company, as adjusted from time to time in accordance with Section 4.2. (bb) "SUBSIDIARY CORPORATION" means any present or future "subsidiary corporation" of the Company, as defined in Section 424(f) of the Code. (cc) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at the time an Option is granted to the Optionee, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of a Participating Company within the meaning of Section 422(b)(6) of the Code. 2.2 CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall 4 5 include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise. 3. ADMINISTRATION. 3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by the Board. All questions of interpretation of the Plan or of any Option shall be determined by the Board, and such determinations shall be final and binding upon all persons having an interest in the Plan or such Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, determination or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, determination or election. 3.2 ADMINISTRATION WITH RESPECT TO INSIDERS. With respect to participation by Insiders in the Plan, at any time that any class of equity security of the Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall be administered in compliance with the requirements, if any, of Rule 16b-3. 3.3 COMMITTEE COMPLYING WITH SECTION 162(m). If a Participating Company is a "publicly held corporation" within the meaning of Section 162(m), the Board may establish a Committee of "outside directors" within the meaning of Section 162(m) to approve the grant of any Option which might reasonably be anticipated to result in the payment of employee remuneration that would otherwise exceed the limit on employee remuneration deductible for income tax purposes pursuant to Section 162(m). 3.4 POWERS OF THE BOARD. In addition to any other powers set forth in the Plan and subject to the provisions of the Plan, the Board shall have the full and final power and authority, in its sole discretion: (a) to determine the persons to whom, and the time or times at which, Options shall be granted and the number of shares of Stock to be subject to each Option; (b) to designate Options as Incentive Stock Options or Nonstatutory Stock Options; (c) to determine the Fair Market Value of shares of Stock or other property; (d) to determine the terms, conditions and restrictions applicable to each Option (which need not be identical) and any shares acquired upon the exercise thereof, including, without limitation, (i) the exercise price of the Option, (ii) the method of payment for shares purchased upon the exercise of the Option, (iii) the method for satisfaction of any tax withholding obligation arising in connection with the Option or such shares, including by the 5 6 withholding or delivery of shares of stock, (iv) the timing, terms and conditions of the exercisability of the Option or the vesting of any shares acquired upon the exercise thereof, (v) the time of the expiration of the Option, (vi) the effect of the Optionee's termination of Service with the Participating Company Group on any of the foregoing, and (vii) all other terms, conditions and restrictions applicable to the Option or such shares not inconsistent with the terms of the Plan; (e) to approve one or more forms of Option Agreement; (f) to amend, modify, extend, cancel, renew, or grant a new Option in substitution for, any Option or to waive any restrictions or conditions applicable to any Option or any shares acquired upon the exercise thereof; (g) to accelerate, continue, extend or defer the exercisability of any Option or the vesting of any shares acquired upon the exercise thereof, including with respect to the period following an Optionee's termination of Service with the Participating Company Group; (h) to prescribe, amend or rescind rules, guidelines and policies relating to the Plan, or to adopt supplements to, or alternative versions of, the Plan, including, without limitation, as the Board deems necessary or desirable to comply with the laws of, or to accommodate the tax policy or custom of, foreign jurisdictions whose citizens may be granted Options; and (i) to correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Option Agreement and to make all other determinations and take such other actions with respect to the Plan or any Option as the Board may deem advisable to the extent consistent with the Plan and applicable law. 4. SHARES SUBJECT TO PLAN. 4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as provided in Section 4.2, the maximum aggregate number of shares of Stock that may be issued under the Plan shall be the sum of (a)____________________________ (__________) shares, (b) the number of shares of Stock, as of the date on which the Board adopted the Plan (the "ADOPTION DATE"), subject to outstanding options granted pursuant to the Prior Plans (the "PRIOR PLAN OPTIONS"), and (c) the number of shares of Stock available for future grant under the Prior Plans as of the Adoption Date (the "PRIOR PLAN AVAILABLE SHARES"), resulting in an aggregate total of five hundred sixty thousand (560,000) shares (the "SHARE RESERVE") and shall consist of authorized but unissued or reacquired shares of Stock or any combination thereof. Notwithstanding the foregoing, the Share Reserve, determined at any time, shall be reduced by (a) the number of shares remaining subject to outstanding Prior Plan Options, (b) the number of shares issued upon the exercise of Prior Plan Options, and (c) the number of shares, if any, of the Prior Plan Available Shares which are issued upon the exercise of options granted under the Prior 6 7 Plans subsequent to the Effective Date. If an outstanding Option for any reason expires or is terminated or canceled, or if shares of Stock acquired, subject to repurchase, upon the exercise of an Option are repurchased by the Company, the shares of Stock allocable to the unexercised portion of such Option or such repurchased shares of Stock shall again be available for issuance under the Plan. 4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number and class of shares subject to the Plan and to any outstanding Options, in the share limit set forth in Section 3.4(h), in the Section 162(m) Grant Limit set forth in Section 5.4, to the automatic Nonemployee Director Option grant provisions set forth in Section 7.1 and in the exercise price per share of any outstanding Options. If a majority of the shares which are of the same class as the shares that are subject to outstanding Options are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event, as defined in Section 9.1) shares of another corporation (the "NEW SHARES"), the Board may unilaterally amend the outstanding Options to provide that such Options are exercisable for New Shares. In the event of any such amendment, the number of shares subject to, and the exercise price per share of, the outstanding Options shall be adjusted in a fair and equitable manner as determined by the Board, in its sole discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 4.2 shall be rounded up or down to the nearest whole number, as determined by the Board, and in no event may the exercise price of any Option be decreased to an amount less than the par value, if any, of the stock subject to the Option. The adjustments determined by the Board pursuant to this Section 4.2 shall be final, binding and conclusive. 5. ELIGIBILITY AND OPTION LIMITATIONS. 5.1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only to Employees, Consultants and Directors. For purposes of the foregoing sentence, "Employees", "Consultants" and "Directors" shall include prospective Employees, prospective Consultants and prospective Directors to whom Options are granted in connection with written offers of employment or other service relationship with the Participating Company Group. Eligible persons may be granted more than one (1) Option. 5.2 OPTION GRANT RESTRICTIONS. Any person who is not an Employee on the effective date of the grant of an Option to such person may be granted only a Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective Employee upon the condition that such person become an Employee shall be deemed granted effective on the date such person commences Service as an Employee with a Participating Company, with an exercise price determined as of such date in accordance with Section 6.1. A Nonemployee Director Option may be granted only to a person who at the time of grant is a Nonemployee Director. 7 8 5.3 FAIR MARKET VALUE LIMITATION. To the extent that options designated as Incentive Stock Options (granted under all stock option plans of the Participating Company Group, including the Plan) become exercisable by an Optionee for the first time during any calendar year for stock having an aggregate Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the portion of such options which exceeds such amount shall be treated as Nonstatutory Stock Options. For purposes of this Section 5.3, options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of stock shall be determined as of the time the option with respect to such stock is granted. If the Code is amended to provide for a different limitation from that set forth in this Section 5.3, such different limitation shall be deemed incorporated herein effective as of the date and with respect to such Options as required or permitted by such amendment to the Code. If an Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section 5.3, the Optionee may designate which portion of such Option the Optionee is exercising. In the absence of such designation, the Optionee shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Separate certificates representing each such portion shall be issued upon the exercise of the Option. 5.4 SECTION 162(m) GRANT LIMIT. Subject to adjustment as provided in Section 4.2, at any such time as a Participating Company is a "publicly held corporation" within the meaning of Section 162(m), no Employee shall be granted one or more Options within any fiscal year of the Company which in the aggregate are for the purchase of more than ___________________________ (_____________) shares of Stock (the "SECTION 162(m) GRANT LIMIT"). An Option which is canceled in the same fiscal year of the Company in which it was granted shall continue to be counted against the Section 162(m) Grant Limit for such period. 6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by Option Agreements specifying the number of shares of Stock covered thereby, in such form as the Board shall from time to time establish. No Option or purported Option shall be a valid and binding obligation of the Company unless evidenced by a fully executed Option Agreement. Option Agreements may incorporate all or any of the terms of the Plan by reference and, except as otherwise set forth in Section 7 with respect to Nonemployee Director Options, shall comply with and be subject to the following terms and conditions: 6.1 EXERCISE PRICE. The exercise price for each Option shall be established in the sole discretion of the Board; provided, however, that (a) the exercise price per share for an Incentive Stock Option shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the Option, (b) the exercise price per share for a Nonstatutory Stock Option shall be not less than eighty-five percent (85%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option, and (c) no Incentive Stock Option granted to a Ten Percent Owner Optionee shall have an exercise price per share less than one hundred ten percent (110%) of the Fair Market Value of a share of Stock on the effective date of grant of the 8 9 Option. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner qualifying under the provisions of Section 424(a) of the Code. 6.2 EXERCISE PERIOD. Options shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria, and restrictions as shall be determined by the Board and set forth in the Option Agreement evidencing such Option; provided, however, that (a) no Incentive Stock Option shall be exercisable after the expiration of ten (10) years after the effective date of grant of such Option, (b) no Incentive Stock Option granted to a Ten Percent Owner Optionee shall be exercisable after the expiration of five (5) years after the effective date of grant of such Option, and (c) no Option granted to a prospective Employee, prospective Consultant or prospective Director may become exercisable prior to the date on which such person commences Service with a Participating Company. Subject to the foregoing, unless otherwise specified by the Board in the grant of an Option, any Option granted hereunder shall have a term of ten (10) years from the effective date of the grant of the Option. 6.3 PAYMENT OF EXERCISE PRICE. (a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided below, payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the exercise price, (iii) by the assignment of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System) (a "CASHLESS EXERCISE"), (iv) provided that the Optionee is an Employee, by cash for a portion of the aggregate exercise price not less than the par value of the shares being acquired and the Optionee's promissory note in a form approved by the Company for the balance of the aggregate exercise price, (v) by such other consideration as may be approved by the Board from time to time to the extent permitted by applicable law, or (vi) by any combination thereof. The Board may at any time or from time to time, by adoption of or by amendment to the standard forms of Option Agreement described in Section 8, or by other means, grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price or which otherwise restrict one or more forms of consideration. (b) TENDER OF STOCK. Notwithstanding the foregoing, an Option may not be exercised by tender to the Company of shares of Stock to the extent such tender of Stock would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. Unless otherwise provided by the Board, an Option may 9 10 not be exercised by tender to the Company of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. (c) CASHLESS EXERCISE. The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to establish, decline to approve or terminate any program or procedures for the exercise of Options by means of a Cashless Exercise. (d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be permitted if the exercise of an Option using a promissory note would be a violation of any law. Any permitted promissory note shall be on such terms as the Board shall determine at the time the Option is granted. The Board shall have the authority to permit or require the Optionee to secure any promissory note used to exercise an Option with the shares of Stock acquired upon the exercise of the Option or with other collateral acceptable to the Company. Unless otherwise provided by the Board, if the Company at any time is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with the Company's securities, any promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations. 6.4 TAX WITHHOLDING. The Company shall have the right, but not the obligation, to deduct from the shares of Stock issuable upon the exercise of an Option, or to accept from the Optionee the tender of, a number of whole shares of Stock having a Fair Market Value, as determined by the Company, equal to all or any part of the federal, state, local and foreign taxes, if any, required by law to be withheld by the Participating Company Group with respect to such Option or the shares acquired upon the exercise thereof. Alternatively or in addition, in its sole discretion, the Company shall have the right to require the Optionee, through payroll withholding, cash payment or otherwise, including by means of a Cashless Exercise, to make adequate provision for any such tax withholding obligations of the Participating Company Group arising in connection with the Option or the shares acquired upon the exercise thereof. The Company shall have no obligation to deliver shares of Stock until the Participating Company Group's tax withholding obligations have been satisfied by the Optionee. 6.5 EFFECT OF TERMINATION OF SERVICE. (a) OPTION EXERCISABILITY. Subject to earlier termination of the Option as otherwise provided herein, an Option shall be exercisable after an Optionee's termination of Service as follows: (i) DISABILITY. If the Optionee's Service with the Participating Company Group is terminated because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be 10 11 exercised by the Optionee (or the Optionee's guardian or legal representative) at any time prior to the expiration of twelve (12) months (or such longer or shorter period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the date of expiration of the Option's term as set forth in the Option Agreement evidencing such Option (the "OPTION EXPIRATION DATE"). (ii) DEATH. If the Optionee's Service with the Participating Company Group is terminated because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee's legal representative or other person who acquired the right to exercise the Option by reason of the Optionee's death at any time prior to the expiration of twelve (12) months (or such longer or shorter period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. The Optionee's Service shall be deemed to have terminated on account of death if the Optionee dies within three (3) months after the Optionee's termination of Service. (iii) OTHER TERMINATION OF SERVICE. If the Optionee's Service with the Participating Company Group terminates for any reason, except Disability, death or Cause, as provided in Section 6.5(d) below, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee's Service terminated, may be exercised by the Optionee within three (3) months (or such longer or shorter period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. (b) EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the foregoing, if the exercise of an Option within the applicable time periods set forth in Section 6.5(a) is prevented by the provisions of Section 12 below, the Option shall remain exercisable until three (3) months after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date. (c) EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 6.5(a) of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of Service, or (iii) the Option Expiration Date. (d) TERMINATION FOR CAUSE. Except as otherwise provided in a contract of employment or service between a Participating Company and an Optionee, and notwithstanding any other provision of the Plan to the contrary, if the Optionee's Service with the Participating Company Group is terminated for Cause as defined below, the Option shall terminate and cease to be exercisable immediately upon such termination of Service. For purposes of this Section 6.5(d), "CAUSE" shall mean any of the following: (1) the Optionee's 11 12 theft, dishonesty, or falsification of any Participating Company documents or records; (2) the Optionee's improper use or disclosure of a Participating Company's confidential or proprietary information; (3) any action by the Optionee which has a detrimental effect on a Participating Company's reputation or business; (4) the Optionee's failure or inability to perform any reasonable assigned duties after written notice from the Participating Company Group of, and a reasonable opportunity to cure, such failure or inability; (5) any material breach by the Optionee of any agreement of employment or service between the Optionee and the Participating Company Group, which breach is not cured pursuant to the terms of such agreement; or (6) the Optionee's conviction (including any plea of guilty or nolo contendere) of any criminal act which impairs the Optionee's ability to perform his or her duties with the Participating Company Group. A determination by the Board that the Optionee was terminated for Cause shall be final and binding upon the Optionee for all purposes and shall not be subject to review by any governmental agency or court of law. 7. TERMS AND CONDITIONS OF NONEMPLOYEE DIRECTOR OPTIONS. Nonemployee Director Options shall be evidenced by Option Agreements specifying the number of shares of Stock covered thereby, in such form as the Board shall from time to time establish. Such Option Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions: 7.1 AUTOMATIC GRANT. Subject to the execution by a Nonemployee Director of an appropriate Option Agreement, Nonemployee Director Options shall be granted automatically and without further action of the Board, as follows: (a) INITIAL OPTION. Each person who first becomes a Nonemployee Director on or after the Effective Date shall be granted on the date such person first becomes a Nonemployee Director a Nonemployee Director Option to purchase twenty thousand (20,000) shares of Stock (an "INITIAL OPTION"); provided, however, that an Initial Option shall not be granted to a Director who previously did not qualify as a Nonemployee Director but subsequently becomes a Nonemployee Director as a result of the termination of his or her status as an Employee. (b) ANNUAL OPTION. Each Nonemployee Director (including any Director who previously did not qualify as a Nonemployee Director but who subsequently becomes a Nonemployee Director) shall be granted on the date immediately following each annual meeting of the stockholders of the Company which occurs on or after the Effective Date (an "ANNUAL MEETING") a Nonemployee Director Option to purchase five thousand (5,000) shares of Stock (an "ANNUAL OPTION"); provided, however, that a Nonemployee Director granted an Initial Option on the date of an Annual Meeting shall not be granted an Annual Option pursuant to this Section on the date immediately following the same Annual Meeting. (c) RIGHT TO DECLINE NONEMPLOYEE DIRECTOR OPTION. Notwithstanding the foregoing, any person may elect not to receive a Nonemployee Director Option by delivering 12 13 written notice of such election to the Board no later than the day prior to the date such Nonemployee Director Option would otherwise be granted. A person so declining a Nonemployee Director Option shall receive no payment or other consideration in lieu of such declined Nonemployee Director Option. A person who has declined a Nonemployee Director Option may revoke such election by delivering written notice of such revocation to the Board no later than the day prior to the date such Nonemployee Director Option would be granted pursuant to Section 7.1(a) or (b), as the case may be. 7.2 EXERCISE PRICE. The exercise price per share of Stock subject to a Nonemployee Director Option shall be the Fair Market Value of a share of Stock on the date the Nonemployee Director Option is granted. 7.3 EXERCISE PERIOD. Each Nonemployee Director Option shall terminate and cease to be exercisable on the date ten (10) years after the date of grant of the Nonemployee Director Option unless earlier terminated pursuant to the terms of the Plan or the Option Agreement. 7.4 RIGHT TO EXERCISE NONEMPLOYEE DIRECTOR OPTIONS. Except as otherwise provided in the Option Agreement, 1/5 of the shares subject to a Nonemployee Director Option shall become vested and exercisable on the first anniversary of the date on which such Option was granted, and the remaining shares shall vest in equal monthly installments over the following 48 months, provided that the Optionee's Service has not terminated prior to the relevant date. 7.5 EFFECT OF TERMINATION OF SERVICE ON NONEMPLOYEE DIRECTOR OPTIONS. (a) OPTION EXERCISABILITY. Subject to earlier termination of the Nonemployee Director Option as otherwise provided herein, a Nonemployee Director Option shall be exercisable after an Optionee's termination of Service as follows: (i) DISABILITY. If the Optionee's Service with the Participating Company Group is terminated because of the Disability of the Optionee, the Nonemployee Director Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee (or the Optionee's guardian or legal representative) at any time prior to the expiration of twelve (12) months after the date on which the Optionee's Service terminated, but in any event no later than the date of expiration of the Option Expiration Date. (ii) DEATH. If the Optionee's Service with the Participating Company Group is terminated because of the death of the Optionee, the Nonemployee Director Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee's legal representative or other person who acquired the right to exercise the Nonemployee Director Option by reason of the Optionee's death at any time prior to the expiration of twelve (12) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. The 13 14 Optionee's Service shall be deemed to have terminated on account of death if the Optionee dies within six (6) months after the Optionee's termination of Service. (iii) OTHER TERMINATION OF SERVICE. If the Optionee's Service with the Participating Company Group terminates for any reason, except Disability or death, the Nonemployee Director Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee's Service terminated, may be exercised by the Optionee within six (6) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. (b) EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the foregoing, if the exercise of a Nonemployee Director Option within the applicable time periods set forth in Section 7.5(a) is prevented by the provisions of Section 12 below, the Nonemployee Director Option shall remain exercisable until three (3) months after the date the Optionee is notified by the Company that the Nonemployee Director Option is exercisable, but in any event no later than the Option Expiration Date. (c) EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 7.5(a) of shares acquired upon the exercise of the Nonemployee Director Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Nonemployee Director Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of Service, or (iii) the Option Expiration Date. 8. STANDARD FORMS OF OPTION AGREEMENT. 8.1 INCENTIVE STOCK OPTIONS. Unless otherwise provided by the Board at the time the Option is granted, an Option designated as an "Incentive Stock Option" shall comply with and be subject to the terms and conditions set forth in the appropriate form of Incentive Stock Option Agreement adopted by the Board concurrently with its adoption of the Plan and as amended from time to time. 8.2 NONSTATUTORY STOCK OPTIONS (OTHER THAN NONEMPLOYEE DIRECTOR OPTION). Unless otherwise provided by the Board at the time the Option is granted, an Option designated as a "Nonstatutory Stock Option" (other than a Nonemployee Director Option) shall comply with and be subject to the terms and conditions set forth in the appropriate form of Nonstatutory Stock Option Agreement adopted by the Board concurrently with its adoption of the Plan and as amended from time to time. 8.3 NONEMPLOYEE DIRECTOR OPTION. Each Nonemployee Director Option shall comply with and be subject to the terms and conditions set forth in the appropriate form of 14 15 Nonstatutory Stock Option Agreement (Nonemployee Director Option) adopted by the Board concurrently with its adoption of the Plan and as amended from time to time. 8.4 AUTHORITY TO VARY TERMS. The Board shall have the authority from time to time to vary the terms of any of the standard forms of Option Agreement described in this Section 8 either in connection with the grant or amendment of an individual Option or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of any such new, revised or amended standard form or forms of Option Agreement are not inconsistent with the terms of the Plan. 9. CHANGE IN CONTROL. 9.1 DEFINITIONS. Except as otherwise determined by the Board and set forth in an Option Agreement, the following terms shall have their respective meanings set forth below: (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the "TRANSACTION") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "TRANSFEREE CORPORATION(S)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 15 16 9.2 EFFECT OF CHANGE IN CONTROL ON OPTIONS. In the event of a Change in Control, each holder of an unexercisable or unvested outstanding Option shall be credited with an additional two (2) years of Service as of the date ten (10) days prior to the date of the Change in Control, solely for the purpose of determining the number of exercisable and vested shares of Stock subject to the Option. The exercise or vesting of any Option that was permissible solely by reason of this Section shall be conditioned upon the consummation of the Change in Control. In addition, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), may either assume the Company's rights and obligations under outstanding Options or substitute for outstanding Options substantially equivalent options for the Acquiring Corporation's stock. For purposes of this Section 9.2, an Option shall be deemed assumed if, following the Change in Control, the Option confers the right to purchase in accordance with its terms and conditions, for each share of Stock subject to the Option immediately prior to the Change in Control, the consideration (whether stock, cash or other securities or property) to which a holder of a share of Stock on the effective date of the Change in Control was entitled. Any Options which are neither assumed or substituted for by the Acquiring Corporation in connection with the Change in Control nor exercised as of the date of the Change in Control shall terminate and cease to be outstanding effective as of the date of the Change in Control. Notwithstanding the foregoing, if the corporation the stock of which is subject to the outstanding Options immediately prior to an Ownership Change Event described in Section 9.1(a)(i) constituting a Change in Control is the surviving or continuing corporation and immediately after such Ownership Change Event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions of Section 1504(b) of the Code, the outstanding Options shall not terminate unless the Board otherwise provides in its sole discretion. 9.3 NOTICE. The Company shall provide notice of a Change in Control to all holders of outstanding Options at least ten (10) days prior to the consummation of the Change in Control. The Company's notice shall summarize the principal terms of the Change in Control, including, without limitation, whether the Acquiring Corporation is assuming the outstanding Options or substituting equivalent options therefor. 10. PROVISION OF INFORMATION. Each Optionee shall be given access to information concerning the Company equivalent to that information generally made available to the Company's common stockholders. 11. TRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, an Option shall be exercisable only by the Optionee or the Optionee's guardian or legal representative. No Option shall be assignable or transferable by the Optionee, except by will or by the laws of descent and distribution. 16 17 Notwithstanding the foregoing, a Nonstatutory Stock Option shall be assignable or transferable to the extent permitted by the Board and set forth in the Option Agreement evidencing such Option. 12. COMPLIANCE WITH SECURITIES LAW. The grant of Options and the issuance of shares of Stock upon exercise of Options shall be subject to compliance with all applicable requirements of federal, state or foreign law with respect to such securities. Options may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, no Option may be exercised unless (a) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (b) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any shares hereunder shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of any Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. 13. INDEMNIFICATION. In addition to such other rights of indemnification as they may have as members of the Board or officers or employees of the Participating Company Group, members of the Board and any officers or employees of the Participating Company Group to whom authority to act for the Board or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same. 17 18 14. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend the Plan at any time. However, subject to changes in applicable law, regulations or rules that would permit otherwise, without the approval of the Company's stockholders, there shall be (a) no increase in the maximum aggregate number of shares of Stock that may be issued under the Plan (except by operation of the provisions of Section 4.2), (b) no change in the class of persons eligible to receive Incentive Stock Options, and (c) no other amendment of the Plan that would require approval of the Company's stockholders under any applicable law, regulation or rule. In any event, no termination or amendment of the Plan may adversely affect any then outstanding Option or any unexercised portion thereof, without the consent of the Optionee, unless such termination or amendment is required to enable an Option designated as an Incentive Stock Option to qualify as an Incentive Stock Option or is necessary to comply with any applicable law, regulation or rule. IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that the foregoing P.F. Chang's China Bistro, Inc. 1998 Stock Option Plan was duly adopted by the Board on _________________, 1998. _____________________________ 18 19 P.F. CHANG'S CHINA BISTRO, INC. NONSTATUTORY STOCK OPTION AGREEMENT (NONEMPLOYEE DIRECTOR) THIS NONSTATUTORY STOCK OPTION AGREEMENT (the "OPTION AGREEMENT") is made and entered into as of the Date of Option Grant by and between P.F. Chang's China Bistro, Inc. and ___________________________ (the "OPTIONEE"). The Company has granted to the Optionee pursuant to the P.F. Chang's China Bistro, Inc. 1998 Stock Option Plan (the "PLAN") an option to purchase certain shares of Stock, upon the terms and conditions set forth in this Option Agreement (the "OPTION"). 1. DEFINITIONS AND CONSTRUCTION. 1.1. DEFINITIONS. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "DATE OF OPTION GRANT" means ___________________ , 199 __ . (b) "NUMBER OF OPTION SHARES" means __________________ shares of Stock, as adjusted from time to time pursuant to Section 9. (c) "EXERCISE PRICE" means $ ______________ per share of Stock, as adjusted from time to time pursuant to Section 9. (d) "OPTION EXPIRATION DATE" means the date ten (10) years after the Date of Option Grant. (e) "VESTED RATIO" means, on any relevant date, the ratio determined as follows:
Vested Ratio ------------ Prior to Initial Vesting Date 0 On Initial Vesting Date, provided the Optionee's Service has not terminated prior to such date 1/5 Plus: For each full month of the Optionee's continuous Service from the Initial Vesting Date until the Vested Ratio equals 1/1, an additional 1/60
1 20 (f) "BOARD" means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, "Board" shall also mean such Committee(s). (g) "CODE" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder. (h) "COMMITTEE" means the Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted in the Plan, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. (i) "COMPANY" means P.F. Chang's China Bistro, Inc., a Delaware corporation, or any successor corporation thereto. (j) "CONSULTANT" means any person, including an advisor, engaged by a Participating Company to render services other than as an Employee or a Director. (k) "DIRECTOR" means a member of the Board or of the board of directors of any other Participating Company. (l) "DISABILITY" means the permanent and total disability of the Optionee within the meaning of Section 22(e)(3) of the Code. (m) "EMPLOYEE" means any person treated as an employee (including an officer or a Director who is also treated as an employee) in the records of a Participating Company and who is an employee for purposes of Section 422 of the Code; provided, however, that neither service as a Director nor payment of a director's fee shall be sufficient to constitute employment for this purpose. The Company shall determine in good faith and in the exercise of its discretion whether an individual has become or has ceased to be an Employee and the effective date of such individual's employment or termination of employment, as the case may be. For purposes of an individual's rights, if any, under the Plan as of the time of the Company's determination, all such determinations by the Company shall be final, binding and conclusive, notwithstanding that the Company or any governmental agency subsequently makes a contrary determination. (n) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (o) "FAIR MARKET VALUE" means, as of any date, the value of a share of stock or other property as determined by the Board, in its sole discretion, or by the Company, in its sole discretion, if such determination is expressly allocated to the Company herein, subject to the following: 2 21 (i) If, on such date, there is a public market for the Stock, the Fair Market Value of a share of Stock shall be the closing price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National Market, the Nasdaq Small-Cap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in the Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Board, in its sole discretion. (ii) If, on such date, there is no public market for the Stock, the Fair Market Value of a share of Stock shall be as determined by the Board without regard to any restriction other than a restriction which, by its terms, will never lapse. (p) "PARENT CORPORATION" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. (q) "PARTICIPATING COMPANY" means the Company or any Parent Corporation or Subsidiary Corporation. (r) "PARTICIPATING COMPANY GROUP" means, at any point in time, all corporations collectively which are then Participating Companies. (s) "SECURITIES ACT" means the Securities Act of 1933, as amended. (t) "SERVICE" means the Optionee's employment or service with the Participating Company Group, whether in the capacity of an Employee, a Director or a Consultant. The Optionee's Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionee renders Service to the Participating Company Group or a change in the Participating Company for which the Optionee renders such Service, provided that there is no interruption or termination of the Optionee's Service. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining the Vested Ratio. The Optionee's Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Optionee performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its sole discretion, shall determine whether the Optionee's Service has terminated and the effective date of such termination. (u) "STOCK" means the common stock of the Company, as adjusted from time to time in accordance with Section 9. (v) "SUBSIDIARY CORPORATION" means any present or future "subsidiary corporation" of the Company, as defined in Section 424(f) of the Code. 3 22 1.2. CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of this Option Agreement. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise. 2. TAX STATUS OF OPTION. This Option is intended to be a nonstatutory stock option and shall not be treated as an incentive stock option within the meaning of Section 422(b) of the Code. 3. ADMINISTRATION. All questions of interpretation concerning this Option Agreement shall be determined by the Board. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 4. EXERCISE OF THE OPTION. 4.1. RIGHT TO EXERCISE. Except as otherwise provided herein, the Option shall be exercisable on and after the Date of Option Grant and prior to the termination of the Option (as provided in Section 6) in an amount not to exceed the Number of Option Shares multiplied by the Vested Ratio less the number of shares previously acquired upon exercise of the Option. In no event shall the Option be exercisable for more shares than the Number of Option Shares. 4.2. METHOD OF EXERCISE. Exercise of the Option shall be by written notice to the Company which must state the election to exercise the Option, the number of whole shares of Stock for which the Option is being exercised and such other representations and agreements as to the Optionee's investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. The written notice must be signed by the Optionee and must be delivered to the Chief Financial Officer of the Company, or other authorized representative of the Participating Company Group, prior to the termination of the Option as set forth in Section 6, accompanied by full payment of the aggregate Exercise Price for the number of shares of Stock being purchased and the tax withholding obligations, if any, as provided in Section 4.4. The Option shall be deemed to be exercised upon receipt by the Company of such written notice, the aggregate Exercise Price, and tax withholding obligations, if any. 4.3. PAYMENT OF EXERCISE PRICE. (a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided below, payment of the aggregate Exercise Price for the number of shares of Stock for which the Option is being exercised shall be made (i) in cash or cash equivalent, (ii) by tender to the Company of whole shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to 4 23 such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in Section 4.3(c), or (iv) by any combination of the foregoing. (b) TENDER OF STOCK. Notwithstanding the foregoing, the Option may not be exercised by tender to the Company of shares of Stock to the extent such tender of Stock would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. The Option may not be exercised by tender to the Company of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. (c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the assignment in a form acceptable to the Company of the proceeds of a sale or loan with respect to some or all of the shares of Stock acquired upon the exercise of the Option pursuant to a program or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to decline to approve or terminate any such program or procedure. 4.4. TAX WITHHOLDING. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee hereby authorizes withholding from payroll and any other amounts payable to the Optionee, and otherwise agrees to make adequate provision for (including by means of a Cashless Exercise to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Participating Company Group, if any, which arise in connection with the Option, including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in whole or in part, of any shares acquired upon exercise of the Option, (iii) the operation of any law or regulation providing for the imputation of interest, or (iv) the lapsing of any restriction with respect to any shares acquired upon exercise of the Option. The Optionee is cautioned that the Option is not exercisable unless the tax withholding obligations of the Participating Company Group are satisfied. Accordingly, the Optionee may not be able to exercise the Option when desired even though the Option is vested, and the Company shall have no obligation to issue a certificate for such shares. 4.5. CERTIFICATE REGISTRATION. Except in the event the Exercise Price is paid by means of a Cashless Exercise, the certificate for the shares as to which the Option is exercised shall be registered in the name of the Optionee, or, if applicable, in the names of the heirs of the Optionee. 4.6. RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The grant of the Option and the issuance of shares of Stock upon exercise of the Option shall be subject to compliance with all applicable requirements of federal, state or foreign law with respect to such securities. The Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock 5 24 may then be listed. In addition, the Option may not be exercised unless (i) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. Questions concerning this restriction should be directed to the Chief Financial Officer of the Company. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any shares subject to the Option shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of the Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. 4.7. FRACTIONAL SHARES. The Company shall not be required to issue fractional shares upon the exercise of the Option. 5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised during the lifetime of the Optionee only by the Optionee or the Optionee's guardian or legal representative and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. Following the death of the Optionee, the Option, to the extent provided in Section 7, may be exercised by the Optionee's legal representative or by any person empowered to do so under the deceased Optionee's will or under the then applicable laws of descent and distribution. 6. TERMINATION OF THE OPTION. The Option shall terminate and may no longer be exercised on the first to occur of (a) the Option Expiration Date, (b) the last date for exercising the Option following termination of the Optionee's Service as described in Section 7, or (c) a Change in Control to the extent provided in Section 8. 6 25 7. EFFECT OF TERMINATION OF SERVICE. 7.1. OPTION EXERCISABILITY. (a) DISABILITY. If the Optionee's Service with the Participating Company Group is terminated because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee (or the Optionee's guardian or legal representative) at any time prior to the expiration of twelve (12) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. (b) DEATH. If the Optionee's Service with the Participating Company Group is terminated because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee's legal representative or other person who acquired the right to exercise the Option by reason of the Optionee's death at any time prior to the expiration of twelve (12) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. The Optionee's Service shall be deemed to have terminated on account of death if the Optionee dies within six (6) months after the Optionee's termination of Service. (c) OTHER TERMINATION OF SERVICE. If the Optionee's Service with the Participating Company Group terminates for any reason, except Disability or death, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee's Service terminated, may be exercised by the Optionee within six (6) months (or such other longer period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. 7.2. EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the foregoing, if the exercise of the Option within the applicable time periods set forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option shall remain exercisable until three (3) months after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date. 7.3. EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 7.1 of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of Service, or (iii) the Option Expiration Date. 8. CHANGE IN CONTROL. 8.1. DEFINITIONS. (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any of the following occurs with respect to the Company: 7 26 (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the "TRANSACTION") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "TRANSFEREE CORPORATION(S)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 8.2. EFFECT OF CHANGE IN CONTROL ON OPTION. In the event of a Change in Control, the Optionee shall be credited with an additional two (2) years of Service as of the date ten (10) days prior to the date of the Change in Control, solely for purposes of determining the Vested Ratio. Any exercise or vesting of the Option that was permissible solely by reason of this Section 8.2 shall be conditioned upon the consummation of the Change in Control. In addition, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), may either assume the Company's rights and obligations under the Option or substitute for the Option a substantially equivalent option for the Acquiring Corporation's stock. For purposes of this Section 8.2, the Option shall be deemed assumed if, following the Change in Control, the Option confers the right to purchase in accordance with its terms and conditions, for each share of Stock subject to the Option immediately prior to the Change in Control, the consideration (whether stock, cash or other securities or property) to which a holder of a share of Stock on the effective date of the Change in Control was entitled. The Option shall terminate and cease to be outstanding effective as of the date of the Change in Control to the extent that the Option is neither assumed or substituted for by the Acquiring Corporation in connection with the Change in Control nor exercised as of the date of the Change in Control. Notwithstanding the foregoing, if the corporation the stock of which is subject to the Option immediately prior to an Ownership Change Event described in Section 8.1(a)(i) constituting a Change in Control is the surviving or continuing corporation and 8 27 immediately after any such event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions of Section 1504(b) of the Code, the Option shall not terminate unless the Board otherwise provides in its sole discretion. 8.3. NOTICE. The Company shall provide notice of a Change in Control to the Optionee at least ten (10) days prior to the consummation of a Change in Control. The Company's notice shall summarize the principal terms of the Change in Control, including, without limitation, whether the Acquiring Corporation is assuming the Option or substituting an equivalent option therefor. 9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification, or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number, Exercise Price and class of shares of stock subject to the Option. If a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares of another corporation (the "NEW SHARES"), the Board may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the Number of Option Shares and the Exercise Price shall be adjusted in a fair and equitable manner, as determined by the Board, in its sole discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 9 shall be rounded up or down to the nearest whole number, as determined by the Board, and in no event may the Exercise Price be decreased to an amount less than the par value, if any, of the stock subject to the Option. The adjustments determined by the Board pursuant to this Section 9 shall be final, binding and conclusive. 10. RIGHTS AS A STOCKHOLDER. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a certificate for the shares for which the Option has been exercised (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such certificate is issued, except as provided in Section 9. 9 28 11. LEGENDS. The Company may at any time place legends referencing any applicable federal, state or foreign securities law restrictions on all certificates representing shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in the possession of the Optionee in order to carry out the provisions of this Section. 12. BINDING EFFECT. Subject to the restrictions on transfer set forth herein, this Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 13. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan or the Option at any time; provided, however, that except as provided in Section 8.2 in connection with a Change in Control, no such termination or amendment may adversely affect the Option or any unexercised portion hereof without the consent of the Optionee unless such termination or amendment is necessary to comply with any applicable law or government regulation. No amendment or addition to this Option Agreement shall be effective unless in writing. 14. NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this Option Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail, with postage and fees prepaid, addressed to the other party at the address of such party as set forth below that party's signature or at such other address as such party may designate in writing from time to time to the other party. 10 29 15. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire understanding and agreement of the Optionee and the Participating Company Group with respect to the subject matter contained herein, and there are no agreements, understandings, restrictions, representations, or warranties among the Optionee and the Participating Company Group with respect to such subject matter other than those as set forth or provided for herein. To the extent contemplated herein, the provisions of this Option Agreement shall survive any exercise of the Option and shall remain in full force and effect. 16. APPLICABLE LAW. This Option Agreement shall be governed by the laws of the State of Delaware as such laws are applied to agreements between Delaware residents entered into and to be performed entirely within the State of Delaware. P.F. CHANG'S CHINA BISTRO, INC. By: ________________________________ Title: _____________________________ Address: ___________________________ ___________________________ The Optionee represents that the Optionee is familiar with the terms and provisions of this Option Agreement, and hereby accepts the Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Option Agreement. OPTIONEE Date:_____________________________ ____________________________________ Optionee Address: ____________________________________ ____________________________________ 11 30 P.F. CHANG'S CHINA BISTRO, INC. NONSTATUTORY STOCK OPTION AGREEMENT THIS NONSTATUTORY STOCK OPTION AGREEMENT (the "OPTION AGREEMENT") is made and entered into as of the Date of Option Grant by and between P.F. Chang's China Bistro, Inc. and ___________________________ (the "OPTIONEE"). The Company has granted to the Optionee pursuant to the P.F. Chang's China Bistro, Inc. 1998 Stock Option Plan (the "PLAN") an option to purchase certain shares of Stock, upon the terms and conditions set forth in this Option Agreement (the "OPTION"). 1. DEFINITIONS AND CONSTRUCTION. 1.1. DEFINITIONS. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "DATE OF OPTION GRANT" means ___________________ , 199 __ . (b) "NUMBER OF OPTION SHARES" means __________________ shares of Stock, as adjusted from time to time pursuant to Section 9. (c) "EXERCISE PRICE" means $ ______________ per share of Stock, as adjusted from time to time pursuant to Section 9. (d) "OPTION EXPIRATION DATE" means the date ten (10) years after the Date of Option Grant. (e) "VESTED RATIO" means, on any relevant date, the ratio determined as follows:
Vested Ratio ------------ Prior to Initial Vesting Date 0 On Initial Vesting Date, provided the Optionee's Service has not terminated prior to such date 1/5 Plus: For each full month of the Optionee's continuous Service from the Initial Vesting Date until the Vested Ratio equals 1/1, an additional 1/60
1 31 (f) "BOARD" means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, "Board" shall also mean such Committee(s). (g) "CAUSE" means any of the following: (i) the Optionee's theft, dishonesty, or falsification of any Participating Company documents or records; (ii) the Optionee's improper use or disclosure of a Participating Company's confidential or proprietary information; (iii) any action by the Optionee which has a detrimental effect on a Participating Company's reputation or business; (iv) the Optionee's failure or inability to perform any reasonable assigned duties after written notice from the Participating Company Group of, and a reasonable opportunity to cure, such failure or inability; (v) any material breach by the Optionee of any agreement of employment or service between the Optionee and the Participating Company Group, which breach is not cured pursuant to the terms of such agreement; or (vi) the Optionee's conviction (including any plea of guilty or nolo contendere) of any criminal act which impairs the Optionee's ability to perform his or her duties with the Participating Company Group. A determination by the Board that the Optionee was terminated for Cause shall be final and binding upon the Optionee for all purposes and shall not be subject to review by any governmental agency or court of law. (h) "CODE" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder. (i) "COMMITTEE" means the Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted in the Plan, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. (j) "COMPANY" means P.F. Chang's China Bistro, Inc., a Delaware corporation, or any successor corporation thereto. (k) "CONSULTANT" means any person, including an advisor, engaged by a Participating Company to render services other than as an Employee or a Director. (l) "DIRECTOR" means a member of the Board or of the board of directors of any other Participating Company. (m) "DISABILITY" means the permanent and total disability of the Optionee within the meaning of Section 22(e)(3) of the Code. (n) "EMPLOYEE" means any person treated as an employee (including an officer or a Director who is also treated as an employee) in the records of a Participating Company and who is an employee for purposes of Section 422 of the Code; provided, however, that neither service as a Director nor payment of a director's fee shall be sufficient to constitute employment for this purpose. The Company shall determine in good faith and in the exercise of its discretion whether an individual has become or has ceased to be an Employee and the 2 32 effective date of such individual's employment or termination of employment, as the case may be. For purposes of an individual's rights, if any, under the Plan as of the time of the Company's determination, all such determinations by the Company shall be final, binding and conclusive, notwithstanding that the Company or any governmental agency subsequently makes a contrary determination. (o) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (p) "FAIR MARKET VALUE" means, as of any date, the value of a share of stock or other property as determined by the Board, in its sole discretion, or by the Company, in its sole discretion, if such determination is expressly allocated to the Company herein, subject to the following: (i) If, on such date, there is a public market for the Stock, the Fair Market Value of a share of Stock shall be the closing price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National Market, the Nasdaq Small-Cap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in the Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Board, in its sole discretion. (ii) If, on such date, there is no public market for the Stock, the Fair Market Value of a share of Stock shall be as determined by the Board without regard to any restriction other than a restriction which, by its terms, will never lapse. (q) "PARENT CORPORATION" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. (r) "PARTICIPATING COMPANY" means the Company or any Parent Corporation or Subsidiary Corporation. (s) "PARTICIPATING COMPANY GROUP" means, at any point in time, all corporations collectively which are then Participating Companies. (t) "SECURITIES ACT" means the Securities Act of 1933, as amended. (u) "SERVICE" means the Optionee's employment or service with the Participating Company Group, whether in the capacity of an Employee, a Director or a Consultant. The Optionee's Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionee renders Service to the Participating Company Group or a change in the Participating Company for which the Optionee renders such Service, provided that there is no interruption or termination of the Optionee's Service. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of 3 33 absence shall not be treated as Service for purposes of determining the Vested Ratio. The Optionee's Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Optionee performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its sole discretion, shall determine whether the Optionee's Service has terminated and the effective date of such termination. (v) "STOCK" means the common stock of the Company, as adjusted from time to time in accordance with Section 9. (w) "SUBSIDIARY CORPORATION" means any present or future "subsidiary corporation" of the Company, as defined in Section 424(f) of the Code. 1.2. CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of this Option Agreement. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise. 2. TAX STATUS OF OPTION. This Option is intended to be a nonstatutory stock option and shall not be treated as an incentive stock option within the meaning of Section 422(b) of the Code. 3. ADMINISTRATION. All questions of interpretation concerning this Option Agreement shall be determined by the Board. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 4. EXERCISE OF THE OPTION. 4.1. RIGHT TO EXERCISE. Except as otherwise provided herein, the Option shall be exercisable on and after the Date of Option Grant and prior to the termination of the Option (as provided in Section 6) in an amount not to exceed the Number of Option Shares multiplied by the Vested Ratio less the number of shares previously acquired upon exercise of the Option. In no event shall the Option be exercisable for more shares than the Number of Option Shares. 4.2. METHOD OF EXERCISE. Exercise of the Option shall be by written notice to the Company which must state the election to exercise the Option, the number of whole shares of Stock for which the Option is being exercised and such other representations and agreements as to the Optionee's investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. The written notice must be signed by the Optionee and must be delivered to the Chief Financial Officer of the Company, or other authorized 4 34 representative of the Participating Company Group, prior to the termination of the Option as set forth in Section 6, accompanied by full payment of the aggregate Exercise Price for the number of shares of Stock being purchased and the tax withholding obligations, if any, as provided in Section 4.4. The Option shall be deemed to be exercised upon receipt by the Company of such written notice, the aggregate Exercise Price, and tax withholding obligations, if any. 4.3. PAYMENT OF EXERCISE PRICE. (a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided below, payment of the aggregate Exercise Price for the number of shares of Stock for which the Option is being exercised shall be made (i) in cash or cash equivalent, (ii) by tender to the Company of whole shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in Section 4.3(c), or (iv) by any combination of the foregoing. (b) TENDER OF STOCK. Notwithstanding the foregoing, the Option may not be exercised by tender to the Company of shares of Stock to the extent such tender of Stock would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. The Option may not be exercised by tender to the Company of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. (c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the assignment in a form acceptable to the Company of the proceeds of a sale or loan with respect to some or all of the shares of Stock acquired upon the exercise of the Option pursuant to a program or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to decline to approve or terminate any such program or procedure. 4.4. TAX WITHHOLDING. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee hereby authorizes withholding from payroll and any other amounts payable to the Optionee, and otherwise agrees to make adequate provision for (including by means of a Cashless Exercise to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Participating Company Group, if any, which arise in connection with the Option, including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in whole or in part, of any shares acquired upon exercise of the Option, (iii) the operation of any law or regulation providing for the imputation of interest, or (iv) the lapsing of any restriction with respect to any shares acquired upon exercise of the Option. The Optionee is cautioned that the Option is not exercisable unless the tax withholding obligations of the Participating Company Group are satisfied. Accordingly, the 5 35 Optionee may not be able to exercise the Option when desired even though the Option is vested, and the Company shall have no obligation to issue a certificate for such shares. 4.5. CERTIFICATE REGISTRATION. Except in the event the Exercise Price is paid by means of a Cashless Exercise, the certificate for the shares as to which the Option is exercised shall be registered in the name of the Optionee, or, if applicable, in the names of the heirs of the Optionee. 4.6. RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The grant of the Option and the issuance of shares of Stock upon exercise of the Option shall be subject to compliance with all applicable requirements of federal, state or foreign law with respect to such securities. The Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, the Option may not be exercised unless (i) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. Questions concerning this restriction should be directed to the Chief Financial Officer of the Company. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any shares subject to the Option shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of the Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. 4.7. FRACTIONAL SHARES. The Company shall not be required to issue fractional shares upon the exercise of the Option. 5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised during the lifetime of the Optionee only by the Optionee or the Optionee's guardian or legal representative and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. Following the death of the Optionee, the Option, to the extent provided in Section 7, may be exercised by the Optionee's legal representative or by any person empowered to do so under the deceased Optionee's will or under the then applicable laws of descent and distribution. 6. TERMINATION OF THE OPTION. 6 36 The Option shall terminate and may no longer be exercised on the first to occur of (a) the Option Expiration Date, (b) the last date for exercising the Option following termination of the Optionee's Service as described in Section 7, or (c) a Change in Control to the extent provided in Section 8. 7. EFFECT OF TERMINATION OF SERVICE. 7.1. OPTION EXERCISABILITY. (a) DISABILITY. If the Optionee's Service with the Participating Company Group is terminated because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee (or the Optionee's guardian or legal representative) at any time prior to the expiration of twelve (12) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. (b) DEATH. If the Optionee's Service with the Participating Company Group is terminated because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee's legal representative or other person who acquired the right to exercise the Option by reason of the Optionee's death at any time prior to the expiration of twelve (12) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. The Optionee's Service shall be deemed to have terminated on account of death if the Optionee dies within three (3) months after the Optionee's termination of Service. (c) OTHER TERMINATION OF SERVICE. If the Optionee's Service with the Participating Company Group terminates for any reason, except Disability, death, or Cause, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee's Service terminated, may be exercised by the Optionee within three (3) months (or such other longer period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. 7.2. EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the foregoing, if the exercise of the Option within the applicable time periods set forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option shall remain exercisable until three (3) months after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date. 7.3. EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 7.1 of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of Service, or (iii) the Option Expiration Date. 7 37 7.4. TERMINATION FOR CAUSE. Except as otherwise provided in a contract of employment or service between a Participating Company and the Optionee, and notwithstanding any other provision of this Option Agreement to the contrary, if the Optionee's Service with the Participating Company Group is terminated for Cause, the Option shall terminate and cease to be exercisable immediately upon such termination of Service. 8. CHANGE IN CONTROL. 8.1. DEFINITIONS. (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the "TRANSACTION") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "TRANSFEREE CORPORATION(S)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 8.2. EFFECT OF CHANGE IN CONTROL ON OPTION. In the event of a Change in Control, the Optionee shall be credited with an additional two (2) years of Service as of the date ten (10) days prior to the date of the Change in Control, solely for purposes of determining the Vested Ratio. Any exercise or vesting of the Option that was permissible solely by reason of this Section 8.2 shall be conditioned upon the consummation of the Change in Control. In addition, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), may either assume the Company's rights and 8 38 obligations under the Option or substitute for the Option a substantially equivalent option for the Acquiring Corporation's stock. For purposes of this Section 8.2, the Option shall be deemed assumed if, following the Change in Control, the Option confers the right to purchase in accordance with its terms and conditions, for each share of Stock subject to the Option immediately prior to the Change in Control, the consideration (whether stock, cash or other securities or property) to which a holder of a share of Stock on the effective date of the Change in Control was entitled. The Option shall terminate and cease to be outstanding effective as of the date of the Change in Control to the extent that the Option is neither assumed or substituted for by the Acquiring Corporation in connection with the Change in Control nor exercised as of the date of the Change in Control. Notwithstanding the foregoing, if the corporation the stock of which is subject to the Option immediately prior to an Ownership Change Event described in Section 8.1(a)(i) constituting a Change in Control is the surviving or continuing corporation and immediately after any such event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions of Section 1504(b) of the Code, the Option shall not terminate unless the Board otherwise provides in its sole discretion. 8.3. NOTICE. The Company shall provide notice of a Change in Control to the Optionee at least ten (10) days prior to the consummation of a Change in Control. The Company's notice shall summarize the principal terms of the Change in Control, including, without limitation, whether the Acquiring Corporation is assuming the Option or substituting an equivalent option therefor. 9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification, or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number, Exercise Price and class of shares of stock subject to the Option. If a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares of another corporation (the "NEW SHARES"), the Board may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the Number of Option Shares and the Exercise Price shall be adjusted in a fair and equitable manner, as determined by the Board, in its sole discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 9 shall be rounded up or down to the nearest whole number, as determined by the Board, and in no event may the Exercise Price be decreased to an amount less than the par value, if any, of the stock subject to the Option. The adjustments determined by the Board pursuant to this Section 9 shall be final, binding and conclusive. 10. RIGHTS AS A STOCKHOLDER, EMPLOYEE OR CONSULTANT. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a certificate for the shares for which the Option has been exercised (as evidenced by the appropriate entry on the books of the Company or of a duly 9 39 authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such certificate is issued, except as provided in Section 9. If the Optionee is an Employee, the Optionee understands and acknowledges that, except as otherwise provided in a separate, written employment agreement between a Participating Company and the Optionee, the Optionee's employment is "at will" and is for no specified term. Nothing in this Option Agreement shall confer upon the Optionee, whether an Employee or Consultant, any right to continue in the Service of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Optionee's Service as an Employee or Consultant, as the case may be, at any time. 11. LEGENDS. The Company may at any time place legends referencing any applicable federal, state or foreign securities law restrictions on all certificates representing shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in the possession of the Optionee in order to carry out the provisions of this Section. 12. BINDING EFFECT. Subject to the restrictions on transfer set forth herein, this Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 13. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan or the Option at any time; provided, however, that except as provided in Section 8.2 in connection with a Change in Control, no such termination or amendment may adversely affect the Option or any unexercised portion hereof without the consent of the Optionee unless such termination or amendment is necessary to comply with any applicable law or government regulation. No amendment or addition to this Option Agreement shall be effective unless in writing. 14. NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this Option Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail, with postage and fees prepaid, addressed to the other party at the address of such party as set forth below that party's signature or at such other address as such party may designate in writing from time to time to the other party. 15. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire understanding and agreement of the Optionee and the Participating Company Group with respect to the subject matter contained 10 40 herein, and there are no agreements, understandings, restrictions, representations, or warranties among the Optionee and the Participating Company Group with respect to such subject matter other than those as set forth or provided for herein. To the extent contemplated herein, the provisions of this Option Agreement shall survive any exercise of the Option and shall remain in full force and effect. 16. APPLICABLE LAW. This Option Agreement shall be governed by the laws of the State of Delaware as such laws are applied to agreements between Delaware residents entered into and to be performed entirely within the State of Delaware. P.F. CHANG'S CHINA BISTRO, INC. By: ________________________________ Title: _____________________________ Address: ___________________________ ___________________________ The Optionee represents that the Optionee is familiar with the terms and provisions of this Option Agreement, and hereby accepts the Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Option Agreement. OPTIONEE Date:_____________________________ ____________________________________ Optionee Address: ____________________________________ ____________________________________ 11 41 P.F. CHANG'S CHINA BISTRO, INC. INCENTIVE STOCK OPTION AGREEMENT THIS INCENTIVE STOCK OPTION AGREEMENT (the "OPTION AGREEMENT") is made and entered into as of the Date of Option Grant by and between P.F. Chang's China Bistro, Inc. and ___________________________ (the "OPTIONEE"). The Company has granted to the Optionee pursuant to the P.F. Chang's China Bistro, Inc. 1998 Stock Option Plan (the "PLAN") an option to purchase certain shares of Stock, upon the terms and conditions set forth in this Option Agreement (the "OPTION"). 1. DEFINITIONS AND CONSTRUCTION. 1.1. DEFINITIONS. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "DATE OF OPTION GRANT" means ___________________ , 199 __ . (b) "NUMBER OF OPTION SHARES" means __________________ shares of Stock, as adjusted from time to time pursuant to Section 9. (c) "EXERCISE PRICE" means $ ______________ per share of Stock, as adjusted from time to time pursuant to Section 9. (d) "OPTION EXPIRATION DATE" means the date ten (10) years after the Date of Option Grant. (e) "VESTED RATIO" means, on any relevant date, the ratio determined as follows:
Vested Ratio ------------ Prior to Initial Vesting Date 0 On Initial Vesting Date, provided the Optionee's Service has not terminated prior to such date 1/5 Plus: For each full month of the Optionee's continuous Service from the Initial Vesting Date until the Vested Ratio equals 1/1, an additional 1/60
1 42 (f) "BOARD" means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, "Board" shall also mean such Committee(s). (g) "CAUSE" means any of the following: (i) the Optionee's theft, dishonesty, or falsification of any Participating Company documents or records; (ii) the Optionee's improper use or disclosure of a Participating Company's confidential or proprietary information; (iii) any action by the Optionee which has a detrimental effect on a Participating Company's reputation or business; (iv) the Optionee's failure or inability to perform any reasonable assigned duties after written notice from the Participating Company Group of, and a reasonable opportunity to cure, such failure or inability; (v) any material breach by the Optionee of any agreement of employment or service between the Optionee and the Participating Company Group, which breach is not cured pursuant to the terms of such agreement; or (vi) the Optionee's conviction (including any plea of guilty or nolo contendere) of any criminal act which impairs the Optionee's ability to perform his or her duties with the Participating Company Group. A determination by the Board that the Optionee was terminated for Cause shall be final and binding upon the Optionee for all purposes and shall not be subject to review by any governmental agency or court of law. (h) "CODE" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder. (i) "COMMITTEE" means the Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted in the Plan, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. (j) "COMPANY" means P.F. Chang's China Bistro, Inc., a Delaware corporation, or any successor corporation thereto. (k) "CONSULTANT" means any person, including an advisor, engaged by a Participating Company to render services other than as an Employee or a Director. (l) "DIRECTOR" means a member of the Board or of the board of directors of any other Participating Company. (m) "DISABILITY" means the permanent and total disability of the Optionee within the meaning of Section 22(e)(3) of the Code. (n) "EMPLOYEE" means any person treated as an employee (including an officer or a Director who is also treated as an employee) in the records of a Participating Company and who is an employee for purposes of Section 422 of the Code; provided, however, that neither service as a Director nor payment of a director's fee shall be sufficient to constitute employment for this purpose. The Company shall determine in good faith and in the exercise of its discretion whether an individual has become or has ceased to be an Employee and the 2 43 effective date of such individual's employment or termination of employment, as the case may be. For purposes of an individual's rights, if any, under the Plan as of the time of the Company's determination, all such determinations by the Company shall be final, binding and conclusive, notwithstanding that the Company or any governmental agency subsequently makes a contrary determination. (o) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (p) "FAIR MARKET VALUE" means, as of any date, the value of a share of stock or other property as determined by the Board, in its sole discretion, or by the Company, in its sole discretion, if such determination is expressly allocated to the Company herein, subject to the following: (i) If, on such date, there is a public market for the Stock, the Fair Market Value of a share of Stock shall be the closing price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National Market, the Nasdaq Small-Cap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in the Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Board, in its sole discretion. (ii) If, on such date, there is no public market for the Stock, the Fair Market Value of a share of Stock shall be as determined by the Board without regard to any restriction other than a restriction which, by its terms, will never lapse. (q) "INCENTIVE STOCK OPTION" means an Option intended to be (to the extent set forth in this Option Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of the Code. (r) "NONSTATUTORY STOCK OPTION" means an Option which does not qualify as an Incentive Stock Option. (s) "PARENT CORPORATION" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. (t) "PARTICIPATING COMPANY" means the Company or any Parent Corporation or Subsidiary Corporation. (u) "PARTICIPATING COMPANY GROUP" means, at any point in time, all corporations collectively which are then Participating Companies. (v) "SECURITIES ACT" means the Securities Act of 1933, as amended. 3 44 (w) "SERVICE" means the Optionee's employment or service with the Participating Company Group, whether in the capacity of an Employee, a Director or a Consultant. The Optionee's Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionee renders Service to the Participating Company Group or a change in the Participating Company for which the Optionee renders such Service, provided that there is no interruption or termination of the Optionee's Service. Furthermore, the Optionee's Service with the Participating Company Group shall not be deemed to have terminated if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company; provided, however, that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and instead shall be treated thereafter as a Nonstatutory Stock Option unless the Optionee's right to return to Service with the Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining the Vested Ratio. The Optionee's Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Optionee performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its sole discretion, shall determine whether the Optionee's Service has terminated and the effective date of such termination. (NOTE: If the Option is exercised more than three (3) months after the date on which the Optionee ceased to be an Employee (other than by reason of death or Disability), the Option will be treated as a Nonstatutory Stock Option and not as an incentive stock option to the extent required by Section 422 of the Code.) (x) "STOCK" means the common stock of the Company, as adjusted from time to time in accordance with Section 9. (y) "SUBSIDIARY CORPORATION" means any present or future "subsidiary corporation" of the Company, as defined in Section 424(f) of the Code. 1.2. CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of this Option Agreement. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise. 2. TAX STATUS OF OPTION. This Option is intended to be an Incentive Stock Option, but the Company does not represent or warrant that this Option qualifies as such. The Optionee should consult with the Optionee's own tax advisor regarding the tax effects of this Option and the requirements necessary to obtain favorable income tax treatment under Section 422 of the Code, including, but not limited to, holding period requirements. (NOTE: If the aggregate Exercise Price of the Option (that is, the Exercise Price multiplied by the Number of Option Shares) plus the aggregate exercise price of any other Incentive Stock Options held by the Optionee (whether granted pursuant to the Plan or any other stock option plan of the Participating Company Group) is 4 45 greater than One Hundred Thousand Dollars ($100,000), the Optionee should contact the Chief Financial Officer of the Company to ascertain whether the entire Option qualifies as an Incentive Stock Option.) 3. ADMINISTRATION. All questions of interpretation concerning this Option Agreement shall be determined by the Board. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 4. EXERCISE OF THE OPTION. 4.1. RIGHT TO EXERCISE. Except as otherwise provided herein, the Option shall be exercisable on and after the Date of Option Grant and prior to the termination of the Option (as provided in Section 6) in an amount not to exceed the Number of Option Shares multiplied by the Vested Ratio less the number of shares previously acquired upon exercise of the Option. In no event shall the Option be exercisable for more shares than the Number of Option Shares. 4.2. METHOD OF EXERCISE. Exercise of the Option shall be by written notice to the Company which must state the election to exercise the Option, the number of whole shares of Stock for which the Option is being exercised and such other representations and agreements as to the Optionee's investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. The written notice must be signed by the Optionee and must be delivered to the Chief Financial Officer of the Company, or other authorized representative of the Participating Company Group, prior to the termination of the Option as set forth in Section 6, accompanied by full payment of the aggregate Exercise Price for the number of shares of Stock being purchased and the tax withholding obligations, if any, as provided in Section 4.4. The Option shall be deemed to be exercised upon receipt by the Company of such written notice, the aggregate Exercise Price, and tax withholding obligations, if any. 4.3. PAYMENT OF EXERCISE PRICE. (a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided below, payment of the aggregate Exercise Price for the number of shares of Stock for which the Option is being exercised shall be made (i) in cash or cash equivalent, (ii) by tender to the Company of whole shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in Section 4.3(c), or (iv) by any combination of the foregoing. (b) TENDER OF STOCK. Notwithstanding the foregoing, the Option may not be exercised by tender to the Company of shares of Stock to the extent such tender of Stock would constitute a violation of the provisions of any law, regulation or agreement restricting the 5 46 redemption of the Company's stock. The Option may not be exercised by tender to the Company of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. (c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the assignment in a form acceptable to the Company of the proceeds of a sale or loan with respect to some or all of the shares of Stock acquired upon the exercise of the Option pursuant to a program or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to decline to approve or terminate any such program or procedure. 4.4. TAX WITHHOLDING. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee hereby authorizes withholding from payroll and any other amounts payable to the Optionee, and otherwise agrees to make adequate provision for (including by means of a Cashless Exercise to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Participating Company Group, if any, which arise in connection with the Option, including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in whole or in part, of any shares acquired upon exercise of the Option, (iii) the operation of any law or regulation providing for the imputation of interest, or (iv) the lapsing of any restriction with respect to any shares acquired upon exercise of the Option. The Optionee is cautioned that the Option is not exercisable unless the tax withholding obligations of the Participating Company Group are satisfied. Accordingly, the Optionee may not be able to exercise the Option when desired even though the Option is vested, and the Company shall have no obligation to issue a certificate for such shares. 4.5. CERTIFICATE REGISTRATION. Except in the event the Exercise Price is paid by means of a Cashless Exercise, the certificate for the shares as to which the Option is exercised shall be registered in the name of the Optionee, or, if applicable, in the names of the heirs of the Optionee. 4.6. RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The grant of the Option and the issuance of shares of Stock upon exercise of the Option shall be subject to compliance with all applicable requirements of federal, state or foreign law with respect to such securities. The Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, the Option may not be exercised unless (i) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE 6 47 OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. Questions concerning this restriction should be directed to the Chief Financial Officer of the Company. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any shares subject to the Option shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of the Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. 4.7. FRACTIONAL SHARES. The Company shall not be required to issue fractional shares upon the exercise of the Option. 5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised during the lifetime of the Optionee only by the Optionee or the Optionee's guardian or legal representative and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. Following the death of the Optionee, the Option, to the extent provided in Section 7, may be exercised by the Optionee's legal representative or by any person empowered to do so under the deceased Optionee's will or under the then applicable laws of descent and distribution. 6. TERMINATION OF THE OPTION. The Option shall terminate and may no longer be exercised on the first to occur of (a) the Option Expiration Date, (b) the last date for exercising the Option following termination of the Optionee's Service as described in Section 7, or (c) a Change in Control to the extent provided in Section 8. 7. EFFECT OF TERMINATION OF SERVICE. 7.1. OPTION EXERCISABILITY. (a) DISABILITY. If the Optionee's Service with the Participating Company Group is terminated because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee (or the Optionee's guardian or legal representative) at any time prior to the expiration of twelve (12) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. (b) DEATH. If the Optionee's Service with the Participating Company Group is terminated because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee's legal representative or other person who acquired the right to exercise the Option by reason of the Optionee's death at any time prior to the expiration of twelve (12) months after the date on which the Optionee's Service terminated, but in any event no later than the Option 7 48 Expiration Date. The Optionee's Service shall be deemed to have terminated on account of death if the Optionee dies within three (3) months after the Optionee's termination of Service. (c) OTHER TERMINATION OF SERVICE. If the Optionee's Service with the Participating Company Group terminates for any reason, except Disability, death, or Cause, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee's Service terminated, may be exercised by the Optionee within three (3) months (or such other longer period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. 7.2. EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the foregoing, if the exercise of the Option within the applicable time periods set forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option shall remain exercisable until three (3) months after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date. The Company makes no representation as to the tax consequences of any such delayed exercise. The Optionee should consult with the Optionee's own tax advisor as to the tax consequences to the Optionee of any such delayed exercise. 7.3. EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 7.1 of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of Service, or (iii) the Option Expiration Date. The Company makes no representation as to the tax consequences of any such delayed exercise. The Optionee should consult with the Optionee's own tax advisors as to the tax consequences to the Optionee of any such delayed exercise. 7.4. TERMINATION FOR CAUSE. Except as otherwise provided in a contract of employment or service between a Participating Company and the Optionee, and notwithstanding any other provision of this Option Agreement to the contrary, if the Optionee's Service with the Participating Company Group is terminated for Cause, the Option shall terminate and cease to be exercisable immediately upon such termination of Service. 8. CHANGE IN CONTROL. 8.1. DEFINITIONS. (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; 8 49 (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the "TRANSACTION") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "TRANSFEREE CORPORATION(S)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 8.2. EFFECT OF CHANGE IN CONTROL ON OPTION. In the event of a Change in Control, the Optionee shall be credited with an additional two (2) years of Service as of the date ten (10) days prior to the date of the Change in Control, solely for purposes of determining the Vested Ratio. Any exercise or vesting of the Option that was permissible solely by reason of this Section 8.2 shall be conditioned upon the consummation of the Change in Control. In addition, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), may either assume the Company's rights and obligations under the Option or substitute for the Option a substantially equivalent option for the Acquiring Corporation's stock. For purposes of this Section 8.2, the Option shall be deemed assumed if, following the Change in Control, the Option confers the right to purchase in accordance with its terms and conditions, for each share of Stock subject to the Option immediately prior to the Change in Control, the consideration (whether stock, cash or other securities or property) to which a holder of a share of Stock on the effective date of the Change in Control was entitled. The Option shall terminate and cease to be outstanding effective as of the date of the Change in Control to the extent that the Option is neither assumed or substituted for by the Acquiring Corporation in connection with the Change in Control nor exercised as of the date of the Change in Control. Notwithstanding the foregoing, if the corporation the stock of which is subject to the Option immediately prior to an Ownership Change Event described in Section 8.1(a)(i) constituting a Change in Control is the surviving or continuing corporation and immediately after any such event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without 9 50 regard to the provisions of Section 1504(b) of the Code, the Option shall not terminate unless the Board otherwise provides in its sole discretion. 8.3. NOTICE. The Company shall provide notice of a Change in Control to the Optionee at least ten (10) days prior to the consummation of a Change in Control. The Company's notice shall summarize the principal terms of the Change in Control, including, without limitation, whether the Acquiring Corporation is assuming the Option or substituting an equivalent option therefor. 8.4. FAIR MARKET VALUE LIMITATION. Should the exercisability of this Option be accelerated in connection with a Change in Control in accordance with Section 8.2, then to the extent that the aggregate Fair Market Value of the shares of Stock with respect to which the Optionee may exercise the Option for the first time during the calendar year of such acceleration, when added to the aggregate Fair Market Value of the shares subject to any other options designated as Incentive Stock Options granted to the Optionee under all stock option plans of the Participating Company Group prior to the Date of Option Grant with respect to which such options are exercisable for the first time during the same calendar year, exceeds One Hundred Thousand Dollars ($100,000) (or such other limit, if any, imposed by Section 422 of the Code), the portion of the Option which exceeds such amount shall be treated as a Nonstatutory Stock Option. For purposes of the preceding sentence, options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of shares of stock shall be determined as of the time the option with respect to such shares is granted. 9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification, or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number, Exercise Price and class of shares of stock subject to the Option. If a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares of another corporation (the "NEW SHARES"), the Board may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the Number of Option Shares and the Exercise Price shall be adjusted in a fair and equitable manner, as determined by the Board, in its sole discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 9 shall be rounded up or down to the nearest whole number, as determined by the Board, and in no event may the Exercise Price be decreased to an amount less than the par value, if any, of the stock subject to the Option. The adjustments determined by the Board pursuant to this Section 9 shall be final, binding and conclusive. 10. RIGHTS AS A STOCKHOLDER, EMPLOYEE OR CONSULTANT. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a certificate for the shares for which the Option has been exercised (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, 10 51 distributions or other rights for which the record date is prior to the date such certificate is issued, except as provided in Section 9. If the Optionee is an Employee, the Optionee understands and acknowledges that, except as otherwise provided in a separate, written employment agreement between a Participating Company and the Optionee, the Optionee's employment is "at will" and is for no specified term. Nothing in this Option Agreement shall confer upon the Optionee, whether an Employee or Consultant, any right to continue in the Service of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Optionee's Service as an Employee or Consultant, as the case may be, at any time. 11. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION. The Optionee shall dispose of the shares acquired pursuant to the Option only in accordance with the provisions of this Option Agreement. In addition, the Optionee shall promptly notify the Chief Financial Officer of the Company if the Optionee disposes of any of the shares acquired pursuant to the Option within one (1) year after the date the Optionee exercises all or part of the Option or within two (2) years after the Date of Option Grant and shall provide the Company with a description of the terms and circumstances of such disposition. Until such time as the Optionee disposes of such shares in a manner consistent with the provisions of this Option Agreement, unless otherwise expressly authorized by the Company, the Optionee shall hold all shares acquired pursuant to the Option in the Optionee's name (and not in the name of any nominee) for the one-year period immediately after the exercise of the Option and the two-year period immediately after Date of Option Grant. At any time during the one-year or two-year periods set forth above, the Company may place a legend on any certificate representing shares acquired pursuant to the Option requesting the transfer agent for the Company's stock to notify the Company of any such transfers. The obligation of the Optionee to notify the Company of any such transfer shall continue notwithstanding that a legend has been placed on the certificate pursuant to the preceding sentence. 12. LEGENDS. The Company may at any time place legends referencing any applicable federal, state or foreign securities law restrictions on all certificates representing shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in the possession of the Optionee in order to carry out the provisions of this Section. 13. BINDING EFFECT. Subject to the restrictions on transfer set forth herein, this Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 14. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan or the Option at any time; provided, however, that except as provided in Section 8.2 in connection with a Change in Control, no such 11 52 termination or amendment may adversely affect the Option or any unexercised portion hereof without the consent of the Optionee unless such termination or amendment is necessary to comply with any applicable law or government regulation or is required to enable the Option to qualify as an Incentive Stock Option. No amendment or addition to this Option Agreement shall be effective unless in writing. 15. NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this Option Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail, with postage and fees prepaid, addressed to the other party at the address of such party as set forth below that party's signature or at such other address as such party may designate in writing from time to time to the other party. 16. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire understanding and agreement of the Optionee and the Participating Company Group with respect to the subject matter contained herein, and there are no agreements, understandings, restrictions, representations, or warranties among the Optionee and the Participating Company Group with respect to such subject matter other than those as set forth or provided for herein. To the extent contemplated herein, the provisions of this Option Agreement shall survive any exercise of the Option and shall remain in full force and effect. 17. APPLICABLE LAW. This Option Agreement shall be governed by the laws of the State of Delaware as such laws are applied to agreements between Delaware residents entered into and to be performed entirely within the State of Delaware. P.F. CHANG'S CHINA BISTRO, INC. By: ________________________________ Title: _____________________________ Address: ___________________________ ___________________________ 12 53 The Optionee represents that the Optionee is familiar with the terms and provisions of this Option Agreement, and hereby accepts the Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Option Agreement. OPTIONEE Date:______________________________ ____________________________________ Optionee Address: ____________________________________ ____________________________________ 13 EX-10.3 7 EX-10.3 1 Exhibit 10.3 P.F. CHANG'S CHINA BISTRO, INC. 1997 RESTAURANT MANAGEMENT STOCK OPTION PLAN 1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN. 1.1. ESTABLISHMENT. The P.F. CHANG'S CHINA BISTRO, INC.'s 1997 Restaurant Management Stock Option Plan (the "PLAN") is hereby established effective as of July 18, 1997 (the "EFFECTIVE DATE"). 1.2. PURPOSE. The purpose of the Plan is to advance the interests of the Participating Company Group and its stockholders by providing an incentive to attract, retain and reward persons performing services for the Participating Company Group and by motivating such persons to contribute to the growth and profitability of the Participating Company Group. 1.3. TERM OF PLAN. The Plan shall continue in effect until the earlier of its termination by the Board or the date on which all of the shares of Stock available for issuance under the Plan have been issued and all restrictions on such shares under the terms of the Plan and the agreements evidencing Options granted under the Plan have lapsed. However, all Options shall be granted, if at all, within ten (10) years from the earlier of the date the Plan is adopted by the Board or the date the Plan is duly approved by the stockholders of the Company. 2. DEFINITIONS AND CONSTRUCTION. 2.1. DEFINITIONS. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "BOARD" means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, "Board" also means such Committee(s). (b) "CODE" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder. (c) "COMMITTEE" means the Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted herein, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. (d) "COMPANY" means P.F. Chang's China Bistro, Inc., a Delaware corporation, or any successor corporation thereto. (e) "CONSULTANT" means any person, including an advisor, engaged by a Participating Company to render services other than as an Employee or a Director. 1 2 (f) "DIRECTOR" means a member of the Board or of the board of directors of any other Participating Company. (g) "EMPLOYEE" means any person treated as an employee (including an officer or a Director who is also treated as an employee) in the records of a Participating Company; provided, however, that neither service as a Director nor payment of a director's fee shall be sufficient to constitute employment for purposes of the Plan. (h) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (i) "FAIR MARKET VALUE" means, as of any date, the value of a share of Stock or other property as determined by the Board, in its sole discretion, or by the Company, in its sole discretion, if such determination is expressly allocated to the Company herein, subject to the following: (i) If, on such date, there is a public market for the Stock, the Fair Market Value of a share of Stock shall be the closing sale price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National Market, the Nasdaq Small-Cap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in the Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Board, in its sole discretion. (ii) If, on such date, there is no public market for the Stock, the Fair Market Value of a share of Stock shall be as determined by the Board without regard to any restriction other than a restriction which, by its terms, will never lapse. (j) "INCENTIVE STOCK OPTION" means an Option intended to be (as set forth in the Option Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of the Code. (k) "INSIDER" means an officer or a Director of the Company or any other person whose transactions in Stock are subject to Section 16 of the Exchange Act. (l) "NONSTATUTORY STOCK OPTION" means an Option not intended to be (as set forth in the Option Agreement) or which does not qualify as an Incentive Stock Option. (m) "OPTION" means a right to purchase Stock (subject to adjustment as provided in Section 4.2) pursuant to the terms and conditions of the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory Stock Option. 2 3 (n) "OPTION AGREEMENT" means a written agreement between the Company and an Optionee setting forth the terms, conditions and restrictions of the Option granted to the Optionee and any shares acquired upon the exercise thereof. (o) "OPTIONEE" means a person who has been granted one or more Options. (p) "PARENT CORPORATION" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. (q) "PARTICIPATING COMPANY" means the Company or any Parent Corporation or Subsidiary Corporation. (r) "PARTICIPATING COMPANY GROUP" means, at any point in time, all corporations collectively which are then Participating Companies. (s) "RULE 16b-3" means Rule 16b-3 under the Exchange Act, as amended from time to time, or any successor rule or regulation. (t) "STOCK" means the common stock, $0.01 par value per share, of the Company, as adjusted from time to time in accordance with Section 4.2. (u) "SUBSIDIARY CORPORATION" means any present or future "subsidiary corporation" of the Company, as defined in Section 424(f) of the Code. (v) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at the time an Option is granted to the Optionee, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of a Participating Company within the meaning of Section 422(b)(6) of the Code. 2.2. CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise. 3. ADMINISTRATION. 3.1. ADMINISTRATION BY THE BOARD. The Plan shall be administered by the Board. All questions of interpretation of the Plan or of any Option shall be determined by the Board, and such determinations shall be final and binding upon all persons having an interest in the Plan or such Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, determination or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, determination or election. 3 4 3.2. ADMINISTRATION WITH RESPECT TO INSIDERS. With respect to participation by Insiders in the Plan, at any time that any class of equity security of the Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall be administered in compliance with the requirements, if any, of Rule 16b-3. 3.3. POWERS OF THE BOARD. In addition to any other powers set forth in the Plan and subject to the provisions of the Plan, the Board shall have the full and final power and authority, in its sole discretion: (a) to determine the persons to whom, and the time or times at which, Options shall be granted and the number of shares of Stock to be subject to each Option; (b) to designate Options as Incentive Stock Options or Nonstatutory Stock Options; (c) to determine the Fair Market Value of shares of Stock or other property; (d) to determine the terms, conditions and restrictions applicable to each Option (which need not be identical) and any shares acquired upon the exercise thereof, including, without limitation, (i) the exercise price of the Option, (ii) the method of payment for shares purchased upon the exercise of the Option, (iii) the method for satisfaction of any tax withholding obligation arising in connection with the Option or such shares, including by the withholding or delivery of shares of stock, (iv) the timing, terms and conditions of the exercisability of the Option or the vesting of any shares acquired upon the exercise thereof, (v) the time of the expiration of the Option, (vi) the effect of the Optionee's termination of employment or service with the Participating Company Group on any of the foregoing, and (vii) all other terms, conditions and restrictions applicable to the Option or such shares not inconsistent with the terms of the Plan; (e) to approve one or more forms of Option Agreement; (f) to amend, modify, extend, or renew, or grant a new Option in substitution for, any Option or to waive any restrictions or conditions applicable to any Option or any shares acquired upon the exercise thereof; (g) to amend the exercisability of any Option or the vesting of any shares acquired upon the exercise thereof, including with respect to the period following an Optionee's termination of employment or service with the Participating Company Group; (h) to prescribe, amend or rescind rules, guidelines and policies relating to the Plan, or to adopt supplements to, or alternative versions of, the Plan, including, without limitation, as the Board deems necessary or desirable to comply with the laws of, or to accommodate the tax policy or custom of, foreign jurisdictions whose citizens may be granted Options; and 4 5 (i) to correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Option Agreement and to make all other determinations and take such other actions with respect to the Plan or any Option as the Board may deem advisable to the extent consistent with the Plan and applicable law. 4. SHARES SUBJECT TO PLAN. 4.1. MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as provided in Section 4.2, the maximum aggregate number of shares of Stock that may be issued under the Plan shall be one hundred twenty-five thousand (125,000) and shall consist of authorized but unissued or reacquired shares of Stock or any combination thereof. If an outstanding Option for any reason expires or is terminated or canceled, or if shares of Stock acquired, subject to repurchase, upon the exercise of an Option are repurchased by the Company, the shares of Stock allocable to the unexercised portion of such Option or such repurchased shares of Stock shall again be available for issuance under the Plan. Notwithstanding the foregoing, at any such time as the offer and sale of securities pursuant to the Plan is subject to compliance with Section 260.140.45 of Title 10 of the California Code of Regulations ("SECTION 260.140.45"), the total number of shares of Stock issuable upon the exercise of all outstanding Options (together with options outstanding under any other stock option plan of the Company) and the total number of shares provided for under any stock bonus or similar plan of the Company shall not exceed thirty percent (30%) (or such other higher percentage limitation as may be approved by the shareholders of the Company pursuant to Section 260.140.45) of the then outstanding shares of the Company as calculated in accordance with the conditions and exclusions of Section 260.140.45. 4.2. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number and class of shares subject to the Plan and to any outstanding Options and in the exercise price per share of any outstanding Options. If a majority of the shares which are of the same class as the shares that are subject to outstanding Options are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event, as defined in Section 8.1) shares of another corporation (the "NEW SHARES"), the Board may unilaterally amend the outstanding Options to provide that such Options are exercisable for New Shares. In the event of any such amendment, the number of shares subject to, and the exercise price per share of, the outstanding Options shall be adjusted in a fair and equitable manner as determined by the Board, in its sole discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 4.2 shall be rounded up or down to the nearest whole number, as determined by the Board, and in no event may the exercise price of any Option be decreased to an amount less than the par value, if any, of the stock subject to the Option. The adjustments determined by the Board pursuant to this Section 4.2 shall be final, binding and conclusive. 5. ELIGIBILITY AND OPTION LIMITATIONS. 5 6 5.1. PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only to key Employees of the Company who are actively engaged in the management and operation of the Company's restaurants. For Purposes of the foregoing sentence, "Employees" shall include prospective Employees to whom Options are granted in connection with written offers of employment or other service relationship with the Participating Company Group. Eligible persons may be granted more than one (1) Option. 5.2. OPTION GRANT RESTRICTIONS. Any person who is not an Employee on the effective date of the grant of an Option to such person may be granted only a Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective Employee upon the condition that such person become an Employee shall be deemed granted effective on the date such person commences service with a Participating Company, with an exercise price determined as of such date in accordance with Section 6.1. 5.3. FAIR MARKET VALUE LIMITATION. To the extent that options designated as Incentive Stock Options (granted under all stock option plans of the Participating Company Group, including the Plan) become exercisable by an Optionee for the first time during any calendar year for stock having an aggregate Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the portion of such options which exceeds such amount shall be treated as Nonstatutory Stock Options. For purposes of this Section 5.3, options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of stock shall be determined as of the time the option with respect to such stock is granted. If the Code is amended to provide for a different limitation from that set forth in this Section 5.3, such different limitation shall be deemed incorporated herein effective as of the date and with respect to such Options as required or permitted by such amendment to the Code. If an Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section 5.3, the Optionee may designate which portion of such Option the Optionee is exercising. In the absence of such designation, the Optionee shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Separate certificates representing each such portion shall be issued upon the exercise of the Option. 6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by Option Agreements specifying the number of shares of Stock covered thereby, in such form as the Board shall from time to time establish. Option Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions: 6.1. EXERCISE PRICE. The exercise price for each Option shall be established in the sole discretion of the Board; provided, however, that (a) the exercise price per share for an Incentive Stock Option shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the Option, (b) the exercise price per share for a Nonstatutory Stock Option shall be not less than eighty-five percent (85%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option, and (c) no Option granted to a Ten Percent Owner Optionee shall have an exercise price per share less than one hundred ten percent (110%) 6 7 of the Fair Market Value of a share of Stock on the effective date of grant of the Option. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner qualifying under the provisions of Section 424(a) of the Code. 6.2. EXERCISE PERIOD. Options shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria, and restrictions as shall be determined by the Board and set forth in the Option Agreement evidencing such Option; provided, however, that (a) no Option shall be exercisable after the expiration of ten (10) years after the effective date of grant of such Option, (b) no Incentive Stock Option granted to a Ten Percent Owner Optionee shall be exercisable after the expiration of five (5) years after the effective date of grant of such Option, and (c) no Option granted to a prospective Employee, prospective Consultant or prospective Director may become exercisable prior to the date on which such person commences service with a Participating Company, and (d) with the exception of an Option granted to an officer, Director or Consultant, no Option shall become exercisable at a rate less than twenty percent (20%) per year over a period of five (5) years from the effective date of grant of such Option, subject to the Optionee's continued Service. Subject to the foregoing, unless otherwise specified by the Board in the grant of an Option, any Option granted hereunder shall have a term of ten (10) years from the effective date of grant of the Option. 6.3. PAYMENT OF EXERCISE PRICE. (a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided below, payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the exercise price, (iii) by the assignment of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System) (a "CASHLESS EXERCISE"), (iv) by the Optionee's promissory note in a form approved by the Company, (v) by such other consideration as may be approved by the Board from time to time to the extent permitted by applicable law, or (vi) by any combination thereof. The Board may at any time or from time to time, by adoption of or by amendment to the standard forms of Option Agreement described in Section 7, or by other means, grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price or which otherwise restrict one or more forms of consideration. (b) TENDER OF STOCK. Notwithstanding the foregoing, an Option may not be exercised by tender to the Company of shares of Stock to the extent such tender of Stock would constitute a violation of the provisions of any law, regulation or agreement restricting the 7 8 redemption of the Company's stock. Unless otherwise provided by the Board, an Option may not be exercised by tender to the Company of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. (c) CASHLESS EXERCISE. The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to establish, decline to approve or terminate any program or procedures for the exercise of Options by means of a Cashless Exercise. (d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be permitted if the exercise of an Option using a promissory note would be a violation of any law. Any permitted promissory note shall be on such terms as the Board shall determine at the time the Option is granted. The Board shall have the authority to permit or require the Optionee to secure any promissory note used to exercise an Option with the shares of Stock acquired upon the exercise of the Option or with other collateral acceptable to the Company. Unless otherwise provided by the Board, if the Company at any time is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with the Company's securities, any promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations. 6.4. TAX WITHHOLDING. The Company shall have the right, but not the obligation, to deduct from the shares of Stock issuable upon the exercise of an Option, or to accept from the Optionee the tender of, a number of whole shares of Stock having a Fair Market Value, as determined by the Company, equal to all or any part of the federal, state, local and foreign taxes, if any, required by law to be withheld by the Participating Company Group with respect to such Option or the shares acquired upon the exercise thereof. Alternatively or in addition, in its sole discretion, the Company shall have the right to require the Optionee, through payroll withholding, cash payment or otherwise, including by means of a Cashless Exercise, to make adequate provision for any such tax withholding obligations of the Participating Company Group arising in connection with the Option or the shares acquired upon the exercise thereof. The Company shall have no obligation to deliver shares of Stock or to release shares of Stock from an escrow established pursuant to the Option Agreement until the Participating Company Group's tax withholding obligations have been satisfied by the Optionee. 6.5. REPURCHASE RIGHTS. Shares issued under the Plan may be subject to a right of first refusal, one or more repurchase options, or other conditions and restrictions as determined by the Board, in its sole discretion, at the time the Option is granted. The Company shall have the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as may be selected by the Company. Upon request by the Company, each Optionee shall execute any agreement evidencing such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the 8 9 Company any and all certificates representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer restrictions. 7. STANDARD FORMS OF OPTION AGREEMENT. 7.1. INCENTIVE STOCK OPTIONS. Unless otherwise provided by the Board at the time the Option is granted, an Option designated as an "Incentive Stock Option" shall comply with and be subject to the terms and conditions set forth in the form of Immediately Exercisable Incentive Stock Option Agreement adopted by the Board concurrently with its adoption of the Plan and as amended from time to time. 7.2. NONSTATUTORY STOCK OPTIONS. Unless otherwise provided by the Board at the time the Option is granted, an Option designated as a "Nonstatutory Stock Option" shall comply with and be subject to the terms and conditions set forth in the form of Immediately Exercisable Nonstatutory Stock Option Agreement adopted by the Board concurrently with its adoption of the Plan and as amended from time to time. 7.3. STANDARD TERM OF OPTIONS. Except as otherwise provided in Section 6.2 or by the Board in the grant of an Option, any Option granted hereunder shall have a term of ten (10) years from the effective date of grant of the Option. 7.4. AUTHORITY TO VARY TERMS. The Board shall have the authority from time to time to vary the terms of any of the standard forms of Option Agreement described in this Section 7 either in connection with the grant or amendment of an individual Option or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of any such new, revised or amended standard form or forms of Option Agreement are not inconsistent with the terms of the Plan. Such authority shall include, but not by way of limitation, the authority to grant Options which are not immediately exercisable. 8. TRANSFER OF CONTROL. 8.1. DEFINITIONS. (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. 9 10 (b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the "TRANSACTION") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "TRANSFEREE CORPORATION(S)"), as the case may be, provided, however, that neither an initial public offering by the Company, nor an equity or convertible securities financing by the Company shall be deemed an Ownership Change Event or Transfer of Control for the purpose of any accelerated vesting provision of this Option Agreement. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 8.2. EFFECT OF TRANSFER OF CONTROL ON OPTIONS. In the event of an eligible Transfer of Control, each of the outstanding Options shall receive an additional two (2) years of accelerated vesting as of the date ten (10) days prior to the date of the Transfer of Control. The exercise or vesting of any Option that was permissible solely by reason of this Section 8.2 shall be conditioned upon the consummation of the Transfer of Control. In addition, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), may either assume the Company's rights and obligations under outstanding Options or substitute for outstanding Options substantially equivalent options for the Acquiring Corporation's stock. For purposes of this Section 8.2, an Option shall be deemed assumed if, following the Transfer of Control, the Option confers the right to purchase in accordance with its terms and conditions, for each share of Stock subject to the Option immediately prior to the Transfer of Control, the consideration (whether stock, cash or other securities or property) to which a holder of a share of Stock on the effective date of the Transfer of Control was entitled. Any Options which are neither assumed or substituted for by the Acquiring Corporation in connection with the Transfer of Control nor exercised as of the date of the Transfer of Control shall terminate and cease to be outstanding effective as of the date of the Transfer of Control. Notwithstanding the foregoing, shares acquired upon exercise of an Option prior to the Transfer of Control and any consideration received pursuant to the Transfer of Control with respect to such shares shall continue to be subject to all applicable provisions of the Option Agreement evidencing such Option except as otherwise provided in such Option Agreement. Furthermore, notwithstanding the foregoing, if the corporation the stock of which is subject to the outstanding Options immediately prior to an Ownership Change Event described in Section 8.1(a)(i) constituting a Transfer of Control is the surviving or continuing corporation and immediately after such Ownership Change Event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of 10 11 the Code without regard to the provisions of Section 1504(b) of the Code, the outstanding Options shall not terminate unless the Board otherwise provides in its sole discretion. 8.3. NOTICE. The Company shall send to all holders of outstanding Options at least ten (10) days' written notice prior to the consummation of a Transfer of Control. The Company's notice shall summarize the principal terms of the Transfer of Control including, without limitation, whether the Acquiring Corporation is assuming the outstanding Options or substituting equivalent options therefor. 9. PROVISION OF INFORMATION. At least annually, copies of the Company's balance sheet and income statement for the just completed fiscal year shall be made available to each Optionee and purchaser of shares of Stock upon the exercise of an Option. The Company shall not be required to provide such information to persons whose duties in connection with the Company assure them access to equivalent information. 10. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, an Option shall be exercisable only by the Optionee or the Optionee's guardian or legal representative. No Option shall be assignable or transferable by the Optionee, except by will or by the laws of descent and distribution. 11. INDEMNIFICATION. In addition to such other rights of indemnification as they may have as members of the Board or officers or employees of the Participating Company Group, members of the Board and any officers or employees of the Participating Company Group to whom authority to act for the Board or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same. 12. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend the Plan at any time. However, subject to changes in applicable law, regulations or rules that would permit otherwise, without the approval of the Company's stockholders there shall be (a) no increase in the maximum aggregate number of shares of Stock that may be issued under the Plan (except by operation of the provisions of Section 4.2), (b) no change in the class of persons eligible to receive Incentive Stock Options, and (c) no other amendment of the Plan that would require approval of the Company's stockholders under any applicable law, regulation or rule. In any event, no termination or amendment of the Plan may adversely affect any then outstanding Option or any unexercised portion thereof, without the consent of the Optionee, unless such 11 12 termination or amendment is required to enable an Option designated as an Incentive Stock Option to qualify as an Incentive Stock Option or is necessary to comply with any applicable law, regulation or rule. 13. STOCKHOLDER APPROVAL. The Plan or any increase in the maximum number of shares of Stock issuable thereunder as provided in Section 4.1 (the "MAXIMUM SHARES") shall be approved by the stockholders of the Company within twelve (12) months of the date of adoption thereof by the Board. Options granted prior to stockholder approval of the Plan or in excess of the Maximum Shares previously approved by the stockholders shall become exercisable no earlier than the date of stockholder approval of the Plan or such increase in the Maximum Shares, as the case may be. IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that the foregoing P.F. CHANG'S CHINA BISTRO, INC. 1997 Restaurant Management Stock Option Plan was duly adopted by the Board on July 18, 1997. By: _____________________________________ Title: __________________________________ _____________________________ Print Name and Title 12 13 PLAN HISTORY July 18, 1997 Board adopts the Plan, with an initial reserve of 125,000 shares. ________, 1997 Stockholders approve the Plan, with an initial reserve of 125,000 shares. 13 14 THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAVE NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. P.F. CHANG'S CHINA BISTRO, INC. IMMEDIATELY EXERCISABLE NONSTATUTORY STOCK OPTION AGREEMENT THIS IMMEDIATELY EXERCISABLE NONSTATUTORY STOCK OPTION AGREEMENT (the "OPTION AGREEMENT") is made and entered into as of ___________, 199_, by and between P.F. CHANG'S CHINA BISTRO, INC., a Delaware corporation (the "COMPANY") and ___________________________ (the "OPTIONEE"). The Company has granted to the Optionee pursuant to the P.F. Chang's China Bistro, Inc. 1997 Restaurant Management Stock Option Plan (the "Plan") an option to purchase certain shares of stock, upon the terms and conditions set forth in this Option Agreement (the "OPTION"). The Option shall in all respects be subject to the terms and conditions of the Plan, the provisions of which are incorporated herein by reference. 1. DEFINITIONS AND CONSTRUCTION. 1. DEFINITIONS. Unless otherwise defined herein, capitalized terms shall have the meanings assigned to such terms in the Plan. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "DATE OF OPTION GRANT" means , 199_. (b) "NUMBER OF OPTION SHARES" means ________ shares of Stock, as adjusted from time to time pursuant to Section 9. (c) "EXERCISE PRICE" means $ _____ per share of Stock, as adjusted from time to time pursuant to Section 9. 15 (d) "INITIAL EXERCISE DATE" means the letter of the Date of Option Grant or the date the Optionee's Service commences. (e) "INITIAL VESTING DATE" means the date occurring one (1) year after (check one): _____ the Date of Option Grant _____ _________________________, 199_, the date the Optionee's Service commenced. (f) "VESTED RATIO" means, on any relevant date, the ratio determined as follows: (i) Prior to the Initial Vesting Date, the Vested Ratio shall be 0. (ii) On the Initial Vesting Date, provided that the Optionee's Service has been continuous from the Date of Option Grant until the Initial Vesting Date, the Vested Ratio shall be 1/5. (iii) For each full month of the Optionee's continuous service after the Initial Vesting Date, the Vested Ratio shall be increased by one-sixtieth (1/60). (iv) In no event shall the Vested Ratio exceed 1/1. (g) "OPTION EXPIRATION DATE" means the date ten (10) years after the Date of Option Grant. (h) "BOARD" means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, "Board" shall also mean such Committee(s). (i) "CODE" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder. (j) "COMMITTEE" means the Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted in the Plan, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. (k) "COMPANY" means P.F. Chang's China Bistro, Inc., a Delaware corporation, or any successor corporation thereto. (l) "DISABILITY" means the inability of the Optionee, in the opinion of a qualified physician acceptable to the Company, to perform the major duties of the Optionee's position with the Participating Company Group because of the sickness or injury of the Optionee. 16 (m) "EMPLOYEE" means any person treated as an employee (including an officer or a director who is also treated as an employee) in the records of the Company; provided, however, that neither service as a director nor payment of a director's fee shall be sufficient to constitute employment for this purpose. (n) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (o) "FAIR MARKET VALUE" means, as of any date, the value of a share of Stock or other property as determined by the Board, in its sole discretion, or by the Company, in its sole discretion, if such determination is expressly allocated to the Company herein. (p) "PARENT CORPORATION" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. (q) "PARTICIPATING COMPANY" means the Company or any Parent Corporation or Subsidiary Corporation. (r) "PARTICIPATING COMPANY GROUP" means, at any point in time, all corporations collectively which are then Participating Companies. (s) "PLAN" means the P.F. Chang's China Bistro, Inc. 1997 Restaurant Management Stock Option Plan. (t) "SECURITIES ACT" means the Securities Act of 1933, as amended. (u) "SERVICE" means the Optionee's employment or service with the Participating Company Group in the capacity of an Employee. The Optionee's Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionee renders Service to the Participating Company Group or a change in the Participating Company for which the Optionee renders such Service, provided that there is no interruption or termination of the Optionee's Service. Furthermore, the Optionee's Service with the Participating Company Group shall not be deemed to have terminated if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company; provided, however, that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day of such leave the Optionee's Service shall be deemed to have terminated unless the Optionee's right to return to Service with the Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining the Optionee's Vested Ratio. The Optionee's Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Optionee performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its sole discretion, shall determine whether the Optionee's Service has terminated and the effective date of such termination. (v) "STOCK" means the common stock of the Company, as adjusted from time to time in accordance with Section 9. (w) "SUBSIDIARY CORPORATION" means any present or future "subsidiary corporation" of the Company, as defined in Section 424(f) of the Code. 17 2. CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of this Option Agreement. Except when otherwise indicated by the context, the singular shall include the plural, the plural shall include the singular, and the term "or" shall include the conjunctive as well as the disjunctive. 2. TAX CONSEQUENCES. 1. TAX STATUS OF OPTION. This Option is intended to be a Nonstatutory Stock Option and shall not be treated as an Incentive Stock Option within the meaning of Section 422(b) of the Code. 2. ELECTION UNDER SECTION 83(b) OF THE CODE. If the Optionee exercises this Option to purchase shares of Stock that are both nontransferable and subject to a substantial risk of forfeiture, the Optionee understands that the Optionee should consult with the Optionee's tax advisor regarding the advisability of filing with the Internal Revenue Service an election under Section 83(b) of the Code, which must be filed no later than thirty (30) days after the date on which the Optionee exercises the Option. Shares acquired upon exercise of the Option are nontransferable and subject to a substantial risk of forfeiture if, for example, (a) they are unvested and are subject to a right of the Company to repurchase such shares at the Optionee's original purchase price if the Optionee's Service terminates, (b) the Optionee is an Insider and exercises the Option within six (6) months of the Date of the Option Grant (if a class of equity security of the Company is registered under Section 12 of the Exchange Act), or (c) the Optionee is subject to a restriction on transfer to comply with "Pooling-of-Interests Accounting" rules. Failure to file an election under Section 83(b), if appropriate, may result in adverse tax consequences to the Optionee. The Optionee acknowledges that the Optionee has been advised to consult with a tax advisor prior to the exercise of the Option regarding the tax consequences to the Optionee of the exercise of the Option. AN ELECTION UNDER SECTION 83(b) MUST BE FILED WITHIN 30 DAYS AFTER THE DATE ON WHICH THE OPTIONEE PURCHASES SHARES. THIS TIME PERIOD CANNOT BE EXTENDED. THE OPTIONEE ACKNOWLEDGES THAT TIMELY FILING OF A SECTION 83(b) ELECTION IS THE OPTIONEE'S SOLE RESPONSIBILITY, EVEN IF THE OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO FILE SUCH ELECTION ON HIS OR HER BEHALF. 3. ADMINISTRATION. All questions of interpretation concerning this Option Agreement shall be determined by the Board, including any duly appointed Committee of the Board. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 4. EXERCISE OF THE OPTION. 1. RIGHT TO EXERCISE. Except as otherwise provided herein, the Option shall be exercisable on and after the Initial Exercise Date and prior to the termination of the Option (as provided in Section 6) in an amount not to exceed the Number of Option Shares less the number of shares of Stock previously acquired upon exercise of the Option subject to the Optionee's agreement that any shares purchased upon exercise are subject to the Company's repurchase rights set forth in Section 11 and to the Company's first refusal rights set forth in Section 12. In no event shall the Option be exercisable for more shares than the Number of Option Shares. 18 2. METHOD OF EXERCISE. Exercise of the Option shall be by written notice to the Company which must state the election to exercise the Option, the number of whole shares of Stock for which the Option is being exercised and such other representations and agreements as to the Optionee's investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. The written notice must be signed by the Optionee and must be delivered in person, by certified or registered mail, return receipt requested, by confirmed facsimile transmission, or by such other means as the Company may permit, to the Chief Financial Officer of the Company, or other authorized representative of the Company, prior to the termination of the Option as set forth in Section 6, accompanied by (i) full payment of the aggregate Exercise Price for the number of shares of Stock being purchased and (ii) an executed copy, if required herein, of the then current forms of escrow and security agreement referenced below. The Option shall be deemed to be exercised upon receipt by the Company of such written notice, the aggregate Exercise Price, and, if required by the Company, such executed agreements. 3. PAYMENT OF EXERCISE PRICE. (a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided below, payment of the aggregate Exercise Price for the number of shares of Stock for which the Option is being exercised shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of whole shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in Section 4.3.(c), (iv) in the Company's sole discretion at the time the Option is exercised, by cash for a portion of the aggregate Exercise Price not less than the par value of the shares being acquired, and the Optionee's promissory note for the balance of the aggregate Exercise Price, or (v) by any combination of the foregoing. (b) TENDER OF STOCK. Notwithstanding the foregoing, the Option may not be exercised by tender to the Company of shares of Stock to the extent such tender of shares of Stock would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's Stock. The Option may not be exercised by the tender to the Company of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. (c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the assignment in a form acceptable to the Company of the proceeds of a sale or loan with respect to some or all of the shares of Stock acquired upon the exercise of the Option pursuant to a program or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to establish, modify, decline to approve or terminate any such Cashless Exercise program or procedures. (d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be permitted if an exercise of the Option using a promissory note would be a violation of any law. The promissory note permitted in clause (iv) of Section 4.3.(a) shall be a full recourse note in a form satisfactory to the Company, with principal payable no more than four (4) years after the date the Option is exercised. Interest on the principal balance of the promissory note shall be payable in annual installments at the minimum interest rate necessary to avoid imputed interest pursuant to all applicable sections of the Code. Such recourse promissory note shall be secured by the shares of Stock acquired pursuant to the then 19 current form of security agreement as approved by the Company. At any time the Company is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with the Company's securities, any promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations. Except as the Company in its sole discretion shall determine, the Optionee shall pay the unpaid principal balance of the promissory note and any accrued interest thereon upon termination of the Optionee's Service with the Participating Company Group for any reason, with or without cause. 4. TAX WITHHOLDING. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee hereby authorizes withholding from payroll and any other amounts payable to the Optionee, and otherwise agrees to make adequate provision for (including by means of a Cashless Exercise to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Participating Company Group, if any, which arise in connection with the Option, including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in whole or in part, of any shares acquired upon exercise of the Option, (iii) the operation of any law or regulation providing for the imputation of interest, or (iv) the lapsing of any restriction with respect to any shares acquired upon exercise of the Option. The Optionee is cautioned that the Option is not exercisable unless such tax withholding obligations are satisfied. Accordingly, the Optionee may not be able to exercise the Option when desired even though the Option is vested, and the Company shall have no obligation to issue a certificate for such shares or release such shares from any escrow provided for herein. 5. CERTIFICATE REGISTRATION. Except in the event the Exercise Price is paid by means of a Cashless Exercise, the certificate for the shares as to which the Option is exercised shall be registered in the name of the Optionee, or, if applicable, in the names of the heirs of the Optionee. 6. RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The grant of the Option and the issuance of shares of Stock upon exercise of the Option shall be subject to compliance with all applicable requirements of federal, state or foreign law with respect to such securities. The Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the shares of Stock may then be listed. In addition, the Option may not be exercised unless (i) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. Questions concerning this restriction should be directed to the Chief Financial Officer of the Company. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any shares subject to the Option shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of the Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. 20 7. FRACTIONAL SHARES. The Company shall not be required to issue fractional shares upon the exercise of the Option. 5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised during the lifetime of the Optionee only by the Optionee or the Optionee's guardian or legal representative and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. Following the death of the Optionee, the Option, to the extent provided in Section 7, may be exercised by the Optionee's legal representative or by any person empowered to do so under the deceased Optionee's will or under the then applicable laws of descent and distribution. 6. TERMINATION OF THE OPTION. The Option shall terminate and may no longer be exercised on the first to occur of (a) the Option Expiration Date, (b) the last date for exercising the Option following termination of the Optionee's Service as described in Section 7, or (c) a Transfer of Control to the extent provided in Section 8. 7. EFFECT OF TERMINATION OF SERVICE. 1. OPTION EXERCISABILITY. (a) DISABILITY. If the Optionee's Service is terminated because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee (or the Optionee's guardian or legal representative) at any time prior to the expiration of twelve (12) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. (b) DEATH. If the Optionee's Service is terminated because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee's legal representative or other person who acquired the right to exercise the Option by reason of the Optionee's death at any time prior to the expiration of twelve (12) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. The Optionee's Service shall be deemed to have terminated on account of death if the Optionee dies within three (3) months after the Optionee's termination of Service. (c) OTHER TERMINATION OF SERVICE. If the Optionee's Service terminates for any reason except Disability or death, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee's Service terminated, may be exercised by the Optionee within three (3) months (or such other longer period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. 2. ADDITIONAL LIMITATIONS ON OPTION EXERCISE. Notwithstanding the provisions of Section 7.1, the Option may not be exercised after the Optionee's termination of Service to the extent that the shares to be acquired upon exercise of the Option would be subject to the Unvested Share Repurchase Option as provided in Section 11. Except as the Company and the Optionee otherwise agree, exercise of the Option pursuant to Section 7.1 following termination of the Optionee's Service may not be made by delivery of a promissory note as provided in Section 4.3.(a). 3. EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the foregoing, if the exercise of the Option within the applicable time periods set forth in Section 7.1 is prevented by the 21 provisions of Section 4.6, the Option shall remain exercisable until three (3) months after the date the Optionee is notified that the Option is exercisable, but in any event no later than the Option Expiration Date. The Company makes no representation as to the tax consequences of any such delayed exercise. The Optionee should consult with the Optionee's own tax advisor as to the tax consequences to the Optionee of any such delayed exercise. 4. EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 7.1 of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of Service, or (iii) the Option Expiration Date. The Company makes no representation as to the tax consequences of any such delayed exercise. The Optionee should consult with the Optionee's own tax advisor(s) as to the tax consequences to the Optionee of any such delayed exercise. 5. LEAVE OF ABSENCE. For purposes of Section 7.1, the Optionee's Service shall not be deemed to terminate if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company of ninety (90) days or less. In the event of a leave of absence in excess of ninety (90) days, the Optionee's Service shall be deemed to terminate on the ninety-first (91st) day of such leave unless the Optionee's right to return to Service remains guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company (or required by law), a leave of absence shall not be treated as Service for purposes of determining the Optionee's Vested Ratio. 8. TRANSFER OF CONTROL. 1. DEFINITIONS. (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the "TRANSACTION") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "TRANSFEREE 22 CORPORATION(S)"), as the case may be; provided, however, that neither an initial public offering by the Company, nor an equity or convertible securities financing by the Company shall be deemed an Ownership Change Event or Transfer of Control for the purpose of any accelerated vesting provision of this Option Agreement.. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 2. EFFECT OF TRANSFER OF CONTROL ON OPTION. In the event of an eligible Transfer of Control, the Vested Ratio shall be increased by two-fifths (2/5) as of the date ten (10) days prior to the date of any such eligible Transfer of Control; provided, however, that in no event shall the Vested Ratio be increased pursuant to this Section 8.2 to a ratio in excess of one (1). The exercise or vesting of any Option that was permissible solely by reason of this Section 8.2 shall be conditioned upon the consummation of the Transfer of Control. In addition, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), may either assume the Company's rights and obligations under the Option or substitute for the Option a substantially equivalent option for the Acquiring Corporation's stock. For purposes of this Section 8.2, the Option shall be deemed assumed if, following the Transfer of Control, the Option confers the right to purchase, for each share of Stock subject to the Option immediately prior to the Transfer of Control, the consideration (whether stock, cash or other securities or property) to which a holder of a share of Stock on the effective date of the Transfer of Control was entitled. The Option shall terminate and cease to be outstanding effective as of the date of the Transfer of Control to the extent that the Option is neither assumed or substituted for by the Acquiring Corporation in connection with the Transfer of Control nor exercised as of the date of the Transfer of Control. Notwithstanding the foregoing, shares acquired upon exercise of the Option prior to the Transfer of Control and any consideration received pursuant to the Transfer of Control with respect to such shares shall continue to be subject to all applicable provisions of this Option Agreement except as otherwise provided herein. Furthermore, notwithstanding the foregoing, if the corporation the stock of which is subject to the Option immediately prior to an Ownership Change Event described in Section 8.1.(a)(i) constituting a Transfer of Control is the surviving or continuing corporation and immediately after such Ownership Change Event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions of Section 1504(b) of the Code, the Option shall not terminate unless the Board otherwise provides in its sole discretion. 9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification, or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number, Exercise Price and class of shares of stock subject to the Option. If a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares of another corporation (the "New Shares"), the Board may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the Number of Option Shares and the Exercise Price shall be adjusted in a fair and equitable manner, as determined by the Board, in its sole discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 9 shall be rounded up or down to the nearest whole number, as determined by the Board, and in no event may the Exercise Price be decreased to an amount less than the par value, if any, of the stock subject to 23 the Option. The adjustments determined by the Board pursuant to this Section 9 shall be final, binding and conclusive. 10. RIGHTS AS A STOCKHOLDER, EMPLOYEE OR CONSULTANT. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a certificate for the shares for which the Option has been exercised (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such certificate is issued, except as provided in Section 9. If the Optionee is an Employee, the Optionee understands and acknowledges that, except as otherwise provided in a separate, written employment agreement between a Participating Company and the Optionee, the Optionee's employment is "at will" and is for no specified term. Nothing in this Option Agreement shall confer upon the Optionee, whether an Employee or Consultant, any right to continue in the Service of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Optionee's Service as an Employee or Consultant, as the case may be, at any time. 11. UNVESTED SHARE REPURCHASE OPTION. 1. GRANT OF UNVESTED SHARE REPURCHASE OPTION. In the event the Optionee's Service is terminated for any reason or no reason, with or without cause, of if the Optionee, the Optionee's legal representative, or other holder of shares acquired upon exercise of the Option attempts to sell, exchange, transfer, pledge, or otherwise dispose of (other than pursuant to an Ownership Change Event) any shares acquired upon exercise of the Option which exceed the Vested Shares as defined in Section 11.2 below (the "Unvested Shares"), the Company shall have the right to repurchase the Unvested Shares under the terms and subject to the conditions set forth in this Section 11 (the "Unvested Share Repurchase Option"). 2. VESTED SHARES AND UNVESTED SHARES DEFINED. The "Vested Shares" shall mean, on any given date, a number of shares of Stock equal to the Number of Option Shares multiplied by the Vested Ratio determined as of such date and rounded down to the nearest whole share. On such given date, the "Unvested Shares" shall mean the number of shares of stock acquired upon exercise of the Option which exceed the Vested Shares determined as of such date. 3. EXERCISE OF UNVESTED SHARE REPURCHASE OPTION. The Company may exercise the Unvested Share Repurchase Option by written notice to the Optionee within sixty (60) days after (a) termination of the Optionee's Service for exercise of the Option, if later) or (b) the Company has received notice of the attempted disposition of Unvested Shares. If the Company fails to give notice within such sixty (60) day period, the Unvested Share Repurchase Option shall terminate (unless the Company and the Optionee have extended the time for the exercise of the Unvested Share Repurchase Option. The Unvested Share Repurchase Option must be exercised, if at all, for all of the Unvested Shares, except as the Company and the Optionee otherwise agree. 4. PAYMENT FOR SHARES AND RETURN OF SHARES TO COMPANY. The Purchase price per share being repurchased by the Company shall be an amount equal to the Optionee's original cost per share, as adjusted pursuant to Section 9 (the "Repurchase Price"). The Company shall pay the aggregate Repurchase Price to the Optionee in cash within thirty (30) days after the date of the written notice to the Optionee of the Company's exercise of the Unvested Share Repurchase Option. For purposes of the foregoing, cancellation of any indebtedness of the Optionee to any Participating Company shall be treated as payment to the Optionee in cash to the extent of the unpaid principal and any accrued interest. 24 The shares being repurchased shall be delivered to the Company by the Optionee at the same time as the delivery of the Repurchase Price to the Optionee. 5. ASSIGNMENT OF UNVESTED SHARE REPURCHASE OPTION. The Company shall have the right to assign the Unvested Share Repurchase Option at any time, whether or not such option is then exercisable, to one or more persons as may be selected by the Company. 6. OWNERSHIP CHANGE EVENT. Upon the occurrence of an Ownership Change Event, any and all new, substituted or additional securities or other property to which the Optionee is entitled by reason of the Optionee's ownership of Unvested Shares shall be immediately subject to the Unvested Share Repurchase Option and included in the terms "Stock" and "Unvested Shares" for all purposes of the Unvested Share Repurchase Option with the same force and effect as the Unvested Shares immediately prior to the Ownership Change Event. While the aggregate Repurchase Price shall remain the same after such Ownership Change Event, the Repurchase Price per Unvested Share upon exercise of the Unvested Share Repurchase Option following such Ownership Change Event shall be adjusted as appropriate. For purposes of determining the Vested Ratio following an Ownership Change Event, credited Service shall include all Service with any corporation which is a Participating Company at the time the Service is rendered, whether or not such corporation is a Participating Company both before and after the Ownership Change Event. The foregoing notwithstanding, in the event of an Ownership Change Event that is also a Transfer of Control, the Unvested Share Repurchase Option will terminate if the surviving corporation does not assume, or substitute substantially equivalent options for, all outstanding Options under the Plan. 12. RIGHT OF FIRST REFUSAL. 1. GRANT OF RIGHT OF FIRST REFUSAL. Except as provided in Section 12.7 below, in the event the Optionee, the Optionee's legal representative, or other holder of shares acquired upon exercise of the Option proposes to sell, exchange, transfer, pledge, or otherwise dispose of any Vested Shares (the "TRANSFER SHARES") to any person or entity, including, without limitation, any shareholder of the Participating Company Group, the Company shall have the right to repurchase the Transfer Shares under the terms and subject to the conditions set forth in this Section 12 (the "RIGHT OF FIRST REFUSAL"). 2. NOTICE OF PROPOSED TRANSFER. Prior to any proposed transfer of the Transfer Shares, the Optionee shall deliver written notice (the "TRANSFER NOTICE") to the Company describing fully the proposed transfer, including the number of Transfer Shares, the name and address of the proposed transferee (the "PROPOSED TRANSFEREE") and, if the transfer is voluntary, the proposed transfer price, and containing such information necessary to show the bona fide nature of the proposed transfer. In the event of a bona fide gift or involuntary transfer, the proposed transfer price shall be deemed to be the Fair Market Value of the Transfer Shares, as determined by the Board in good faith. If the Optionee proposes to transfer any Transfer Shares to more than one Proposed Transferee, the Optionee shall provide a separate Transfer Notice for the proposed transfer to each Proposed Transferee. The Transfer Notice shall be signed by both the Optionee and the Proposed Transferee and must constitute a binding commitment of the Optionee and the Proposed Transferee for the transfer of the Transfer Shares to the Proposed Transferee subject only to the Right of First Refusal. 3. BONA FIDE TRANSFER. If the Company determines that the information provided by the Optionee in the Transfer Notice is insufficient to establish the bona fide nature of a proposed voluntary transfer, the Company shall give the Optionee written notice of the Optionee's failure to comply with the procedure described in this Section 12, and the Optionee shall have no right to transfer 25 the Transfer Shares without first complying with the procedure described in this Section 12. The Optionee shall not be permitted to transfer the Transfer Shares if the proposed transfer is not bona fide. 4. EXERCISE OF RIGHT OF FIRST REFUSAL. If the Company determines the proposed transfer to be bona fide, the Company shall have the right to purchase all, but not less than all, of the Transfer Shares (except as the Company and the Optionee otherwise agree) at the purchase price and on the terms set forth in the Transfer Notice by delivery to the Optionee of a notice of exercise of the Right of First Refusal within thirty (30) days after the date the Transfer Notice is delivered to the Company. The Company's exercise or failure to exercise the Right of First Refusal with respect to any proposed transfer described in a Transfer Notice shall not affect the Company's right to exercise the Right of First Refusal with respect to any proposed transfer described in any other Transfer Notice, whether or not such other Transfer Notice is issued by the Optionee or issued by a person other than the Optionee with respect to a proposed transfer to the same Proposed Transferee. If the Company exercises the Right of First Refusal, the Company and the Optionee shall thereupon consummate the sale of the Transfer Shares to the Company on the terms set forth in the Transfer Notice within sixty (60) days after the date the Transfer Notice is delivered to the Company (unless a longer period is offered by the Proposed Transferee); provided, however, that in the event the Transfer Notice provides for the payment for the Transfer Shares other than in cash, the Company shall have the option of paying for the Transfer Shares by the present value cash equivalent of the consideration described in the Transfer Notice as reasonably determined by the Company. For purposes of the foregoing, cancellation of any indebtedness of the Optionee to any Participating Company shall be treated as payment to the Optionee in cash to the extent of the unpaid principal and any accrued interest canceled. 5. FAILURE TO EXERCISE RIGHT OF FIRST REFUSAL. If the Company fails to exercise the Right of First Refusal in full (or to such lesser extent as the Company and the Optionee otherwise agree) within the period specified in Section 12.4 above, the Optionee may conclude a transfer to the Proposed Transferee of the Transfer Shares on the terms and conditions described in the Transfer Notice, provided such transfer occurs not later than ninety (90) days following delivery to the Company of the Transfer Notice. The Company shall have the right to demand further assurances from the Optionee and the Proposed Transferee (in a form satisfactory to the Company) that the transfer of the Transfer Shares was actually carried out on the terms and conditions described in the Transfer Notice. No Transfer Shares shall be transferred on the books of the Company until the Company has received such assurances, if so demanded, and has approved the proposed transfer as bona fide. Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by the Optionee, shall again be subject to the Right of First Refusal and shall require compliance by the Optionee with the procedure described in this Section 12. 6. TRANSFEREES OF TRANSFER SHARES. All transferees of the Transfer Shares or any interest therein, other than the Company, shall be required as a condition of such transfer to agree in writing (in a form satisfactory to the Company) that such transferee shall receive and hold such Transfer Shares or interest therein subject to all of the terms and conditions of this Option Agreement, including this Section 12 providing for the Right of First Refusal with respect to any subsequent transfer. Any sale or transfer of any shares acquired upon exercise of the Option shall be void unless the provisions of this Section 12 are met. 7. TRANSFERS NOT SUBJECT TO RIGHT OF FIRST REFUSAL. The Right of First Refusal shall not apply to any transfer or exchange of the shares acquired upon exercise of the Option if such transfer or exchange is in connection with an Ownership Change Event. If the consideration received pursuant to such transfer or exchange consists of stock of a Participating Company, such consideration 26 shall remain subject to the Right of First Refusal unless the provisions of Section 12.9 below result in a termination of the Right of First Refusal. 8. ASSIGNMENT OF RIGHT OF FIRST REFUSAL. The Company shall have the right to assign the Right of First Refusal at any time, whether or not there has been an attempted transfer, to one or more persons as may be selected by the Company. 9. EARLY TERMINATION OF RIGHT OF FIRST REFUSAL. The other provisions of this Option Agreement notwithstanding, the Right of First Refusal shall terminate and be of no further force and effect upon (a) the occurrence of a Transfer of Control, unless the Acquiring Corporation assumes the Company's rights and obligations under the Option or substitutes a substantially equivalent option for the Acquiring Corporation's stock for the Option, or (b) the existence of a public market for the class of shares subject to the Right of First Refusal. A "PUBLIC MARKET" shall be deemed to exist if (i) such stock is listed on a national securities exchange (as that term is used in the Exchange Act) or (ii) such stock is traded on the over-the-counter market and prices therefor are published daily on business days in a recognized financial journal. 13. ESCROW. 1. ESTABLISHMENT OF ESCROW. To ensure that shares of Stock obtained upon exercise of this Option which are subject to the Unvested Share Repurchase Option, the Right of First Refusal or securing any promissory note will be available for repurchase, the Company may require the Optionee to deposit the certificate evidencing the shares of Stock which the Optionee purchases upon exercise of the Option with an escrow agent designated by the Company under the terms and conditions of an escrow and security agreements approved by the Company. If the Company does not require such deposit as a condition of exercise of the Option, the Company reserves the right at any time to require the Optionee to so deposit the certificate in escrow. Upon the occurrence of an Ownership Change Event or a change, as described in Section 9, in the character or amount of any of the outstanding stock of the corporation the stock of which is subject to the provisions of this Option Agreement, any and all new, substituted or additional securities or other property to which the Optionee is entitled by reason of the Optionee's ownership of shares of Stock acquired upon exercise of the Option that remain, following such Ownership Change Event or change described in Section 9, subject to the Unvested Share Repurchase Option Right of First Refusal or any security interest held by the Company shall be immediately subject to the escrow to the same extent as such shares of Stock immediately before such event. The Company shall bear the expenses of the escrow. 2. DELIVERY OF SHARES TO OPTIONEE. As soon as practicable after the expiration of the Unvested Share Repurchase Option, the Right of First Refusal and after full repayment of any promissory note secured by the option shares of Stock or other property in escrow, but not more frequently than twice each calendar year, the escrow agent shall deliver to the Optionee the shares of Stock and any other property no longer subject to such restrictions and no longer securing any promissory note. 3. NOTICES AND PAYMENTS. In the event the shares of Stock and any other property held in escrow are subject to the Company's exercise of the Unvested Share Repurchase Option, the Right of First Refusal, or any security interest of the Company, the notices required to be given to the Optionee shall be given to the escrow agent, and any payment required to be given to the Optionee shall be given to the escrow agent. Within thirty (30) days after payment by the Company, the escrow agent shall deliver the shares of Stock and any other property which the Company has purchased to the Company and shall deliver the payment received from the Company to the Optionee. 27 14. STOCK DISTRIBUTIONS SUBJECT TO OPTION AGREEMENT. If, from time to time, there is any stock dividend, stock split or other change, as described in Section 9, in the character or amount of any of the outstanding stock of the corporation the stock of which is subject to the provisions of this Option Agreement, then in such event any and all new, substituted or additional securities to which the Optionee is entitled by reason of the Optionee's ownership of the shares acquired upon exercise of the Option shall be immediately subject to the Unvested Share Repurchase Option, Right of First Refusal and any security interest held by the Company and with the same force and effect as the shares subject to the Unvested Share Repurchase Option, Right of First Refusal and any such security interest immediately before such event. 15. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION. The Optionee shall dispose of the shares acquired pursuant to the Option only in accordance with the provisions of this Option Agreement. In addition, the Optionee shall promptly notify the Chief Financial Officer of the Company if the Optionee disposes of any of the shares acquired pursuant to the Option within one (1) year after the date the Optionee exercises all or part of the Option or within two (2) years after the Date of Option Grant and shall provide the Company with a description of the terms and circumstances of such disposition. Until such time as the Optionee disposes of such shares in a manner consistent with the provisions of this Option Agreement, unless otherwise expressly authorized by the Company, the Optionee shall hold all shares acquired pursuant to the Option in the Optionee's name (and not in the name of any nominee) for the one-year period immediately after the exercise of the Option and the two-year period immediately after Date of Option Grant. At any time during the one-year or two-year periods set forth above, the Company may place a legend on any certificate representing shares acquired pursuant to the Option requesting the transfer agent for the Company's stock to notify the Company of any such transfers. The obligation of the Optionee to notify the Company of any such transfer shall continue notwithstanding that a legend has been placed on the certificate pursuant to the preceding sentence. 16. LEGENDS. The Company may at any time place legends referencing the Unvested Share Repurchase Option, the Right of First Refusal, any security interest and any applicable federal, state or foreign securities law restrictions on all certificates representing shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in the possession of the Optionee in order to carry out the provisions of this Section. Unless otherwise specified by the Company, legends placed on such certificates may include, but shall not be limited to, the following: 1. "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT." 2. Any legend required to be placed thereon by the Commissioner of Corporations of the State of California. 3. "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN UNVESTED SHARE REPURCHASE OPTION IN FAVOR OF THE CORPORATION OR ITS 28 ASSIGNEE SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS CORPORATION." 4. "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS CORPORATION." 17. PUBLIC OFFERING. The Optionee hereby agrees that in the event of any underwritten public offering of stock, including an initial public offering of stock, made by the Company pursuant to an effective registration statement filed under the Securities Act, the Optionee shall not offer, sell, contract to sell, pledge, hypothecate, grant any option to purchase or make any short sale of, or otherwise dispose of any shares of stock of the Company or any rights to acquire stock of the Company for such period of time from and after the effective date of such registration statement as may be established by the underwriter for such public offering at its sole discretion. The foregoing limitation shall not apply to shares registered in the public offering under the Securities Act. The Optionee shall be subject to this Section provided and only if the officers and directors of the Company are also subject to similar arrangements. 18. RESTRICTIONS ON TRANSFER OF SHARES. No shares acquired upon exercise of the Option may be sold, exchanged, transferred (including, without limitation, any transfer to a nominee or agent of the Optionee), assigned, pledged, hypothecated or otherwise disposed of, including by operation of law, in any manner which violates any of the provisions of this Option Agreement and, except pursuant to an Ownership Change, until the date on which such shares become Vested Shares, any such attempted disposition shall be void. The Company shall not be required (a) to transfer on its books any shares which will have been transferred in violation of any of the provisions set forth in this Option Agreement or (b) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares will have been so transferred. 19. BINDING EFFECT. Subject to the restrictions on transfer set forth herein, this Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 20. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan or the Option at any time; provided, however, that except as provided in Section 8.2 in connection with a Transfer of Control, no such termination or amendment may adversely affect the Option or any unexercised portion hereof without the consent of the Optionee unless such termination or amendment is necessary to comply with any applicable law or government regulation or is required to enable the Option to qualify as an Incentive Stock Option. No amendment or addition to this Option Agreement shall be effective unless in writing. 21. NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this Option Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail, with postage and fees prepaid, addressed to the other party at the address shown below that party's signature or at such other address as such party may designate in writing from time to time to the other party. 29 22. INTEGRATED AGREEMENT. This Option Agreement and the Plan constitute the entire understanding and agreement of the Optionee and the Participating Company Group with respect to the subject matter contained herein or therein, and there are no agreements, understandings, restrictions, representations, or warranties among the Optionee and the Participating Company Group with respect to such subject matter other than those as set forth or provided for herein or therein. To the extent contemplated herein or therein, the provisions of this Option Agreement shall survive any exercise of the Option and shall remain in full force and effect. 23. APPLICABLE LAW. This Option Agreement shall be governed by the laws of the State of Delaware as such laws are applied to agreements between Delaware residents entered into and to be performed entirely within the State of Delaware. COMPANY: P.F. CHANG'S CHINA BISTRO, INC., a Delaware corporation By:_____________________________________ Title:__________________________________ ________________________________________ Print Name and Title 5040 North 40th Street Phoenix, AZ 85018 The Optionee represents that the Optionee is familiar with the terms and provisions of this Option Agreement, including the Unvested Share Repurchase Option set forth in Section 11, and the Right of First Refusal set forth in Section 12, and hereby accepts the Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Option Agreement. The undersigned acknowledges receipt of a copy of the Plan. OPTIONEE: Date:______________________________ ________________________________________ Signature ________________________________________ Print Name Optionee's Address: ________________________________________ ________________________________________ ________________________________________ 30 THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAVE NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. P.F. CHANG'S CHINA BISTRO, INC. IMMEDIATELY EXERCISABLE INCENTIVE STOCK OPTION AGREEMENT THIS IMMEDIATELY EXERCISABLE INCENTIVE STOCK OPTION AGREEMENT (the "OPTION AGREEMENT") is made and entered into as of ___________, 199_, by and between P.F. CHANG'S CHINA BISTRO, INC., a Delaware corporation (the "Company") and ___________________________ (the "OPTIONEE"). The Company has granted to the Optionee pursuant to the P.F. Chang's China Bistro, Inc. 1997 Restaurant Management Stock Option Plan (the "Plan") an option to purchase certain shares of stock, upon the terms and conditions set forth in this Option Agreement (the "OPTION"). The Option shall in all respects be subject to the terms and conditions of the Plan, the provisions of which are incorporated herein by reference. 1. DEFINITIONS AND CONSTRUCTION. 1 DEFINITIONS. Unless otherwise defined herein, capitalized terms shall have the meanings assigned to such terms in the Plan. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "DATE OF OPTION GRANT" means , 199_. (b) "NUMBER OF OPTION SHARES" means shares of Stock, as adjusted from time to time pursuant to Section 9. (c) "EXERCISE PRICE" means $ per share of Stock, as adjusted from time to time pursuant to Section 9. 31 (d) "INITIAL EXERCISE DATE" means the Date of Option Grant. (e) "INITIAL VESTING DATE" means the date occurring one (1) year after (check one): _____ the Date of Option Grant. _____ _______________, 199__, the date the Optionee's Service commenced. (f) "VESTED RATIO" means, on any relevant date, the ratio determined as follows: (i) Prior to the Initial Vesting Date, the Vested Ratio shall be 0. (ii) On the Initial Vesting Date, provided that the Optionee's Service has been continuous from the Date of Option Grant until the Initial Vesting Date, the Vested Ratio shall be 1/5. (iii) For each full month of the Optionee's continuous service after the Initial Vesting Date, the Vested Ratio shall be increased by one-sixtieth (1/60). (iv) In no event shall the Vested Ratio exceed 1/1. (g) "OPTION EXPIRATION DATE" means the date ten (10) years after the Date of Option Grant. (h) "BOARD" means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, "Board" shall also mean such Committee(s). (i) "CODE" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder. (j) "COMMITTEE" means the Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted in the Plan, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. (k) "COMPANY" means P.F. Chang's China Bistro, Inc., a Delaware corporation, or any successor corporation thereto. (l) "DISABILITY" means the inability of the Optionee, in the opinion of a qualified physician acceptable to the Company, to perform the major duties of the Optionee's position with the Participating Company Group because of the sickness or injury of the Optionee. (m) "EMPLOYEE" means any person treated as an employee (including an officer or a director who is also treated as an employee) in the records of the Company; provided, 32 however, that neither service as a director nor payment of a director's fee shall be sufficient to constitute employment for this purpose. (n) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (o) "FAIR MARKET VALUE" means, as of any date, the value of a share of Stock or other property as determined by the Board, in its sole discretion, or by the Company, in its sole discretion, if such determination is expressly allocated to the Company herein. (p) "PARENT CORPORATION" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. (q) "PARTICIPATING COMPANY" means the Company or any Parent Corporation or Subsidiary Corporation. (r) "PARTICIPATING COMPANY GROUP" means, at any point in time, all corporations collectively which are then Participating Companies. (s) "PLAN" means the P.F. Chang's China Bistro, Inc. 1997 Restaurant Management Stock Option Plan. (t) "SECURITIES ACT" means the Securities Act of 1933, as amended. (u) "SERVICE" means the Optionee's employment or service with the Participating Company Group in the capacity of an Employee. The Optionee's Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionee renders Service to the Participating Company Group or a change in the Participating Company for which the Optionee renders such Service, provided that there is no interruption or termination of the Optionee's Service. Furthermore, the Optionee's Service with the Participating Company Group shall not be deemed to have terminated if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company; provided, however, that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day of such leave the Optionee's Service shall be deemed to have terminated unless the Optionee's right to return to Service with the Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining the Optionee's Vested Ratio. The Optionee's Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Optionee performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its sole discretion, shall determine whether the Optionee's Service has terminated and the effective date of such termination. (v) "STOCK" means the common stock of the Company, as adjusted from time to time in accordance with Section 9. (w) "SUBSIDIARY CORPORATION" means any present or future "subsidiary corporation" of the Company, as defined in Section 424(f) of the Code. 2 CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of this Option Agreement. Except when 33 otherwise indicated by the context, the singular shall include the plural, the plural shall include the singular, and the term "or" shall include the conjunctive as well as the disjunctive. 2. TAX CONSEQUENCES. 1 TAX STATUS OF OPTION. This Option is intended to be an Incentive Stock Option within the meaning of Section 422(b) of the Code (an "INCENTIVE STOCK OPTION"), but the Company does not represent or warrant that this Option qualifies as such. The Optionee should consult with the Optionee's own tax advisor regarding the tax effects of this Option and the requirements necessary to obtain favorable income tax treatment under Section 422 of the Code, including, but not limited to, holding period requirements. (NOTE: If the aggregate Exercise Price of the Option (that is, the Exercise Price multiplied by the Number of Option Shares) plus the aggregate exercise price of any other Incentive Stock Options held by the Optionee (whether granted pursuant to the Plan or any other stock option plan of the Participating Company Group) is greater than One Hundred Thousand Dollars ($100,000), the Optionee should contact the Chief Financial Officer of the Company to ascertain whether the entire Option qualifies as an Incentive Stock Option.) 2 ELECTION UNDER SECTION 83(b) OF THE CODE. If the Optionee exercises this Option to purchase shares of Stock that are both nontransferable and subject to a substantial risk of forfeiture, the Optionee understands that the Optionee should consult with the Optionee's tax advisor regarding the advisability of filing with the Internal Revenue Service an election under Section 83(b) of the Code, which must be filed no later than thirty (30) days after the date on which the Optionee exercises the Option. Shares acquired upon exercise of the Option are nontransferable and subject to a substantial risk of forfeiture if, for example, (a) they are unvested and are subject to a right of the Company to repurchase such shares at the Optionee's original purchase price if the Optionee's Service terminates, (b) the Optionee is an Insider and exercises the Option within six (6) months of the Date of Option Grant (if a class of equity security of the Company is registered under Section 12 of the Exchange Act), or (c) the Optionee is subject to a restriction on transfer to comply with "Pooling-of-Interests Accounting" rules. Failure to file an election under Section 83(b), if appropriate, may result in adverse tax consequences to the Optionee. The Optionee acknowledges that the Optionee has been advised to consult with a tax advisor prior to the exercise of the Option regarding the tax consequences to the Optionee of the exercise of the Option. AN ELECTION UNDER SECTION 83(b) MUST BE FILED WITHIN 30 DAYS AFTER THE DATE ON WHICH THE OPTIONEE PURCHASES SHARES. THIS TIME PERIOD CANNOT BE EXTENDED. THE OPTIONEE ACKNOWLEDGES THAT TIMELY FILING OF A SECTION 83(b) ELECTION IS THE OPTIONEE'S SOLE RESPONSIBILITY, EVEN IF THE OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO FILE SUCH ELECTION ON HIS OR HER BEHALF. 3. ADMINISTRATION. All questions of interpretation concerning this Option Agreement shall be determined by the Board, including any duly appointed Committee of the Board. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 34 4. EXERCISE OF THE OPTION. 1 RIGHT TO EXERCISE. (a) Except as otherwise provided herein, the Option shall be exercisable on and after the Initial Exercise Date and prior to the termination of the Option (as provided in Section 6) in an amount not to exceed the Number of Option Shares less the number of shares of Stock previously acquired upon exercise of the Option, subject to the Optionee's agreement that any shares purchased upon exercise are subject to the Company's repurchase rights set forth in Section 11 and to the Company's first refusal rights set forth in Section 12. In no event shall the Option be exercisable for more shares than the Number of Option Shares. Notwithstanding the foregoing, except as provided in Section 4.1(b), the aggregate Fair Market Value of the shares of Stock with respect to which the Optionee may exercise the Option for the first time during any calendar year, when added to the aggregate Fair Market Value of the shares subject to any other options designated as Incentive Stock Options granted to the Optionee under all stock option plans of the Participating Company Group prior to the Date of Option Grant with respect to which such options are exercisable for the first time during the same calendar year, shall not exceed One Hundred Thousand Dollars ($100,000). For purposes of the preceding sentence, options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of shares of stock shall be determined as of the time the option with respect to such shares is granted. Such limitation on exercise shall be referred to in this Option Agreement as the "ISO Exercise Limitation." If Section 422 of the Code is amended to provide for a different limitation from that set forth in this Section 4.1(a), the ISO Exercise Limitation shall be deemed amended effective as of the date required or permitted by such amendment to the Code. The ISO Exercise Limitation shall terminate upon the earlier of (i) the Optionee's termination of Service, (ii) the day immediately prior to the effective date of a Transfer of Control in which the Option is not assumed or substituted for by the Acquiring Corporation as provided in Section 8, or (iii) the day ten (10) days prior to the Option Expiration Date. Upon such termination of the ISO Exercise Limitation, the Option shall be deemed a Nonstatutory Stock Option to the extent of the number of shares subject to the Option which would otherwise exceed the ISO Exercise Limitation. (b) Notwithstanding any other provision of this Option Agreement, if compliance with the ISO Exercise Limitation as set forth in Section 4.1(a) will result in the exercisability of any Vested Shares (as defined in Section 11.2) being delayed more than thirty (30) days beyond the date such shares become Vested (the "Vesting Date"), the Option shall be deemed to be two (2) options. The fist option shall be for the maximum portion of the Number of Option Shares that can comply with the ISO Exercise Limitation without causing the Option to be unexercisable in the aggregate as to Vested Shares on the Vesting Date for such shares. The second option, which shall not be treated as an Incentive Stock Option as described in Section 422(b) of the Code, shall be for the balance of the Number of Option Shares: that is, those such shares which, on the respective Vesting Date for such shares, would be unexercisable if included in the first option and thereby made subject to the ISO Exercise Limitation. Shares treated as subject to the second option shall be exercisable on the same terms and at the same time as set forth in this Option Agreement; provided, however, that (i) the third sentence of Section 4.1(a) shall not apply to the second option and (ii) each such share shall become a Vested Share on the Vesting Date on which such shares must first be allocated to the second option pursuant to the preceding sentence. Unless the Optionee specifically elects to the contrary in the Optionee's written notice of exercise, the first option shall be deemed to be exercise first to the maximum possible extent and then the second option shall be deemed to be exercised. 2 METHOD OF EXERCISE. Exercise of the Option shall be by written notice to the Company which must state the election to exercise the Option, the number of whole shares of Stock for 35 which the Option is being exercised and such other representations and agreements as to the Optionee's investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. The written notice must be signed by the Optionee and must be delivered in person, by certified or registered mail, return receipt requested, by confirmed facsimile transmission, or by such other means as the Company may permit, to the Chief Financial Officer of the Company, or other authorized representative of the Company, prior to the termination of the Option as set forth in Section 6, accompanied by (i) full payment of the aggregate Exercise Price for the number of shares of Stock being purchased and (ii) an executed copy, if required herein, of the then current forms of escrow and security agreement referenced below. The Option shall be deemed to be exercised upon receipt by the Company of such written notice, the aggregate Exercise Price, and, if required by the Company, such executed agreements. 3 PAYMENT OF EXERCISE PRICE. (a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided below, payment of the aggregate Exercise Price for the number of shares of Stock for which the Option is being exercised shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of whole shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in Section 4.3(c), (iv) in the Company's sole discretion at the time the Option is exercised, by cash for a portion of the aggregate Exercise Price not less than the par value of the shares being acquired, and the Optionee's promissory note for the balance of the aggregate Exercise Price, or (v) by any combination of the foregoing. (b) TENDER OF STOCK. Notwithstanding the foregoing, the Option may not be exercised by tender to the Company of shares of Stock to the extent such tender of shares of Stock would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's Stock. The Option may not be exercised by tender to the Company of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. (c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the assignment in a form acceptable to the Company of the proceeds of a sale or loan with respect to some or all of the shares of Stock acquired upon the exercise of the Option pursuant to a program or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to establish, modify, decline to approve or terminate any such program or procedures. (d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be permitted if an exercise of the Option using a promissory note would be a violation of any law. The promissory note permitted in clause (iv) of Section 4.3(a) shall be a full recourse note in a form satisfactory to the Company, with principal payable no more than four (4) years after the date the Option is exercised. Interest on the principal balance of the promissory note shall be payable in annual installments at the minimum interest rate necessary to avoid imputed interest pursuant to all applicable sections of the Code. Such recourse promissory note shall be secured by the shares of Stock acquired pursuant to the then current form of security agreement as approved by the Company. At any time the Company is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with the Company's securities, any 36 promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations. Except as the Company in its sole discretion shall determine, the Optionee shall pay the unpaid principal balance of the promissory note and any accrued interest thereon upon termination of the Optionee's Service with the Participating Company Group for any reason, with or without cause. 4 TAX WITHHOLDING. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee hereby authorizes withholding from payroll and any other amounts payable to the Optionee, and otherwise agrees to make adequate provision for (including by means of a Cashless Exercise to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Participating Company Group, if any, which arise in connection with the Option, including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in whole or in part, of any shares acquired upon exercise of the Option, (iii) the operation of any law or regulation providing for the imputation of interest, or (iv) the lapsing of any restriction with respect to any shares acquired upon exercise of the Option. The Optionee is cautioned that the Option is not exercisable unless such tax withholding obligations are satisfied. Accordingly, the Optionee may not be able to exercise the Option when desired even though the Option is vested, and the Company shall have no obligation to issue a certificate for such shares or release such shares from any escrow provided for herein. 5 CERTIFICATE REGISTRATION. Except in the event the Exercise Price is paid by means of a Cashless Exercise, the certificate for the shares as to which the Option is exercised shall be registered in the name of the Optionee, or, if applicable, in the names of the heirs of the Optionee. 6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The grant of the Option and the issuance of shares of Stock upon exercise of the Option shall be subject to compliance with all applicable requirements of federal, state or foreign law with respect to such securities. The Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the shares of Stock may then be listed. In addition, the Option may not be exercised unless (i) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. Questions concerning this restriction should be directed to the Chief Financial Officer of the Company. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any shares subject to the Option shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of the Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. 7 FRACTIONAL SHARES. The Company shall not be required to issue fractional shares upon the exercise of the Option. 37 5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised during the lifetime of the Optionee only by the Optionee or the Optionee's guardian or legal representative and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. Following the death of the Optionee, the Option, to the extent provided in Section 7, may be exercised by the Optionee's legal representative or by any person empowered to do so under the deceased Optionee's will or under the then applicable laws of descent and distribution. 6. TERMINATION OF THE OPTION. The Option shall terminate and may no longer be exercised on the first to occur of (a) the Option Expiration Date, (b) the last date for exercising the Option following termination of the Optionee's Service as described in Section 7, or (c) a Transfer of Control to the extent provided in Section 8. 7. EFFECT OF TERMINATION OF SERVICE. 1 OPTION EXERCISABILITY. (a) DISABILITY. If the Optionee's Service is terminated because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee (or the Optionee's guardian or legal representative) at any time prior to the expiration of twelve (12) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. (NOTE: If the Option is exercised more than three (3) months after the date on which the Optionee's Service as an Employee terminated as a result of a Disability other than a permanent and total disability as defined in Section 22(e)(3) of the Code, the Option will be treated as a Nonstatutory Stock Option and not as an Incentive Stock Option to the extent required by Section 422 of the Code. (b) DEATH. If the Optionee's Service is terminated because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee's legal representative or other person who acquired the right to exercise the Option by reason of the Optionee's death at any time prior to the expiration of twelve (12) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. The Optionee's Service shall be deemed to have terminated on account of death if the Optionee dies within three (3) months after the Optionee's termination of Service. (c) OTHER TERMINATION OF SERVICE. If the Optionee's Service terminates for any reason except Disability or death, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee's Service terminated, may be exercised by the Optionee within three (3) months (or such other longer period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. 2 ADDITIONAL LIMITATIONS ON OPTION EXERCISE. Notwithstanding the provisions in Section 7.1, the Option may not be exercised after the Optionee's termination of Service to the extent that the shares to be acquired upon exercise of the Option would be subject to the Unvested Share Repurchase Option as provided in Section 11. Except as the Company and the Optionee otherwise agree, exercise of the Option pursuant to Section 7.1 following termination of the Optionee's Service may not be made by delivery of a promissory note as provided in Section 4.3(a). 38 3 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the foregoing, if the exercise of the Option within the applicable time periods set forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option shall remain exercisable until three (3) months after the date the Optionee is notified that the Option is exercisable, but in any event no later than the Option Expiration Date. The Company makes no representation as to the tax consequences of any such delayed exercise. The Optionee should consult with the Optionee's own tax advisor as to the tax consequences to the Optionee of any such delayed exercise. 4 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 7.1 of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of Service, or (iii) the Option Expiration Date. The Company makes no representation as to the tax consequences of any such delayed exercise. The Optionee should consult with the Optionee's own tax advisor(s) as to the tax consequences to the Optionee of any such delayed exercise. 5 LEAVE OF ABSENCE. For purposes of Section 7.1, the Optionee's Service shall not be deemed to terminate if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company of ninety (90) days or less. In the event of a leave of absence in excess of ninety (90) days, the Optionee's Service shall be deemed to terminate on the ninety-first (91st) day of such leave unless the Optionee's right to return to Service remains guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company (or required by law), a leave of absence shall not be treated as Service for purposes of determining the Optionee's Vested Ratio. 8. TRANSFER OF CONTROL. 1 DEFINITIONS. (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the "TRANSACTION") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent 39 (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "TRANSFEREE CORPORATION(s)"), as the case may be; provided, however, that neither an initial public offering by the Company, nor an equity or convertible securities financing by the Company shall be deemed an Ownership Change Event or Transfer of Control for the purpose of any accelerated vesting provision of this Option Agreement. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 2 EFFECT OF TRANSFER OF CONTROL ON OPTION. In the event of an eligible Transfer of Control, the Vested Ratio shall be increased by two-fifths (2/5) as of the date ten (10) days prior to the date of any such eligible Transfer of Control; provided, however, that in no event shall the Vested Ratio be increased pursuant to this Section 8.2 to a ratio in excess of one (1). The exercise or vesting of any Option that was permissible solely by reason of this Section 8.2 shall be conditioned upon the consummation of the Transfer of Control. In addition, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), may either assume the Company's rights and obligations under the Option or substitute for the Option a substantially equivalent option for the Acquiring Corporation's stock. For purposes of this Section 8.2, the Option shall be deemed assumed if, following the Transfer of Control, the Option confers the right to purchase, for each share of Stock subject to the Option immediately prior to the Transfer of Control, the consideration (whether stock, cash or other securities or property) to which a holder of a share of Stock on the effective date of the Transfer of Control was entitled. The Option shall terminate and cease to be outstanding effective as of the date of the Transfer of Control to the extent that the Option is neither assumed or substituted for by the Acquiring Corporation in connection with the Transfer of Control nor exercised as of the date of the Transfer of Control. Notwithstanding the foregoing, shares acquired upon exercise of the Option prior to the Transfer of Control and any consideration received pursuant to the Transfer of Control with respect to such shares shall continue to be subject to all applicable provisions of this Option Agreement except as otherwise provided herein. Furthermore, notwithstanding the foregoing, if the corporation the stock of which is subject to the Option immediately prior to an Ownership Change Event described in Section 8.1(a)(i) constituting a Transfer of Control is the surviving or continuing corporation and immediately after such Ownership Change Event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions of Section 1504(b) of the Code, the Option shall not terminate unless the Board otherwise provides in its sole discretion. 9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification, or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number, Exercise Price and class of shares of stock subject to the Option. If a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares of another corporation (the "New Shares"), the Board may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the Number of Option Shares and the Exercise Price shall be adjusted in a fair and equitable manner, as determined by the Board, in its sole discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this 40 Section 9 shall be rounded up or down to the nearest whole number, as determined by the Board, and in no event may the Exercise Price be decreased to an amount less than the par value, if any, of the stock subject to the Option. The adjustments determined by the Board pursuant to this Section 9 shall be final, binding and conclusive. 10. RIGHTS AS A STOCKHOLDER, EMPLOYEE OR CONSULTANT. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a certificate for the shares for which the Option has been exercised (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such certificate is issued, except as provided in Section 9. If the Optionee is an Employee, the Optionee understands and acknowledges that, except as otherwise provided in a separate, written employment agreement between a Participating Company and the Optionee, the Optionee's employment is "at will" and is for no specified term. Nothing in this Option Agreement shall confer upon the Optionee, whether an Employee or Consultant, any right to continue in the Service of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Optionee's Service as an Employee or Consultant, as the case may be, at any time. 11. UNVESTED SHARE REPURCHASE OPTION. 1 GRANT OF UNVESTED SHARE REPURCHASE OPTION. In the event the Optionee's Service is terminated for any reason or no reason, with or without cause, or if the Optionee, the Optionee's legal representative, or other holder of shares acquired upon exercise of the Option attempts to sell, exchange, transfer, pledge, or otherwise dispose of (other than pursuant to an Ownership Change Event) any shares acquired upon exercise of the Option which exceed the Vested Shares as defined in Section 11.2 below (the "Unvested Shares"), the Company shall have the right to repurchase the Unvested Shares under the terms and subject to the conditions set forth in this Section 11 (the "Unvested Share Repurchase Option"). 2 VESTED SHARES AND UNVESTED SHARES DEFINED. The "Vested Shares" shall mean, on any given date, a number of shares of Stock equal to the Number of Option Shares multiplied by the Vested Ratio determined as of such date and rounded down to the nearest whole share. On such given date, the "Unvested Shares" shall mean the number of shares of Stock acquired upon exercise of the Option which exceed the Vested Shares determined as of such date. 3 EXERCISE OF UNVESTED SHARE REPURCHASE OPTION. The Company may exercise the Unvested Share Repurchase Option by written notice to the Optionee within sixty (60) days after (a) termination of the Optionee's Service (or exercise of the Option, if later) or (b) the Company has received notice of the attempted disposition of Unvested Shares. If the Company fails to give notice within such sixty (60) day period, the Unvested Share Repurchase Option shall terminate unless the Company and the Optionee have extended the time for the exercise of the Unvested Share Repurchase Option. The Unvested Share Repurchase Option must be exercised, if at all, for all of the Unvested Shares, except as the Company and the Optionee otherwise agree. 4 PAYMENT FOR SHARES AND RETURN OF SHARES TO COMPANY. The purchase price per share being repurchased by the Company shall be an amount equal to the Optionee's original cost per share, as adjusted pursuant to Section 9 (the "Repurchase Price"). The Company shall pay the aggregate Repurchase Price to the Optionee in cash within thirty (30) days after the date of the written notice to the Optionee of the Company's exercise of the Unvested Share Repurchase Option. For purposes of the foregoing, cancellation of any indebtedness of the Optionee to any Participating Company shall be 41 treated as payment to the Optionee in cash to the extent of the unpaid principal and any accrued interest canceled. The shares being repurchased shall be delivered to the Company by the Optionee at the same time as the delivery of the Repurchase Price to the Optionee. 5 ASSIGNMENT OF UNVESTED SHARE REPURCHASE OPTION. The Company shall have the right to assign the Unvested Share Repurchase Option at any time, whether or not such option is then exercisable, to one or more persons as may be selected by the Company. 6 OWNERSHIP CHANGE EVENT. Upon the occurrence of an Ownership Change Event, any and all new, substituted or additional securities or other property to which the Optionee is entitled by reason of the Optionee's ownership of Unvested Shares shall be immediately subject to the Unvested Share Repurchase Option and included in the terms "Stock" and "Unvested Shares" for all purposes of the Unvested Share Repurchase Option with the same force and effect as the Unvested Shares immediately prior to the Ownership Change Event. While the aggregate Repurchase Price shall remain the same after such Ownership Change Event, the Repurchase Price per Unvested Share upon exercise of the Unvested Share Repurchase Option following such Ownership Change Event shall be adjusted as appropriate. For purposes of determining the Vested Ratio following an Ownership Change Event, credited Service shall include all Service with any corporation which is a Participating Company at the time the Service is rendered, whether or not such corporation is a Participating Company both before and after the Ownership Change Event. The foregoing notwithstanding, in the event of an Ownership Change Event that is also a Transfer of Control, the Unvested Share Repurchase Option will terminate if the surviving corporation does not assume, or substitute substantially equivalent options for, all outstanding Options under the Plan. 12. RIGHT OF FIRST REFUSAL. 1 GRANT OF RIGHT OF FIRST REFUSAL. Except as provided in Section 12.7 below, in the event the Optionee, the Optionee's legal representative, or other holder of shares acquired upon exercise of the Option proposes to sell, exchange, transfer, pledge, or otherwise dispose of any Vested Shares (the "TRANSFER SHARES") to any person or entity, including, without limitation, any shareholder of the Participating Company Group, the Company shall have the right to repurchase the Transfer Shares under the terms and subject to the conditions set forth in this Section 12 (the "RIGHT OF FIRST REFUSAL"). 2 NOTICE OF PROPOSED TRANSFER. Prior to any proposed transfer of the Transfer Shares, the Optionee shall deliver written notice (the "TRANSFER NOTICE") to the Company describing fully the proposed transfer, including the number of Transfer Shares, the name and address of the proposed transferee (the "PROPOSED TRANSFEREE") and, if the transfer is voluntary, the proposed transfer price, and containing such information necessary to show the bona fide nature of the proposed transfer. In the event of a bona fide gift or involuntary transfer, the proposed transfer price shall be deemed to be the Fair Market Value of the Transfer Shares, as determined by the Board in good faith. If the Optionee proposes to transfer any Transfer Shares to more than one Proposed Transferee, the Optionee shall provide a separate Transfer Notice for the proposed transfer to each Proposed Transferee. The Transfer Notice shall be signed by both the Optionee and the Proposed Transferee and must constitute a binding commitment of the Optionee and the Proposed Transferee for the transfer of the Transfer Shares to the Proposed Transferee subject only to the Right of First Refusal. 3 BONA FIDE TRANSFER. If the Company determines that the information provided by the Optionee in the Transfer Notice is insufficient to establish the bona fide nature of a proposed voluntary transfer, the Company shall give the Optionee written notice of the Optionee's failure to comply with the procedure described in this Section 12, and the Optionee shall have no right to transfer 42 the Transfer Shares without first complying with the procedure described in this Section 12. The Optionee shall not be permitted to transfer the Transfer Shares if the proposed transfer is not bona fide. 4 EXERCISE OF RIGHT OF FIRST REFUSAL. If the Company determines the proposed transfer to be bona fide, the Company shall have the right to purchase all, but not less than all, of the Transfer Shares (except as the Company and the Optionee otherwise agree) at the purchase price and on the terms set forth in the Transfer Notice by delivery to the Optionee of a notice of exercise of the Right of First Refusal within thirty (30) days after the date the Transfer Notice is delivered to the Company. The Company's exercise or failure to exercise the Right of First Refusal with respect to any proposed transfer described in a Transfer Notice shall not affect the Company's right to exercise the Right of First Refusal with respect to any proposed transfer described in any other Transfer Notice, whether or not such other Transfer Notice is issued by the Optionee or issued by a person other than the Optionee with respect to a proposed transfer to the same Proposed Transferee. If the Company exercises the Right of First Refusal, the Company and the Optionee shall thereupon consummate the sale of the Transfer Shares to the Company on the terms set forth in the Transfer Notice within sixty (60) days after the date the Transfer Notice is delivered to the Company (unless a longer period is offered by the Proposed Transferee); provided, however, that in the event the Transfer Notice provides for the payment for the Transfer Shares other than in cash, the Company shall have the option of paying for the Transfer Shares by the present value cash equivalent of the consideration described in the Transfer Notice as reasonably determined by the Company. For purposes of the foregoing, cancellation of any indebtedness of the Optionee to any Participating Company shall be treated as payment to the Optionee in cash to the extent of the unpaid principal and any accrued interest canceled. 5 FAILURE TO EXERCISE RIGHT OF FIRST REFUSAL. If the Company fails to exercise the Right of First Refusal in full (or to such lesser extent as the Company and the Optionee otherwise agree) within the period specified in Section 12.4 above, the Optionee may conclude a transfer to the Proposed Transferee of the Transfer Shares on the terms and conditions described in the Transfer Notice, provided such transfer occurs not later than ninety (90) days following delivery to the Company of the Transfer Notice. The Company shall have the right to demand further assurances from the Optionee and the Proposed Transferee (in a form satisfactory to the Company) that the transfer of the Transfer Shares was actually carried out on the terms and conditions described in the Transfer Notice. No Transfer Shares shall be transferred on the books of the Company until the Company has received such assurances, if so demanded, and has approved the proposed transfer as bona fide. Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by the Optionee, shall again be subject to the Right of First Refusal and shall require compliance by the Optionee with the procedure described in this Section 12. 6 TRANSFEREES OF TRANSFER SHARES. All transferees of the Transfer Shares or any interest therein, other than the Company, shall be required as a condition of such transfer to agree in writing (in a form satisfactory to the Company) that such transferee shall receive and hold such Transfer Shares or interest therein subject to all of the terms and conditions of this Option Agreement, including this Section 12 providing for the Right of First Refusal with respect to any subsequent transfer. Any sale or transfer of any shares acquired upon exercise of the Option shall be void unless the provisions of this Section 12 are met. 7 TRANSFERS NOT SUBJECT TO RIGHT OF FIRST REFUSAL. The Right of First Refusal shall not apply to any transfer or exchange of the shares acquired upon exercise of the Option if such transfer or exchange is in connection with an Ownership Change Event. If the consideration received pursuant to such transfer or exchange consists of stock of a Participating Company, such consideration shall remain 43 subject to the Right of First Refusal unless the provisions of Section 12.9 below result in a termination of the Right of First Refusal. 8 ASSIGNMENT OF RIGHT OF FIRST REFUSAL. The Company shall have the right to assign the Right of First Refusal at any time, whether or not there has been an attempted transfer, to one or more persons as may be selected by the Company. 9 EARLY TERMINATION OF RIGHT OF FIRST REFUSAL. The other provisions of this Option Agreement notwithstanding, the Right of First Refusal shall terminate and be of no further force and effect upon (a) the occurrence of a Transfer of Control, unless the Acquiring Corporation assumes the Company's rights and obligations under the Option or substitutes a substantially equivalent option for the Acquiring Corporation's stock for the Option, or (b) the existence of a public market for the class of shares subject to the Right of First Refusal. A "PUBLIC MARKET" shall be deemed to exist if (i) such stock is listed on a national securities exchange (as that term is used in the Exchange Act) or (ii) such stock is traded on the over-the-counter market and prices therefor are published daily on business days in a recognized financial journal. 13. ESCROW. 1 ESTABLISHMENT OF ESCROW. To ensure that shares of Stock issued upon exercise of this Option which are subject to the Unvested Share Repurchase Option, the Right of First Refusal or securing any promissory note will be available for repurchase, the Company may require the Optionee to deposit the certificate evidencing the shares of Stock which the Optionee purchases upon exercise of the Option with an escrow agent designated by the Company under the terms and conditions of an escrow and security agreements approved by the Company. If the Company does not require such deposit as a condition of exercise of the Option, the Company reserves the right at any time to require the Optionee to so deposit the certificate in escrow. Upon the occurrence of an Ownership Change Event or a change, as described in Section 9, in the character or amount of any of the outstanding stock of the corporation the stock of which is subject to the provisions of this Option Agreement, any and all new, substituted or additional securities or other property to which the Optionee is entitled by reason of the Optionee's ownership of shares of Stock acquired upon exercise of the Option that remain, following such Ownership Change Event or change described in Section 9, subject to the Unvested Share Repurchase Option, the Right of First Refusal or any security interest held by the Company shall be immediately subject to the escrow to the same extent as such shares of Stock immediately before such event. The Company shall bear the expenses of the escrow. 2 DELIVERY OF SHARES TO OPTIONEE. As soon as practicable after the expiration of the Unvested Share Repurchase Option, the Right of First Refusal and after full repayment of any promissory note secured by the shares of Stock or other property in escrow, but not more frequently than twice each calendar year, the escrow agent shall deliver to the Optionee the shares of Stock and any other property no longer subject to such restrictions and no longer securing any promissory note. 3 NOTICES AND PAYMENTS. In the event the shares of Stock and any other property held in escrow are subject to the Company's exercise of the Unvested Share Repurchase Option, the Right of First Refusal, or any security interest of the Company, the notices required to be given to the Optionee shall be given to the escrow agent, and any payment required to be given to the Optionee shall be given to the escrow agent. Within thirty (30) days after payment by the Company, the escrow agent shall deliver the shares of Stock and any other property which the Company has purchased to the Company and shall deliver the payment received from the Company to the Optionee. 44 14. STOCK DISTRIBUTIONS SUBJECT TO OPTION AGREEMENT. If, from time to time, there is any stock dividend, stock split or other change, as described in Section 9, in the character or amount of any of the outstanding stock of the corporation the stock of which is subject to the provisions of this Option Agreement, then in such event any and all new, substituted or additional securities to which the Optionee is entitled by reason of the Optionee's ownership of the shares acquired upon exercise of the Option shall be immediately subject to the Unvested Share Repurchase Option, the Right of First Refusal and any security interest held by the Company and with the same force and effect as the shares subject to the Unvested Share Repurchase Option, the Right of First Refusal and any such security interest immediately before such event. 15. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION. The Optionee shall dispose of the shares acquired pursuant to the Option only in accordance with the provisions of this Option Agreement. In addition, the Optionee shall promptly notify the Chief Financial Officer of the Company if the Optionee disposes of any of the shares acquired pursuant to the Option within one (1) year after the date the Optionee exercises all or part of the Option or within two (2) years after the Date of Option Grant and shall provide the Company with a description of the terms and circumstances of such disposition. Until such time as the Optionee disposes of such shares in a manner consistent with the provisions of this Option Agreement, unless otherwise expressly authorized by the Company, the Optionee shall hold all shares acquired pursuant to the Option in the Optionee's name (and not in the name of any nominee) for the one-year period immediately after the exercise of the Option and the two-year period immediately after Date of Option Grant. At any time during the one-year or two-year periods set forth above, the Company may place a legend on any certificate representing shares acquired pursuant to the Option requesting the transfer agent for the Company's stock to notify the Company of any such transfers. The obligation of the Optionee to notify the Company of any such transfer shall continue notwithstanding that a legend has been placed on the certificate pursuant to the preceding sentence. 16. LEGENDS. The Company may at any time place legends referencing the Unvested Share Repurchase Option, the Right of First Refusal, any security interest and any applicable federal, state or foreign securities law restrictions on all certificates representing shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in the possession of the Optionee in order to carry out the provisions of this Section. Unless otherwise specified by the Company, legends placed on such certificates may include, but shall not be limited to, the following: 1 "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT." 2 Any legend required to be placed thereon by the Commissioner of Corporations of the State of California. 3 "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN UNVESTED SHARE REPURCHASE OPTION IN FAVOR OF THE CORPORATION OR ITS 45 ASSIGNEE SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS CORPORATION." 4 "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS CORPORATION." 5 "THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORATION TO THE REGISTERED HOLDER UPON EXERCISE OF AN INCENTIVE STOCK OPTION AS DEFINED IN SECTION 422 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED ("ISO"). IN ORDER TO OBTAIN THE PREFERENTIAL TAX TREATMENT AFFORDED TO ISOs, THE SHARES SHOULD NOT BE TRANSFERRED PRIOR TO . SHOULD THE REGISTERED HOLDER ELECT TO TRANSFER ANY OF THE SHARES PRIOR TO THIS DATE AND FOREGO ISO TAX TREATMENT, THE TRANSFER AGENT FOR THE SHARES SHALL NOTIFY THE CORPORATION IMMEDIATELY. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER THE INCENTIVE STOCK OPTION IN THE REGISTERED HOLDER'S NAME (AND NOT IN THE NAME OF ANY NOMINEE) PRIOR TO THIS DATE OR UNTIL TRANSFERRED AS DESCRIBED ABOVE." 17. PUBLIC OFFERING. The Optionee hereby agrees that in the event of any underwritten public offering of stock, including an initial public offering of stock, made by the Company pursuant to an effective registration statement filed under the Securities Act, the Optionee shall not offer, sell, contract to sell, pledge, hypothecate, grant any option to purchase or make any short sale of, or otherwise dispose of any shares of stock of the Company or any rights to acquire stock of the Company for such period of time from and after the effective date of such registration statement as may be established by the underwriter for such public offering at its sole discretion. The foregoing limitation shall not apply to shares registered in the public offering under the Securities Act. The Optionee shall be subject to this Section provided and only if the officers and directors of the Company are also subject to similar arrangements. 18. RESTRICTIONS ON TRANSFER OF SHARES. No shares acquired upon exercise of the Option may be sold, exchanged, transferred (including, without limitation, any transfer to a nominee or agent of the Optionee), assigned, pledged, hypothecated or otherwise disposed of, including by operation of law, in any manner which violates any of the provisions of this Option Agreement and, except pursuant to an Ownership Change, until the date on which such shares become Vested Shares, any such attempted disposition shall be void. The Company shall not be required (a) to transfer on its books any shares which will have been transferred in violation of any of the provisions set forth in this Option Agreement or (b) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares will have been so transferred. 19. BINDING EFFECT. Subject to the restrictions on transfer set forth herein, this Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 20. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan or the Option at any time; provided, however, that except as provided in Section 8.2 in connection with a Transfer of Control, no such termination or amendment may adversely affect the Option or any 46 unexercised portion hereof without the consent of the Optionee unless such termination or amendment is necessary to comply with any applicable law or government regulation or is required to enable the Option to qualify as an Incentive Stock Option. No amendment or addition to this Option Agreement shall be effective unless in writing. 21. NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this Option Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail, with postage and fees prepaid, addressed to the other party at the address shown below that party's signature or at such other address as such party may designate in writing from time to time to the other party. 22. INTEGRATED AGREEMENT. This Option Agreement and the Plan constitute the entire understanding and agreement of the Optionee and the Participating Company Group with respect to the subject matter contained herein or therein, and there are no agreements, understandings, restrictions, representations, or warranties among the Optionee and the Participating Company Group with respect to such subject matter other than those as set forth or provided for herein or therein. To the extent contemplated herein or therein, the provisions of this Option Agreement shall survive any exercise of the Option and shall remain in full force and effect. 23. APPLICABLE LAW. This Option Agreement shall be governed by the laws of the State of Delaware as such laws are applied to agreements between Delaware residents entered into and to be performed entirely within the State of Delaware. COMPANY: P.F. CHANG'S CHINA BISTRO, INC. By:____________________________________ Title:_________________________________ _______________________________________ Print Name and Title 5040 North 49th Street Phoenix, AZ 85018 47 The Optionee represents that the Optionee is familiar with the terms and provisions of this Option Agreement, including the Unvested Share Repurchase Option set forth in Section 11, and the Right of First Refusal set forth in Section 12, and hereby accepts the Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Option Agreement. The undersigned acknowledges receipt of a copy of the Plan. OPTIONEE Date:_______________________________ _______________________________________ Signature _______________________________________ Print Name Optionee's Address: _______________________________________ _______________________________________ _______________________________________ EX-10.4 8 EX-10.4 1 Exhibit 10.4 P.F. CHANG'S CHINA BISTRO, INC. 1996 STOCK OPTION PLAN 1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN. 1 ESTABLISHMENT. The P.F. CHANG'S CHINA BISTRO, INC.'s 1996 Stock Option Plan (the "PLAN") is hereby established effective as of August 2, 1996 (the "EFFECTIVE DATE"). 2 PURPOSE. The purpose of the Plan is to advance the interests of the Participating Company Group and its stockholders by providing an incentive to attract, retain and reward persons performing services for the Participating Company Group and by motivating such persons to contribute to the growth and profitability of the Participating Company Group. 3 TERM OF PLAN. The Plan shall continue in effect until the earlier of its termination by the Board or the date on which all of the shares of Stock available for issuance under the Plan have been issued and all restrictions on such shares under the terms of the Plan and the agreements evidencing Options granted under the Plan have lapsed. However, all Options shall be granted, if at all, within ten (10) years from the earlier of the date the Plan is adopted by the Board or the date the Plan is duly approved by the stockholders of the Company. 2. DEFINITIONS AND CONSTRUCTION. 1 DEFINITIONS. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "BOARD" means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, "Board" also means such Committee(s). (b) "CODE" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder. (c) "COMMITTEE" means the Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted herein, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. (d) "COMPANY" means P.F. Chang's China Bistro, Inc., a Delaware corporation, or any successor corporation thereto. 2 (e) "CONSULTANT" means any person, including an advisor, engaged by a Participating Company to render services other than as an Employee or a Director. (f) "DIRECTOR" means a member of the Board or of the board of directors of any other Participating Company. (g) "EMPLOYEE" means any person treated as an employee (including an officer or a Director who is also treated as an employee) in the records of a Participating Company; provided, however, that neither service as a Director nor payment of a director's fee shall be sufficient to constitute employment for purposes of the Plan. (h) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (i) "FAIR MARKET VALUE" means, as of any date, the value of a share of Stock or other property as determined by the Board, in its sole discretion, or by the Company, in its sole discretion, if such determination is expressly allocated to the Company herein, subject to the following: (i) If, on such date, there is a public market for the Stock, the Fair Market Value of a share of Stock shall be the closing sale price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National Market, the Nasdaq Small-Cap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in the Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Board, in its sole discretion. (ii) If, on such date, there is no public market for the Stock, the Fair Market Value of a share of Stock shall be as determined by the Board without regard to any restriction other than a restriction which, by its terms, will never lapse. (j) "INCENTIVE STOCK OPTION" means an Option intended to be (as set forth in the Option Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of the Code. (k) "INSIDER" means an officer or a Director of the Company or any other person whose transactions in Stock are subject to Section 16 of the Exchange Act. (l) "NONSTATUTORY STOCK OPTION" means an Option not intended to be (as set forth in the Option Agreement) or which does not qualify as an Incentive Stock Option. 3 (m) "OPTION" means a right to purchase Stock (subject to adjustment as provided in Section 4.2) pursuant to the terms and conditions of the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory Stock Option. (n) "OPTION AGREEMENT" means a written agreement between the Company and an Optionee setting forth the terms, conditions and restrictions of the Option granted to the Optionee and any shares acquired upon the exercise thereof. (o) "OPTIONEE" means a person who has been granted one or more Options. (p) "PARENT CORPORATION" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. (q) "PARTICIPATING COMPANY" means the Company or any Parent Corporation or Subsidiary Corporation. (r) "PARTICIPATING COMPANY GROUP" means, at any point in time, all corporations collectively which are then Participating Companies. (s) "RULE 16b-3" means Rule 16b-3 under the Exchange Act, as amended from time to time, or any successor rule or regulation. (t) "STOCK" means the common stock, $0.01 par value per share, of the Company, as adjusted from time to time in accordance with Section 4.2. (u) "SUBSIDIARY CORPORATION" means any present or future "subsidiary corporation" of the Company, as defined in Section 424(f) of the Code. (v) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at the time an Option is granted to the Optionee, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of a Participating Company within the meaning of Section 422(b)(6) of the Code. 2 CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise. 3 4 3. ADMINISTRATION. 1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by the Board. All questions of interpretation of the Plan or of any Option shall be determined by the Board, and such determinations shall be final and binding upon all persons having an interest in the Plan or such Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, determination or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, determination or election. 2 ADMINISTRATION WITH RESPECT TO INSIDERS. With respect to participation by Insiders in the Plan, at any time that any class of equity security of the Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall be administered in compliance with the requirements, if any, of Rule 16b-3. 3 POWERS OF THE BOARD. In addition to any other powers set forth in the Plan and subject to the provisions of the Plan, the Board shall have the full and final power and authority, in its sole discretion: (a) to determine the persons to whom, and the time or times at which, Options shall be granted and the number of shares of Stock to be subject to each Option; (b) to designate Options as Incentive Stock Options or Nonstatutory Stock Options; (c) to determine the Fair Market Value of shares of Stock or other property; (d) to determine the terms, conditions and restrictions applicable to each Option (which need not be identical) and any shares acquired upon the exercise thereof, including, without limitation, (i) the exercise price of the Option, (ii) the method of payment for shares purchased upon the exercise of the Option, (iii) the method for satisfaction of any tax withholding obligation arising in connection with the Option or such shares, including by the withholding or delivery of shares of stock, (iv) the timing, terms and conditions of the exercisability of the Option or the vesting of any shares acquired upon the exercise thereof, (v) the time of the expiration of the Option, (vi) the effect of the Optionee's termination of employment or service with the Participating Company Group on any of the foregoing, and (vii) all other terms, conditions and restrictions applicable to the Option or such shares not inconsistent with the terms of the Plan; (e) to approve one or more forms of Option Agreement; (f) to amend, modify, extend, or renew, or grant a new Option in substitution for, any Option or to waive any restrictions or conditions applicable to any Option or any shares acquired upon the exercise thereof; 5 (g) to amend the exercisability of any Option or the vesting of any shares acquired upon the exercise thereof, including with respect to the period following an Optionee's termination of employment or service with the Participating Company Group; (h) to prescribe, amend or rescind rules, guidelines and policies relating to the Plan, or to adopt supplements to, or alternative versions of, the Plan, including, without limitation, as the Board deems necessary or desirable to comply with the laws of, or to accommodate the tax policy or custom of, foreign jurisdictions whose citizens may be granted Options; and (i) to correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Option Agreement and to make all other determinations and take such other actions with respect to the Plan or any Option as the Board may deem advisable to the extent consistent with the Plan and applicable law. 4. SHARES SUBJECT TO PLAN. 1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as provided in Section 4.2, the maximum aggregate number of shares of Stock that may be issued under the Plan shall be one hundred seventy-eight thousand (178,000) and shall consist of authorized but unissued or reacquired shares of Stock or any combination thereof. If an outstanding Option for any reason expires or is terminated or canceled, or if shares of Stock acquired, subject to repurchase, upon the exercise of an Option are repurchased by the Company, the shares of Stock allocable to the unexercised portion of such Option or such repurchased shares of Stock shall again be available for issuance under the Plan. 2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number and class of shares subject to the Plan and to any outstanding Options and in the exercise price per share of any outstanding Options. If a majority of the shares which are of the same class as the shares that are subject to outstanding Options are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event, as defined in Section 8.1) shares of another corporation (the "NEW SHARES"), the Board may unilaterally amend the outstanding Options to provide that such Options are exercisable for New Shares. In the event of any such amendment, the number of shares subject to, and the exercise price per share of, the outstanding Options shall be adjusted in a fair and equitable manner as determined by the Board, in its sole discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 4.2 shall be rounded up or down to the nearest whole number, as determined by the Board, and in no event may the exercise price of any Option be decreased to an amount less than the par value, if any, of the stock subject to the Option. The adjustments determined by the Board pursuant to this Section 4.2 shall be final, binding and conclusive. 6 5. ELIGIBILITY AND OPTION LIMITATIONS. 1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only to Employees, Consultants, and Directors. For purposes of the foregoing sentence, "Employees," "Consultants" and "Directors" shall include prospective Employees, prospective Consultants and prospective Directors to whom Options are granted in connection with written offers of employment or other service relationship with the Participating Company Group. Eligible persons may be granted more than one (1) Option. 2 OPTION GRANT RESTRICTIONS. Any person who is not an Employee on the effective date of the grant of an Option to such person may be granted only a Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective Employee upon the condition that such person become an Employee shall be deemed granted effective on the date such person commences service with a Participating Company, with an exercise price determined as of such date in accordance with Section 6.1. 3 FAIR MARKET VALUE LIMITATION. To the extent that options designated as Incentive Stock Options (granted under all stock option plans of the Participating Company Group, including the Plan) become exercisable by an Optionee for the first time during any calendar year for stock having an aggregate Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the portion of such options which exceeds such amount shall be treated as Nonstatutory Stock Options. For purposes of this Section 5.3, options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of stock shall be determined as of the time the option with respect to such stock is granted. If the Code is amended to provide for a different limitation from that set forth in this Section 5.3, such different limitation shall be deemed incorporated herein effective as of the date and with respect to such Options as required or permitted by such amendment to the Code. If an Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section 5.3, the Optionee may designate which portion of such Option the Optionee is exercising. In the absence of such designation, the Optionee shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Separate certificates representing each such portion shall be issued upon the exercise of the Option. 6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by Option Agreements specifying the number of shares of Stock covered thereby, in such form as the Board shall from time to time establish. Option Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions: 1 EXERCISE PRICE. The exercise price for each Option shall be established in the sole discretion of the Board; provided, however, that (a) the exercise price per share for an Incentive Stock Option shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the Option, (b) the exercise price per share for a Nonstatutory Stock Option shall be not less than eighty-five percent (85%) of the Fair Market Value of a share of 7 Stock on the effective date of grant of the Option, and (c) no Option granted to a Ten Percent Owner Optionee shall have an exercise price per share less than one hundred ten percent (110%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner qualifying under the provisions of Section 424(a) of the Code. 2 EXERCISE PERIOD. Options shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria, and restrictions as shall be determined by the Board and set forth in the Option Agreement evidencing such Option; provided, however, that (a) no Option shall be exercisable after the expiration of ten (10) years after the effective date of grant of such Option, (b) no Incentive Stock Option granted to a Ten Percent Owner Optionee shall be exercisable after the expiration of five (5) years after the effective date of grant of such Option, and (c) no Option granted to a prospective Employee, prospective Consultant or prospective Director may become exercisable prior to the date on which such person commences service with a Participating Company. 3 PAYMENT OF EXERCISE PRICE. (a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided below, payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the exercise price, (iii) by the assignment of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System) (a "CASHLESS EXERCISE"), (iv) by the Optionee's promissory note in a form approved by the Company, (v) by such other consideration as may be approved by the Board from time to time to the extent permitted by applicable law, or (vi) by any combination thereof. The Board may at any time or from time to time, by adoption of or by amendment to the standard forms of Option Agreement described in Section 7, or by other means, grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price or which otherwise restrict one or more forms of consideration. (b) TENDER OF STOCK. Notwithstanding the foregoing, an Option may not be exercised by tender to the Company of shares of Stock to the extent such tender of Stock would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. Unless otherwise provided by the Board, an Option may not be exercised by tender to the Company of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. 8 (c) CASHLESS EXERCISE. The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to establish, decline to approve or terminate any program or procedures for the exercise of Options by means of a Cashless Exercise. (d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be permitted if the exercise of an Option using a promissory note would be a violation of any law. Any permitted promissory note shall be on such terms as the Board shall determine at the time the Option is granted. The Board shall have the authority to permit or require the Optionee to secure any promissory note used to exercise an Option with the shares of Stock acquired upon the exercise of the Option or with other collateral acceptable to the Company. Unless otherwise provided by the Board, if the Company at any time is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with the Company's securities, any promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations. 4 TAX WITHHOLDING. The Company shall have the right, but not the obligation, to deduct from the shares of Stock issuable upon the exercise of an Option, or to accept from the Optionee the tender of, a number of whole shares of Stock having a Fair Market Value, as determined by the Company, equal to all or any part of the federal, state, local and foreign taxes, if any, required by law to be withheld by the Participating Company Group with respect to such Option or the shares acquired upon the exercise thereof. Alternatively or in addition, in its sole discretion, the Company shall have the right to require the Optionee, through payroll withholding, cash payment or otherwise, including by means of a Cashless Exercise, to make adequate provision for any such tax withholding obligations of the Participating Company Group arising in connection with the Option or the shares acquired upon the exercise thereof. The Company shall have no obligation to deliver shares of Stock or to release shares of Stock from an escrow established pursuant to the Option Agreement until the Participating Company Group's tax withholding obligations have been satisfied by the Optionee. 5 REPURCHASE RIGHTS. Shares issued under the Plan may be subject to a right of first refusal, one or more repurchase options, or other conditions and restrictions as determined by the Board, in its sole discretion, at the time the Option is granted. The Company shall have the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as may be selected by the Company. Upon request by the Company, each Optionee shall execute any agreement evidencing such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the Company any and all certificates representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer restrictions. 9 7. STANDARD FORMS OF OPTION AGREEMENT. 1 INCENTIVE STOCK OPTIONS. Unless otherwise provided by the Board at the time the Option is granted, an Option designated as an "Incentive Stock Option" shall comply with and be subject to the terms and conditions set forth in the form of Immediately Exercisable Incentive Stock Option Agreement adopted by the Board concurrently with its adoption of the Plan and as amended from time to time. 2 NONSTATUTORY STOCK OPTIONS. Unless otherwise provided by the Board at the time the Option is granted, an Option designated as a "Nonstatutory Stock Option" shall comply with and be subject to the terms and conditions set forth in the form of Immediately Exercisable Nonstatutory Stock Option Agreement adopted by the Board concurrently with its adoption of the Plan and as amended from time to time. 3 STANDARD TERM OF OPTIONS. Except as otherwise provided in Section 6.2 or by the Board in the grant of an Option, any Option granted hereunder shall have a term of ten (10) years from the effective date of grant of the Option. 4 AUTHORITY TO VARY TERMS. The Board shall have the authority from time to time to vary the terms of any of the standard forms of Option Agreement described in this Section 7 either in connection with the grant or amendment of an individual Option or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of any such new, revised or amended standard form or forms of Option Agreement are not inconsistent with the terms of the Plan. Such authority shall include, but not by way of limitation, the authority to grant Options which are not immediately exercisable. 8. TRANSFER OF CONTROL. 1 DEFINITIONS. (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. 10 (b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the "TRANSACTION") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "TRANSFEREE CORPORATION(S)"), as the case may be, provided, however, that neither an initial public offering by the Company, nor an equity or convertible securities financing by the Company shall be deemed an Ownership Change Event or Transfer of Control for the purpose of any accelerated vesting provision of this Option Agreement. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 11 2 EFFECT OF TRANSFER OF CONTROL ON OPTIONS. In the event of an eligible Transfer of Control, each of the outstanding Options shall receive an additional two (2) years of accelerated vesting as of the date ten (10) days prior to the date of the Transfer of Control. The exercise or vesting of any Option that was permissible solely by reason of this Section 8.2 shall be conditioned upon the consummation of the Transfer of Control. In addition, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), may either assume the Company's rights and obligations under outstanding Options or substitute for outstanding Options substantially equivalent options for the Acquiring Corporation's stock. For purposes of this Section 8.2, an Option shall be deemed assumed if, following the Transfer of Control, the Option confers the right to purchase in accordance with its terms and conditions, for each share of Stock subject to the Option immediately prior to the Transfer of Control, the consideration (whether stock, cash or other securities or property) to which a holder of a share of Stock on the effective date of the Transfer of Control was entitled. Any Options which are neither assumed or substituted for by the Acquiring Corporation in connection with the Transfer of Control nor exercised as of the date of the Transfer of Control shall terminate and cease to be outstanding effective as of the date of the Transfer of Control. Notwithstanding the foregoing, shares acquired upon exercise of an Option prior to the Transfer of Control and any consideration received pursuant to the Transfer of Control with respect to such shares shall continue to be subject to all applicable provisions of the Option Agreement evidencing such Option except as otherwise provided in such Option Agreement. Furthermore, notwithstanding the foregoing, if the corporation the stock of which is subject to the outstanding Options immediately prior to an Ownership Change Event described in Section 8.1(a)(i) constituting a Transfer of Control is the surviving or continuing corporation and immediately after such Ownership Change Event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions of Section 1504(b) of the Code, the outstanding Options shall not terminate unless the Board otherwise provides in its sole discretion. 3 NOTICE. The Company shall send to all holders of outstanding Options at least ten (10) days' written notice prior to the consummation of a Transfer of Control. The Company's notice shall summarize the principal terms of the Transfer of Control including, without limitation, whether the Acquiring Corporation is assuming the outstanding Options or substituting equivalent options therefor. 9. PROVISION OF INFORMATION. At least annually, copies of the Company's balance sheet and income statement for the just completed fiscal year shall be made available to each Optionee and purchaser of shares of Stock upon the exercise of an Option. The Company shall not be required to provide such information to persons whose duties in connection with the Company assure them access to equivalent information. 10. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, an Option shall be exercisable only by the Optionee or the Optionee's guardian or legal representative. No Option shall be assignable or transferable by the Optionee, except by will or by the laws of descent and distribution. 12 11. TRANSFER OF COMPANY'S RIGHTS. In the event any Participating Company assigns, other than by operation of law, to a third person, other than another Participating Company, any of the Participating Company's rights to repurchase any shares of Stock acquired upon the exercise of an Option, the assignee shall pay to the assigning Participating Company the value of such right as determined by the Company in the Company's sole discretion. Such consideration shall be paid in cash. In the event such repurchase right is exercisable at the time of such assignment, the value of such right shall be not less than the Fair Market Value of the shares of Stock which may be repurchased under such right (as determined by the Company) minus the repurchase price of such shares. The requirements of this Section 11 regarding the minimum consideration to be received by the assigning Participating Company shall not inure to the benefit of the Optionee whose shares of Stock are being repurchased. Failure of a Participating Company to comply with the provisions of this Section 11 shall not constitute a defense or otherwise prevent the exercise of the repurchase right by the assignee of such right. 12. INDEMNIFICATION. In addition to such other rights of indemnification as they may have as members of the Board or officers or employees of the Participating Company Group, members of the Board and any officers or employees of the Participating Company Group to whom authority to act for the Board or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same. 13. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend the Plan at any time. However, subject to changes in applicable law, regulations or rules that would permit otherwise, without the approval of the Company's stockholders there shall be (a) no increase in the maximum aggregate number of shares of Stock that may be issued under the Plan (except by operation of the provisions of Section 4.2), (b) no change in the class of persons eligible to receive Incentive Stock Options, and (c) no other amendment of the Plan that would require approval of the Company's stockholders under any applicable law, regulation or rule. In any event, no termination or amendment of the Plan may adversely affect any then outstanding Option or any unexercised portion thereof, without the consent of the Optionee, unless such termination or amendment is required to enable an Option designated as an Incentive Stock Option to qualify as an Incentive Stock Option or is necessary to comply with any applicable law, regulation or rule. 13 14. STOCKHOLDER APPROVAL. The Plan or any increase in the maximum number of shares of Stock issuable thereunder as provided in Section 4.1 (the "MAXIMUM SHARES") shall be approved by the stockholders of the Company within twelve (12) months of the date of adoption thereof by the Board. Options granted prior to stockholder approval of the Plan or in excess of the Maximum Shares previously approved by the stockholders shall become exercisable no earlier than the date of stockholder approval of the Plan or such increase in the Maximum Shares, as the case may be. IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that the foregoing P.F. CHANG'S CHINA BISTRO, INC. 1996 Stock Option Plan was duly adopted by the Board on August 2, 1996. PLAN HISTORY August 2, 1996 Board adopts the Plan, with an initial reserve of 178,000 shares. ________, 1997 Stockholders approve the Plan, with an initial reserve of 178,000 shares. 14 THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAVE NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. P.F. CHANG'S CHINA BISTRO, INC. IMMEDIATELY EXERCISABLE INCENTIVE STOCK OPTION AGREEMENT THIS IMMEDIATELY EXERCISABLE INCENTIVE STOCK OPTION AGREEMENT (the "OPTION AGREEMENT") is made and entered into as of ___________, 199_, by and between P.F. CHANG'S CHINA BISTRO, INC., a Delaware corporation (the "Company") and ___________________________ (the "OPTIONEE"). The Company has granted to the Optionee pursuant to the P.F. Chang's China Bistro, Inc. 1996 Stock Option Plan (the "Plan") an option to purchase certain shares of stock, upon the terms and conditions set forth in this Option Agreement (the "OPTION"). The Option shall in all respects be subject to the terms and conditions of the Plan, the provisions of which are incorporated herein by reference. 1. DEFINITIONS AND CONSTRUCTION. 1.1 DEFINITIONS. Unless otherwise defined herein, capitalized terms shall have the meanings assigned to such terms in the Plan. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "DATE OF OPTION GRANT" means _________________ , 199_. (b) "NUMBER OF OPTION Shares" means _____________ shares of Stock, as adjusted from time to time pursuant to Section 9. (c) "EXERCISE PRICE" means $________ per share of Stock, as adjusted from time to time pursuant to Section 9. (d) "INITIAL EXERCISE DATE" means the Date of Option Grant. 15 (e) "INITIAL VESTING DATE" means the date occurring one (1) year after (check one): _____ the Date of Option Grant. _____ _______________, 199__, the date the Optionee's Service commenced. (f) "VESTED RATIO" means, on any relevant date, the ratio determined as follows: (i) Prior to the Initial Vesting Date, the Vested Ratio shall be 0. (ii) On the Initial Vesting Date, provided that the Optionee's Service has been continuous from the Date of Option Grant until the Initial Vesting Date, the Vested Ratio shall be 1/5. (iii) For each full month of the Optionee's continuous service after the Initial Vesting Date, the Vested Ratio shall be increased by one-sixtieth (1/60). (iv) In no event shall the Vested Ratio exceed 1/1. (g) "OPTION EXPIRATION Date" means the date ten (10) years after the Date of Option Grant. (h) "BOARD" means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, "Board" shall also mean such Committee(s). (i) "CODE" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder. (j) "COMMITTEE" means the Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted in the Plan, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. (k) "COMPANY" means P.F. Chang's China Bistro, Inc., a Delaware corporation, or any successor corporation thereto. (l) "DISABILITY" means the inability of the Optionee, in the opinion of a qualified physician acceptable to the Company, to perform the major duties of the Optionee's position with the Participating Company Group because of the sickness or injury of the Optionee. 16 (m) "EMPLOYEE" means any person treated as an employee (including an officer or a director who is also treated as an employee) in the records of the Company; provided, however, that neither service as a director nor payment of a director's fee shall be sufficient to constitute employment for this purpose. (n) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (o) "FAIR MARKET VALUE" means, as of any date, the value of a share of Stock or other property as determined by the Board, in its sole discretion, or by the Company, in its sole discretion, if such determination is expressly allocated to the Company herein. (p) "PARENT CORPORATION" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. (q) "PARTICIPATING COMPANY" means the Company or any Parent Corporation or Subsidiary Corporation. (r) "PARTICIPATING COMPANY GROUP" means, at any point in time, all corporations collectively which are then Participating Companies. (s) "PLAN" means the P.F. Chang's China Bistro, Inc. 1996 Stock Option Plan. (t) "SECURITIES ACT" means the Securities Act of 1933, as amended. (u) "SERVICE" means the Optionee's employment or service with the Participating Company Group, whether in the capacity of an Employee, a Director or a Consultant. The Optionee's Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionee renders Service to the Participating Company Group or a change in the Participating Company for which the Optionee renders such Service, provided that there is no interruption or termination of the Optionee's Service. Furthermore, the Optionee's Service with the Participating Company Group shall not be deemed to have terminated if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company; provided, however, that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day of such leave the Optionee's Service shall be deemed to have terminated unless the Optionee's right to return to Service with the Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining the Optionee's Vested Ratio. The Optionee's Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Optionee performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its sole discretion, shall determine whether the Optionee's Service has terminated and the effective date of such termination. (v) "STOCK" means the common stock of the Company, as adjusted from time to time in accordance with Section 9. (w) "SUBSIDIARY Corporation" means any present or future "subsidiary corporation" of the Company, as defined in Section 424(f) of the Code. 17 1.2 CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of this Option Agreement. Except when otherwise indicated by the context, the singular shall include the plural, the plural shall include the singular, and the term "or" shall include the conjunctive as well as the disjunctive. 2. TAX CONSEQUENCES. 2.1 TAX STATUS OF OPTION. This Option is intended to be an Incentive Stock Option within the meaning of Section 422(b) of the Code (an "INCENTIVE STOCK OPTION"), but the Company does not represent or warrant that this Option qualifies as such. The Optionee should consult with the Optionee's own tax advisor regarding the tax effects of this Option and the requirements necessary to obtain favorable income tax treatment under Section 422 of the Code, including, but not limited to, holding period requirements. (NOTE: If the aggregate Exercise Price of the Option (that is, the Exercise Price multiplied by the Number of Option Shares) plus the aggregate exercise price of any other Incentive Stock Options held by the Optionee (whether granted pursuant to the Plan or any other stock option plan of the Participating Company Group) is greater than One Hundred Thousand Dollars ($100,000), the Optionee should contact the Chief Financial Officer of the Company to ascertain whether the entire Option qualifies as an Incentive Stock Option.) 2.2 ELECTION UNDER SECTION 83(b) OF THE CODE. If the Optionee exercises this Option to purchase shares of Stock that are both nontransferable and subject to a substantial risk of forfeiture, the Optionee understands that the Optionee should consult with the Optionee's tax advisor regarding the advisability of filing with the Internal Revenue Service an election under Section 83(b) of the Code, which must be filed no later than thirty (30) days after the date on which the Optionee exercises the Option. Shares acquired upon exercise of the Option are nontransferable and subject to a substantial risk of forfeiture if, for example, (a) they are unvested and are subject to a right of the Company to repurchase such shares at the Optionee's original purchase price if the Optionee's Service terminates, (b) the Optionee is an Insider and exercises the Option within six (6) months of the Date of Option Grant (if a class of equity security of the Company is registered under Section 12 of the Exchange Act), or (c) the Optionee is subject to a restriction on transfer to comply with "Pooling-of-Interests Accounting" rules. Failure to file an election under Section 83(b), if appropriate, may result in adverse tax consequences to the Optionee. The Optionee acknowledges that the Optionee has been advised to consult with a tax advisor prior to the exercise of the Option regarding the tax consequences to the Optionee of the exercise of the Option. AN ELECTION UNDER SECTION 83(b) MUST BE FILED WITHIN 30 DAYS AFTER THE DATE ON WHICH THE OPTIONEE PURCHASES SHARES. THIS TIME PERIOD CANNOT BE EXTENDED. THE OPTIONEE ACKNOWLEDGES THAT TIMELY FILING OF A SECTION 83(b) ELECTION IS THE OPTIONEE'S SOLE RESPONSIBILITY, EVEN IF THE OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO FILE SUCH ELECTION ON HIS OR HER BEHALF. 3. ADMINISTRATION. All questions of interpretation concerning this Option Agreement shall be determined by the Board, including any duly appointed Committee of the Board. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 18 4. EXERCISE OF THE OPTION. 4.1 RIGHT TO EXERCISE. (a) Except as otherwise provided herein, the Option shall be exercisable on and after the Initial Exercise Date and prior to the termination of the Option (as provided in Section 6) in an amount not to exceed the Number of Option Shares less the number of shares of Stock previously acquired upon exercise of the Option, subject to the Optionee's agreement that any shares purchased upon exercise are subject to the Company's repurchase rights set forth in Section 11 and to the Company's first refusal rights set forth in Section 12. In no event shall the Option be exercisable for more shares than the Number of Option Shares. Notwithstanding the foregoing, except as provided in Section 4.1(b), the aggregate Fair Market Value of the shares of Stock with respect to which the Optionee may exercise the Option for the first time during any calendar year, when added to the aggregate Fair Market Value of the shares subject to any other options designated as Incentive Stock Options granted to the Optionee under all stock option plans of the Participating Company Group prior to the Date of Option Grant with respect to which such options are exercisable for the first time during the same calendar year, shall not exceed One Hundred Thousand Dollars ($100,000). For purposes of the preceding sentence, options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of shares of stock shall be determined as of the time the option with respect to such shares is granted. Such limitation on exercise shall be referred to in this Option Agreement as the "ISO Exercise Limitation." If Section 422 of the Code is amended to provide for a different limitation from that set forth in this Section 4.1(a), the ISO Exercise Limitation shall be deemed amended effective as of the date required or permitted by such amendment to the Code. The ISO Exercise Limitation shall terminate upon the earlier of (i) the Optionee's termination of Service, (ii) the day immediately prior to the effective date of a Transfer of Control in which the Option is not assumed or substituted for by the Acquiring Corporation as provided in Section 8, or (iii) the day ten (10) days prior to the Option Expiration Date. Upon such termination of the ISO Exercise Limitation, the Option shall be deemed a Nonstatutory Stock Option to the extent of the number of shares subject to the Option which would otherwise exceed the ISO Exercise Limitation. (b) Notwithstanding any other provision of this Option Agreement, if compliance with the ISO Exercise Limitation as set forth in Section 4.1(a) will result in the exercisability of any Vested Shares (as defined in Section 11.2) being delayed more than thirty (30) days beyond the date such shares become Vested (the "Vesting Date"), the Option shall be deemed to be two (2) options. The fist option shall be for the maximum portion of the Number of Option Shares that can comply with the ISO Exercise Limitation without causing the Option to be unexercisable in the aggregate as to Vested Shares on the Vesting Date for such shares. The second option, which shall not be treated as an Incentive Stock Option as described in Section 422(b) of the Code, shall be for the balance of the Number of Option Shares: that is, those such shares which, on the respective Vesting Date for such shares, would be unexercisable if included in the first option and thereby made subject to the ISO Exercise Limitation. Shares treated as subject to the second option shall be exercisable on the same terms and at the same time as set forth in this Option Agreement; provided, however, that (i) the third sentence of Section 4.1(a) shall not apply to the second option and (ii) each such share shall become a Vested Share on the Vesting Date on which such shares must first be allocated to the second option pursuant to the preceding sentence. Unless the Optionee specifically elects to the contrary in the Optionee's written notice of exercise, the first option shall be deemed to be exercise first to the maximum possible extent and then the second option shall be deemed to be exercised. 4.2 METHOD OF EXERCISE. Exercise of the Option shall be by written notice to the Company which must state the election to exercise the Option, the number of whole shares of Stock 19 for which the Option is being exercised and such other representations and agreements as to the Optionee's investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. The written notice must be signed by the Optionee and must be delivered in person, by certified or registered mail, return receipt requested, by confirmed facsimile transmission, or by such other means as the Company may permit, to the Chief Financial Officer of the Company, or other authorized representative of the Company, prior to the termination of the Option as set forth in Section 6, accompanied by (i) full payment of the aggregate Exercise Price for the number of shares of Stock being purchased and (ii) an executed copy, if required herein, of the then current forms of escrow and security agreement referenced below. The Option shall be deemed to be exercised upon receipt by the Company of such written notice, the aggregate Exercise Price, and, if required by the Company, such executed agreements. 4.3 PAYMENT OF EXERCISE PRICE. (a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided below, payment of the aggregate Exercise Price for the number of shares of Stock for which the Option is being exercised shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of whole shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in Section 4.3(c), (iv) in the Company's sole discretion at the time the Option is exercised, by cash for a portion of the aggregate Exercise Price not less than the par value of the shares being acquired, and the Optionee's promissory note for the balance of the aggregate Exercise Price, or (v) by any combination of the foregoing. (b) TENDER OF STOCK. Notwithstanding the foregoing, the Option may not be exercised by tender to the Company of shares of Stock to the extent such tender of shares of Stock would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's Stock. The Option may not be exercised by tender to the Company of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. (c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the assignment in a form acceptable to the Company of the proceeds of a sale or loan with respect to some or all of the shares of Stock acquired upon the exercise of the Option pursuant to a program or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to establish, modify, decline to approve or terminate any such program or procedures. (d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be permitted if an exercise of the Option using a promissory note would be a violation of any law. The promissory note permitted in clause (iv) of Section 4.3(a) shall be a full recourse note in a form satisfactory to the Company, with principal payable no more than four (4) years after the date the Option is exercised. Interest on the principal balance of the promissory note shall be payable in annual installments at the minimum interest rate necessary to avoid imputed interest pursuant to all applicable sections of the Code. Such recourse promissory note shall be secured by the shares of Stock acquired pursuant to the then current form of security agreement as approved by the Company. At any time the Company is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other 20 governmental entity affecting the extension of credit in connection with the Company's securities, any promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations. Except as the Company in its sole discretion shall determine, the Optionee shall pay the unpaid principal balance of the promissory note and any accrued interest thereon upon termination of the Optionee's Service with the Participating Company Group for any reason, with or without cause. 4.4 TAX WITHHOLDING. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee hereby authorizes withholding from payroll and any other amounts payable to the Optionee, and otherwise agrees to make adequate provision for (including by means of a Cashless Exercise to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Participating Company Group, if any, which arise in connection with the Option, including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in whole or in part, of any shares acquired upon exercise of the Option, (iii) the operation of any law or regulation providing for the imputation of interest, or (iv) the lapsing of any restriction with respect to any shares acquired upon exercise of the Option. The Optionee is cautioned that the Option is not exercisable unless such tax withholding obligations are satisfied. Accordingly, the Optionee may not be able to exercise the Option when desired even though the Option is vested, and the Company shall have no obligation to issue a certificate for such shares or release such shares from any escrow provided for herein. 4.5 CERTIFICATE REGISTRATION. Except in the event the Exercise Price is paid by means of a Cashless Exercise, the certificate for the shares as to which the Option is exercised shall be registered in the name of the Optionee, or, if applicable, in the names of the heirs of the Optionee. 4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The grant of the Option and the issuance of shares of Stock upon exercise of the Option shall be subject to compliance with all applicable requirements of federal, state or foreign law with respect to such securities. The Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the shares of Stock may then be listed. In addition, the Option may not be exercised unless (i) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. Questions concerning this restriction should be directed to the Chief Financial Officer of the Company. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any shares subject to the Option shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of the Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. 21 4.7 FRACTIONAL SHARES. The Company shall not be required to issue fractional shares upon the exercise of the Option. 5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised during the lifetime of the Optionee only by the Optionee or the Optionee's guardian or legal representative and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. Following the death of the Optionee, the Option, to the extent provided in Section 7, may be exercised by the Optionee's legal representative or by any person empowered to do so under the deceased Optionee's will or under the then applicable laws of descent and distribution. 6. TERMINATION OF THE OPTION. The Option shall terminate and may no longer be exercised on the first to occur of (a) the Option Expiration Date, (b) the last date for exercising the Option following termination of the Optionee's Service as described in Section 7, or (c) a Transfer of Control to the extent provided in Section 8. 7. EFFECT OF TERMINATION OF SERVICE. 7.1 OPTION EXERCISABILITY. (a) DISABILITY. If the Optionee's Service is terminated because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee (or the Optionee's guardian or legal representative) at any time prior to the expiration of twelve (12) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. (NOTE: If the Option is exercised more than three (3) months after the date on which the Optionee's Service as an Employee terminated as a result of a Disability other than a permanent and total disability as defined in Section 22(e)(3) of the Code, the Option will be treated as a Nonstatutory Stock Option and not as an Incentive Stock Option to the extent required by Section 422 of the Code. (b) DEATH. If the Optionee's Service is terminated because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee's legal representative or other person who acquired the right to exercise the Option by reason of the Optionee's death at any time prior to the expiration of twelve (12) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. The Optionee's Service shall be deemed to have terminated on account of death if the Optionee dies within three (3) months after the Optionee's termination of Service. (c) OTHER TERMINATION OF SERVICE. If the Optionee's Service terminates for any reason except Disability or death, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee's Service terminated, may be exercised by the Optionee within three (3) months (or such other longer period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. 7.2 ADDITIONAL LIMITATIONS ON OPTION EXERCISE. Notwithstanding the provisions in Section 7.1, the Option may not be exercised after the Optionee's termination of Service to the extent that the shares to be acquired upon exercise of the Option would be subject to the Unvested Share Repurchase Option as provided in Section 11. Except as the Company and the Optionee otherwise agree, exercise of the Option pursuant to Section 7.1 following termination of the Optionee's Service may not be made by delivery of a promissory note as provided in Section 4.3(a). 22 7.3 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the foregoing, if the exercise of the Option within the applicable time periods set forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option shall remain exercisable until three (3) months after the date the Optionee is notified that the Option is exercisable, but in any event no later than the Option Expiration Date. The Company makes no representation as to the tax consequences of any such delayed exercise. The Optionee should consult with the Optionee's own tax advisor as to the tax consequences to the Optionee of any such delayed exercise. 7.4 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 7.1 of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of Service, or (iii) the Option Expiration Date. The Company makes no representation as to the tax consequences of any such delayed exercise. The Optionee should consult with the Optionee's own tax advisor(s) as to the tax consequences to the Optionee of any such delayed exercise. 7.5 LEAVE OF ABSENCE. For purposes of Section 7.1, the Optionee's Service shall not be deemed to terminate if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company of ninety (90) days or less. In the event of a leave of absence in excess of ninety (90) days, the Optionee's Service shall be deemed to terminate on the ninety-first (91st) day of such leave unless the Optionee's right to return to Service remains guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company (or required by law), a leave of absence shall not be treated as Service for purposes of determining the Optionee's Vested Ratio. 8. TRANSFER OF CONTROL. 8.1 DEFINITIONS. (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the "TRANSACTION") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the 23 Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "TRANSFEREE CORPORATION(S)"), as the case may be; provided, however, that neither an initial public offering by the Company, nor an equity or convertible securities financing by the Company shall be deemed an Ownership Change Event or Transfer of Control for the purpose of any accelerated vesting provision of this Option Agreement. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 8.2 EFFECT OF TRANSFER OF CONTROL ON OPTION. In the event of an eligible Transfer of Control, the Vested Ratio shall be increased by two-fifths (2/5) as of the date ten (10) days prior to the date of any such eligible Transfer of Control; provided, however, that in no event shall the Vested Ratio be increased pursuant to this Section 8.2 to a ratio in excess of one (1). The exercise or vesting of any Option that was permissible solely by reason of this Section 8.2 shall be conditioned upon the consummation of the Transfer of Control. In addition, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), may either assume the Company's rights and obligations under the Option or substitute for the Option a substantially equivalent option for the Acquiring Corporation's stock. For purposes of this Section 8.2, the Option shall be deemed assumed if, following the Transfer of Control, the Option confers the right to purchase, for each share of Stock subject to the Option immediately prior to the Transfer of Control, the consideration (whether stock, cash or other securities or property) to which a holder of a share of Stock on the effective date of the Transfer of Control was entitled. The Option shall terminate and cease to be outstanding effective as of the date of the Transfer of Control to the extent that the Option is neither assumed or substituted for by the Acquiring Corporation in connection with the Transfer of Control nor exercised as of the date of the Transfer of Control. Notwithstanding the foregoing, shares acquired upon exercise of the Option prior to the Transfer of Control and any consideration received pursuant to the Transfer of Control with respect to such shares shall continue to be subject to all applicable provisions of this Option Agreement except as otherwise provided herein. Furthermore, notwithstanding the foregoing, if the corporation the stock of which is subject to the Option immediately prior to an Ownership Change Event described in Section 8.1(a)(i) constituting a Transfer of Control is the surviving or continuing corporation and immediately after such Ownership Change Event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions of Section 1504(b) of the Code, the Option shall not terminate unless the Board otherwise provides in its sole discretion. 8.3 FAIR MARKET VALUE LIMITATION. Should the exercisability of this Option be accelerated in connection with a Transfer of Control in accordance with Section 8.2, then to the extent that the aggregate Fair Market Value of the shares of Stock with respect to which the Optionee may exercise the Option for the first time during the calendar year of the Transfer of Control, when added to the aggregate Fair Market Value of the shares subject to any other options designated as Incentive Stock Options granted to the Optionee under all stock option plans of the Participating Company Group prior to the Date of Option Grant with respect to which such options are exercisable for the first time during the same calendar year, exceeds One Hundred Thousand Dollars ($100,000) (or such other limit, if any, 24 imposed by Section 422 of the Code), the portion of the Option which exceeds such amount shall be treated as a Nonstatutory Stock Option. For purposes of the preceding sentence, options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of shares of stock shall be determined as of the time the option with respect to such shares is granted. 9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification, or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number, Exercise Price and class of shares of stock subject to the Option. If a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares of another corporation (the "New Shares"), the Board may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the Number of Option Shares and the Exercise Price shall be adjusted in a fair and equitable manner, as determined by the Board, in its sole discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 9 shall be rounded up or down to the nearest whole number, as determined by the Board, and in no event may the Exercise Price be decreased to an amount less than the par value, if any, of the stock subject to the Option. The adjustments determined by the Board pursuant to this Section 9 shall be final, binding and conclusive. 10. RIGHTS AS A STOCKHOLDER, EMPLOYEE OR CONSULTANT. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a certificate for the shares for which the Option has been exercised (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such certificate is issued, except as provided in Section 9. If the Optionee is an Employee, the Optionee understands and acknowledges that, except as otherwise provided in a separate, written employment agreement between a Participating Company and the Optionee, the Optionee's employment is "at will" and is for no specified term. Nothing in this Option Agreement shall confer upon the Optionee, whether an Employee or Consultant, any right to continue in the Service of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Optionee's Service as an Employee or Consultant, as the case may be, at any time. 11. UNVESTED SHARE REPURCHASE OPTION. 11.1 GRANT OF UNVESTED SHARE REPURCHASE OPTION. In the event the Optionee's Service is terminated for any reason or no reason, with or without cause, or if the Optionee, the Optionee's legal representative, or other holder of shares acquired upon exercise of the Option attempts to sell, exchange, transfer, pledge, or otherwise dispose of (other than pursuant to an Ownership Change Event) any shares acquired upon exercise of the Option which exceed the Vested Shares as defined in Section 11.2 below (the "Unvested Shares"), the Company shall have the right to repurchase the Unvested Shares under the terms and subject to the conditions set forth in this Section 11 (the "Unvested Share Repurchase Option"). 11.2 VESTED SHARES AND UNVESTED SHARES DEFINED. The "Vested Shares" shall mean, on any given date, a number of shares of Stock equal to the Number of Option Shares multiplied by the Vested Ratio determined as of such date and rounded down to the nearest whole share. On such given date, the "Unvested Shares" shall mean the number of shares of Stock acquired upon exercise of the Option which exceed the Vested Shares determined as of such date. 25 11.3 EXERCISE OF UNVESTED SHARE REPURCHASE OPTION. The Company may exercise the Unvested Share Repurchase Option by written notice to the Optionee within sixty (60) days after (a) termination of the Optionee's Service (or exercise of the Option, if later) or (b) the Company has received notice of the attempted disposition of Unvested Shares. If the Company fails to give notice within such sixty (60) day period, the Unvested Share Repurchase Option shall terminate unless the Company and the Optionee have extended the time for the exercise of the Unvested Share Repurchase Option. The Unvested Share Repurchase Option must be exercised, if at all, for all of the Unvested Shares, except as the Company and the Optionee otherwise agree. 11.4 PAYMENT FOR SHARES AND RETURN OF SHARES TO COMPANY. The purchase price per share being repurchased by the Company shall be an amount equal to the Optionee's original cost per share, as adjusted pursuant to Section 9 (the "Repurchase Price"). The Company shall pay the aggregate Repurchase Price to the Optionee in cash within thirty (30) days after the date of the written notice to the Optionee of the Company's exercise of the Unvested Share Repurchase Option. For purposes of the foregoing, cancellation of any indebtedness of the Optionee to any Participating Company shall be treated as payment to the Optionee in cash to the extent of the unpaid principal and any accrued interest canceled. The shares being repurchased shall be delivered to the Company by the Optionee at the same time as the delivery of the Repurchase Price to the Optionee. 11.5 ASSIGNMENT OF UNVESTED SHARE REPURCHASE OPTION. The Company shall have the right to assign the Unvested Share Repurchase Option at any time, whether or not such option is then exercisable, to one or more persons as may be selected by the Company. 11.6 OWNERSHIP CHANGE Event. Upon the occurrence of an Ownership Change Event, any and all new, substituted or additional securities or other property to which the Optionee is entitled by reason of the Optionee's ownership of Unvested Shares shall be immediately subject to the Unvested Share Repurchase Option and included in the terms "Stock" and "Unvested Shares" for all purposes of the Unvested Share Repurchase Option with the same force and effect as the Unvested Shares immediately prior to the Ownership Change Event. While the aggregate Repurchase Price shall remain the same after such Ownership Change Event, the Repurchase Price per Unvested Share upon exercise of the Unvested Share Repurchase Option following such Ownership Change Event shall be adjusted as appropriate. For purposes of determining the Vested Ratio following an Ownership Change Event, credited Service shall include all Service with any corporation which is a Participating Company at the time the Service is rendered, whether or not such corporation is a Participating Company both before and after the Ownership Change Event. The foregoing notwithstanding, in the event of an Ownership Change Event that is also a Transfer of Control, the Unvested Share Repurchase Option will terminate if the surviving corporation does not assume, or substitute substantially equivalent options for, all outstanding Options under the Plan. 12. RIGHT OF FIRST REFUSAL. 12.1 GRANT OF RIGHT OF FIRST REFUSAL. Except as provided in Section 12.7 below, in the event the Optionee, the Optionee's legal representative, or other holder of shares acquired upon exercise of the Option proposes to sell, exchange, transfer, pledge, or otherwise dispose of any shares acquired upon exercise of the Option (the "TRANSFER SHARES") to any person or entity, including, without limitation, any shareholder of the Participating Company Group, the Company shall have the right to repurchase the Transfer Shares under the terms and subject to the conditions set forth in this Section 12 (the "RIGHT OF FIRST REFUSAL"). 26 12.2 NOTICE OF PROPOSED TRANSFER. Prior to any proposed transfer of the Transfer Shares, the Optionee shall deliver written notice (the "TRANSFER NOTICE") to the Company describing fully the proposed transfer, including the number of Transfer Shares, the name and address of the proposed transferee (the "PROPOSED TRANSFEREE") and, if the transfer is voluntary, the proposed transfer price, and containing such information necessary to show the bona fide nature of the proposed transfer. In the event of a bona fide gift or involuntary transfer, the proposed transfer price shall be deemed to be the Fair Market Value of the Transfer Shares, as determined by the Board in good faith. If the Optionee proposes to transfer any Transfer Shares to more than one Proposed Transferee, the Optionee shall provide a separate Transfer Notice for the proposed transfer to each Proposed Transferee. The Transfer Notice shall be signed by both the Optionee and the Proposed Transferee and must constitute a binding commitment of the Optionee and the Proposed Transferee for the transfer of the Transfer Shares to the Proposed Transferee subject only to the Right of First Refusal. 12.3 BONA FIDE TRANSFER. If the Company determines that the information provided by the Optionee in the Transfer Notice is insufficient to establish the bona fide nature of a proposed voluntary transfer, the Company shall give the Optionee written notice of the Optionee's failure to comply with the procedure described in this Section 12, and the Optionee shall have no right to transfer the Transfer Shares without first complying with the procedure described in this Section 12. The Optionee shall not be permitted to transfer the Transfer Shares if the proposed transfer is not bona fide. 12.4 EXERCISE OF RIGHT OF FIRST REFUSAL. If the Company determines the proposed transfer to be bona fide, the Company shall have the right to purchase all, but not less than all, of the Transfer Shares (except as the Company and the Optionee otherwise agree) at the purchase price and on the terms set forth in the Transfer Notice by delivery to the Optionee of a notice of exercise of the Right of First Refusal within thirty (30) days after the date the Transfer Notice is delivered to the Company. The Company's exercise or failure to exercise the Right of First Refusal with respect to any proposed transfer described in a Transfer Notice shall not affect the Company's right to exercise the Right of First Refusal with respect to any proposed transfer described in any other Transfer Notice, whether or not such other Transfer Notice is issued by the Optionee or issued by a person other than the Optionee with respect to a proposed transfer to the same Proposed Transferee. If the Company exercises the Right of First Refusal, the Company and the Optionee shall thereupon consummate the sale of the Transfer Shares to the Company on the terms set forth in the Transfer Notice within sixty (60) days after the date the Transfer Notice is delivered to the Company (unless a longer period is offered by the Proposed Transferee); provided, however, that in the event the Transfer Notice provides for the payment for the Transfer Shares other than in cash, the Company shall have the option of paying for the Transfer Shares by the present value cash equivalent of the consideration described in the Transfer Notice as reasonably determined by the Company. For purposes of the foregoing, cancellation of any indebtedness of the Optionee to any Participating Company shall be treated as payment to the Optionee in cash to the extent of the unpaid principal and any accrued interest canceled. 12.5 FAILURE TO EXERCISE RIGHT OF FIRST REFUSAL. If the Company fails to exercise the Right of First Refusal in full (or to such lesser extent as the Company and the Optionee otherwise agree) within the period specified in Section 12.4 above, the Optionee may conclude a transfer to the Proposed Transferee of the Transfer Shares on the terms and conditions described in the Transfer Notice, provided such transfer occurs not later than ninety (90) days following delivery to the Company of the Transfer Notice. The Company shall have the right to demand further assurances from the Optionee and the Proposed Transferee (in a form satisfactory to the Company) that the transfer of the Transfer Shares was actually carried out on the terms and conditions described in the Transfer Notice. No Transfer Shares shall be transferred on the books of the Company until the Company has received such assurances, if so demanded, and has approved the proposed transfer as bona fide. Any proposed 27 transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by the Optionee, shall again be subject to the Right of First Refusal and shall require compliance by the Optionee with the procedure described in this Section 12. 12.6 TRANSFEREES OF TRANSFER SHARES. All transferees of the Transfer Shares or any interest therein, other than the Company, shall be required as a condition of such transfer to agree in writing (in a form satisfactory to the Company) that such transferee shall receive and hold such Transfer Shares or interest therein subject to all of the terms and conditions of this Option Agreement, including this Section 12 providing for the Right of First Refusal with respect to any subsequent transfer. Any sale or transfer of any shares acquired upon exercise of the Option shall be void unless the provisions of this Section 12 are met. 12.7 TRANSFERS NOT SUBJECT TO RIGHT OF FIRST REFUSAL. The Right of First Refusal shall not apply to any transfer or exchange of the shares acquired upon exercise of the Option if such transfer or exchange is in connection with an Ownership Change Event. If the consideration received pursuant to such transfer or exchange consists of stock of a Participating Company, such consideration shall remain subject to the Right of First Refusal unless the provisions of Section 12.9 below result in a termination of the Right of First Refusal. 12.8 ASSIGNMENT OF RIGHT OF FIRST REFUSAL. The Company shall have the right to assign the Right of First Refusal at any time, whether or not there has been an attempted transfer, to one or more persons as may be selected by the Company. 12.9 EARLY TERMINATION OF RIGHT OF FIRST REFUSAL. The other provisions of this Option Agreement notwithstanding, the Right of First Refusal shall terminate and be of no further force and effect upon (a) the occurrence of a Transfer of Control, unless the Acquiring Corporation assumes the Company's rights and obligations under the Option or substitutes a substantially equivalent option for the Acquiring Corporation's stock for the Option, or (b) the existence of a public market for the class of shares subject to the Right of First Refusal. A "PUBLIC MARKET" shall be deemed to exist if (i) such stock is listed on a national securities exchange (as that term is used in the Exchange Act) or (ii) such stock is traded on the over-the-counter market and prices therefor are published daily on business days in a recognized financial journal. 13. ESCROW. 13.1 ESTABLISHMENT OF Escrow. To ensure that shares of Stock issued upon exercise of this Option which are subject to the Unvested Share Repurchase Option, the Tight of First Refusal or securing any promissory note will be available for repurchase, the Company may require the Optionee to deposit the certificate evidencing the shares of Stock which the Optionee purchases upon exercise of the Option with an escrow agent designated by the Company under the terms and conditions of an escrow and security agreements approved by the Company. If the Company does not require such deposit as a condition of exercise of the Option, the Company reserves the right at any time to require the Optionee to so deposit the certificate in escrow. Upon the occurrence of an Ownership Change Event or a change, as described in Section 9, in the character or amount of any of the outstanding stock of the corporation the stock of which is subject to the provisions of this Option Agreement, any and all new, substituted or additional securities or other property to which the Optionee is entitled by reason of the Optionee's ownership of shares of Stock acquired upon exercise of the Option that remain, following such Ownership Change Event or change described in Section 9, subject to the Unvested Share Repurchase Option, the Right of First Refusal or any security interest held by the Company shall be 28 immediately subject to the escrow to the same extent as such shares of Stock immediately before such event. The Company shall bear the expenses of the escrow. 13.2 DELIVERY OF SHARES TO OPTIONEE. As soon as practicable after the expiration of the Unvested Share Repurchase Option, the Right of First Refusal and after full repayment of any promissory note secured by the shares of Stock or other property in escrow, but not more frequently than twice each calendar year, the escrow agent shall deliver to the Optionee the shares of Stock and any other property no longer subject to such restrictions and no longer securing any promissory note. 13.3 NOTICES AND PAYMENTS. In the event the shares of Stock and any other property held in escrow are subject to the Company's exercise of the Unvested Share Repurchase Option, the Right of First Refusal, or any security interest of the Company, the notices required to be given to the Optionee shall be given to the escrow agent, and any payment required to be given to the Optionee shall be given to the escrow agent. Within thirty (30) days after payment by the Company, the escrow agent shall deliver the shares of Stock and any other property which the Company has purchased to the Company and shall deliver the payment received from the Company to the Optionee. 14. STOCK DISTRIBUTIONS SUBJECT TO OPTION AGREEMENT. If, from time to time, there is any stock dividend, stock split or other change, as described in Section 9, in the character or amount of any of the outstanding stock of the corporation the stock of which is subject to the provisions of this Option Agreement, then in such event any and all new, substituted or additional securities to which the Optionee is entitled by reason of the Optionee's ownership of the shares acquired upon exercise of the Option shall be immediately subject to the Unvested Share Repurchase Option, the Right of First Refusal and any security interest held by the Company and with the same force and effect as the shares subject to the Unvested Share Repurchase Option, the Right of First Refusal and any such security interest immediately before such event. 15. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION. The Optionee shall dispose of the shares acquired pursuant to the Option only in accordance with the provisions of this Option Agreement. In addition, the Optionee shall promptly notify the Chief Financial Officer of the Company if the Optionee disposes of any of the shares acquired pursuant to the Option within one (1) year after the date the Optionee exercises all or part of the Option or within two (2) years after the Date of Option Grant and shall provide the Company with a description of the terms and circumstances of such disposition. Until such time as the Optionee disposes of such shares in a manner consistent with the provisions of this Option Agreement, unless otherwise expressly authorized by the Company, the Optionee shall hold all shares acquired pursuant to the Option in the Optionee's name (and not in the name of any nominee) for the one-year period immediately after the exercise of the Option and the two-year period immediately after Date of Option Grant. At any time during the one-year or two-year periods set forth above, the Company may place a legend on any certificate representing shares acquired pursuant to the Option requesting the transfer agent for the Company's stock to notify the Company of any such transfers. The obligation of the Optionee to notify the Company of any such transfer shall continue notwithstanding that a legend has been placed on the certificate pursuant to the preceding sentence. 16. REPRESENTATIONS AND WARRANTIES. In connection with the receipt of the Option and any acquisition of shares upon the exercise thereof, the Optionee hereby agrees, represents and warrants as follows: 29 16.1 The Optionee is acquiring the Option and will acquire any shares of Stock upon exercise of the Option for the Optionee's own account, and not on behalf of any other person or as a nominee, for investment and not with a view to, or sale in connection with, any distribution of the Option or such shares. 16.2 The Optionee was not presented with or solicited by any form of general solicitation or general advertising, including, but not limited to, any advertisement, article, notice, or other communication published in any newspaper, magazine, or similar media, or broadcast over television, radio or similar communications media, or presented at any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. 16.3 The Optionee has either (a) a preexisting personal or business relationship with the Company or any of its officers, directors, or controlling persons, consisting of personal or business contacts of a nature and duration to enable the Optionee to be aware of the character, business acumen and general business and financial circumstances of the person with whom such relationship exists, or (b) such knowledge and experience in financial and business matters (or has relied on the financial and business knowledge and experience of the Optionee's professional advisor who is unaffiliated with and who is not, directly or indirectly, compensated by the Company or any affiliate or selling agent of the Company) as to make the Optionee capable of evaluating the merits and risks of the Option and any investment in shares acquired pursuant to the Option and to protect the Optionee's own interests in the transaction, or (c) both such relationship and such knowledge and experience. 16.4 The Optionee understands that the Option and any shares acquired upon exercise of the Option have not been qualified under the Corporate Securities Law of 1968, as amended, of the State of California by reason of a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Optionee's representations as expressed herein. The Optionee understands that the Company is relying on the Optionee's representations and warrants that the Company is entitled to rely on such representations and that such reliance is reasonable. 17. LEGENDS. The Company may at any time place legends referencing the Unvested Share Repurchase Option, the Right of First Refusal, any security interest and any applicable federal, state or foreign securities law restrictions on all certificates representing shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in the possession of the Optionee in order to carry out the provisions of this Section. Unless otherwise specified by the Company, legends placed on such certificates may include, but shall not be limited to, the following: 17.1 "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT." 30 17.2 Any legend required to be placed thereon by the Commissioner of Corporations of the State of California. 17.3 "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN UNVESTED SHARE REPURCHASE OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS CORPORATION." 17.4 "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS CORPORATION." 17.5 "THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORATION TO THE REGISTERED HOLDER UPON EXERCISE OF AN INCENTIVE STOCK OPTION AS DEFINED IN SECTION 422 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED ("ISO"). IN ORDER TO OBTAIN THE PREFERENTIAL TAX TREATMENT AFFORDED TO ISOs, THE SHARES SHOULD NOT BE TRANSFERRED PRIOR TO . SHOULD THE REGISTERED HOLDER ELECT TO TRANSFER ANY OF THE SHARES PRIOR TO THIS DATE AND FOREGO ISO TAX TREATMENT, THE TRANSFER AGENT FOR THE SHARES SHALL NOTIFY THE CORPORATION IMMEDIATELY. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER THE INCENTIVE STOCK OPTION IN THE REGISTERED HOLDER'S NAME (AND NOT IN THE NAME OF ANY NOMINEE) PRIOR TO THIS DATE OR UNTIL TRANSFERRED AS DESCRIBED ABOVE." 18. PUBLIC OFFERING. The Optionee hereby agrees that in the event of any underwritten public offering of stock, including an initial public offering of stock, made by the Company pursuant to an effective registration statement filed under the Securities Act, the Optionee shall not offer, sell, contract to sell, pledge, hypothecate, grant any option to purchase or make any short sale of, or otherwise dispose of any shares of stock of the Company or any rights to acquire stock of the Company for such period of time from and after the effective date of such registration statement as may be established by the underwriter for such public offering at its sole discretion. The foregoing limitation shall not apply to shares registered in the public offering under the Securities Act. The Optionee shall be subject to this Section provided and only if the officers and directors of the Company are also subject to similar arrangements. 19. RESTRICTIONS ON TRANSFER OF SHARES. No shares acquired upon exercise of the Option may be sold, exchanged, transferred (including, without limitation, any transfer to a nominee or agent of the Optionee), assigned, pledged, hypothecated or otherwise disposed of, including by operation of law, in any manner which violates any of the provisions of this Option Agreement and, except pursuant to an Ownership Change, until the date on which such shares become Vested Shares, any such attempted disposition shall be void. The Company shall not be required (a) to transfer on its books any shares which will have been transferred in violation of any of the provisions set forth in this Option Agreement or (b) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares will have been so transferred. 31 20. BINDING EFFECT. Subject to the restrictions on transfer set forth herein, this Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 21. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan or the Option at any time; provided, however, that except as provided in Section 8.2 in connection with a Transfer of Control, no such termination or amendment may adversely affect the Option or any unexercised portion hereof without the consent of the Optionee unless such termination or amendment is necessary to comply with any applicable law or government regulation or is required to enable the Option to qualify as an Incentive Stock Option. No amendment or addition to this Option Agreement shall be effective unless in writing. 22. NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this Option Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail, with postage and fees prepaid, addressed to the other party at the address shown below that party's signature or at such other address as such party may designate in writing from time to time to the other party. 23. INTEGRATED AGREEMENT. This Option Agreement and the Plan constitute the entire understanding and agreement of the Optionee and the Participating Company Group with respect to the subject matter contained herein or therein, and there are no agreements, understandings, restrictions, representations, or warranties among the Optionee and the Participating Company Group with respect to such subject matter other than those as set forth or provided for herein or therein. To the extent contemplated herein or therein, the provisions of this Option Agreement shall survive any exercise of the Option and shall remain in full force and effect. 24. APPLICABLE LAW. This Option Agreement shall be governed by the laws of the State of Delaware as such laws are applied to agreements between Delaware residents entered into and to be performed entirely within the State of Delaware. COMPANY: P.F. CHANG'S CHINA BISTRO, INC. By:___________________________________ Title:________________________________ 32 The Optionee represents that the Optionee is familiar with the terms and provisions of this Option Agreement, including the Unvested Share Repurchase Option set forth in Section 11, and the Right of First Refusal set forth in Section 12, and hereby accepts the Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Option Agreement. The undersigned acknowledges receipt of a copy of the Plan. OPTIONEE Date:________________________________ ______________________________________ Signature Optionee's Address: ______________________________________ ______________________________________ ______________________________________ 33 THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAVE NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. P.F. CHANG'S CHINA BISTRO, INC. IMMEDIATELY EXERCISABLE NONSTATUTORY STOCK OPTION AGREEMENT THIS IMMEDIATELY EXERCISABLE NONSTATUTORY STOCK OPTION AGREEMENT (the "OPTION AGREEMENT") is made and entered into as of ___________, 199_, by and between P.F. CHANG'S CHINA BISTRO, INC., a Delaware corporation (the "COMPANY") and ___________________________ (the "OPTIONEE"). The Company has granted to the Optionee pursuant to the P.F. Chang's China Bistro, Inc. 1996 Stock Option Plan (the "Plan") an option to purchase certain shares of stock, upon the terms and conditions set forth in this Option Agreement (the "OPTION"). The Option shall in all respects be subject to the terms and conditions of the Plan, the provisions of which are incorporated herein by reference. 1. DEFINITIONS AND CONSTRUCTION. 1.1. DEFINITIONS. Unless otherwise defined herein, capitalized terms shall have the meanings assigned to such terms in the Plan. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "DATE OF OPTION GRANT" means_______________ , 199_. (b) "NUMBER OF OPTION SHARES" means ____________ shares of Stock, as adjusted from time to time pursuant to Section 0. (c) "EXERCISE PRICE" means $ ________ per share of Stock, as adjusted from time to time pursuant to Section 0. (d) "INITIAL EXERCISE DATE" means the letter of the Date of Option Grant or the date the Optionee's Service commences. 34 (e) "INITIAL VESTING DATE" means the date occurring one (1) year after (check one): _____ the Date of Option Grant _____ ______________________________, 199_, the date the Optionee's Service commenced. (f) "VESTED RATIO" means, on any relevant date, the ratio determined as follows: (i) Prior to the Initial Vesting Date, the Vested Ratio shall be 0. (ii) On the Initial Vesting Date, provided that the Optionee's Service has been continuous from the Date of Option Grant until the Initial Vesting Date, the Vested Ratio shall be 1/5. (iii) For each full month of the Optionee's continuous service after the Initial Vesting Date, the Vested Ratio shall be increased by one-sixtieth (1/60). (iv) In no event shall the Vested Ratio exceed 1/1. (g) "OPTION EXPIRATION DATE" means the date ten (10) years after the Date of Option Grant. (h) "BOARD" means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, "Board" shall also mean such Committee(s). (i) "CODE" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder. (j) "COMMITTEE" means the Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted in the Plan, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. (k) "COMPANY" means P.F. Chang's China Bistro, Inc., a Delaware corporation, or any successor corporation thereto. (l) "DISABILITY" means the inability of the Optionee, in the opinion of a qualified physician acceptable to the Company, to perform the major duties of the Optionee's position with the Participating Company Group because of the sickness or injury of the Optionee. (m) "EMPLOYEE" means any person treated as an employee (including an officer or a director who is also treated as an employee) in the records of the Company; provided, 35 however, that neither service as a director nor payment of a director's fee shall be sufficient to constitute employment for this purpose. (n) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (o) "FAIR MARKET VALUE" means, as of any date, the value of a share of Stock or other property as determined by the Board, in its sole discretion, or by the Company, in its sole discretion, if such determination is expressly allocated to the Company herein. (p) "PARENT CORPORATION" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. (q) "PARTICIPATING COMPANY" means the Company or any Parent Corporation or Subsidiary Corporation. (r) "PARTICIPATING COMPANY GROUP" means, at any point in time, all corporations collectively which are then Participating Companies. (s) "PLAN" means the P.F. Chang's China Bistro, Inc. 1996 Stock Option Plan. (t) "SECURITIES ACT" means the Securities Act of 1933, as amended. (u) "SERVICE" means the Optionee's employment or service with the Participating Company Group, whether in the capacity of an Employee, a Director or a Consultant. The Optionee's Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionee renders Service to the Participating Company Group or a change in the Participating Company for which the Optionee renders such Service, provided that there is no interruption or termination of the Optionee's Service. Furthermore, the Optionee's Service with the Participating Company Group shall not be deemed to have terminated if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company; provided, however, that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day of such leave the Optionee's Service shall be deemed to have terminated unless the Optionee's right to return to Service with the Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining the Optionee's Vested Ratio. The Optionee's Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Optionee performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its sole discretion, shall determine whether the Optionee's Service has terminated and the effective date of such termination. (v) "STOCK" means the common stock of the Company, as adjusted from time to time in accordance with Section 0. (w) "SUBSIDIARY CORPORATION" means any present or future "subsidiary corporation" of the Company, as defined in Section 424(f) of the Code. 1.2. CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of this Option Agreement. Except when 36 otherwise indicated by the context, the singular shall include the plural, the plural shall include the singular, and the term "or" shall include the conjunctive as well as the disjunctive. 2. TAX CONSEQUENCES. 2.1. TAX STATUS OF OPTION. This Option is intended to be a Nonstatutory Stock Option and shall not be treated as an Incentive Stock Option within the meaning of Section 422(b) of the Code. 2.2. ELECTION UNDER SECTION 83(b) OF THE CODE. If the Optionee exercises this Option to purchase shares of Stock that are both nontransferable and subject to a substantial risk of forfeiture, the Optionee understands that the Optionee should consult with the Optionee's tax advisor regarding the advisability of filing with the Internal Revenue Service an election under Section 83(b) of the Code, which must be filed no later than thirty (30) days after the date on which the Optionee exercises the Option. Shares acquired upon exercise of the Option are nontransferable and subject to a substantial risk of forfeiture if, for example, (a) they are unvested and are subject to a right of the Company to repurchase such shares at the Optionee's original purchase price if the Optionee's Service terminates, (b) the Optionee is an Insider and exercises the Option within six (6) months of the Date of the Option Grant (if a class of equity security of the Company is registered under Section 12 of the Exchange Act), or (c) the Optionee is subject to a restriction on transfer to comply with "Pooling-of-Interests Accounting" rules. Failure to file an election under Section 83(b), if appropriate, may result in adverse tax consequences to the Optionee. The Optionee acknowledges that the Optionee has been advised to consult with a tax advisor prior to the exercise of the Option regarding the tax consequences to the Optionee of the exercise of the Option. AN ELECTION UNDER SECTION 83(b) MUST BE FILED WITHIN 30 DAYS AFTER THE DATE ON WHICH THE OPTIONEE PURCHASES SHARES. THIS TIME PERIOD CANNOT BE EXTENDED. THE OPTIONEE ACKNOWLEDGES THAT TIMELY FILING OF A SECTION 83(b) ELECTION IS THE OPTIONEE'S SOLE RESPONSIBILITY, EVEN IF THE OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO FILE SUCH ELECTION ON HIS OR HER BEHALF. 3. ADMINISTRATION. All questions of interpretation concerning this Option Agreement shall be determined by the Board, including any duly appointed Committee of the Board. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 4. EXERCISE OF THE OPTION. 4.1. RIGHT TO EXERCISE. Except as otherwise provided herein, the Option shall be exercisable on and after the Initial Exercise Date and prior to the termination of the Option (as provided in Section 0) in an amount not to exceed the Number of Option Shares less the number of shares of Stock previously acquired upon exercise of the Option subject to the Optionee's agreement that any shares purchased upon exercise are subject to the Company's repurchase rights set forth in Section ERROR! REFERENCE SOURCE NOT FOUND. and to the Company's first refusal rights set forth in Section ERROR! REFERENCE SOURCE NOT FOUND. In no event shall the Option be exercisable for more shares than the Number of Option Shares. 37 4.2. METHOD OF EXERCISE. Exercise of the Option shall be by written notice to the Company which must state the election to exercise the Option, the number of whole shares of Stock for which the Option is being exercised and such other representations and agreements as to the Optionee's investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. The written notice must be signed by the Optionee and must be delivered in person, by certified or registered mail, return receipt requested, by confirmed facsimile transmission, or by such other means as the Company may permit, to the Chief Financial Officer of the Company, or other authorized representative of the Company, prior to the termination of the Option as set forth in Section 0, accompanied by (i) full payment of the aggregate Exercise Price for the number of shares of Stock being purchased and (ii) an executed copy, if required herein, of the then current forms of escrow and security agreement referenced below. The Option shall be deemed to be exercised upon receipt by the Company of such written notice, the aggregate Exercise Price, and, if required by the Company, such executed agreements. 4.3. PAYMENT OF EXERCISE PRICE. (a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided below, payment of the aggregate Exercise Price for the number of shares of Stock for which the Option is being exercised shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of whole shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in Section 0, (iv) in the Company's sole discretion at the time the Option is exercised, by cash for a portion of the aggregate Exercise Price not less than the par value of the shares being acquired, and the Optionee's promissory note for the balance of the aggregate Exercise Price, or (v) by any combination of the foregoing. (b) TENDER OF STOCK. Notwithstanding the foregoing, the Option may not be exercised by tender to the Company of shares of Stock to the extent such tender of shares of Stock would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's Stock. The Option may not be exercised by the tender to the Company of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. (c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the assignment in a form acceptable to the Company of the proceeds of a sale or loan with respect to some or all of the shares of Stock acquired upon the exercise of the Option pursuant to a program or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to establish, modify, decline to approve or terminate any such Cashless Exercise program or procedures. (d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be permitted if an exercise of the Option using a promissory note would be a violation of any law. The promissory note permitted in clause (iv) of Section 0 shall be a full recourse note in a form satisfactory to the Company, with principal payable no more than four (4) years after the date the Option is exercised. Interest on the principal balance of the promissory note shall be payable in annual installments at the minimum interest rate necessary to avoid imputed interest pursuant to all applicable sections of the Code. Such recourse promissory note shall be secured by the shares of Stock acquired pursuant to the then 38 current form of security agreement as approved by the Company. At any time the Company is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with the Company's securities, any promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations. Except as the Company in its sole discretion shall determine, the Optionee shall pay the unpaid principal balance of the promissory note and any accrued interest thereon upon termination of the Optionee's Service with the Participating Company Group for any reason, with or without cause. 4.4. TAX WITHHOLDING. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee hereby authorizes withholding from payroll and any other amounts payable to the Optionee, and otherwise agrees to make adequate provision for (including by means of a Cashless Exercise to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Participating Company Group, if any, which arise in connection with the Option, including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in whole or in part, of any shares acquired upon exercise of the Option, (iii) the operation of any law or regulation providing for the imputation of interest, or (iv) the lapsing of any restriction with respect to any shares acquired upon exercise of the Option. The Optionee is cautioned that the Option is not exercisable unless such tax withholding obligations are satisfied. Accordingly, the Optionee may not be able to exercise the Option when desired even though the Option is vested, and the Company shall have no obligation to issue a certificate for such shares or release such shares from any escrow provided for herein. 4.5. CERTIFICATE REGISTRATION. Except in the event the Exercise Price is paid by means of a Cashless Exercise, the certificate for the shares as to which the Option is exercised shall be registered in the name of the Optionee, or, if applicable, in the names of the heirs of the Optionee. 4.6. RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The grant of the Option and the issuance of shares of Stock upon exercise of the Option shall be subject to compliance with all applicable requirements of federal, state or foreign law with respect to such securities. The Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the shares of Stock may then be listed. In addition, the Option may not be exercised unless (i) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. Questions concerning this restriction should be directed to the Chief Financial Officer of the Company. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any shares subject to the Option shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of the Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. 39 4.7. FRACTIONAL SHARES. The Company shall not be required to issue fractional shares upon the exercise of the Option. 5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised during the lifetime of the Optionee only by the Optionee or the Optionee's guardian or legal representative and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. Following the death of the Optionee, the Option, to the extent provided in Section 0, may be exercised by the Optionee's legal representative or by any person empowered to do so under the deceased Optionee's will or under the then applicable laws of descent and distribution. 6. TERMINATION OF THE OPTION. The Option shall terminate and may no longer be exercised on the first to occur of (a) the Option Expiration Date, (b) the last date for exercising the Option following termination of the Optionee's Service as described in Section 0, or (c) a Transfer of Control to the extent provided in Section 0. 7. EFFECT OF TERMINATION OF SERVICE. 7.1. OPTION EXERCISABILITY. (a) DISABILITY. If the Optionee's Service is terminated because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee (or the Optionee's guardian or legal representative) at any time prior to the expiration of twelve (12) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. (b) DEATH. If the Optionee's Service is terminated because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee's legal representative or other person who acquired the right to exercise the Option by reason of the Optionee's death at any time prior to the expiration of twelve (12) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. The Optionee's Service shall be deemed to have terminated on account of death if the Optionee dies within three (3) months after the Optionee's termination of Service. (c) OTHER TERMINATION OF SERVICE. If the Optionee's Service terminates for any reason except Disability or death, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee's Service terminated, may be exercised by the Optionee within three (3) months (or such other longer period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. 7.2. ADDITIONAL LIMITATIONS ON OPTION EXERCISE. Notwithstanding the provisions of Section 7.1, the Option may not be exercised after the Optionee's termination of Service to the extent that the shares to be acquired upon exercise of the Option would be subject to the Unvested Share Repurchase Option as provided in Section 11. Except as the Company and the Optionee otherwise agree, exercise of the Option pursuant to Section 0 following termination of the Optionee's Service may not be made by delivery of a promissory note as provided in Section 0. 7.3. EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the foregoing, if the exercise of the Option within the applicable time periods set forth in Section 0 is prevented by the 40 provisions of Section 0, the Option shall remain exercisable until three (3) months after the date the Optionee is notified that the Option is exercisable, but in any event no later than the Option Expiration Date. The Company makes no representation as to the tax consequences of any such delayed exercise. The Optionee should consult with the Optionee's own tax advisor as to the tax consequences to the Optionee of any such delayed exercise. 7.4. EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 0 of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of Service, or (iii) the Option Expiration Date. The Company makes no representation as to the tax consequences of any such delayed exercise. The Optionee should consult with the Optionee's own tax advisor(s) as to the tax consequences to the Optionee of any such delayed exercise. 7.5. LEAVE OF ABSENCE. For purposes of Section 0, the Optionee's Service shall not be deemed to terminate if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company of ninety (90) days or less. In the event of a leave of absence in excess of ninety (90) days, the Optionee's Service shall be deemed to terminate on the ninety-first (91st) day of such leave unless the Optionee's right to return to Service remains guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company (or required by law), a leave of absence shall not be treated as Service for purposes of determining the Optionee's Vested Ratio. 8. TRANSFER OF CONTROL. 8.1. DEFINITIONS. (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the "TRANSACTION") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "TRANSFEREE 41 CORPORATION(S)"), as the case may be; provided, however, that neither an initial public offering by the Company, nor an equity or convertible securities financing by the Company shall be deemed an Ownership Change Event or Transfer of Control for the purpose of any accelerated vesting provision of this Option Agreement. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 8.2. EFFECT OF TRANSFER OF CONTROL ON OPTION. In the event of an eligible Transfer of Control, the Vested Ratio shall be increased by two-fifths (2/5) as of the date ten (10) days prior to the date of any such eligible Transfer of Control; provided, however, that in no event shall the Vested Ratio be increased pursuant to this Section 0 to a ratio in excess of one (1). The exercise or vesting of any Option that was permissible solely by reason of this Section 0 shall be conditioned upon the consummation of the Transfer of Control. In addition, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), may either assume the Company's rights and obligations under the Option or substitute for the Option a substantially equivalent option for the Acquiring Corporation's stock. For purposes of this Section 0, the Option shall be deemed assumed if, following the Transfer of Control, the Option confers the right to purchase, for each share of Stock subject to the Option immediately prior to the Transfer of Control, the consideration (whether stock, cash or other securities or property) to which a holder of a share of Stock on the effective date of the Transfer of Control was entitled. The Option shall terminate and cease to be outstanding effective as of the date of the Transfer of Control to the extent that the Option is neither assumed or substituted for by the Acquiring Corporation in connection with the Transfer of Control nor exercised as of the date of the Transfer of Control. Notwithstanding the foregoing, shares acquired upon exercise of the Option prior to the Transfer of Control and any consideration received pursuant to the Transfer of Control with respect to such shares shall continue to be subject to all applicable provisions of this Option Agreement except as otherwise provided herein. Furthermore, notwithstanding the foregoing, if the corporation the stock of which is subject to the Option immediately prior to an Ownership Change Event described in Section 0 constituting a Transfer of Control is the surviving or continuing corporation and immediately after such Ownership Change Event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions of Section 1504(b) of the Code, the Option shall not terminate unless the Board otherwise provides in its sole discretion. 9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification, or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number, Exercise Price and class of shares of stock subject to the Option. If a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares of another corporation (the "New Shares"), the Board may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the Number of Option Shares and the Exercise Price shall be adjusted in a fair and equitable manner, as determined by the Board, in its sole discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 0 shall be rounded up or down to the nearest whole number, as determined by the Board, and in no event may the Exercise Price be decreased to an amount less than the par value, if any, of the stock subject to 42 the Option. The adjustments determined by the Board pursuant to this Section 0 shall be final, binding and conclusive. 10. RIGHTS AS A STOCKHOLDER, EMPLOYEE OR CONSULTANT. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a certificate for the shares for which the Option has been exercised (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such certificate is issued, except as provided in Section 0. If the Optionee is an Employee, the Optionee understands and acknowledges that, except as otherwise provided in a separate, written employment agreement between a Participating Company and the Optionee, the Optionee's employment is "at will" and is for no specified term. Nothing in this Option Agreement shall confer upon the Optionee, whether an Employee or Consultant, any right to continue in the Service of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Optionee's Service as an Employee or Consultant, as the case may be, at any time. 11. UNVESTED SHARE REPURCHASE OPTION. 11.1. GRANT OF UNVESTED SHARE REPURCHASE OPTION. In the event the Optionee's Service is terminated for any reason or no reason, with or without cause, of if the Optionee, the Optionee's legal representative, or other holder of shares acquired upon exercise of the Option attempts to sell, exchange, transfer, pledge, or otherwise dispose of (other than pursuant to an Ownership Change Event) any shares acquired upon exercise of the Option which exceed the Vested Shares as defined in Section 11.2 below (the "Unvested Shares"), the Company shall have the right to repurchase the Unvested Shares under the terms and subject to the conditions set forth in this Section 11 (the "Unvested Share Repurchase Option"). 11.2. VESTED SHARES AND UNVESTED SHARES DEFINED. The "Vested Shares" shall mean, on any given date, a number of shares of Stock equal to the Number of Option Shares multiplied by the Vested Ratio determined as of such date and rounded down to the nearest whole share. On such given date, the "Unvested Shares" shall mean the number of shares of stock acquired upon exercise of the Option which exceed the Vested Shares determined as of such date. 11.3. EXERCISE OF UNVESTED SHARE REPURCHASE OPTION. The Company may exercise the Unvested Share Repurchase Option by written notice to the Optionee within sixty (60) days after (a) termination of the Optionee's Service for exercise of the Option, if later) or (b) the Company has received notice of the attempted disposition of Unvested Shares. If the Company fails to give notice within such sixty (60) day period, the Unvested Share Repurchase Option shall terminate (unless the Company and the Optionee have extended the time for the exercise of the Unvested Share Repurchase Option. The Unvested Share Repurchase Option must be exercised, if at all, for all of the Unvested Shares, except as the Company and the Optionee otherwise agree. 11.4. PAYMENT FOR SHARES AND RETURN OF SHARES TO COMPANY. The Purchase price per share being repurchased by the Company shall be an amount equal to the Optionee's original cost per share, as adjusted pursuant to Section 9 (the "Repurchase Price"). The Company shall pay the aggregate Repurchase Price to the Optionee in cash within thirty (30) days after the date of the written notice to the Optionee of the Company's exercise of the Unvested Share Repurchase Option. For purposes of the foregoing, cancellation of any indebtedness of the Optionee to any Participating Company shall be treated as payment to the Optionee in cash to the extent of the unpaid principal and any accrued interest. 43 The shares being repurchased shall be delivered to the Company by the Optionee at the same time as the delivery of the Repurchase Price to the Optionee. 11.5. ASSIGNMENT OF UNVESTED SHARE REPURCHASE OPTION. The Company shall have the right to assign the Unvested Share Repurchase Option at any time, whether or not such option is then exercisable, to one or more persons as may be selected by the Company. 11.6. OWNERSHIP CHANGE EVENT. Upon the occurrence of an Ownership Change Event, any and all new, substituted or additional securities or other property to which the Optionee is entitled by reason of the Optionee's ownership of Unvested Shares shall be immediately subject to the Unvested Share Repurchase Option and included in the terms "Stock" and "Unvested Shares" for all purposes of the Unvested Share Repurchase Option with the same force and effect as the Unvested Shares immediately prior to the Ownership Change Event. While the aggregate Repurchase Price shall remain the same after such Ownership Change Event, the Repurchase Price per Unvested Share upon exercise of the Unvested Share Repurchase Option following such Ownership Change Event shall be adjusted as appropriate. For purposes of determining the Vested Ratio following an Ownership Change Event, credited Service shall include all Service with any corporation which is a Participating Company at the time the Service is rendered, whether or not such corporation is a Participating Company both before and after the Ownership Change Event. The foregoing notwithstanding, in the event of an Ownership Change Event that is also a Transfer of Control, the Unvested Share Repurchase Option will terminate if the surviving corporation does not assume, or substitute substantially equivalent options for, all outstanding Options under the Plan. 12. RIGHT OF FIRST REFUSAL. 12.1. GRANT OF RIGHT OF FIRST REFUSAL. Except as provided in Section 0 below, in the event the Optionee, the Optionee's legal representative, or other holder of shares acquired upon exercise of the Option proposes to sell, exchange, transfer, pledge, or otherwise dispose of any Vested Shares (the "TRANSFER SHARES") to any person or entity, including, without limitation, any shareholder of the Participating Company Group, the Company shall have the right to repurchase the Transfer Shares under the terms and subject to the conditions set forth in this Section 0 (the "RIGHT OF FIRST REFUSAL"). 12.2. NOTICE OF PROPOSED TRANSFER. Prior to any proposed transfer of the Transfer Shares, the Optionee shall deliver written notice (the "TRANSFER NOTICE") to the Company describing fully the proposed transfer, including the number of Transfer Shares, the name and address of the proposed transferee (the "PROPOSED TRANSFEREE") and, if the transfer is voluntary, the proposed transfer price, and containing such information necessary to show the bona fide nature of the proposed transfer. In the event of a bona fide gift or involuntary transfer, the proposed transfer price shall be deemed to be the Fair Market Value of the Transfer Shares, as determined by the Board in good faith. If the Optionee proposes to transfer any Transfer Shares to more than one Proposed Transferee, the Optionee shall provide a separate Transfer Notice for the proposed transfer to each Proposed Transferee. The Transfer Notice shall be signed by both the Optionee and the Proposed Transferee and must constitute a binding commitment of the Optionee and the Proposed Transferee for the transfer of the Transfer Shares to the Proposed Transferee subject only to the Right of First Refusal. 12.3. BONA FIDE TRANSFER. If the Company determines that the information provided by the Optionee in the Transfer Notice is insufficient to establish the bona fide nature of a proposed voluntary transfer, the Company shall give the Optionee written notice of the Optionee's failure to comply with the procedure described in this Section 0, and the Optionee shall have no right to transfer 44 the Transfer Shares without first complying with the procedure described in this Section 0. The Optionee shall not be permitted to transfer the Transfer Shares if the proposed transfer is not bona fide. 12.4. EXERCISE OF RIGHT OF FIRST REFUSAL. If the Company determines the proposed transfer to be bona fide, the Company shall have the right to purchase all, but not less than all, of the Transfer Shares (except as the Company and the Optionee otherwise agree) at the purchase price and on the terms set forth in the Transfer Notice by delivery to the Optionee of a notice of exercise of the Right of First Refusal within thirty (30) days after the date the Transfer Notice is delivered to the Company. The Company's exercise or failure to exercise the Right of First Refusal with respect to any proposed transfer described in a Transfer Notice shall not affect the Company's right to exercise the Right of First Refusal with respect to any proposed transfer described in any other Transfer Notice, whether or not such other Transfer Notice is issued by the Optionee or issued by a person other than the Optionee with respect to a proposed transfer to the same Proposed Transferee. If the Company exercises the Right of First Refusal, the Company and the Optionee shall thereupon consummate the sale of the Transfer Shares to the Company on the terms set forth in the Transfer Notice within sixty (60) days after the date the Transfer Notice is delivered to the Company (unless a longer period is offered by the Proposed Transferee); provided, however, that in the event the Transfer Notice provides for the payment for the Transfer Shares other than in cash, the Company shall have the option of paying for the Transfer Shares by the present value cash equivalent of the consideration described in the Transfer Notice as reasonably determined by the Company. For purposes of the foregoing, cancellation of any indebtedness of the Optionee to any Participating Company shall be treated as payment to the Optionee in cash to the extent of the unpaid principal and any accrued interest canceled. 12.5. FAILURE TO EXERCISE RIGHT OF FIRST REFUSAL. If the Company fails to exercise the Right of First Refusal in full (or to such lesser extent as the Company and the Optionee otherwise agree) within the period specified in Section 0 above, the Optionee may conclude a transfer to the Proposed Transferee of the Transfer Shares on the terms and conditions described in the Transfer Notice, provided such transfer occurs not later than ninety (90) days following delivery to the Company of the Transfer Notice. The Company shall have the right to demand further assurances from the Optionee and the Proposed Transferee (in a form satisfactory to the Company) that the transfer of the Transfer Shares was actually carried out on the terms and conditions described in the Transfer Notice. No Transfer Shares shall be transferred on the books of the Company until the Company has received such assurances, if so demanded, and has approved the proposed transfer as bona fide. Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by the Optionee, shall again be subject to the Right of First Refusal and shall require compliance by the Optionee with the procedure described in this Section 0. 12.6. TRANSFEREES OF TRANSFER SHARES. All transferees of the Transfer Shares or any interest therein, other than the Company, shall be required as a condition of such transfer to agree in writing (in a form satisfactory to the Company) that such transferee shall receive and hold such Transfer Shares or interest therein subject to all of the terms and conditions of this Option Agreement, including this Section 0 providing for the Right of First Refusal with respect to any subsequent transfer. Any sale or transfer of any shares acquired upon exercise of the Option shall be void unless the provisions of this Section 0 are met. 12.7. TRANSFERS NOT SUBJECT TO RIGHT OF FIRST REFUSAL. The Right of First Refusal shall not apply to any transfer or exchange of the shares acquired upon exercise of the Option if such transfer or exchange is in connection with an Ownership Change Event. If the consideration received pursuant to such transfer or exchange consists of stock of a Participating Company, such consideration 45 shall remain subject to the Right of First Refusal unless the provisions of Section 0 below result in a termination of the Right of First Refusal. 12.8. ASSIGNMENT OF RIGHT OF FIRST REFUSAL. The Company shall have the right to assign the Right of First Refusal at any time, whether or not there has been an attempted transfer, to one or more persons as may be selected by the Company. 12.9. EARLY TERMINATION OF RIGHT OF FIRST REFUSAL. The other provisions of this Option Agreement notwithstanding, the Right of First Refusal shall terminate and be of no further force and effect upon (a) the occurrence of a Transfer of Control, unless the Acquiring Corporation assumes the Company's rights and obligations under the Option or substitutes a substantially equivalent option for the Acquiring Corporation's stock for the Option, or (b) the existence of a public market for the class of shares subject to the Right of First Refusal. A "PUBLIC MARKET" shall be deemed to exist if (i) such stock is listed on a national securities exchange (as that term is used in the Exchange Act) or (ii) such stock is traded on the over-the-counter market and prices therefor are published daily on business days in a recognized financial journal. 13. ESCROW. 13.1. ESTABLISHMENT OF ESCROW. To ensure that shares of Stock obtained upon exercise of this Option which are subject to the Unvested Share Repurchase Option, the Right of First Refusal or securing any promissory note will be available for repurchase, the Company may require the Optionee to deposit the certificate evidencing the shares of Stock which the Optionee purchases upon exercise of the Option with an escrow agent designated by the Company under the terms and conditions of an escrow and security agreements approved by the Company. If the Company does not require such deposit as a condition of exercise of the Option, the Company reserves the right at any time to require the Optionee to so deposit the certificate in escrow. Upon the occurrence of an Ownership Change Event or a change, as described in Section 0, in the character or amount of any of the outstanding stock of the corporation the stock of which is subject to the provisions of this Option Agreement, any and all new, substituted or additional securities or other property to which the Optionee is entitled by reason of the Optionee's ownership of shares of Stock acquired upon exercise of the Option that remain, following such Ownership Change Event or change described in Section 0, subject to the Unvested Share Repurchase Option Right of First Refusal or any security interest held by the Company shall be immediately subject to the escrow to the same extent as such shares of Stock immediately before such event. The Company shall bear the expenses of the escrow. 13.2. DELIVERY OF SHARES TO OPTIONEE. As soon as practicable after the expiration of the Unvested Share Repurchase Option, the Right of First Refusal and after full repayment of any promissory note secured by the option shares of Stock or other property in escrow, but not more frequently than twice each calendar year, the escrow agent shall deliver to the Optionee the shares of Stock and any other property no longer subject to such restrictions and no longer securing any promissory note. 13.3. NOTICES AND PAYMENTS. In the event the shares of Stock and any other property held in escrow are subject to the Company's exercise of the Unvested Share Repurchase Option, the Right of First Refusal, or any security interest of the Company, the notices required to be given to the Optionee shall be given to the escrow agent, and any payment required to be given to the Optionee shall be given to the escrow agent. Within thirty (30) days after payment by the Company, the escrow agent shall deliver the shares of Stock and any other property which the Company has purchased to the Company and shall deliver the payment received from the Company to the Optionee. 46 14. STOCK DISTRIBUTIONS SUBJECT TO OPTION AGREEMENT. If, from time to time, there is any stock dividend, stock split or other change, as described in Section 0, in the character or amount of any of the outstanding stock of the corporation the stock of which is subject to the provisions of this Option Agreement, then in such event any and all new, substituted or additional securities to which the Optionee is entitled by reason of the Optionee's ownership of the shares acquired upon exercise of the Option shall be immediately subject to the Unvested Share Repurchase Option, Right of First Refusal and any security interest held by the Company and with the same force and effect as the shares subject to the Unvested Share Repurchase Option, Right of First Refusal and any such security interest immediately before such event. 15. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION. The Optionee shall dispose of the shares acquired pursuant to the Option only in accordance with the provisions of this Option Agreement. In addition, the Optionee shall promptly notify the Chief Financial Officer of the Company if the Optionee disposes of any of the shares acquired pursuant to the Option within one (1) year after the date the Optionee exercises all or part of the Option or within two (2) years after the Date of Option Grant and shall provide the Company with a description of the terms and circumstances of such disposition. Until such time as the Optionee disposes of such shares in a manner consistent with the provisions of this Option Agreement, unless otherwise expressly authorized by the Company, the Optionee shall hold all shares acquired pursuant to the Option in the Optionee's name (and not in the name of any nominee) for the one-year period immediately after the exercise of the Option and the two-year period immediately after Date of Option Grant. At any time during the one-year or two-year periods set forth above, the Company may place a legend on any certificate representing shares acquired pursuant to the Option requesting the transfer agent for the Company's stock to notify the Company of any such transfers. The obligation of the Optionee to notify the Company of any such transfer shall continue notwithstanding that a legend has been placed on the certificate pursuant to the preceding sentence. 16. REPRESENTATIONS AND WARRANTIES. In connection with the receipt of the Option and any acquisition of shares upon the exercise thereof, the Optionee hereby agrees, represents and warrants as follows: 16.1. The Optionee is acquiring the Option and will acquire any shares of Stock upon exercise of the Option for the Optionee's own account, and not on behalf of any other person or as a nominee, for investment and not with a view to, or sale in connection with, any distribution of the Option or such shares. 16.2. The Optionee was not presented with or solicited by any form of general solicitation or general advertising, including, but not limited to, any advertisement, article, notice, or other communication published in any newspaper, magazine, or similar media, or broadcast over television, radio or similar communications media, or presented at any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. 16.3. The Optionee has either (a) a preexisting personal or business relationship with the Company or any of its officers, directors, or controlling persons, consisting of personal or business contacts of a nature and duration to enable the Optionee to be aware of the character, business acumen and general business and financial circumstances of the person with whom such relationship exists, or (b) such knowledge and experience in financial and business matters (or has relied on the financial and business knowledge and experience of the Optionee's professional advisor who is unaffiliated with and who is not, directly or indirectly, compensated by the Company or any affiliate or selling agent of the Company) as to make the Optionee capable of evaluating the merits and risks of the Option and any 47 investment in shares acquired pursuant to the Option and to protect the Optionee's own interests in the transaction, or (c) both such relationship and such knowledge and experience. 16.4. The Optionee understands that the Option and any shares acquired upon exercise of the Option have not been qualified under the Corporate Securities Law of 1968, as amended, of the State of California by reason of a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Optionee's representations as expressed herein. The Optionee understands that the Company is relying on the Optionee's representations and warrants that the Company is entitled to rely on such representations and that such reliance is reasonable. 17. LEGENDS. The Company may at any time place legends referencing the Unvested Share Repurchase Option, the Right of First Refusal, any security interest and any applicable federal, state or foreign securities law restrictions on all certificates representing shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in the possession of the Optionee in order to carry out the provisions of this Section. Unless otherwise specified by the Company, legends placed on such certificates may include, but shall not be limited to, the following: 17.1. "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT." 17.2. Any legend required to be placed thereon by the Commissioner of Corporations of the State of California. 17.3. "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN UNVESTED SHARE REPURCHASE OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS CORPORATION." 17.4. "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS CORPORATION." 18. PUBLIC OFFERING. The Optionee hereby agrees that in the event of any underwritten public offering of stock, including an initial public offering of stock, made by the Company pursuant to an effective registration statement filed under the Securities Act, the Optionee shall not offer, sell, contract to sell, pledge, hypothecate, grant any option to purchase or make any short sale of, or otherwise dispose of any shares of stock of the Company or any rights to acquire stock of the Company for such period of time from and after the effective date of such registration statement as may be established by the underwriter for such public offering at its sole discretion. The foregoing limitation shall not apply to 48 shares registered in the public offering under the Securities Act. The Optionee shall be subject to this Section provided and only if the officers and directors of the Company are also subject to similar arrangements. 19. RESTRICTIONS ON TRANSFER OF SHARES. No shares acquired upon exercise of the Option may be sold, exchanged, transferred (including, without limitation, any transfer to a nominee or agent of the Optionee), assigned, pledged, hypothecated or otherwise disposed of, including by operation of law, in any manner which violates any of the provisions of this Option Agreement and, except pursuant to an Ownership Change, until the date on which such shares become Vested Shares, any such attempted disposition shall be void. The Company shall not be required (a) to transfer on its books any shares which will have been transferred in violation of any of the provisions set forth in this Option Agreement or (b) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares will have been so transferred. 20. BINDING EFFECT. Subject to the restrictions on transfer set forth herein, this Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 21. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan or the Option at any time; provided, however, that except as provided in Section 0 in connection with a Transfer of Control, no such termination or amendment may adversely affect the Option or any unexercised portion hereof without the consent of the Optionee unless such termination or amendment is necessary to comply with any applicable law or government regulation or is required to enable the Option to qualify as an Incentive Stock Option. No amendment or addition to this Option Agreement shall be effective unless in writing. 22. NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this Option Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail, with postage and fees prepaid, addressed to the other party at the address shown below that party's signature or at such other address as such party may designate in writing from time to time to the other party. 23. INTEGRATED AGREEMENT. This Option Agreement and the Plan constitute the entire understanding and agreement of the Optionee and the Participating Company Group with respect to the subject matter contained herein or therein, and there are no agreements, understandings, restrictions, representations, or warranties among the Optionee and the Participating Company Group with respect to such subject matter other than those as set forth or provided for herein or therein. To the extent contemplated herein or therein, the provisions of this Option Agreement shall survive any exercise of the Option and shall remain in full force and effect. 49 24. APPLICABLE LAW. This Option Agreement shall be governed by the laws of the State of Delaware as such laws are applied to agreements between Delaware residents entered into and to be performed entirely within the State of Delaware. COMPANY: P.F. CHANG'S CHINA BISTRO, INC., a Delaware corporation By:_______________________________________ Title:____________________________________ The Optionee represents that the Optionee is familiar with the terms and provisions of this Option Agreement, including the Unvested Share Repurchase Option set forth in Section ERROR! REFERENCE SOURCE NOT FOUND., and the Right of First Refusal set forth in Section 0, and hereby accepts the Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Option Agreement. The undersigned acknowledges receipt of a copy of the Plan. OPTIONEE: Date:____________________________ __________________________________________ Signature Optionee's Address: __________________________________________ __________________________________________ __________________________________________ EX-10.5 9 EX-10.5 1 EXHIBIT 10.5 P.F. CHANG'S CHINA BISTRO, INC. 1998 EMPLOYEE STOCK PURCHASE PLAN 1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN. 1.1 ESTABLISHMENT. The P.F. Chang's China Bistro, Inc. 1998 Employee Stock Purchase Plan (the "PLAN") is hereby established effective as of the effective date of the initial registration by the Company of its Stock under Section 12 of the Securities Exchange Act of 1934, as amended (the "EFFECTIVE DATE"). 1.2 PURPOSE. The purpose of the Plan is to advance the interests of Company and its stockholders by providing an incentive to attract, retain and reward Eligible Employees of the Participating Company Group and by motivating such persons to contribute to the growth and profitability of the Participating Company Group. The Plan provides such Eligible Employees with an opportunity to acquire a proprietary interest in the Company through the purchase of Stock. The Company intends that the Plan qualify as an "employee stock purchase plan" under Section 423 of the Code (including any amendments or replacements of such section), and the Plan shall be so construed. 1.3 TERM OF PLAN. The Plan shall continue in effect until the earlier of its termination by the Board or the date on which all of the shares of Stock available for issuance under the Plan have been issued. 2. DEFINITIONS AND CONSTRUCTION. 2.1 DEFINITIONS. Any term not expressly defined in the Plan but defined for purposes of Section 423 of the Code shall have the same definition herein. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "BOARD" means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, "Board" also means such Committee(s). (b) "CODE" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder. (c) "COMMITTEE" means a committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted herein, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. 1 2 (d) "COMPANY" means P.F. Chang's China Bistro, Inc., a Delaware corporation, or any successor corporation thereto. (e) "COMPENSATION" means, with respect to any Offering Period, base wages or salary, commissions, overtime, bonuses, annual awards, other incentive payments, shift premiums, and all other compensation paid in cash during such Offering Period before deduction for any contributions to any plan maintained by a Participating Company and described in Section 401(k) or Section 125 of the Code. Compensation shall not include reimbursements of expenses, allowances, long-term disability, workers' compensation or any amount deemed received without the actual transfer of cash or any amounts directly or indirectly paid pursuant to the Plan or any other stock purchase or stock option plan, or any compensation other than base wages or salary. (f) "ELIGIBLE EMPLOYEE" means an Employee who meets the requirements set forth in Section 5 for eligibility to participate in the Plan. (g) "EMPLOYEE" means a person treated as an employee of a Participating Company for purposes of Section 423 of the Code. A Participant shall be deemed to have ceased to be an Employee either upon an actual termination of employment or upon the corporation employing the Participant ceasing to be a Participating Company. For purposes of the Plan, an individual shall not be deemed to have ceased to be an Employee while such individual is on any military leave, sick leave, or other bona fide leave of absence approved by the Company of ninety (90) days or less. In the event an individual's leave of absence exceeds ninety (90) days, the individual shall be deemed to have ceased to be an Employee on the ninety-first (91st) day of such leave unless the individual's right to reemployment with the Participating Company Group is guaranteed either by statute or by contract. The Company shall determine in good faith and in the exercise of its discretion whether an individual has become or has ceased to be an Employee and the effective date of such individual's employment or termination of employment, as the case may be. For purposes of an individual's participation in or other rights, if any, under the Plan as of the time of the Company's determination, all such determinations by the Company shall be final, binding and conclusive, notwithstanding that the Company or any governmental agency subsequently makes a contrary determination. (h) "FAIR MARKET VALUE" means, as of any date, if there is then a public market for the Stock, the closing price of a share of Stock (or the mean of the closing bid and asked prices if the Stock is so quoted instead) as quoted on the Nasdaq National Market, the Nasdaq Small-Cap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in The Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Board, in its sole discretion. If there is then no public market for the Stock, the Fair Market Value on any relevant date shall be as determined by the Board. Notwithstanding the foregoing, the Fair Market Value per share of Stock on the Effective Date shall be deemed to be the public offering 2 3 price set forth in the final prospectus filed with the Securities and Exchange Commission in connection with the public offering of the Stock on the Effective Date. (i) "OFFERING" means an offering of Stock as provided in Section 6. (j) "OFFERING DATE" means, for any Offering, the first day of the Offering Period with respect to such Offering. (k) "OFFERING PERIOD" means a period established in accordance with Section 6.1. (l) "PARENT CORPORATION" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. (m) "PARTICIPANT" means an Eligible Employee who has become a participant in an Offering Period in accordance with Section 7 and remains a participant in accordance with the Plan. (n) "PARTICIPATING COMPANY" means the Company or any Parent Corporation or Subsidiary Corporation designated by the Board as a corporation the Employees of which may, if Eligible Employees, participate in the Plan. The Board shall have the sole and absolute discretion to determine from time to time which Parent Corporations or Subsidiary Corporations shall be Participating Companies. (o) "PARTICIPATING COMPANY GROUP" means, at any point in time, the Company and all other corporations collectively which are then Participating Companies. (p) "PURCHASE DATE" means, for any Offering Period (or Purchase Period, if so determined by the Board in accordance with Section 6.2), the last day of such period. (q) "PURCHASE PERIOD" means a period, if any, established in accordance with Section 6.2. (r) "PURCHASE PRICE" means the price at which a share of Stock may be purchased under the Plan, as determined in accordance with Section 9. (s) "PURCHASE RIGHT" means an option granted to a Participant pursuant to the Plan to purchase such shares of Stock as provided in Section 8, which the Participant may or may not exercise during the Offering Period in which such option is outstanding. Such option arises from the right of a Participant to withdraw any accumulated payroll deductions of the Participant not previously applied to the purchase of Stock under the Plan and to terminate participation in the Plan at any time during an Offering Period. (t) "STOCK" means the common stock of the Company, as adjusted from time to time in accordance with Section 4.2. 3 4 (u) "SUBSCRIPTION AGREEMENT" means a written agreement in such form as specified by the Company, stating an Employee's election to participate in the Plan and authorizing payroll deductions under the Plan from the Employee's Compensation. (v) "SUBSCRIPTION DATE" means the last business day prior to the Offering Date of an Offering Period or such earlier date as the Company shall establish. (w) "SUBSIDIARY CORPORATION" means any present or future "subsidiary corporation" of the Company, as defined in Section 424(f) of the Code. 2.2 CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise. 3. ADMINISTRATION. 3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by the Board. All questions of interpretation of the Plan, of any form of agreement or other document employed by the Company in the administration of the Plan, or of any Purchase Right shall be determined by the Board and shall be final and binding upon all persons having an interest in the Plan or the Purchase Right. Subject to the provisions of the Plan, the Board shall determine all of the relevant terms and conditions of Purchase Rights granted pursuant to the Plan; provided, however, that all Participants granted Purchase Rights pursuant to the Plan shall have the same rights and privileges within the meaning of Section 423(b)(5) of the Code. All expenses incurred in connection with the administration of the Plan shall be paid by the Company. 3.2 AUTHORITY OF OFFICERS. Any officer of the Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, determination or election that is the responsibility of or that is allocated to the Company herein, provided that the officer has apparent authority with respect to such matter, right, obligation, determination or election. 3.3 POLICIES AND PROCEDURES ESTABLISHED BY THE COMPANY. The Company may, from time to time, consistent with the Plan and the requirements of Section 423 of the Code, establish, change or terminate such rules, guidelines, policies, procedures, limitations, or adjustments as deemed advisable by the Company, in its sole discretion, for the proper administration of the Plan, including, without limitation, (a) a minimum payroll deduction amount required for participation in an Offering, (b) a limitation on the frequency or number of changes permitted in the rate of payroll deduction during an Offering, (c) an exchange ratio applicable to amounts withheld in a currency other than United States dollars, (d) a payroll deduction greater than or less than the amount designated by a Participant in order to adjust for the Company's delay or mistake in processing a Subscription Agreement or in otherwise effecting a Participant's election under the Plan or as advisable to comply with the requirements 4 5 of Section 423 of the Code, and (e) determination of the date and manner by which the Fair Market Value of a share of Stock is determined for purposes of administration of the Plan. 4. SHARES SUBJECT TO PLAN. 4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as provided in Section 4.2, the maximum aggregate number of shares of Stock that may be issued under the Plan shall be eight hundred thousand (800,000) and shall consist of authorized but unissued or reacquired shares of Stock, or any combination thereof. If an outstanding Purchase Right for any reason expires or is terminated or canceled, the shares of Stock allocable to the unexercised portion of such Purchase Right shall again be available for issuance under the Plan. 4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification or similar change in the capital structure of the Company, or in the event of any merger (including a merger effected for the purpose of changing the Company's domicile), sale of assets or other reorganization in which the Company is a party, appropriate adjustments shall be made in the number and class of shares subject to the Plan and each Purchase Right and in the Purchase Price. If a majority of the shares which are of the same class as the shares that are subject to outstanding Purchase Rights are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares of another corporation (the "NEW SHARES"), the Board may unilaterally amend the outstanding Purchase Rights to provide that such Purchase Rights are exercisable for New Shares. In the event of any such amendment, the number of shares subject to, and the Purchase Price of, the outstanding Purchase Rights shall be adjusted in a fair and equitable manner, as determined by the Board, in its sole discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 4.2 shall be rounded down to the nearest whole number, and in no event may the Purchase Price be decreased to an amount less than the par value, if any, of the stock subject to the Purchase Right. The adjustments determined by the Board pursuant to this Section 4.2 shall be final, binding and conclusive. 5. ELIGIBILITY. 5.1 EMPLOYEES ELIGIBLE TO PARTICIPATE. Each Employee of a Participating Company is eligible to participate in the Plan and shall be deemed an Eligible Employee except for any Employee who has not completed one (1) year of continuous employment with a Participating Company as of the commencement of an Offering Period. 5.2 EXCLUSION OF CERTAIN STOCKHOLDERS. Notwithstanding any provision of the Plan to the contrary, no Employee shall be granted a Purchase Right under the Plan if, immediately after such grant, such Employee would own or hold options to purchase stock of the Company or of any Parent Corporation or Subsidiary Corporation possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of such corporation, as determined in accordance with Section 423(b)(3) of the Code. For purposes of this Section 5.2, the attribution rules of Section 424(d) of the Code shall apply in determining the stock ownership of such Employee. 5 6 6. OFFERINGS. 6.1 OFFERING PERIODS. Except as otherwise set forth below, the Plan shall be implemented by sequential Offerings of approximately six (6) months duration (an "OFFERING PERIOD"). The first Offering Period shall commence on the Effective Date and end on January 31, 1999. Subsequent Offerings shall commence on the first day of February and August of each year and end on the last day of the following July and January, respectively, occurring thereafter. Notwithstanding the foregoing, the Board may establish a different duration for one or more future Offering Periods or different commencing or ending dates for such Offering Periods; provided, however, that no Offering Period may have a duration exceeding twenty-seven (27) months. If the first or last day of an Offering Period is not a day on which the national or regional securities exchange or market system constituting the primary market for the Stock is open for trading, the Company shall specify the trading day that will be deemed the first or last day, as the case may be, of the Offering Period. 6.2 PURCHASE PERIODS. If the Board so determines, in its discretion, each Offering Period may consist of two (2) or more consecutive Purchase Periods having such duration as the Board shall specify, and the last day of each such Purchase Period shall be a Purchase Date. If the first or last day of a Purchase Period is not a day on which the national or regional securities exchange or market system constituting the primary market for the Stock is open for trading, the Company shall specify the trading day that will be deemed the first or last day, as the case may be, of the Purchase Period. 7. PARTICIPATION IN THE PLAN. 7.1 INITIAL PARTICIPATION. An Eligible Employee may become a Participant in an Offering Period by delivering a properly completed Subscription Agreement to the office designated by the Company not later than the close of business for such office on the Subscription Date established by the Company for such Offering Period. An Eligible Employee who does not deliver a properly completed Subscription Agreement to the Company's designated office on or before the Subscription Date for an Offering Period shall not participate in the Plan for that Offering Period or for any subsequent Offering Period unless such Eligible Employee subsequently delivers a properly completed Subscription Agreement to the appropriate office of the Company on or before the Subscription Date for such subsequent Offering Period. An Employee who becomes an Eligible Employee after the Offering Date of an Offering Period shall not be eligible to participate in such Offering Period but may participate in any subsequent Offering Period provided such Employee is still an Eligible Employee as of the Offering Date of such subsequent Offering Period. 7.2 CONTINUED PARTICIPATION. A Participant shall automatically participate in the next Offering Period commencing immediately after the Purchase Date of each Offering Period in which the Participant participates provided that such Participant remains an Eligible Employee on the Offering Date of the new Offering Period and has not either (a) withdrawn from the Plan pursuant to Section 12.1 or (b) terminated employment as provided in Section 13. A Participant who may automatically participate in a subsequent Offering Period, as provided in 6 7 this Section, is not required to deliver any additional Subscription Agreement for the subsequent Offering Period in order to continue participation in the Plan. However, a Participant may deliver a new Subscription Agreement for a subsequent Offering Period in accordance with the procedures set forth in Section 7.1 if the Participant desires to change any of the elections contained in the Participant's then effective Subscription Agreement. 8. RIGHT TO PURCHASE SHARES. 8.1 GRANT OF PURCHASE RIGHT. Except as set forth below, on the Offering Date of each Offering Period, each Participant in such Offering Period shall be granted automatically a Purchase Right consisting of an option to purchase the lesser of (a) that number of whole shares of Stock determined by dividing Twelve Thousand Five Hundred Dollars ($12,500) by the Fair Market Value of a share of Stock on such Offering Date or (b) one thousand two hundred fifty (1,250) shares of Stock. No Purchase Right shall be granted on an Offering Date to any person who is not, on such Offering Date, an Eligible Employee. 8.2 PRO RATA ADJUSTMENT OF PURCHASE RIGHT. Notwithstanding the provisions of Section 8.1, if the Board establishes an Offering Period of any duration other than six months, then (a) the dollar amount in Section 8.1 shall be determined by multiplying $2,083.33 by the number of months (rounded to the nearest whole month) in the Offering Period and rounding to the nearest whole dollar, and (b) the share amount in Section 8.1 shall be determined by multiplying 208.33 shares by the number of months (rounded to the nearest whole month) in the Offering Period and rounding to the nearest whole share. 8.3 CALENDAR YEAR PURCHASE LIMITATION. Notwithstanding any provision of the Plan to the contrary, no Participant shall be granted a Purchase Right which permits his or her right to purchase shares of Stock under the Plan to accrue at a rate which, when aggregated with such Participant's rights to purchase shares under all other employee stock purchase plans of a Participating Company intended to meet the requirements of Section 423 of the Code, exceeds Twenty-Five Thousand Dollars ($25,000) in Fair Market Value (or such other limit, if any, as may be imposed by the Code) for each calendar year in which such Purchase Right is outstanding at any time. For purposes of the preceding sentence, the Fair Market Value of shares purchased during a given Offering Period shall be determined as of the Offering Date for such Offering Period. The limitation described in this Section 8.3 shall be applied in conformance with applicable regulations under Section 423(b)(8) of the Code. 9. PURCHASE PRICE. The Purchase Price at which each share of Stock may be acquired in an Offering Period upon the exercise of all or any portion of a Purchase Right shall be established by the Board; provided, however, that the Purchase Price shall not be less than eighty-five percent (85%) of the lesser of (a) the Fair Market Value of a share of Stock on the Offering Date of the Offering Period or (b) the Fair Market Value of a share of Stock on the Purchase Date. Unless otherwise provided by the Board prior to the commencement of an Offering Period, the Purchase Price for that Offering Period shall be eighty-five percent (85%) of the lesser of (a) the Fair 7 8 Market Value of a share of Stock on the Offering Date of the Offering Period, or (b) the Fair Market Value of a share of Stock on the Purchase Date. 10. ACCUMULATION OF PURCHASE PRICE THROUGH PAYROLL DEDUCTION. Shares of Stock acquired pursuant to the exercise of all or any portion of a Purchase Right may be paid for only by means of payroll deductions from the Participant's Compensation accumulated during the Offering Period for which such Purchase Right was granted, subject to the following: 10.1 AMOUNT OF PAYROLL DEDUCTIONS. Except as otherwise provided herein, the amount to be deducted under the Plan from a Participant's Compensation on each payday during an Offering Period shall be determined by the Participant's Subscription Agreement. The Subscription Agreement shall set forth the percentage of the Participant's Compensation to be deducted on each payday during an Offering Period in whole percentages of not less than one percent (1%) (except as a result of an election pursuant to Section 10.3 to stop payroll deductions made effective following the first payday during an Offering) or more than ten percent (10%). Notwithstanding the foregoing, the Board may change the limits on payroll deductions effective as of any future Offering Date. 10.2 COMMENCEMENT OF PAYROLL DEDUCTIONS. Payroll deductions shall commence on the first payday following the Offering Date and shall continue to the end of the Offering Period unless sooner altered or terminated as provided herein. 10.3 ELECTION TO CHANGE OR STOP PAYROLL DEDUCTIONS. During an Offering Period, a Participant may elect to increase or decrease the rate of or to stop deductions from his or her Compensation by delivering to the Company's designated office an amended Subscription Agreement authorizing such change on or before the "Change Notice Date." The "CHANGE NOTICE DATE" shall be a date prior to the beginning of the first pay period for which such election is to be effective as established by the Company from time to time and announced to the Participants. A Participant who elects to decrease the rate of his or her payroll deductions to zero percent (0%) shall nevertheless remain a Participant in the current Offering Period unless such Participant withdraws from the Plan as provided in Section 12.1. 10.4 ADMINISTRATIVE SUSPENSION OF PAYROLL DEDUCTIONS. The Company may, in its sole discretion, suspend a Participant's payroll deductions under the Plan as the Company deems advisable to avoid accumulating payroll deductions in excess of the amount that could reasonably be anticipated to purchase the maximum number of shares of Stock permitted during a calendar year under the limit set forth in Section 8.3. Payroll deductions shall be resumed at the rate specified in the Participant's then effective Subscription Agreement at the beginning of the next Offering Period the Purchase Date of which falls in the following calendar year. 10.5 PARTICIPANT ACCOUNTS. Individual bookkeeping accounts shall be maintained for each Participant. All payroll deductions from a Participant's Compensation shall be credited to such Participant's Plan account and shall be deposited with the general funds of the 8 9 Company. All payroll deductions received or held by the Company may be used by the Company for any corporate purpose. 10.6 NO INTEREST PAID. Interest shall not be paid on sums deducted from a Participant's Compensation pursuant to the Plan. 10.7 VOLUNTARY WITHDRAWAL FROM PLAN ACCOUNT. A Participant may withdraw all or any portion of the payroll deductions credited to his or her Plan account and not previously applied toward the purchase of Stock by delivering to the Company's designated office a written notice on a form provided by the Company for such purpose. A Participant who withdraws the entire remaining balance credited to his or her Plan account shall be deemed to have withdrawn from the Plan in accordance with Section 12.1. Amounts withdrawn shall be returned to the Participant as soon as practicable after the withdrawal and may not be applied to the purchase of shares in any Offering under the Plan. The Company may from time to time establish or change limitations on the frequency of withdrawals permitted under this Section, establish a minimum dollar amount that must be retained in the Participant's Plan account, or terminate the withdrawal right provided by this Section. 11. PURCHASE OF SHARES. 11.1 EXERCISE OF PURCHASE RIGHT. On each Purchase Date of an Offering Period, each Participant who has not withdrawn from the Plan and whose participation in the Offering has not terminated before such Purchase Date shall automatically acquire pursuant to the exercise of the Participant's Purchase Right the number of whole shares of Stock determined by dividing (a) the total amount of the Participant's payroll deductions accumulated in the Participant's Plan account during the Offering Period and not previously applied toward the purchase of Stock by (b) the Purchase Price. However, in no event shall the number of shares purchased by the Participant during an Offering Period exceed the number of shares subject to the Participant's Purchase Right. No shares of Stock shall be purchased on a Purchase Date on behalf of a Participant whose participation in the Offering or the Plan has terminated before such Purchase Date. 11.2 PRO RATA ALLOCATION OF SHARES. In the event that the number of shares of Stock which might be purchased by all Participants in the Plan on a Purchase Date exceeds the number of shares of Stock available in the Plan as provided in Section 4.1, the Company shall make a pro rata allocation of the remaining shares in as uniform a manner as shall be practicable and as the Company shall determine to be equitable. Any fractional share resulting from such pro rata allocation to any Participant shall be disregarded. 11.3 DELIVERY OF CERTIFICATES. As soon as practicable after each Purchase Date, the Company shall arrange the delivery to each Participant, as appropriate, of a certificate representing the shares acquired by the Participant on such Purchase Date; provided that the Company may deliver such shares to a broker that holds such shares in street name for the benefit of the Participant. Shares to be delivered to a Participant under the Plan shall be registered in the name of the Participant, or, if requested by the Participant, in the name of the Participant and his or her spouse, or, if applicable, in the names of the heirs of the Participant. 9 10 11.4 RETURN OF CASH BALANCE. Any cash balance remaining in a Participant's Plan account following any Purchase Date shall be refunded to the Participant as soon as practicable after such Purchase Date. However, if the cash to be returned to a Participant pursuant to the preceding sentence is an amount less than the amount that would have been necessary to purchase an additional whole share of Stock on such Purchase Date, the Company may retain such amount in the Participant's Plan account to be applied toward the purchase of shares of Stock in the subsequent Purchase Period or Offering Period, as the case may be. 11.5 TAX WITHHOLDING. At the time a Participant's Purchase Right is exercised, in whole or in part, or at the time a Participant disposes of some or all of the shares of Stock he or she acquires under the Plan, the Participant shall make adequate provision for the foreign, federal, state and local tax withholding obligations of the Participating Company Group, if any, which arise upon exercise of the Purchase Right or upon such disposition of shares, respectively. The Participating Company Group may, but shall not be obligated to, withhold from the Participant's compensation the amount necessary to meet such withholding obligations. 11.6 EXPIRATION OF PURCHASE RIGHT. Any portion of a Participant's Purchase Right remaining unexercised after the end of the Offering Period to which the Purchase Right relates shall expire immediately upon the end of the Offering Period. 11.7 REPORTS TO PARTICIPANTS. Each Participant who has exercised all or part of his or her Purchase Right shall receive, as soon as practicable after the Purchase Date, a report of such Participant's Plan account setting forth the total payroll deductions accumulated prior to such exercise, the number of shares of Stock purchased, the Purchase Price for such shares, the date of purchase and the cash balance, if any, remaining immediately after such purchase that is to be refunded or retained in the Participant's Plan account pursuant to Section 11.4. The report required by this Section may be delivered in such form and by such means, including by electronic transmission, as the Company may determine. 12. WITHDRAWAL FROM THE PLAN. 12.1 VOLUNTARY WITHDRAWAL FROM THE PLAN. A Participant may withdraw from the Plan by signing and delivering to the Company's designated office a written notice of withdrawal on a form provided by the Company for such purpose. Such withdrawal may be elected at any time prior to the end of an Offering Period. A Participant who voluntarily withdraws from the Plan is prohibited from resuming participation in the Plan in the same Offering from which he or she withdrew, but may participate in any subsequent Offering by again satisfying the requirements of Sections 5 and 7.1. The Company may impose, from time to time, a requirement that the notice of withdrawal from the Plan be on file with the Company's designated office for a reasonable period prior to the effectiveness of the Participant's withdrawal. 12.2 RETURN OF PAYROLL DEDUCTIONS. Upon a Participant's voluntary withdrawal from the Plan pursuant to Sections 12.1, the Participant's accumulated payroll deductions which have not been applied toward the purchase of shares of Stock shall be refunded to the Participant as soon as practicable after the withdrawal, without the payment of any interest, 10 11 and the Participant's interest in the Plan shall terminate. Such accumulated payroll deductions to be refunded in accordance with this Section may not be applied to any other Offering under the Plan. 13. TERMINATION OF EMPLOYMENT OR ELIGIBILITY. Upon a Participant's ceasing, prior to a Purchase Date, to be an Employee of the Participating Company Group for any reason, including retirement, disability or death, or the failure of a Participant to remain an Eligible Employee, the Participant's participation in the Plan shall terminate immediately. In such event, the payroll deductions credited to the Participant's Plan account since the last Purchase Date shall, as soon as practicable, be returned to the Participant or, in the case of the Participant's death, to the Participant's legal representative, and all of the Participant's rights under the Plan shall terminate. Interest shall not be paid on sums returned pursuant to this Section 13. A Participant whose participation has been so terminated may again become eligible to participate in the Plan by again satisfying the requirements of Sections 5 and 7.1. 14. CHANGE IN CONTROL. 14.1 DEFINITIONS. (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the "TRANSACTION") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "TRANSFEREE CORPORATION(S)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. (c) EFFECT OF CHANGE IN CONTROL ON PURCHASE RIGHTS. In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or parent 11 12 corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), may assume the Company's rights and obligations under the Plan. If the Acquiring Corporation elects not to assume the Company's rights and obligations under outstanding Purchase Rights, the Purchase Date of the then current Offering Period (or Purchase Period) shall be accelerated to a date before the date of the Change in Control specified by the Board, but the number of shares of Stock subject to outstanding Purchase Rights shall not be adjusted. All Purchase Rights which are neither assumed by the Acquiring Corporation in connection with the Change in Control nor exercised as of the date of the Change in Control shall terminate and cease to be outstanding effective as of the date of the Change in Control. 15. NONTRANSFERABILITY OF PURCHASE RIGHTS. A Purchase Right may not be transferred in any manner otherwise than by will or the laws of descent and distribution and shall be exercisable during the lifetime of the Participant only by the Participant. 16. COMPLIANCE WITH SECURITIES LAW. The issuance of shares under the Plan shall be subject to compliance with all applicable requirements of federal, state and foreign law with respect to such securities. A Purchase Right may not be exercised if the issuance of shares upon such exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any securities exchange or market system upon which the Stock may then be listed. In addition, no Purchase Right may be exercised unless (a) a registration statement under the Securities Act of 1933, as amended, shall at the time of exercise of the Purchase Right be in effect with respect to the shares issuable upon exercise of the Purchase Right, or (b) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Purchase Right may be issued in accordance with the terms of an applicable exemption from the registration requirements of said Act. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any shares under the Plan shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of a Purchase Right, the Company may require the Participant to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation, and to make any representation or warranty with respect thereto as may be requested by the Company. 17. RIGHTS AS A STOCKHOLDER AND EMPLOYEE. A Participant shall have no rights as a stockholder by virtue of the Participant's participation in the Plan until the date of the issuance of a certificate for the shares purchased pursuant to the exercise of the Participant's Purchase Right (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such certificate is issued, except as provided in Section 4.2. Nothing herein shall 12 13 confer upon a Participant any right to continue in the employ of the Participating Company Group or interfere in any way with any right of the Participating Company Group to terminate the Participant's employment at any time. 18. LEGENDS. The Company may at any time place legends or other identifying symbols referencing any applicable federal, state or foreign securities law restrictions or any provision convenient in the administration of the Plan on some or all of the certificates representing shares of Stock issued under the Plan. The Participant shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to a Purchase Right in the possession of the Participant in order to carry out the provisions of this Section. 19. NOTIFICATION OF SALE OF SHARES. The Company may require the Participant to give the Company prompt notice of any disposition of shares acquired by exercise of a Purchase Right within two years from the date of granting such Purchase Right or one year from the date of exercise of such Purchase Right. The Company may require that until such time as a Participant disposes of shares acquired upon exercise of a Purchase Right, the Participant shall hold all such shares in the Participant's name (or, if elected by the Participant, in the name of the Participant and his or her spouse but not in the name of any nominee) until the lapse of the time periods with respect to such Purchase Right referred to in the preceding sentence. The Company may direct that the certificates evidencing shares acquired by exercise of a Purchase Right refer to such requirement to give prompt notice of disposition. 20. NOTICES. All notices or other communications by a Participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 21. INDEMNIFICATION. In addition to such other rights of indemnification as they may have as members of the Board or officers or employees of the Participating Company Group, members of the Board and any officers or employees of the Participating Company Group to whom authority to act for the Board or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or 13 14 proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same. 22. AMENDMENT OR TERMINATION OF THE PLAN. The Board may at any time amend or terminate the Plan, except that (a) such termination shall not affect Purchase Rights previously granted under the Plan, except as permitted under the Plan, and (b) no amendment may adversely affect a Purchase Right previously granted under the Plan (except to the extent permitted by the Plan or as may be necessary to qualify the Plan as an employee stock purchase plan pursuant to Section 423 of the Code or to obtain qualification or registration of the shares of Stock under applicable federal, state or foreign securities laws). In addition, an amendment to the Plan must be approved by the stockholders of the Company within twelve (12) months of the adoption of such amendment if such amendment would authorize the sale of more shares than are authorized for issuance under the Plan or would change the definition of the corporations that may be designated by the Board as Participating Companies. In the event that the Board approves an amendment to increase the number of shares authorized for issuance under the Plan (the "ADDITIONAL SHARES"), the Board, in its sole discretion, may specify that such Additional Shares may only be issued pursuant to Purchase Rights granted after the date on which the stockholders of the Company approve such amendment, and such designation by the Board shall not be deemed to have adversely affected any Purchase Right granted prior to the date on which the stockholders approve the amendment. IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that the foregoing P.F. Chang's China Bistro, Inc. 1998 Employee Stock Purchase Plan was duly adopted by the Board of Directors of the Company on _____________, 1998. ____________________________________ Secretary 14 15 PLAN HISTORY _____________, 1998 Board adopts the Plan, with an initial reserve of 800,000 shares. _____________, 1998 Stockholders approve Plan, with an initial reserve of 800,000 shares. EX-10.7 10 EX-10.7 1 EXHIBIT 10.7 ================================================================================ STOCK PURCHASE AGREEMENT by and among P.F. CHANG'S CHINA BISTRO, INC.; CATTERTON-SIMON PARTNERS, L.P.; CATTERTON-PFC, L.L.C.; OAK INVESTMENT PARTNERS VI, L.P.; OAK AFFILIATES FUND, L.P.; the OTHER CO-INVESTORS listed on Schedule 1; and PAUL M. FLEMING and KELLY M. FLEMING ---------- Dated as of FEBRUARY 1, 1996 ---------- ================================================================================ 2
TABLE OF CONTENTS Page ---- RECITALS ................................................................................................1 AGREEMENT ...............................................................................................1 ARTICLE 1 DEFINITIONS ...........................................................2 1.1 Definitions .................................................................................2 1.2 Accounting Terms; Financial Statements.......................................................8 1.3 Knowledge Standard...........................................................................8 1.4 Other Defined Terms..........................................................................8 ARTICLE 2 AUTHORIZATION OF PREFERRED STOCK; PURCHASE AND SALE OF SECURITIES.................................................9 2.1 Preferred Stock..............................................................................9 2.2 Purchase and Sale of Securities..............................................................9 2.3 Closing......................................................................................9 2.4 Fees and Expenses...........................................................................10 ARTICLE 3 CONDITIONS TO THE OBLIGATION OF THE PURCHASERS TO PURCHASE THE SECURITIES..........................................10 3.1 Representations and Warranties.............................................................10 3.2 Compliance with Terms and Conditions of this Agreement.....................................10 3.3 Delivery of Certificates Evidencing the Securities.........................................10 3.5 Secretary's Certificates...................................................................11 3.6 Documents .................................................................................11 3.7 Purchase Permitted by Applicable Laws......................................................11 3.8 Opinion of Counsel.........................................................................11 3.9 Approval of Counsel to Purchasers..........................................................11 3.10 Consents and Approvals.....................................................................11 3.11 Certain Waivers............................................................................12 3.12 No material Adverse Change.................................................................12 3.13 Certificate and By-laws....................................................................12 3.14 No Material Judgment or Order..............................................................12 3.15 Financial Statements.......................................................................12 3.16 Pro Forma Balance Sheet....................................................................12 3.17 Budget.....................................................................................12 3.18 Contribution Agreement.....................................................................13 3.19 Employment Agreement.......................................................................13 3.20 Guaranty Agreement.........................................................................13 3.21 Registration Rights Agreement..............................................................13 3.22 Shareholders' Agreement....................................................................13 3.23 Transition Services Agreement..............................................................13 3.24 Corporate Restructuring. The Corporate Restructuring shall have been completed in form and substance reasonably satisfactory to the Purchasers....................................13 ARTICLE 4 CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE.........................................................13 4.1 Representations and Warranties.............................................................13 4.2 Compliance with Terms and Conditions of this Agreement.....................................13
4.3 Certificates. The Company shall have received (i) for each Purchaser that is a corporation, a certificate from such corporation, dated as of the Closing Date and signed by the Secretary or an Assistant Secretary of the Company, certifying that the attached resolutions of the Board of Directors of such corporation approving the Transaction Agreements and the transactions contemplated thereby, are true, complete and correct and remain unchanged and in full force and effect; and (ii) for each Purchaser that is not a corporation, a certificate executed by such Person as the Company shall reasonably deem appropriate under the circumstances, certifying that all approvals required according to such Purchaser's organizational documents have been duly obtained, and remain unchanged and in full force and effect. 4.4 Documents. The Company shall have received true, complete and correct copies of such documents and such other information as it may have reasonably requested in connection with or related to the purchase of the Securities by each Purchaser and the transactions contemplated by the Transaction Agreement, all in form and substance reasonably satisfactory to the Company prior to the Closing, including without limitation the Registration Rights Agreement and the Shareholders Agreement executed by the Purchasers, unless the execution of such documents by the Company has been waived by the Purchasers as a condition to their obligation to purchase the Securities. i 3
TABLE OF CONTENTS - (cont'd) Page ---- 4.5 Closing Certificate..................................................................14 4.7 Payment of Purchase Price............................................................14 4.8 Approval of Counsel to Company.......................................................14 4.9 Consents and Approvals...............................................................15 4.10 No Material Judgment or Order........................................................15 ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF THE COMPANY..........................................15 5.1 Corporate Existence and Authority....................................................15 5.2 Corporate Authorization; No Contravention............................................15 5.3 Governmental Authorization; Third Party Consents.....................................16 5.4 Binding Effect.......................................................................16 5.5 Other Agreements.....................................................................16 5.6 Capitalization.......................................................................16 5.7 Company Affiliates...................................................................17 5.8 Private Offering.....................................................................17 5.9 Litigation...........................................................................18 5.10 Financial Statements.................................................................18 5.11 Title and Condition of Assets........................................................18 5.12 Contractual Obligations..............................................................19 5.13 Patents, Trademarks, Etc.............................................................20 5.14 Tax Matters..........................................................................20 5.15 Severance Arrangements...............................................................22 5.16 No Material Adverse Change...........................................................22 5.17 Environmental Matters................................................................22 5.18 Investment Company/Government Regulations............................................23 5.19 Broker's, Finder's or Similar Fees...................................................23 5.20 Labor Relations and Employee Matters.................................................23 5.21 Employee Benefits Matters 5.22 Potential Conflicts of Interest......................................................26 5.23 Outstanding Borrowings...............................................................26 5.24 Insurance Schedule...................................................................26 5.25 Undisclosed Liabilities..............................................................26 5.26 Solvency.............................................................................26 5.27 Compliance with Law..................................................................27 5.28 No Other Agreements to Sell the Assets or Capital Stock of the Company...............27 5.29 Hart-Scott-Rodino....................................................................27 5.30 Disclosure...........................................................................27 ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS........................................28 6.1 Existence and Authority..............................................................28 6.2 Authorization; No Contravention......................................................28 6.3 Governmental Authorization; Third Party Consent......................................28 6.4 Binding Effect.......................................................................28 6.5 Purchase for Own Account.............................................................28 6.6 Accredited Investor Status...........................................................29 6.8 Broker's, Finder's or Similar Fees...................................................30 ARTICLE 7 COVENANTS OF THE COMPANY...........................................30 7.1 Further Assurances...................................................................30 7.2 Notification of Certain Matters......................................................30 7.3 Access to Information................................................................30 7.4 Conduct of Business..................................................................31 7.5 Contribution Agreement...............................................................31 ARTICLE 8 COVENANTS OF THE COMPANY WITH RESPECT TO THE PERIOD FOLLOWING THE CLOSING.....................................31 8.1 Reservation of Shares................................................................31 8.2 Books and Records....................................................................32 8.3 Use of Proceeds......................................................................32 8.4 New Lines of Business................................................................32 8.5 Compensation of Directors............................................................32 8.6 Management Incentive Stock Option Plan...............................................32 ARTICLE 9 INDEMNIFICATION.................................................32 9.1 Indemnification......................................................................32 ii
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TABLE OF CONTENTS - (cont'd) Page ---- 9.2 Notification........................................................................33 9.3 Registration Rights Agreement.......................................................34 ARTICLE 10 MISCELLANEOUS...........................................34 10.1 Termination.........................................................................34 10.2 Survival of Representations and Warranties..........................................35 10.4 Notices.............................................................................35 10.5 Successors and Assigns..............................................................36 10.6 Amendment and Waiver................................................................37 10.7 Counterparts........................................................................37 10.8 Headings............................................................................37 10.9 Governing Law.......................................................................37 10.10 Jurisdiction........................................................................37 10.11 Severability........................................................................38 10.12 Rules of Construction...............................................................38 10.13 Entire Agreement....................................................................38 10.14 Transaction Expenses................................................................38 10.15 Publicity...........................................................................38 10.16 Further Assurances..................................................................38 10.17 Severability of Representations, Warranties and Covenants...........................38 iii
5 TABLE OF EXHIBITS AND SCHEDULES EXHIBITS Contribution Agreement........................................................A Acquisition Agreement.........................................................B Corporate Restructuring.......................................................C Guaranty Agreement............................................................D Registration Rights Agreement.................................................E Shareholders' Agreement.......................................................F Transition Services Agreement.................................................G Warrant.......................................................................H Certificate of Incorporation..................................................I By-Laws.......................................................................J Employment Agreement..........................................................K SCHEDULES Securities Being Purchased....................................................1
6 SCHEDULES (continued) Government & Other Consents.......................................5.3 Shareholders......................................................5.6 Affiliates........................................................5.7 Leased Real Estate.............................................5.11(a) Agreements.......................................................5.12 Intellectual Property............................................5.13 Tax Elections....................................................5.14 Environmental....................................................5.17 Employee Plans...................................................5.21 Conflicts........................................................5.22 Borrowings.......................................................5.23 Insurance Policies...............................................5.24 Noncompliance....................................................5.27 Obligation to Sell...............................................5.28
7 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement") is entered into as of the 1st day of February, 1996 by and among CATTERTON-SIMON PARTNERS, L.P., a Delaware limited partnership, and CATTERTON-PFC, L.L.C., a Delaware limited liability company (collectively "Catterton"), OAK INVESTMENT PARTNERS VI, L.P., a Delaware limited partnership and OAK VI AFFILIATES FUND, L.P., a Delaware limited partnership (collectively "Oak"), the other co-investors listed on Schedule 1 attached hereto (the "Co-Investors"), PAUL M. FLEMING and KELLY M. FLEMING, a married couple dealing in community property (collectively, "Fleming") and P.F. CHANG'S CHINA BISTRO, INC., a Delaware corporation (the "Company"). RECITALS: A. WHEREAS, upon the terms and subject to the conditions set forth in this Agreement, the Company proposes to issue and sell (i) shares of its Series A Convertible Preferred Stock (as defined herein) and (ii) Warrants (as defined herein) to purchase shares of Series A Convertible Preferred Stock to Catterton, Oak and the Co-Investors (each being referred to herein as a "Purchaser" and collectively referred to herein as the "Purchasers"). B. WHEREAS, upon the terms and subject to the conditions set forth in this Agreement, the Purchasers desire to contribute capital to the Company in exchange for the issuance to the Purchasers of shares of the Series A Convertible Preferred Stock and Warrants of the Company as set forth herein. C. WHEREAS, the Purchasers desire that, upon the Closing (as defined in herein), the Purchasers will collectively own one hundred percent (100%) of the Company's outstanding Series A Convertible Preferred Stock. D. WHEREAS, Fleming and the Company shall enter into a Contribution Agreement simultaneously with the execution of this Agreement in the form attached hereto as Exhibit A. E. WHEREAS, the Company, the Purchasers and Fleming, holder of 100% of the Company's common stock, desire to set forth the objectives and agreements, that will govern their relations and responsibilities with respect to each other by entering into concurrently with the sale and purchase of securities hereunder a Shareholders' Agreement (as defined herein). AGREEMENT: NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereby agree as follows: 8 ARTICLE 1 DEFINITIONS 1.1 Definitions. As used in this Agreement, and unless the context requires a different meaning, the following terms have the meanings indicated: "Acquisition Agreement" means the Acquisition Agreement among the holders of equity interests in the Company Affiliates and the Company substantially in the form attached hereto as Exhibit B. "Affiliate" means, with respect to any specified Person, any Person that, directly or indirectly, controls, is controlled by, or is under common control with, such specified Person, whether by contract, through one or more intermediaries, or otherwise. "Balance Sheet Date" means November 30, 1995. "Benefit Arrangement" means any employment, consulting, severance or other similar contract, arrangement or policy and each plan, arrangement (written or oral), program, agreement or commitment providing for insurance coverage (including any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, life, health, disability or accident benefits (including, without limitation, any "voluntary employees' beneficiary association" as defined in Section 501(c)(9) of the Code providing for the same or other benefits) or for deferred compensation, profit-sharing bonuses, stock options, stock appreciation rights, stock purchases or other forms of incentive compensation or post-retirement insurance, compensation or benefits which (A) is not a Welfare Plan, Pension Plan or Multiemployer Plan, (B) is entered into, maintained, contributed to or required to be contributed to, as the case may be, by the Company or an ERISA Affiliate or under which the Company or any ERISA Affiliate may incur any liability, and (C) covers any employee or former employee of the Company or any ERISA Affiliate (with respect to their relationship with such entities). "Code" means the Internal Revenue Code of 1986, as amended, or any successor statute thereto. "Commission" means the Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act. "Common Stock" means the common stock, par value $.01 per share, of the Company, or any other capital stock of the Company into which such stock is reclassified or reconstituted. "Company Affiliates" means (i) Fleming Chinese Restaurants, Inc., an Arizona corporation, together with its successors and assigns; (ii) P.F. Chang's II, Inc., an Arizona corporation, together with its successors and assigns; (iii) P.F. Chang's III, L.L.C., an Arizona 2 9 limited liability company; (iv) P.F. Chang's IV, L.L.C., an Arizona limited liability company; (v) PFC Building Limited Partnership, an Arizona limited partnership; and (vi) Fleming/PFC III Corp, an Arizona corporation. "Condition of the Company" means the assets, business, properties, operations, financial condition or prospects (excluding prospects arising out of general economic or business conditions affecting the restaurant industry generally) of the Company and the Company Affiliates taken as a whole. "Contractual Obligation" means as to any Person, any provision of any security issued by such Person or any provision of any agreement, lease of real or personal property, undertaking, contract, indenture, mortgage, deed of trust or other instrument to which such Person is a party or by which it or any of its property is bound. "Contribution Agreement" means that certain Contribution Agreement to be entered into as of the Closing Date by and between the Company and Paul Fleming. "Corporate Restructuring" means the restructuring of Fleming Chinese Restaurants, Inc., and P.F. Chang's II, Inc., as described in Exhibit C attached hereto. "Defined Benefit Plan" means a defined benefit plan within the meaning of Section 3(35) of ERISA or Section 414(j) of the Code, whether funded or unfunded, qualified or nonqualified (whether or not subject to ERISA or the Code). "Employee Plans" means all Benefit Arrangements, Multiemployer Plans, Pension Plans and Welfare Plans. "Employment Agreement" means the Employment Agreement to be entered into as of the Closing Date between the Company and Fleming substantially in the form attached hereto as Exhibit K. "Environmental Expenses" means any liability, loss, cost or expense arising from any Pre-Closing Environmental Matter, including, without limitation, costs of investigation, cleanup, removal, remedial, corrective or response action, the costs associated with posting financial assurances for the completion of investigation, cleanup, removal, remedial, corrective or response actions, the preparation of any closure or other necessary or required plans or analyses, or other reports or analyses submitted to or prepared by regulating agencies, including the cost of health assessments, epidemiological studies and the like, retention of engineers and other expert consultants, legal counsel, capital improvement, operation and maintenance testing and monitoring costs, power and utility costs and pumping taxes or fees, and administrative costs or damages. "Environmental Laws" means any federal, state, territorial, provincial or local law, common law doctrine, rule, order, decree, judgment, injunction, license, permit or regulation relating to environmental matters, including those pertaining to land use, air, soil, surface water, ground water (including the protection, cleanup, removal, remediation or damage 3 10 thereof), public or employee health or safety or any other environmental matter, together with any other laws (federal, state, territorial, provincial or local) relating to emissions, discharges, releases or threatened releases of any pollutant or contaminant including, without limitation, medical, chemical, biological, biohazardous or radioactive waste and materials, into ambient air, land, surface water, groundwater, personal property or structures, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation, discharge or handling of any contaminant, including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. Section 9601 et seq.), the Hazardous Material Transportation Act (49 U.S.C. Section 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.), the Federal Water Pollution Control Act (33 U.S.C. Section 1251 et seq.), the Clean Air Act (42 U.S.C. Section 1251 et seq.), the Toxic Substances Control Act (15 U.S.C. Section 2601 et seq.), and the Occupational Safety and Health Act (29 U.S.C. Section 651 et seq.), as such laws have been, or are, amended, modified or supplemented heretofore or from time to time hereafter and any analogous future federal, or present or future state or local laws, statutes and regulations promulgated thereunder. "Equipment" means all of the tangible personal property owned or leased by the Company or any Company Affiliate and used in or held for use in the operations of the business of the Company or any of Company Affiliate. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means any Person that is (or at any relevant time was) a member of a "controlled group of corporations" with or under "common control" with the Company as defined in Section 414(b), (c), (m) or (o) of the Code. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder. "Facilities" means the buildings, plants, offices, stores, restaurants and all other improvements on any real property (including fixtures affixed thereto) which are owned or leased by the Company or any Company Affiliate and used or held for use in the operation of the business of the Company or any Company Affiliate. "GAAP" means United States generally accepted accounting principles, in effect from time to time, consistently applied. "Governmental Authority" means the government of any nation, state, city, locality or other political subdivision of any thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity exercising public functions owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Guaranty Agreement" means the Guaranty Agreement entered into by Fleming for the benefit of the Purchasers substantially in the form attached hereto as Exhibit D. 4 11 "Hazardous Materials" means those substances which are regulated by or form the basis of liability under any Environmental Laws, including, without limitation, petroleum products, radon and asbestos. "Indebtedness" means, as to any Person: (a) all obligations, whether or not contingent, of such Person for borrowed money (including, without limitation, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured), (b) all obligations of such Person evidenced by notes, bonds, debentures or similar instruments, (c) all obligations of such Person representing the balance of deferred purchase price of property or services, except trade accounts payable and accrued commercial or trade liabilities arising in the ordinary course of business, (d) all interest rate and currency swaps, caps, collars and similar agreements or hedging devices under which payments are obligated to be made by such Person, whether periodically or upon the happening of a contingency, (e) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (f) all obligations of such Person under leases which have been or should be, in accordance with GAAP, recorded as capital leases, (g) all indebtedness secured by any Lien (other than Liens in favor of lessors under leases other than leases included in clause (f)) on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is non-recourse to the credit of that Person, and (h) all Indebtedness of any other Person referred to in clauses (a) through (f) above, guaranteed, directly or indirectly, by that Person. "Initial Issue Date" shall mean the date that shares of Preferred Stock are first issued by the Company. "Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment, encumbrance, lien (statutory or other) or other security interest of any kind or nature whatsoever (excluding preferred stock or equity related preferences) including, without limitation, those created by, arising under or evidenced by any conditional sale or other title retention agreement, the interest of a lessor under a capital lease obligation, or any financing lease having - substantially the same economic effect as any of the foregoing. "Material Adverse Effect" means any event or condition which individually or in the aggregate has a material adverse effect on the Condition of the Company or on the ability of the Company to perform its obligations under the Transaction Agreements. "Multiemployer Plan" means any "multiemployer plan," as defined in Section 4001(a)(3) or Section 3(37) of ERISA, (A) which the Company or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or, after September 25, 1980, maintained, administered, contributed to or was required to contribute to, or under which the Company or any ERISA Affiliate may incur any liability and (B) which covers any employee or former employee of the Company or any ERISA Affiliate (with respect to their relationship with such entities). 5 12 "Outstanding Borrowings" means all Indebtedness of the Company and/or its Subsidiaries for borrowed money (including without limitation, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured), excluding obligations with respect to trade payables incurred in the ordinary course of business. "PBGC" means the Pension Benefit Guaranty Corporation. "Pension Plan" means any "employee pension benefit plan" as defined in Section 3(2) of ERISA (other than a Multiemployer Plan) (A) which the Company or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or, within the five years prior to the Closing Date, maintained, administered, contributed to or was required to contribute to, or under which the Company or any ERISA Affiliate may incur any liability and (B) which covers any employee or former employee of the Company or any ERISA Affiliate (with respect to their relationship with such entities). "Permitted Liens" means (i) Liens for taxes, governmental charges or levies which (a) are not yet due and payable, or (b) are being diligently contested in good faith by appropriate proceedings; provided, that for any such taxes being diligently contested in good faith, the Company has set aside adequate reserves, (ii) Liens imposed by law, such as mechanic's, materialman's, landlord's, warehouseman's and carrier's liens, securing obligations incurred in the ordinary course of business which are not yet overdue or which are being diligently contested in good faith by appropriate proceeding and, with respect to such obligations which are being contested, for which the Company has set aside adequate reserves, and (iii) Liens which (x) in each case, secure obligations of less than $10,000, and (y) do not, individually or in the aggregate, interfere with the use and enjoyment of the property subject thereto. "Person" means any individual, firm, corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, limited liability company, Governmental Authority or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. "Pre-Closing Environmental Matters" means (i) the production, use, generation, storage, treatment, recycling, disposal, discharge, release, or other handling or disposition of any kind at any time on or prior to the Closing Date (collectively "Handling") of any Hazardous Material, either in, on, or under any real property or facility (including the Facilities) owned, leased or used at any time by the Company (or a predecessor or affiliate of the Company) including without limitation the effects of such Handling of Hazardous Materials on resources, persons, or property within or outside the boundaries of any facility owned, operated or otherwise used by the Company; (ii) the presence as of the Closing Date of Hazardous Materials in, on or under any facility (including the Facilities) owned, leased or used at any time by the Company regardless of how the Hazardous Materials came to rest at, on or under such facility, (iii) the failure on or prior to the Closing Date of any facility or any operations of the Company to be in compliance with an Environmental Laws, and (iv) any other act, omission or condition existing prior to the Closing Date which gives rise to liability under any Environmental Laws with respect to the Company. 6 13 "Preferred Stock" means the Series A Convertible Preferred Stock, par value $.01 per share, of the Company, or any other capital stock of the Company into which such stock is reclassified or reconstituted. "Qualified Initial Public Offering" shall mean a public offering, underwritten by a reputable and nationally recognized underwriter, pursuant to an effective registration statement under the Securities Act of shares of the Common Stock, (i) the aggregate gross proceeds of which equal or exceed $15,000,000 and (ii) the per share offering price to the public of which equals or exceeds five (5) times the per share Purchase Price; provided, however, that the per share offering price referred to in clause (ii) shall be adjusted to reflect the effect of any stock split or any subdivision, reclassification, combination or like event of or with respect to outstanding shares of Common Stock occurring after the Initial Issue Date. "Registration Rights Agreement" means the Registration Rights Agreement substantially in the form attached hereto as Exhibit E. "Requirements of Law" means, as to any Person, the provisions of the Certificate of Incorporation and By-laws or other organizational or governing documents of such Person, and any law, treaty, rule, regulation, right, privilege, qualification, license or franchise, order, judgment, or determination, in each case, of an arbitrator or a court or other Governmental Authority, in each case, applicable to or binding upon such Person or any of its property (or to which such Person or any of its property is subject) or applicable to any or all of the transactions contemplated by or referred to in the Transaction Agreements. "Securities" means the Preferred Stock and the Warrants. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder. "Shareholders' Agreement" means the Shareholders' Agreement among the Company, Paul Fleming and the Purchasers substantially in the form attached hereto as Exhibit F. "Shares" means the Common Stock and the Preferred Stock. "Tax" or "Taxes" shall mean all federal, state, local, foreign and other taxes, assessments or other government charges, including, without limitation, income, estimated income, business, occupation, franchise, property, sales, transfer, use, employment, commercial rent or withholding taxes, including interest, penalties and additions in connection therewith for which the Company may be liable. "Transaction Agreements" means collectively, this Agreement, the Acquisition Agreement, the Contribution Agreement, the Employment Agreement, the Guaranty Agreement, the Registration Rights Agreement, the Shareholders' Agreement, the Transition Services Agreement, and the Warrants. 7 14 "Transaction Expenses" means any and all reasonable out-of-pocket expenses incurred by the Purchasers in connection with the legal and financial due diligence review of the Condition of the Company conducted by the Purchasers, the negotiation and preparation of the Transaction Agreements, the consummation of the transactions contemplated thereby and preparation for any of the foregoing, including, without limitation, travel expenses, fees, charges and disbursements of counsel and any similar or related costs and expenses; provided, however, that with respect to legal fees and costs, such legal fees and costs shall be limited to those charged by one firm of counsel representing all Purchasers. "Transition Services Agreement" means the Transition Services Agreement between the Company and Beverly Hills Cajun, Inc. substantially in the form attached hereto as Exhibit G. "Warrants" means those certain warrants in the form attached hereto as Exhibit H to purchase shares of Series A Convertible Preferred Stock. "Welfare Plan" means any "employee welfare benefit plan" as defined in Section 3(l) of ERISA, (A) which the Company or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or under which the Company or any ERISA Affiliate may incur any liability and (B) which covers any employee or former employee of the Company or any ERISA Affiliate (with respect to their relationship with such entities). 1.2 Accounting Terms; Financial Statements. All accounting terms used herein not expressly defined in this Agreement shall have the respective meanings given to them in accordance with GAAP. 1.3 Knowledge Standard. When used herein, the phrase "to the knowledge of" any Person, "to the best knowledge of" any Person or any similar phrase shall mean, (i) with respect to any individual, the actual knowledge of such Person (ii) with respect to any corporation (or a limited liability company), the actual knowledge of officers and directors, or Persons acting in similar capacities, of such corporation and the knowledge of such facts that such persons should have in the exercise of their duties after reasonable inquiry and (iii) with respect to a partnership, the actual knowledge of the officers and directors of the general partner of such partnership and the knowledge of such facts that such persons should have in the exercise of their duties after reasonable inquiry. When used herein, the phrase "to the knowledge of the Company," "to the best knowledge of the Company" or any similar phrase shall mean "to the best knowledge of the Company and each Company Affiliate" using the standards set forth in the previous sentence. 1.4 Other Defined Terms. The following terms shall have the meanings specified in the Sections set forth below:
Term Section ---- ------- Actions 5.9 Certificate 2.1
8 15 Closing 2.3 Closing Date 2.3 Indemnified Party 8.1 Indemnifying Party 8.1 Intellectual Property 5.13 Liability (and Liabilities) 8.1 Preferred Shares 2.1 Pro Forma Balance Sheet 3.17 Purchase Price 2.2 Purchased Securities 2.2 Taxpayers 5.14 Unaudited Financial Statements 5.10 Warrant Shares 2.1
ARTICLE 2 AUTHORIZATION OF PREFERRED STOCK; PURCHASE AND SALE OF SECURITIES 2.1 Preferred Stock. The Company has authorized (a) the issuance and sale to the Purchasers of 497,500 shares of Preferred Stock (the "Preferred Shares") and the Warrants exercisable for an aggregate of 124,375 shares of Preferred Stock (the "Warrant Shares") and (b) has duly adopted resolutions establishing the rights, preferences, privileges and restrictions of the Preferred Stock. The Preferred Stock will have the respective rights, preferences and privileges set forth in the Company's Certificate of Incorporation substantially in the form attached hereto as Exhibit I (the "Certificate"). 2.2 Purchase and Sale of Securities. Upon the terms and subject to the conditions herein contained, at the Closing (as defined herein) on the Closing Date (as defined herein), the Company agrees that it will issue to each of the Purchasers, and each Purchaser agrees that it will purchase from the Company, the number of Preferred Shares and a Warrant exercisable for the number of Warrant Shares listed next to such Purchaser's name on Schedule 1 hereto (collectively, the "Purchased Securities"). The aggregate purchase price of such Purchased Securities, to be paid by the Purchasers in the amounts listed next to each Purchaser's name on Schedule 1 hereto shall be Nine Million, Nine Hundred and Fifty Thousand Dollars ($9,950,000) (the "Purchase Price"). The Purchase Price is subject to adjustment which is reflected in the Warrants to be issued at Closing. 2.3 Closing. The closing of the sale to and purchase by the Purchasers of the Securities referred to in Section 2.2 hereof (the "Closing") shall occur at the offices of Squire, Sanders & Dempsey, 40 North Central, Suite 2700, Phoenix, AZ 85004 at 10:00 a.m., Phoenix, AZ time on February 29, 1996 or at such different time of day as the Purchasers and the Company shall agree (the "Closing Date"). At the Closing, (i) the Company shall deliver to each Purchaser certificates evidencing the Securities being purchased by such Purchaser, free and clear of any Liens of any nature whatsoever, other than those created by the Certificate, 9 16 registered in such Purchaser's name, and (ii) each Purchaser shall deliver to the Company the portion of the Purchase Price listed next to such Purchaser's name on Schedule 1 hereto, by cashier's check or wire transfer of immediately available funds. 2.4 Fees and Expenses. The Company shall reimburse the Purchasers for all Transaction Expenses, at the Closing out of the proceeds of the sale of the Securities hereunder. If the Closing does not occur for any reason other than a refusal or failure of Purchasers to close in material breach hereof by the Purchasers, the Company shall reimburse the Purchasers for all Transaction Expenses promptly upon request therefor, which payment shall be made by wire transfer of immediately available funds to an account or accounts designated by the Purchasers. ARTICLE 3 CONDITIONS TO THE OBLIGATION OF THE PURCHASERS TO PURCHASE THE SECURITIES The obligation of each Purchaser to purchase the Securities, to pay the purchase prices therefor and to perform any obligations hereunder on the Closing Date (unless otherwise specified) shall be subject to the satisfaction as determined by, or waiver by, such Purchaser of the following conditions on or before the Closing Date: 3.1 Representations and Warranties. The representations and warranties of the Company contained in Article 5 hereof shall be true and correct at and as of the Closing Date (both before and after giving effect to the transactions contemplated under this Agreement) as if made at and as of such date, except that the timely filing and payment of Taxes as set forth in the first sentence of Section 5.14(a) and Section 5.14(b) shall be true and correct at and as of the Closing Date (both before and after giving effect to the transactions contemplated under this Agreement) as if made at and as of such date to the extent that any failure to timely file or pay such Taxes shall not have a Material Adverse Effect. 3.2 Compliance with Terms and Conditions of this Agreement. The Company shall have performed and complied with all of the agreements and conditions set forth herein that are required to be performed or complied with by the Company on or before the Closing Date. 3.3 Delivery of Certificates Evidencing the Securities. The Company shall contemporaneously deliver to each Purchaser the certificates evidencing the Securities as set forth in Section 2.3. 3.4 Closing Certificates. The Company shall have delivered to each Purchaser a certificate executed by an authorized officer of the Company certifying that the representations and warranties of the Company contained in the Agreement are true and correct on and as of the Closing Date, and that the conditions set forth in this Section 3 to be satisfied by the Company have been satisfied on and as of the Closing Date. 10 17 3.5 Secretary's Certificates. Each Purchaser shall have received a certificate from the Company, dated as of the Closing Date and signed by the Secretary or an Assistant Secretary of the Company, certifying that the attached copies of the Certificate of Incorporation, By-laws of the Company, and resolutions of the Board of Directors of the Company approving the Transaction Agreements and the transactions contemplated thereby, are all true, complete and correct and remain unamended and in full force and effect. 3.6 Documents . Each Purchaser shall have received true, complete and correct copies of such documents and such other information as it may have reasonably requested in connection with or relating to the sale of the Securities and the transactions contemplated by the Transaction Agreements, all in form and substance reasonably satisfactory to the Purchasers prior to the Closing. 3.7 Purchase Permitted by Applicable Laws. The acquisition of and payment for the Securities to be acquired by the Purchasers hereunder and the consummation of the transactions contemplated by the Transaction Agreements shall not (a) violate any Requirements of Law, (b) result in a material breach or default (i) under any of the Contractual Obligations of the Company or (ii) under any order, writ, judgment, injunction, decree, determination or award of any court, arbitrator, or commission, board, bureau, agency or other governmental instrumentality, or (c) result in, or require, the creation or imposition of any Lien upon or with respect to any of the property of the Company. 3.8 Opinion of Counsel. Each Purchaser shall have received an opinion of Squire, Sanders & Dempsey, counsel to the Company, dated as of the Closing Date in a form mutually agreed upon by Squire, Sanders & Dempsey and Latham & Watkins, counsel to the Purchasers. 3.9 Approval of Counsel to Purchasers. All actions and proceedings required to be performed on or prior to the Closing Date hereunder and all documents required to be delivered by the Company on or prior to the Closing Date as required by this Agreement, shall have been acceptable to Latham & Watkins, counsel to the Purchasers, in their reasonable judgment as to their form and substance. 3.10 Consents and Approvals. All consents, exemptions, authorizations, or other actions by, or notices to, or filings with, Governmental Authorities and other Persons in respect of all Requirements of Law (except with respect to any post-Closing filing requirements required by (i) the Arizona State Department of Liquor License and Control, (ii) the California State Department of Liquor License and Control, (iii) the Nevada State Department of Liquor License and Control, or (iv) any federal or state securities agencies) and with respect to those material Contractual Obligations of the Company, necessary or required in connection with the execution, delivery or performance of the Transaction Agreements (including, without limitation, the issuance of the Securities, based solely on the Requirements of the Law and facts and circumstances in effect as of the Closing Date, and issuance of the Common Stock upon conversion or exercise of the Securities) by the Company, and shall have been obtained and be in full force and effect, and the Purchasers shall have been furnished with appropriate evidence 11 18 thereof, and all waiting periods shall have lapsed without extension or the imposition of any conditions or restrictions. 3.11 Certain Waivers. Each holder of the shares of the capital stock of the Company (or any other party who may possess such rights) shall have waived any and all preemptive rights, rights of first refusal, "tag along" rights, rights of co-sale and any similar rights with respect to the issuance of the Preferred Shares contemplated hereby. 3.12 No Material Adverse Change. Since the Balance Sheet Date, there shall have been no Material Adverse Effect. 3.13 Certificate and By-laws. The Company shall have adopted and filed the Certificate of Incorporation in the form of Exhibit I hereto (with such changes as agreed to by the Purchasers) and adopted the By-laws of the Company in the form of Exhibit J hereto. 3.14 No Material Judgment or Order. There shall not be on the Closing Date any judgment or order of a court of competent jurisdiction or any ruling of any Governmental Authority affecting the Company or any Company Affiliate or any condition imposed under any Requirement of Law affecting the Company or any Company Affiliate which, in the reasonable judgment of the Purchasers, would (i) prohibit the purchase of the Securities or the consummation of the other transactions contemplated hereunder, (ii) subject the Purchasers to any penalty if the Securities were to be purchased hereunder, (iii) question the validity or legality of the transactions contemplated hereby, or (iv) be reasonably expected to materially adversely affect the value of the capital stock of the Company, the Securities or have a Material Adverse Effect. 3.15 Financial Statements. The Company shall have delivered to the Purchasers a copy of the combined audited balance sheets of the Company Affiliates as of December 31, 1995, which financial statements shall fairly present in all material respects the financial position and the results of operations and cash flows of each Company Affiliate for such period in conformity with GAAP. 3.16 Pro Forma Balance Sheet. The Company shall have delivered to the Purchasers on or before the Closing Date pro forma balance sheet dated as of the Balance Sheet Date (the "Pro Forma Balance Sheet"), setting forth the assets and liabilities of the Company after giving effect to the transactions referred to in the Transaction Agreements (including the payment of all fees and expenses estimated to be paid or incurred in connection therewith), certified on behalf of the Company by Paul Fleming, acting as an officer of the Company, as fairly presenting the assets and liabilities of the Company and each Company Affiliate as of the Balance Sheet Date, based on the assumptions set forth therein. 3.17 Budget. The Company previously has delivered to the Purchasers a copy of the budget (the "Budget") for the Company's fiscal year ending December 31, 1996. As of the date hereof, the Budget represents the Company's management's good faith estimate of the future financial and operating performance of the Company (for the period set forth therein), based upon the best currently available information. As of the Closing Date, no event shall have 12 19 occurred that would result in a material adverse change in the Budget or the assumptions underlying the Budget. 3.18 Contribution Agreement. The Company and Fleming shall contemporaneously enter into and consummate the Contribution Agreement substantially in the form attached hereto as Exhibit A. 3.19 Employment Agreement. The Company and Fleming shall contemporaneously duly execute and deliver to the Purchasers an Employment Agreement substantially in the form attached hereto as Exhibit K. 3.20 Guaranty Agreement. Fleming shall have entered into the Guaranty Agreement substantially in the form attached hereto as Exhibit D. 3.21 Registration Rights Agreement. The Company shall contemporaneously duly execute and deliver to each Purchaser the Registration Rights Agreement substantially in the form attached hereto as Exhibit E. 3.22 Shareholders' Agreement. The Company, Fleming and the Purchasers shall contemporaneously enter into a Shareholders' Agreement substantially in the form attached hereto as Exhibit F. 3.23 Transition Services Agreement. The Company shall have entered into the Transition Services Agreement substantially in the form attached hereto as Exhibit G. 3.24 Corporate Restructuring. The Corporate Restructuring shall have been completed in form and substance reasonably satisfactory to the Purchasers. ARTICLE 4 CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE The obligation of the Company to issue and sell the Securities and the other obligations of the Company hereunder, shall be subject to the satisfaction as determined by, or waiver by, the Company of the following conditions on or before the Closing Date: 4.1 Representations and Warranties. The representations and warranties of the Purchasers contained in Section 6 hereof shall be true and correct at and as of the Closing Date (both before and after giving effect to the transactions contemplated under this Agreement) as if made at and as of such date. 4.2 Compliance with Terms and Conditions of this Agreement. The Purchasers shall have performed and complied with all of the agreements and conditions set forth 13 20 herein that are required to be performed or complied with by the Purchasers on or before the Closing Date. 4.3 Certificates. The Company shall have received (i) for each Purchaser that is a corporation, a certificate from such corporation, dated as of the Closing Date and signed by the Secretary or an Assistant Secretary of the Company, certifying that the attached resolutions of the Board of Directors of such corporation approving the Transaction Agreements and the transactions contemplated thereby, are true, complete and correct and remain unchanged and in full force and effect; and (ii) for each Purchaser that is not a corporation, a certificate executed by such Person as the Company shall reasonably deem appropriate under the circumstances, certifying that all approvals required according to such Purchaser's organizational documents have been duly obtained, and remain unchanged and in full force and effect. 4.4 Documents. The Company shall have received true, complete and correct copies of such documents and such other information as it may have reasonably requested in connection with or related to the purchase of the Securities by each Purchaser and the transactions contemplated by the Transaction Agreement, all in form and substance reasonably satisfactory to the Company prior to the Closing, including without limitation the Registration Rights Agreement and the Shareholders Agreement executed by the Purchasers, unless the execution of such documents by the Company has been waived by the Purchasers as a condition to their obligation to purchase the Securities. 4.5 Closing Certificate. Each Purchaser shall have delivered to the Company a certificate executed by such Purchaser certifying that the representations and warranties of such Purchaser contained in this Agreement are true and correct on and as of the Closing Date, and that the conditions set forth in this Section 4 to be satisfied by such Purchaser have been satisfied on and as of the Closing Date. 4.6 Issuance Permitted by Applicable Laws. The issuance of the Securities by the Company hereunder, acquisition of the Securities by the Purchaser hereunder and the consummation of the transactions contemplated by the Transaction Agreements shall not (a) violate any Requirements of Law, or (b) result in a breach or default (i) under any of the Contractual Obligations of the Purchasers, or (ii) under any order, writ, judgment, injunction, decree, determination or award of any court, arbitrator, or commission, board, bureau, agency or other governmental instrumentality, or (c) require any consents, approvals, exemptions, authorizations, registrations, declarations or filings by the Purchasers. 4.7 Payment of Purchase Price. The Purchasers shall tender to the Company the Purchase Price in the manner set forth in Section 2.2 in the respective amounts specified on Schedule 1 hereto. 4.8 Approval of Counsel to Company. All actions and proceedings required to be performed on or prior to the Closing Date hereunder and all documents required to be delivered by the Purchasers on or prior to the Closing Date as required by this Agreement, shall have been acceptable to Squire, Sanders & Dempsey, counsel to the Company, in their reasonable judgment as to their form and substance. 14 21 4.9 Consents and Approvals. All consents, exemptions, authorizations, or other actions by, or notices to, or filings with. Governmental Authorities and other Persons in respect of all Requirements of Law and with respect to those material Contractual Obligations of the Purchasers; necessary or required in connection with the execution, delivery or performance of the Transaction Agreements by each Purchaser, shall have been obtained and be in full force and effect, and the Company shall have been furnished with appropriate evidence thereof as requested by the Company and all waiting periods shall have lapsed without extension or imposition of any conditions or restrictions. 4. 10 No Material Judgment or Order. There shall not be on the Closing Date any judgment or order of a court of competent jurisdiction or any ruling of any Governmental Authority or any condition imposed under any Requirements of Law which, in the reasonable judgment of the Company would (i) prohibit the sale of the Securities or the consummation of the other transactions contemplated hereunder, (ii) subject the Company to any penalty if the Securities were to be sold hereunder, or (iii) question the validity or legality of the transactions contemplated hereby. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to the Purchasers as of the date hereof as follows: 5.1 Corporate Existence and Authority. The Company (a) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, (b) has all requisite corporate power and authority to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently, or is currently proposed to be engaged, (c) is duly qualified as a foreign corporation, licensed and in good standing in each jurisdiction where the failure to do so would have a Material Adverse Effect, and (d) has the corporate power and authority to execute, deliver and perform its obligations under each Transaction Agreement to which it is or will be a party. 5.2 Corporate Authorization, No Contravention. The execution, delivery and performance by the Company of each of the Transaction Agreements and the consummation of the transactions contemplated thereby, including without limitation, the issuance of the Securities (a) has been duly authorized by all necessary corporate action, including, if required, stockholder action, (b) does not and will not conflict with or contravene the terms of the Certificate or the By-Laws of the Company, or any amendment thereof; and (c) does not and will not violate, conflict with or result in any material breach or contravention of (i) any Contractual Obligation of the Company or any of its Subsidiaries, or (ii) any Requirements of Law applicable to the Company or any of its Subsidiaries. 15 22 5.3 Governmental Authorization, Third Party Consents. Except as set forth on Schedule 5.3, no approval, consent, compliance, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person in respect of any applicable Requirements of Law, and no lapse of a waiting period under any applicable Requirements of Law, is necessary or required in connection with the execution, delivery or performance (including, without limitation, the issuance of the Securities, the issuance of the Common Stock upon the conversion or exercise of the Securities and execution, delivery and performance of the Contribution Agreement by the Company and Fleming) by the Company or the enforcement against the Company of the Transaction Agreements, or the transactions contemplated thereby. 5.4 Binding Effect. The Transaction Agreements have been duly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as enforceability may be limited by applicable bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity relating to enforceability. 5.5 Other Agreements. Neither the Company, the Company Affiliates nor Fleming have previously entered into any agreements which are currently in effect or to which the Company, the Company Affiliates and Fleming is currently bound, granting any registration or other material rights to any Person, the provision or performance of which would render the provision or performance (including, without limitation, the issuance of the Securities and the issuance of the Common Stock upon the conversion or exercise of the Securities and the issuance of Common Stock upon the conversion or exercise of the Securities) of the material rights to be granted to the Purchasers by the Company in the Transaction Agreements impracticable. 5.6 Capitalization. (a) As of the date hereof, the capital stock of the Company consists solely of (i) 8,000,000 authorized shares of Common Stock (of which 100 are issued and outstanding and (ii) 2,000,000 authorized shares of Preferred Stock. Immediately following the Closing (i) 500,000 shares of Common Stock will be issued and outstanding; (ii) 933,541 shares of Common Stock will be reserved for issuance upon (a) the exercise of options and warrants to purchase such shares, (b) the conversion of Preferred Stock and (c) the conversion of Preferred Stock issued upon the exercise of the Warrants and certain warrants issued to Montgomery Securities; (iii) 497,500 shares of Preferred Stock will be issued and outstanding; (iv) 124,375 shares of Preferred Stock will be reserved for issuance upon exercise of the Warrants; (v) 12,438 shares of Preferred Stock will be reserved for issuance upon exercise of certain warrants issued to Montgomery Securities; (vi) 170,621 shares of Preferred Stock will be reserved for issuance as "payment-in-kind" dividends of Preferred Stock. A total of 1,250,483 fully diluted shares of Common Stock will be outstanding immediately following the Closing, assuming the conversion of all outstanding shares of Preferred Stock and the exercise of all outstanding options and warrants. All outstanding shares of capital stock of the Company are, and the shares of Preferred Stock (when issued, sold and delivered against payment therefor) and the shares of Preferred Stock issuable pursuant to the Warrant (when issued and delivered against any applicable payment therefore) and as "payment-in-kind" shares in respect 16 23 of Preferred Stock will be, duly authorized and validly issued, fully paid, nonassessable and free and clear of any Liens, preferential rights, priorities, claims, options, charges or other encumbrances or restrictions, other than those created by the Certificate and the Shareholders' Agreement. (b) Schedule 5.6 sets forth the name of each holder of the issued and outstanding capital stock of the Company, the number of shares of such capital stock held of record by each such holder, the name of each Person holding any options, warrants or other rights to purchase any capital stock of the Company, the number, class and series of shares of capital stock subject to each such option, warrant or right and the exercise price of each such option, warrant or right. Except as set forth on Schedule 5.6, and except for the stock options, warrants and rights referred to in Section 5.6(a) and the Preferred Stock, there are no outstanding securities convertible into or exchangeable for capital stock of the Company or options, warrants or other rights to purchase or subscribe to capital stock of the Company or contracts, commitments, agreements, understandings or arrangements of any kind to which the Company or any such holder of capital stock is a party relating to the issuance of any capital stock of the Company, any such convertible or exchangeable securities or any such options, warrants or rights. (c) Except as set forth on Schedule 5.6 and in the Transaction Agreements, no Person has any preemptive rights, rights of first refusal, "tag along" rights, rights of co-sale or any similar rights with respect to the issuance of the Preferred Shares contemplated hereby. Schedule 5.6 identifies all Persons holding any such rights and describes the material terms of all such rights and as of the Closing Date. 5.7 Company Affiliates. Schedule 5.7 sets forth a complete and accurate list of all of the Company Affiliates and all entities that own or operate a P. F. Chang's China Bistro together with their respective jurisdictions of incorporation or organization. Each Company Affiliate that is a corporation or a limited liability company is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, with the corporate or requisite power and authority to own its properties and conduct its business. Each Company Affiliate that is a partnership is an existing partnership under the laws of the jurisdiction of its formation and has full partnership power and authority to own its properties and conduct its business. Each Company Affiliate is qualified and licensed to transact business in each jurisdiction where the failure to do so would have a Material Adverse Effect. All of the outstanding shares of capital stock of the Company Affiliates that are corporations have been duly authorized and validly issued and are fully paid and nonassessable. Except as set forth on Schedule 5.7, all of the outstanding shares of capital stock of, or other ownership interests in, each of the Company Affiliates are owned by the Company free and clear of any Liens, claims, options, charges or other encumbrances, except as expressly provided in the organizational documents of the Company Affiliates. Except as set forth on Schedule 5.7, no Company Affiliate has outstanding options, warrants, subscriptions, calls, rights, convertible securities or other agreements or commitments obligating the Company Affiliate to issue, transfer or sell any securities of the Company Affiliate. 17 24 5.8 Private Offering. No form of general solicitation or general advertising was used by the Company or its representatives in connection with the offer or sale of the Preferred Shares. No registration of the Preferred Shares pursuant to the provisions of the Securities Act or any state securities or "blue sky" laws will be required by the offer, sale or issuance of the Securities pursuant to this Agreement. 5.9 Litigation. There is no complaint, action, order, writ, injunction, judgment or decree outstanding, or claim, suit, litigation, proceeding, labor dispute, arbitral action or investigation (collectively, "Actions") pending or, to the knowledge of the Company, threatened against, relating to or affecting (i) the assets of the Company or the Company Affiliates or (ii) the transactions required to be performed under this Agreement or by the Transaction Agreements. Neither the Company nor any of the Company Affiliates is in default with respect to any judgment, order, writ, injunction or decree of any court or governmental agency, and there are no unsatisfied judgments against the Company or any Company Affiliate. There is not a reasonable likelihood of an adverse determination of any pending Action that would, individually or in the aggregate, have a Material Adverse Effect. 5.10 Financial Statements (a) The Company has furnished the Purchasers with the unaudited balance sheets of each Company Affiliate as of the Balance Sheet Date and the related separate statements of operations and cash flows of each Company Affiliate for the eleven (11) month period ending on the Balance Sheet Date, certified on behalf of the Company by the Chief Financial Officer of the Company or, if there is no such Chief Financial Officer, another responsible officer of the Company (the "Unaudited Financial Statements"). The Unaudited Financial Statements were properly prepared on a tax basis and present in all material respects the separate financial position of each Company Affiliate as of the dates thereof and the results of operations and cash flows of each Company Affiliate for the periods set forth therein. (b) The Pro Forma Balance Sheets delivered to the Purchasers set forth the assets and liabilities of the Company and each Company Affiliate on a pro forma consolidated basis after giving effect to the consummation of this Agreement and the transactions contemplated hereby. The Pro Forma Balance Sheets were properly prepared on a tax basis and present the assets and liabilities of the Company and each Company Affiliate as of the Balance Sheet Date based on the assumptions set forth therein. 5.11 Title and Condition of Assets. (a) The Company and each Company Affiliate has good title to all of the personal property reflected on the balance sheets included in the Unaudited Financial Statements or acquired by the Company or any of the Company Affiliates since the Balance Sheet Date, and all real and personal property reflected on such balance sheets or acquired by the Company or the Company Affiliates since the Balance Sheet Date is free and clear of any Liens or defects of title, other than Permitted Liens. All real property which is leased by the Company and the Existing Subsidiaries is listed on Schedule 5.11(a) hereto. The Company and each Company Affiliate has a valid and enforceable leasehold interest in all real property leased 18 25 by it pursuant to the terms of the respective lease agreements (assuming that each respective landlord has good and marketable title to all real property that is subject to such leases and except as enforceability may be limited by applicable bankruptcy laws or rights of creditors generally.) (b) The Facilities and Equipment are in good operating condition and repair (except for ordinary wear and tear and any defect the cost of repairing which would not be material), are sufficient for the operation of the business of the Company and each Company Affiliate and are in conformity in all material respects with applicable laws, ordinances, orders, regulations and other requirements (including applicable zoning, environmental, motor vehicle safety standards, occupational safety and health laws and regulations) relating thereto, except where such failure to conform would not have a Material Adverse Effect. The Company and each Company Affiliate enjoy peaceful and undisturbed possession of all Facilities owned or leased by the Company or such Company Affiliate, and, to the best knowledge of the Company, such Facilities are not subject to any encroachments, building or use restrictions, exceptions, reservations or limitations which in any material respect interfere with or impair the present and continued use thereof in the usual and normal conduct of the business of the Company or each Company Affiliate. There are no pending or, to the best knowledge of the Company, threatened, condemnation proceedings relating to any of the Facilities. The Facilities and the Equipment are insured and are, to the best of the Company's knowledge, structurally sound with no material defects. (c) All assets are valued on the books of the Company or the Company Affiliate at or below actual cost less appropriate depreciation charges. Neither the Company nor any Company Affiliate has depreciated any of the Assets for tax purposes in any manner inconsistent with the Code or the rules, regulations, or guidelines of the Internal Revenue Service. 5.12 Contractual Obligations. (a) Neither the Company nor any of the Company Affiliates is in default or breach under or with respect to any Contractual Obligation to which it is a party (and to the best knowledge of the Company and such Company Affiliates no other party to any such Contractual Obligation is in default or breach thereunder), except any such default which, individually or together with all such defaults, would not have a Material Adverse Effect. (b) Schedule 5.12 lists all of the contracts, leases, agreements, indentures and undertakings governing or relating to the Contractual Obligations of the Company and the Company Affiliates other than (i) the Transaction Agreements, (ii) purchase orders entered into in the ordinary course of business, and (iii) any such contracts, leases, agreements, indentures or undertaking that (x) do not involve the receipt or payment of more than $20,000 each, (y) do not involve employment or labor matters and (z) do not contain covenants materially restricting the Company or any Company Affiliate from engaging in any line of business. To the best knowledge of the Company, the Company has provided the Purchaser with true, correct and complete copies of all written contracts, leases, agreements, indentures and undertakings listed on Schedule 5.12. 19 26 5.13 Patents, Trademarks, Etc. As of the Closing, the Company owns or is licensed or otherwise has the right to use all patents, trademarks, service marks, trade names, copyrights, licenses, franchises and other intellectual property rights that are material to the operation of the businesses of the Company (the "Intellectual Property"), and all pending applications related to such Intellectual Property, registered rights in such Intellectual Property and executed agreements related to such Intellectual Property are listed on Schedule 5.13 hereto. To the best knowledge of the Company, no product, process, method, substance or other material presently sold by or employed by the Company, or which the Company contemplates selling or employing, infringes upon the patents, trademarks, service marks, trade names, copyrights, licenses or other intellectual property rights that are owned by others. No litigation is pending and no claim has been made against the Company or any Company Affiliate or, to the best knowledge of the Company, is threatened, contesting the right of the Company or any Company Affiliate to sell or use any product, process, method, substance or other material presently sold by or employed by the Company or any Company Affiliate. To the best knowledge of the Company, no patent, invention, devise, principal or any statute, law, rule, regulation, standard or code is pending or proposed, which would have a material adverse effect on the Condition of the Company. 5.14 Tax Matters. (a) Filing of Tax Returns. Each of the Company and the Company Affiliates (each such entity hereinafter a "Taxpayer" or collectively the "Taxpayers") have timely filed with the appropriate taxing authorities all returns (including without limitation information returns and other material information) in respect of Taxes required to be filed through the date hereof and will timely file any such returns required to be filed on or prior to the Closing Date. The returns and other information filed (or to be filed) are complete and accurate in all material respects. No Taxpayer has requested any extension of time within which to file returns (including without limitation information returns) in respect of any Taxes that have not been filed. (b) Payment of Taxes. All Taxes of each of the Taxpayers in respect of periods beginning before the Closing Date have been timely paid, or will be timely paid prior to the Closing Date, to the extent due and payable prior to the Closing Date, and no Taxpayer has any material liability for Taxes in excess of the amounts so paid. All Taxes that each Taxpayer has been required to collect or withhold have been duly collected or withheld and, to the extent required when due, have been or will be (prior to the Closing Date) duly paid to the proper taxing authority. (c) Audits, Investigations or Claims. The federal income tax returns of each of the Taxpayers have not been examined by the Internal Revenue Service, and no material deficiencies for Taxes of any of the Taxpayers have been claimed, proposed or assessed by any taxing or other governmental authority against any of the Taxpayers. There are no pending or, to the best knowledge of the Taxpayers, threatened audits, investigations or claims for or relating to any material additional liability to any of them in respect of Taxes, and there are no matters under discussion with any governmental authorities with respect to Taxes that in the reasonable judgment of any of the Taxpayers, or its or their counsel, is likely to result in a material 20 27 additional liability to any of them for Taxes. No audits of any of the Taxpayers' federal, state, and local returns for Taxes by the relevant taxing authorities have occurred. None of the Taxpayers have been notified that any taxing authority intends to audit a return for any period. No extension of a statute of limitations relating to Taxes is in effect with respect to any of the Taxpayers. (d) Lien. There are no liens for Taxes (other than for current Taxes not yet due and payable) on any assets of any Taxpayer. (e) Partnership Status. Each of the Company Affiliates which purports to be a limited liability company or a partnership is properly treated as a partnership for federal income tax purposes and not as an association or publicly traded partnership taxable as a corporation, and has been properly so treated since the time of its organization. (f) Tax Elections; Tax Sharing Arrangements (i) All material elections with respect to Taxes affecting each of the Taxpayers as of the date hereof are set forth on Schedule 5.14. (ii) None of the Taxpayers have made an election, and none of them are required, to treat any asset as owned by another person or as tax-exempt bond financed property or tax-exempt use property within the meaning of section 168 of the Code or under any comparable state or local income tax or other tax provision. (iii) None of the Taxpayers are a party to or bound by any binding tax sharing, tax indemnity or tax allocation agreement or other similar arrangement with any other party. (iv) None of the Taxpayers have filed a consent pursuant to the collapsible corporation provisions of Section 341(f) of the Code (or any corresponding provision of state or local law) or agreed to have Section 341(f)(2) of the Code (or any corresponding provision of state or local law) apply to any disposition of any asset owned by it. (g) Affiliated Group. None of the Taxpayers have ever been a member of an affiliated group of corporations, within the meaning of Section 1504 of the Code. (h) Section 481(a). None of the Taxpayers have agreed to make, or are required to make, any adjustment under Section 481(a) of the Code by reason of a change in accounting method or otherwise. (i) Excess Parachute Payments. None of the Taxpayers are a party to any agreement, contract, arrangement or plan that has resulted or would result, separately or in the aggregate, in the payment of any "excess parachute payments" within the meaning of Section 280G of the Code. 21 28 (j) No Joint Venture. Except as set forth on Schedule 5.14, none of the Taxpayers is a party to any joint venture, partnership, or other arrangement or contract which could be treated as a partnership for federal income tax purposes. 5.15 Severance Arrangements. Except pursuant to the Employment Agreement, neither the Company nor any Company Affiliate has not entered into any severance or similar arrangement in respect of any present or former employee that will result in any obligation (absolute or contingent) of the Purchasers, the Company to make any payment to any present or former employee following termination of employment. 5.16 No Material Adverse Change. To the best knowledge of the Company, since the Balance Sheet Date, there has not been any Material Adverse Effect, nor to the best knowledge of the Company is any such Material Adverse Effect threatened. 5.17 Environmental Matters. (a) Except as set forth on Schedule 5.17, the property, assets and operations of the Company and each Company Affiliate are and have been in compliance in all material respects with all applicable Environmental Laws; there are no Hazardous Materials stored or otherwise located in, on or under any of the property or assets of the Company and each Company Affiliate, including the groundwater; and, to the best knowledge of the Company, there have been no releases or threatened releases of Hazardous Materials in, on or under any property adjoining any of the property or assets of the Company and each Company Affiliate. Neither the Company nor any Company Affiliate has stored or caused to be stored any Hazardous Materials on or under any of the property or assets of the Company, including the groundwater, other than in compliance with Environmental Laws; and the Company has not generated, released or discharged any Hazardous Materials other than in compliance with Environmental Laws. (b) None of the property, assets or operations of the Company or any Company Affiliate is the subject of any federal, state or local investigation evaluating whether (i) any remedial action is needed to respond to a release or threatened release of any Hazardous Materials into the environment or (ii) any release or threatened release of any Hazardous Materials into the environment is in contravention of any Environmental Law. (c) There are no pending, or, to the best knowledge of the Company, threatened lawsuits or proceedings against the Company or any Company Affiliate, with respect to violations of an Environmental Law or in connection with the presence of or exposure to any Hazardous Materials in the environment or any release or threatened release of any Hazardous Materials into the environment, and neither the Company nor any Company Affiliate is or was the owner or operator of any property which (i) pursuant to any Environmental Law has been placed on any list of Hazardous Materials disposal sites, including without limitation, the "National Priorities List" or "CERCLIS List," (ii) has or, to the best knowledge of the Company, had any subsurface storage tanks located thereon; or (iii) to the knowledge of the Company, has ever been used as or for a waste disposal facility, a mine, a gasoline service station or a petroleum products storage facility. 22 29 (d) Neither the Company nor any Company Affiliate has any present or contingent liability in connection which the presence either on or off the property or assets of the Company or any Company Affiliate of any Hazardous Materials in the environment or any release or threatened release of any Hazardous Materials into the environment, except for any such liability that would not have a material adverse effect on the Condition of the Company. 5.18 Investment Company/Government Regulations. Immediately following the Closing, after giving effect to the transactions contemplated by the Transaction Agreements, neither the Company nor any Person controlling, controlled by or under common control with the Company will be an "investment company" within the meaning of the Investment Company Act of 1940, as amended. The Company is not subject to regulation under the Public Utility Holding Company Act of 1935, as amended, the Federal Power Act, or any federal or state statute or regulation limiting its ability to incur Indebtedness. 5.19 Broker's, Finder's or Similar Fees. There are no brokerage commissions, finder's fees or similar fees or commissions payable in connection with the transactions contemplated hereby based on any agreement, arrangement or understanding with the Company or any officer, director, shareholder, or Affiliate of the Company, or any action taken by any such person except for (i) such fees payable to Montgomery Securities in an amount not to exceed $485,000 and (ii) certain warrants to purchase 12,438 shares of Preferred Stock at an exercise price of $20.00 per share to be issued to Montgomery Securities. 5.20 Labor Relations and Employee Matters. (a) Neither the Company nor any Company Affiliate is engaged in any unfair labor practice. There is (i) no unfair labor practice complaint pending or, to the best knowledge of the Company, threatened against the Company or any Company Affiliate before the National Labor Relations Board, and no grievance or arbitration proceeding arising out of or under collective bargaining agreements is so pending or, to the best knowledge of the Company, threatened against the Company or any Company Affiliate (ii) no strike, labor dispute, slowdown or stoppage pending or, to the best knowledge of the Company, threatened against the Company or any Company Affiliate and (iii) no union representation question existing with respect to the employees of the Company or any Company Affiliate and, to the knowledge of the Company, no union organizing activities are taking place. (b) Except as set forth on Schedule 5.12, the Company is not a party to any employment agreement (other than "at will" employment relationships), collective bargaining agreement or covenant not to compete. 5.21 Employee Benefits Matters. Schedule 5.21 contains a complete list of Employee Plans which cover or have covered employees of the Company or a Company Affiliate (with respect to their relationship with such entities). True and complete copies of each of the following documents have been delivered by the Company to the Purchaser: (i) each Welfare Plan (and, if applicable, 23 30 related trust agreements) which covers or has covered employees of the Company or a Company Affiliate (with respect to their relationship with such entities) and all amendments thereto, all written interpretations thereof and written descriptions thereof which have been distributed to the Company's employees and all funding instruments, (ii) each Benefit Arrangement (other than "at will" benefits arrangements) which cover or have covered employees of the Company or a Company Affiliate (with respect to their relationship with such entities) including written interpretations thereof and written descriptions thereof which have been distributed to the Company's employees (including descriptions of the number and level of employees covered thereby) and a complete description of any such Benefit Arrangement which is not in writing, (iii) the most recent determination or opinion letter, if any, issued by the Internal Revenue Service, with respect to each Welfare Plan (other than a "multiemployer plan," as defined in Section 3(37) of ERISA) which covers or has covered employees of the Company or a Company Affiliate (with respect to their relationship with such entities), and (iv) a description setting forth the amount of any liability of the Company as of the Closing Date for payments more than thirty days past due with respect to each Welfare Plan which covers or has covered employees or former employees of the Company or a Company Affiliate. Except as set forth in Schedule 5.21, the Company represents as follows: (1) Pension Plans and Multiemployer Plans Neither the Company nor any ERISA Affiliate sponsors, maintains, contributes to, is required to contribute to or otherwise has a liability or potential liability with respect to, or has at any time sponsored, maintained, contributed to, or been required to contribute to, a Pension Plan or a Multiemployer Plan. (2) Welfare Plans (i) Each Welfare Plan which covers or has covered employees or former employees of the Company or a Company Affiliate (with respect to their relationship with such entities) has been maintained in material compliance with its terms and, both as to form and operation, with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Welfare Plan, including but not limited to ERISA and the Code. (ii) None of the Company, any ERISA Affiliate or any Welfare Plan has any present or future obligation to make any payment to or with respect to any present or former employee of the Company or any ERISA Affiliate pursuant to any retiree medical benefit plan, or other retiree Welfare Plan, and no condition exists which would prevent the Company from amending or terminating any such benefit plan or Welfare Plan. (iii) Each Welfare Plan which covers or has covered employees or former employees of the Company or a Company Affiliate and which is a "group health plan," as defined in Section 607(1) of ERISA, has been operated in material compliance with the provisions of Part 6 of Title 1, Subtitle B of ERISA and Sections 162K and 4980B of the Code at all times. 24 31 (3) Benefit Arrangements. Each Benefit Arrangement which covers or has covered employees or former employees of the Company or a Company Affiliate (with respect to their relationship with such entities) has been maintained in compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Benefit Arrangement, including but not limited to the Code. (4) Unrelated Business Taxable Income. No Employee Plan (or trust or other funding vehicle pursuant thereto) is subject to any tax under Code Section 511. (5)Deductibility of Payments. There is no contract, agreement, plan or arrangement covering any employee or former employee of the Company or a Company Affiliate (with respect to their relationship with such entities) that, individually or collectively, provides for the payment by the Company of any amount (i) that is not deductible under Section 162(a)(1) or 404 of the Code or (ii) for which the deduction by Company would be disallowed under Section 162(m) of the Code. (6) Fiduciary Duties and Prohibited Transactions. Neither the Company nor any plan fiduciary of any Welfare Plan which covers or has covered employees or former employees of the Company or any ERISA Affiliate, has engaged in any transaction in violation of Sections 404 or 406 of ERISA or any "prohibited transaction," as defined in Section 4975(c)(1) of the Code, for which no exemption exists under Section 408 of ERISA or Section 4975(c)(2) or (d) of the Code. (7) Validity and Enforceability. Each Welfare Plan, related trust agreement or other funding instrument and Benefit Arrangement which covers or has covered employees or former employees of the Company or a Company Affiliate (with respect to their relationship with such entities) is legally valid and binding and in full force and effect. (8) Litigation. There is no action, order, writ, injunction, judgment or decree outstanding or claim, suit, proceeding, arbitral action, governmental audit or investigation relating to or seeking benefits under any Employee Plan that is pending, or, to the best knowledge of the Company, threatened against the Company, any ERISA Affiliate or any Employee Plan other than a domestic relations order or a qualified domestic relations order. (9) No Amendments. Except for the Employment Agreement, neither the Company nor any ERISA Affiliate has any announced plan or legally binding commitment to create any additional Employee Plans which are intended to cover employees or former employees of the Company or a Company Affiliate (with respect to their relationship with such entities) or to amend or modify any existing Employee Plan which covers or has covered employees or former employees of the Company or a Company Affiliate (with respect to their relationship with such entities). (10) No Other Material Liability. No event has occurred in connection with which the Company or any ERISA Affiliate or any Employee Plan, directly or indirectly, could be subject to any material liability (i) under any statute, regulation or governmental order relating to any Employee Plans or (ii) pursuant to any obligation of the Company or any 25 32 Company Affiliate to indemnify any person against liability incurred under, any such statute, regulation or order as they relate to the Employee Plans. (11) No Acceleration or Creation of Rights. Neither the execution and delivery of this Agreement or other related agreements by the Company nor the consummation of the transactions contemplated hereby or the related transactions will result in the acceleration or creation of any rights of any person to benefits under any Employee Plan. 5.22 Potential Conflicts of Interest. Except as set forth on Schedule 5.22, no officer, director, or stockholder of ten percent (10%) or more of the aggregate number of shares of Common Stock then outstanding on a fully diluted basis of the Company or any Company Affiliate, no spouse of any such officer, director or stockholder and no Affiliate of the foregoing: (a) owns, directly or indirectly, any interest in, or is an officer, director, employee or consultant of, any Person which is, or is engaged in business as, a competitor, lessor, lessee, supplier, distributor, sales agent or customer of, or lender to or borrower from, the Company or any Company Affiliate (b) owns, directly or indirectly, in whole or in part, any tangible or intangible property that the Company or any Company Affiliate uses in the conduct of business; or (c) has any cause of action or other claim whatsoever against, or owes any amount to, the Company or any Company Affiliate, except for claims in the ordinary course of business such as for accrued vacation pay, accrued benefits under employee benefit plans, and similar matters and agreements existing on the date hereof and described in Schedule 5.22. 5.23 Outstanding Borrowings. Schedule 5.23 lists the amount of all Outstanding Borrowings as of the date hereof and the name of each lender thereof. 5.24 Insurance Schedule. Schedule 5.24 accurately summarizes all of the insurance policies or programs of the Company or any Company Affiliate in effect as of the date hereof (true and correct copies of which have been provided to the Purchasers), and indicates the insurer's name, policy number, expiration date, amount of coverage, type of coverage, annual premiums and deductibles, and also indicates any self-insurance program that is in effect. 5.25 Undisclosed Liabilities. Neither the Company nor any Company Affiliate have any liabilities or obligations (absolute, accrued, contingent or otherwise) to the best knowledge of the Company except (i) liabilities that are reflected and reserved against on the balance sheets included in the Unaudited Financial Statements (including the notes thereto), (ii) liabilities incurred in the ordinary course of business and consistent with the past practice of the Company since the Balance Sheet Date, and which are reflected and reserved for in the balance sheets included in the Unaudited Financial Statements, and (iii) liabilities arising under Contractual Obligations described on Schedule 5.12, or not required to be described on Schedule 5.12 pursuant to clauses (i), (ii) or (iii) thereof. 5.26 Solvency. Neither the Company nor any Company Affiliate has (i) made a general assignment for the benefit of its creditors, (ii) filed any voluntary petition in bankruptcy or suffered the filing of any involuntary petition in bankruptcy by its creditors, (iii) suffered the appointment of a receiver to take possession of all or substantially all of its assets or properties, (iv) suffered the attachment or other judicial seizure of all or substantially all of 26 33 its assets or (v) admitted in writing its inability to pay its debts as they come due. After giving effect to the transactions contemplated by the Transaction Agreements, the Pro Forma Balance Sheets will not show that the Company will (i) have liabilities which exceed the stated value of its assets, or (ii) be left with unreasonably small capital with which to engage in its respective business for the foreseeable future, or (iii) have incurred debts beyond its ability to pay such debts as they mature. 5.27 Compliance with Law. Except as set forth on Schedule 5.27, to the best knowledge of the Company, the Company and the Company Affiliates and the conduct of their businesses is in compliance with all applicable laws, statutes, ordinances and regulations, whether federal, state or local, except where the failure to comply would not have a Material Adverse Effect. Neither the Company nor any Company Affiliate has received any written notice to the effect that, or to the knowledge of the Company, it is not in compliance with any of such statutes, regulations, orders, ordinances or other laws where the failure to comply would have a material adverse effect on the Condition of the Company or, to the best knowledge of the Company has no reason to anticipate that any presently existing circumstances are likely to result in violations of any such regulations which would, in any one case or in the aggregate, have a Material Adverse Effect. 5.28 No Other Agreements to Sell the Assets or Capital Stock of the Company. Except as set forth on Schedule 5.28, neither the Company nor any Company Affiliate has any legal obligation, absolute or contingent, other than the obligations of the Company and each Company Affiliate under the Transaction Agreements, to any person or firm to (i) sell the assets other than in the ordinary course of business consistent with past practices, (ii) sell any capital stock of the Company (other than as set forth in Section 5.6) or effect any merger, consolidation or other reorganization of the Company or (iii) enter into any agreement with respect to any of the foregoing. 5.29 Hart-Scott-Rodino. The Person (as that term is defined in 16 C.F.R. Section 801.1(a)(1)) of which the Company is a part does not have total assets or annual net sales of $100,000,000 or more, as measured under the applicable rules and regulations interpreting the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). 5.30 Disclosure. (a) Agreement and Other Documents. This Agreement does not, and the documents and certificates executed by the Company or otherwise furnished by the Company to the Purchasers at the Closing will not, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading. (b) Material Adverse Effects. There is no fact known to the Company, which the Company has not disclosed to the Purchasers in writing, which materially adversely affects, or insofar as the Company can reasonably foresee, will have a Material Adverse Effect. 27 34 ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS Each Purchaser, severally and not jointly, hereby represents and warrants to the Company as of the date hereof as follows: 6.1 Existence and Authority. Such Purchaser (a) is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation, (b) has all requisite power and authority to own its assets and operate its business, and (c) has all requisite power and authority to execute, deliver and perform its obligations under each of the Transaction Agreements to which it is or will be a party. 6.2 Authorization; No Contravention. The execution, delivery and performance by such Purchaser of the Transaction Agreements to which it is a party and the consummation of the transactions contemplated thereby, including, without limitation, the acquisition of the Preferred Shares: (a) is within such Purchaser's power and authority and has been duly authorized by all necessary action on the part of such Purchaser; (b) does not conflict with or contravene the terms of such Purchaser's organizational documents or any amendment thereof; and (c) will not violate, conflict with or result in any material breach or contravention of (i) any Contractual Obligation of such Purchaser, or (ii) the Requirements of Law or any order or decree applicable to such Purchaser. 6.3 Governmental Authorization; Third Party Consent. No approval, consent, compliance, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person in respect of any Requirements of Law, and no lapse of a waiting period under any Requirements of Law, is necessary or required in connection with the execution, delivery or performance by such Purchaser (including, without limitation, the acquisition of the Securities and issuance of Common Stock upon the conversion or exercise of the Securities) or enforcement against such Purchaser of this Agreement or the other Transaction Agreements to which it is a party, or the transactions contemplated thereby. 6.4 Binding Effect. This Agreement has been duly executed and delivered by such Purchaser, and this Agreement constitutes the legal, valid and binding obligation of such Purchaser, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. 6.5 Purchase for Own Account. The Securities and the Common Stock to be issued upon conversion of the Securities, are being or will be acquired by such Purchaser for its own account and with no intention of distributing or reselling such securities or any part thereof in any transaction that would be in violation of the securities laws of the United States of America, or any state, without prejudice, however, to the rights of such Purchaser at all times to sell or otherwise dispose of all or any part of the Securities or the shares of Common Stock issuable upon conversion of the Securities under an effective registration statement under the 28 35 Securities Act, or under an exemption from such registration available under the Securities Act, and subject, nevertheless, to the disposition of such Purchaser's property being at all times within its control. Such Purchaser agrees not to dispose of any of the Securities or the shares of Common Stock issuable upon conversion of the Securities, unless it does so only in compliance with the Securities Act and applicable state securities laws, as then in effect. Such Purchaser agrees to the imprinting, so long as required by law, of a legend on certificates representing all of the Securities or the shares of Common Stock to be issued upon conversion of the Preferred Shares to the following effect: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS SET FORTH IN A SHAREHOLDERS' AGREEMENT DATED AS OF FEBRUARY, 1996. A COPY OF SUCH AGREEMENT MAY BE OBTAINED FROM THE COMPANY UPON REQUEST." 6.6 Accredited Investor Status. Such Purchaser is an "accredited investor" as such term is defined in Rule 501(a) of Regulation D, promulgated under the Securities Act. Each Purchaser shall provide such information with respect to its status as an "accredited investor" that the Company shall have reasonably requested at least ten (10) days prior to the Closing Date. 6.7 Investment Risk. Each Purchaser has the ability to bear the economic risks of the Purchaser's prospective investment and the Purchaser is able, without materially impairing its financial condition, to hold the Preferred Stock for an indefinite period of time and to suffer complete loss on its investment. Each Purchaser understands and has fully considered for purposes of this investment the risks of this investment and understands that: (i) this investment is suitable only for an investor who is able to bear the economic consequences of losing his or its entire investment; (ii) the Preferred Stock represents an extremely speculative investment which involves a high degree of risk of loss; (iii) there are substantial restrictions on the transferability of the Preferred Stock and, accordingly, it may not be possible for the Purchaser to liquidate his or its investment in the Preferred Stock; and (iv) there have been no representations as to the possible future value, if any, of the Preferred Stock. Each Purchaser acknowledges that it has been provided the opportunity to ask questions and receive answers from duly authorized officers or other representatives of the Company concerning the Company. Each Purchaser acknowledges that its acquisition of the Securities hereunder may involve tax consequences to such Purchaser and that the Company has not provided such Purchaser with tax advice. 29 36 Each Purchaser understands and acknowledges that the sale of the Preferred Stock pursuant to this Agreement will not be registered under the Securities Act on the grounds that the offering and sale of securities contemplated by this Agreement are exempt from registration pursuant to Section 4(2) of the Securities Act, and that the Company's reliance upon such exemption is predicated in part upon the Purchaser's representations set forth in this Agreement. 6.8 Broker's, Finder's or Similar Fees. There are no brokerage commissions, finder's fees or similar fees or commissions payable by the Company in connection with the transactions contemplated hereby based on any agreement, arrangement or understanding with the Purchasers. ARTICLE 7 COVENANTS OF THE COMPANY From the date hereof until the Closing Date, the Company hereby covenants and agrees with the Purchasers as follows: 7.1 Further Assurances. Upon the terms and subject to the conditions contained herein, each of the parties hereto agrees, both before and after the Closing, (i) to use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement, (ii) to execute any documents, instruments or conveyances of any kind which may be reasonably necessary or advisable to carry out any of the transactions contemplated hereunder, and (iii) to cooperate with each other in connection with the foregoing, including using their reasonable respective best efforts (A) to obtain all necessary waivers, consents and approvals from other parties that may be required; (B) to obtain all necessary permits as are required to be obtained under any federal, state, local or foreign law or regulations, and (C) to fulfill all conditions to this Agreement. 7.2 Notification of Certain Matters. From the date hereof through the Closing, the Company shall give prompt notice upon obtaining knowledge thereof to Purchaser of (a) the occurrence, or failure to occur, of any event which occurrence or failure would be likely to cause any representation or warranty contained in this Agreement or in any exhibit or schedule hereto to be untrue or inaccurate in any material respect and (b) any material failure of the Company to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it under this Agreement or any exhibit or schedule hereto. 7.3 Access to Information. From the date hereof through the Closing, the Company shall, and shall cause its officers, directors, employees and agents to, afford the Purchasers (or its representatives) access at all times to the Company's records for the purpose of inspecting the same, and subject to prior written request, to the officers, employees, agents, attorneys, accountants, properties, and contracts of the Company, and shall furnish Purchasers 30 37 all financial, operating and other data and information as the Purchasers or their representatives, may reasonably request. 7.4 Conduct of Business. From the date hereof through the Closing (the "Interim Period"), the Company shall, except as contemplated by this Agreement, or as consented to by Purchaser in writing which consent will not be unreasonably withheld, operate the Company in the ordinary course of business and in accordance with past practice and will not take any action inconsistent with this Agreement or with the consummation of the Closing; provided, however, that the Company may during the Interim Period take such actions as a reasonably necessary or appropriate in connection with the development of restaurant facilities located in Irvine, California, Las Vegas, Nevada and the additional locations set forth in Schedule 7.4 attached hereto so long as the Company (a) provides advance notice to the Purchasers of any such action and (b) upon request of any Purchaser, provides to such Purchaser and its counsel copies of any agreements and other documents relating to such actions. The Company agrees that neither it, nor anyone acting on its behalf, will offer or sell the Securities or any other security in a manner that would require the issuance and sale of the Securities to be registered or qualified pursuant to the provisions of the Securities Act or any state securities or "blue sky" laws. 7.5 Contribution Agreement. The Company and Fleming shall consummate the Contribution Agreement in accordance with its terms concurrently with the transactions contemplated hereunder. 7.6 Corporate Restructuring. Fleming shall use his best efforts to cause the Corporate Restructuring to be completed prior to the Closing Date. ARTICLE 8 COVENANTS OF THE COMPANY WITH RESPECT TO THE PERIOD FOLLOWING THE CLOSING Until (a) all shares of Preferred Stock are no longer outstanding due to conversion, redemption or otherwise, and (b) the Company has paid to the Purchasers all other amounts due to them under the Transaction Agreements or the Certificate, the Company hereby covenants and agrees with the Purchasers as follows: 8.1 Reservation of Shares. The Company shall at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issue or delivery upon conversion of the Securities as provided in the Certificate, the maximum number of shares of Common Stock that may be issuable or deliverable upon such conversion, as well as the number of shares of Common Stock that may be issuable or deliverable upon conversion of the Securities issued to the Purchasers as dividends. Such shares of Common Stock shall, when issued or delivered in accordance with the provisions of the Certificate, be duly authorized, validly issued and fully paid and non-assessable. The Company shall issue such Common Stock in accordance with the provisions of the Certificate and shall otherwise comply with the terms thereof. 31 38 8.2 Books and Records. The Company shall, and shall cause each of the Company Affiliates, together with any newly formed subsidiaries of the Company, to, keep proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Company and each of such Company Affiliates or subsidiaries in accordance with GAAP, to the extent GAAP is applicable. The Company shall provide the Purchasers with reasonable access to all such books and records during regular business hours and allow the Purchasers to make copies and abstracts thereof. 8.3 Use of Proceeds. The Company shall use the proceeds of the sale of Securities hereunder only (a) as a payment to Fleming pursuant to the terms of the Contribution Agreement, (b) as working capital for the Company, (c) for expansion of the Company, (d) for the payment of fees and expenses in connection with the transactions contemplated in the - Transaction Agreements, including without limitation, expenses incurred by Fleming in connection with such transactions; and (e) for any other purpose contained in, or undertaken pursuant to, the Budget. 8.4 New Lines of Business. The Company shall not without the prior written consent of holders of a majority in interest of the Preferred Stock, engage in any business other than the preparation and distribution of Chinese food products or any line of business that is related thereto. 8.5 Compensation of Directors. Each member of the Board of Directors shall entitled to customary fees and reimbursement by the Company for all out-of-pocket expenses, including, without limitation, travel expenses, incurred by such director in connection with the performance of such director's duties. 8.6 Management Incentive Stock Option Plan. After consultation with the Purchasers, the Company shall develop and the Board of Directors shall authorize a Management Incentive Stock Option Plan pursuant to which Fleming shall be granted options to purchase up to 5% of the Common Stock of the Company (after taking into account the conversion of the Preferred Shares, including Preferred Shares issued upon the exercise of the Warrants) in accordance with the provisions set forth in the Employment Agreement and shall at all times keep and reserve available out of its Common Stock, solely for the purpose of issue or delivery upon exercise of such options, the maximum number of shares of Common Stock that may be issuable or deliverable upon such exercise. ARTICLE 9 INDEMNIFICATION 9.1 Indemnification. In addition to all other sums due hereunder or provided for in this Agreement and all other remedies that may be otherwise available, the Company (the "Indemnifying Party") agrees to indemnify and hold harmless each Purchaser and its Affiliates and its respective officers, directors, agents, employees, Subsidiaries, partners and assigns (each, an "Indemnified Party") to the fullest extent permitted by law from and against any and all (i) Environmental Expenses and (ii) tax liabilities, losses, costs, claims, damages, expenses 32 39 (including reasonable fees, disbursements and other charges of counsel) and other liabilities (collectively, "Liabilities") based upon, relating to or arising out of any breach of any representation or warranty, covenant or agreement of such Indemnifying Party in this Agreement or any legal, administrative or other actions (including actions brought by any of the Purchasers or any Indemnifying Party or any equity holders of the Company or derivative actions brought by any Person claiming through or in the Company's name), proceedings or investigations (whether formal or informal), or written threats thereof, based upon, relating to or arising out of (A) the status of the Purchasers as shareholders of the Company and the existence or exercise of the rights and powers of the Purchasers (including without limitation, any claim against any Indemnified Party relating to Environmental Matters), (B) violations of applicable securities laws by the Company in connection with the offering of the Shares, or (C) third party claims that the Securities hereunder violate preexisting understandings or arrangements with the Company; provided, however, that no Indemnifying Party shall be liable under this Section 9.1 to an Indemnified Party: (a) for any amount paid in settlement of claims without such Indemnifying Party's consent (which consent shall not be unreasonably withheld), (b) to the extent that it is finally judicially determined that such Liabilities resulted solely from the willful misconduct or gross negligence of such Indemnified Party, or (c) to the extent that it is finally judicially determined that such Liabilities resulted solely from the material breach by such Indemnified Party of any representation, warranty, covenant or other agreement of such Indemnified Party contained in this Agreement; provided, further, that if and to the extent that such indemnification is unenforceable for any reason, the Indemnifying Party shall make the maximum contribution to the payment and satisfaction of such indemnified liability which shall be permissible under applicable laws. In connection with the obligation of the Indemnifying Party to indemnify for expenses as set forth above, the Indemnifying Party further agrees to reimburse each Indemnified Party for all such expenses (including reasonable fees, disbursements and other charges of counsel) as they are incurred by such Indemnified Party. The Company shall be liable for losses pursuant to this Section 9.1 only to the extent that the aggregate amount of such losses exceed $100,000 (the "Basket Amount"), whereupon the Company shall be liable for all such losses in excess of the Basket Amount. Notwithstanding any other provision of this Agreement, the Basket Amount shall not apply to Liabilities (collectively, the "Exceptional Liabilities") incurred by the Purchasers based upon, relating to or arising out of (i) any breach of the representations and warranties in Section 5.14 of the this Agreement; (ii) the Company's ownership of the assets it purports to own after giving effect to the transactions contemplated by this Agreement; and (iii) the organization and corporate or other governance of the Company Affiliates prior to the Closing, including, but not limited to the Corporate Restructuring. 9.2 Notification. Each Indemnified Party under this Article 9 will, promptly after the receipt of notice of the commencement of any action, investigation, claim or other proceeding against such Indemnified Party in respect of which indemnity may be sought from any Indemnifying Party under this Article 9, notify the Indemnifying Party in writing of the commencement thereof. The omission of any Indemnified Party to so notify the Indemnifying Party of any such action shall not relieve the Indemnifying Party from any liability which it may have to such Indemnified Party under this Article 9 except to the extent that such failure to 33 40 notify results in a loss of a material defense of such Indemnified Party in actual prejudice due to such action. In case any such action, claim or other proceeding shall be brought against any Indemnified Party and such Indemnified Party shall notify the Indemnifying Party of the commencement thereof, the Indemnifying Party shall be entitled to assume the defense thereof at its own expense, with counsel satisfactory to such Indemnified Party in its reasonable judgment; provided, however, that any Indemnified Party may, at its own expense, retain separate counsel to participate in such defense. Notwithstanding the foregoing, in any action, claim or proceeding in which both the Indemnifying Party, on the one hand, and an Indemnified Party, on the other hand, is, or is reasonably likely to become, a party, such Indemnified Party shall have the right to employ separate counsel at the Indemnifying Party's expense and to control its own defense of such action, claim or proceeding if, in the reasonable opinion of counsel to such Indemnified Party, a conflict or potential conflict exists between the Indemnifying Party, on the one hand, and such Indemnified Party, on the other hand, that would make such separate representation advisable. The Indemnifying Party agrees that it will not, without the prior written consent of the Purchasers (such consent not to be unreasonably withheld), settle, compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding relating to the matters contemplated hereby (if any Indemnified Party is a party thereto or has been actually threatened to be made a party thereto) unless such settlement, compromise or consent includes an unconditional release of the Purchasers and each other Indemnified Party from all liability arising or that may arise out of such claim, action or proceeding. The rights accorded to Indemnified Parties hereunder shall be in addition to any rights that any Indemnified Party may have at common law, by separate agreement or otherwise. 9.3 Registration Rights Agreement. Notwithstanding anything to the contrary in this Article 9, the indemnification and contribution provisions of the Registration Rights Agreement shall govern any claim made with respect to registration statements filed pursuant thereto or sales made thereunder. ARTICLE 10 MISCELLANEOUS 10.1 Termination. This Agreement may be terminated at any time prior to the Closing Date: (a) by the mutual written consent of the Purchaser and the Company; (b) by either Purchaser or the Company if the Closing shall not have occurred prior to March 31, 1996 (the "Termination Date") unless such Termination Date is extended by mutual written consent of the Purchasers and the Company provided, that the right to terminate this Agreement under this Section 10.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or results in, the failure of the Closing to have occurred by such date; 34 41 In the event of a termination, no party hereto (or any of its directors or officers or shareholders, partner, members or Affiliates) shall have any liability or further obligation to any other party hereto or directors or officers in respect thereof, other than as provided in Section 2.4 and under Section 10.3, except that nothing herein will relieve any party from liability for any breach of this Agreement. 10.2 Survival of Representations and Warranties. All of the representations and warranties made herein shall survive the Closing Date of this Agreement for a period of two (2) years from the date hereof except the representations and warranties in (i) Sections 5.11(a) and 5.17 shall survive until the statute of limitations period has expired for such representations and warranties and (ii) Section 5.14 shall survive until thirty days after the expiration of the statute of limitations period has expired for such representations and warranties. 10.3 Confidential Information. The Company and the Purchaser shall each maintain as confidential any non-public, confidential and proprietary information (collectively, "Confidential Information") provided by one to the other regarding the matters contained in the Transaction Documents or with respect to the other. The Company and Purchaser and each of their partners, officers, directors, members, employees, agents and representative (collectively, "Representatives") will not disclose, use or otherwise appropriate the Confidential Information in any way detrimental to the other party, and the Confidential Information will be kept confidential by each party; provided, however, that any Confidential Information may be disclosed to prospective investors who require such information for the purpose of evaluating the transactions contemplated by the Transaction Agreements. If no transaction is effected pursuant to the terms of the Transaction Agreements, the Company and Purchaser shall each promptly deliver to the other party any Confidential Information of such other party, without retaining any copy thereof. 10.4 Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, courier service or personal delivery: (a) if to Catterton: Catterton Partners Corporation 115 East Putnam Avenue Greenwich, Connecticut 06830 Attention: J. Michael Chu with a copy to: Latham & Watkins 1001 Pennsylvania Avenue, NW, Suite 1300 Washington, DC 20004-2505 Attention: Eric A. Stem, Esq. 35 42 (b) if to Oak: Oak Investment Partners 4550 Norwest Center Minneapolis, Minnesota 55402 Attention: Gerald Gallagher with a copy to: Latham & Watkins 1001 Pennsylvania Avenue, N.W, Suite 1300 Washington, DC 20004-2505 Attention: Eric A. Stern, Esq. (c) if to the Company: P.F. Chang's China Bistro, Inc. c/o Ruth's Chris Steakhouse 2201 East Camelback Phoenix, Arizona 85016 Attention: Paul Fleming with a copy to: Squire, Sanders & Dempsey 40 North Central Suite 2700 Phoenix, Arizona 85004 Attention: Norman C. Storey, Esq. All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; when delivered by courier, if delivered by commercial overnight courier service; when mailed, five business days after being deposited in the mail, postage prepaid. 10.5 Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties hereto. This Agreement may not be assigned by any Purchaser subsequent to the Closing without the written consent of the Company. The Company may not assign any of its rights under this Agreement without the written consent of each of the Purchasers. Except as provided in Article 9, no Person other than the parties hereto and their successors and permitted assigns is intended to be a beneficiary of any of the Transaction Agreements. 36 43 10.6 Amendment and Waiver. (a) No failure or delay on the part of the Company, or the Purchasers in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the Company or the Purchasers at law, in equity or otherwise. (b) Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure by any party from the terms of any provision of this Agreement, shall be effective (i) only if it is made or given in writing and signed by the Company and holders of a majority in interest of the Preferred Stock or by the party or parties to be bound hereby, and (ii) only in the specific instance and for the specific purpose for which made or given. Except where notice is specifically required by this Agreement, no notice to or demand on any party in any case shall entitle any party hereto to any other or further notice or demand in similar or other circumstances. 10. 7 Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 10. 8 Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 10. 9 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to the principles of conflicts of law of such state. 10. 10 Jurisdiction. Each party to this Agreement hereby irrevocably agrees that any legal action or proceeding arising out of or relating to this Agreement or any agreements or transactions contemplated hereby shall be brought in the courts of the State of New York or of the United States of America for the District of New York and hereby expressly submits to the personal jurisdiction and venue of such courts for the purposes thereof and expressly waives any claim of improper venue and any claim that such courts are an inconvenient forum. Each party hereby irrevocably consents to the service of process of any of the aforementioned courts in any such suit, action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the address set forth in Section 10.2, such service to become effective 10 days after such mailing. 10.11 Severability. If anyone or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the 37 44 provision or provisions held invalid, illegal or unenforceable shall substantially impair the remaining provisions hereof. 10.12 Rules of Construction. Unless the context otherwise requires, "or" is not exclusive, and references to sections or subsections refer to sections or subsections of this Agreement. 10.13 Entire Agreement. This Agreement, together with the exhibits and schedules hereto and the other Transaction Agreements is intended by the parties as a final expression of their agreement and is intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth herein or therein. This Agreement, together with the exhibits and schedules hereto, the other Transaction Agreements, supersedes all prior agreements and understandings between the parties with respect to such subject matter. 10.14 Transaction Expenses. The Company will pay all Transaction Expenses of the Purchasers in accordance with Section 2.4 of this Agreement, regardless whether the transactions contemplated hereby are consummated. 10.15 Publicity. Except as may be required by applicable law, none of the parties hereto shall issue a publicity release or announcement or otherwise make any public disclosure concerning this Agreement or the transactions contemplated hereby, without prior approval by the other parties hereto. If any announcement is required by law to be made by any party hereto, prior to making such announcement such party will deliver a draft of such announcement to the other parties and shall give the other parties an opportunity to comment thereon. 10.16 Further Assurances. Upon the terms and subject to the conditions contained herein, each of the parties hereto agrees, both before and after the Closing, (i) to use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement, (ii) to execute any documents, instruments or conveyances of any kind which may be reasonably necessary or advisable to carry out any of the transactions contemplated hereunder, and (iii) to cooperate with each other in connection with the foregoing, including using their respective best efforts (A) to obtain all necessary waivers, consents and approvals from other parties that may be required; (B) to obtain all necessary permits as are required to be obtained under any federal, state, local or foreign law or regulations, and (C) to fulfill all conditions to this Agreement. 10.17 Severability of Representations, Warranties and Covenants. Neither Catterton nor Oak shall be liable to the Company for the breach or violation, if any, of any representation, warranty or covenant made or to be complied with by any of the other Purchasers, but each such Purchaser shall be liable to the Company solely for its own breach or violation, if any, of any representation, warranty or covenant made or to be complied with by such Purchaser. Neither the Company nor Fleming shall be liable to the Purchasers for the breach or violation, if any, of any representation, warranty or covenant made or to be complied 38 45 with by any party hereto, but the Company shall be liable to the Purchasers solely for its and Fleming's breach or violation , if any, of any representation, warranty, or covenant made or to be complied with by the Company or Fleming. 39 46 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. P.F. CHANG'S CHINA BISTRO, INC. By: /s/ PAUL M. FLEMING ------------------------------------------- Name: Paul M. Fleming Title: President c/o Ruth's Chris Steakhouse 2201 East Camelback Phoenix, Arizona 85016 Attention: Paul Fleming Telephone: 602-957-8986 Telecopy: 602-957-8998 PAUL M. FLEMING By: /s/ PAUL M. FLEMING ------------------------------------------- c/o Ruth's Chris Steakhouse 2201 East Camelback Phoenix, Arizona 85016 KELLY M. FLEMING By: /s/ KELLY M. FLEMING ------------------------------------------- c/o Ruth's Chris Steakhouse 2201 East Camelback Phoenix, Arizona 85016 47 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. CATTERTON-SIMON PARTNERS, L.P. By: CATTERTON INVESTMENT PARTNERS, its General Partner By: CATTERTON PARTNERS CORPORATION its Managing General Partner By: /s/ J. MICHAEL CHU --------------------------------- Name: J. Michael Chu Title: President 115 East Putnam Avenue Greenwich, Connecticut 06830 Attention: J. Michael Chu Telephone: 203-629-4901 Telecopy: 203-629-4903 CATTERTON-PFC, L.L.C. By: CATTERTON PARTNERS CORPORATION in Managing Member By: /s/ J. MICHAEL CHU --------------------------------- Name: J. Michael Chu Title: President 115 East Putnam Avenue Greenwich, Connecticut 06830 Attention: J. Michael Chu Telephone: 203-629-4901 Telecopy: 203-629-4903 48 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. OAK INVESTMENT PARTNERS VI, LIMITED PARTNERSHIP By: /s/ GERALD R. GALLAGHER --------------------------------------- Gerald R. Gallagher General Partner of Oak Associates VI Limited Partnership, the General Partner of Oak Investment Partners VI, Limited Partnership Oak Investment Partners 4550 Norwest Center Minneapolis, Minnesota 55402 Attention: Gerald Gallagher Telephone: 612-339-9322 Telecopy: 612-337-8017 OAK VI AFFILIATES FUND, LIMITED PARTNERSHIP By: /s/GERALD R. GALLAGHER --------------------------------------- Gerald R. Gallagher General Partner of Oak VI Affiliates, Limited Partnership, the General Partner of Oak VI Affiliates Fund, Limited Partnership Oak Investment Partners 4550 Norwest Center Minneapolis, Minnesota 55402 Attention: Gerald Gallagher Telephone: 612-339-9322 Telecopy: 612-337-8017 49 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. TRINITY VENTURES V, L.P. By: /s/ JAMES G. SHENNAN, JR. ----------------------------------------------- General Partner Trinity Ventures 155 Bovet Road, Suite 660 San Mateo, California 94402 Attention: James G. Shennan, Jr. Telephone: 415-358-9700 Telecopy: 415-358-9785 TRINITY VENTURES V SIDE-BY-SIDE FUND, L.P. By: /s/ JAMES G. SHENNAN, JR. ----------------------------------------------- General Partner Trinity Ventures 155 Bovet Road, Suite 660 San Mateo, California 94402 Attention: James G. Shennan, Jr. Telephone: 415-358-9700 Telecopy: 415-358-9785 50 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. ARABELLA S.A. By: /s/ PIERRE CALAND -------------------------------------- Name:PIERRE CALAND Title: c/o NECB 1, Avenue Montaigne Paris, France 75008 Telephone: 33 (15) 367-8530 Telecopy: 33 (15) 367-8531 51 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. JOSEPH SCHELL /s/ JOSEPH SCHELL -------------------------------------- 3983 Happy Valley Road Lafayette, California 94549 Telephone: 415-627-2000 Telecopy: 415-249-5513 KARL MATTHIES /s/ KARL MATTHIES -------------------------------------- 7 Bellagio Road PO Box 1322 Ross, California 94957 Telephone: 415-627-2250 Telecopy: 415-249-5513 J. RICHARD FREDRICKS /s/ RICHARD FREDRICKS -------------------------------------- 2395 Vallejo Street San Francisco, California 94010 Telephone: 415-627-2000 Telecopy: 415-249-5513 52 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. DAVID JACQUIN /s/ DAVID JACQUIN ---------------------------------- 1870 Pacific Avenue #704 San Francisco, California 94109 Telephone: 415-627-2402 Telecopy: 415-249-5514 MURRAY HUNEKE /S/ MURRAY HUNEKE ---------------------------------- 315 Ambar Way Menlo Park, California 94025 Telephone: 415-627-2873 Telecopy: 415-249-5512 PAUL MADERA /s/ PAUL MADERA ---------------------------------- 1205 Vancouver Ave. Burlingame, California 94010 Telephone: 415-627-3174 Telecopy: 415-249-5511 53 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. KENNETH LANG /s/ KENNETH LANG -------------------------------------- 2121 Sacramento Street #203 San Francisco, California 94109 Telephone: 415-627-2143 Telecopy: 415-249-5097 54 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. EDWARD J. MATHIAS /s/ EDWARD J. MATHIAS -------------------------------------- 5120 Cammack Drive Bethesda, Maryland 20816 Telephone: 202-626-1228 Telecopy: 202-347-1818 WILLIAM A. ALLEN -------------------------------------- 7710 Sweetgum Avenue Los Colinas, Texas 75063 Telephone: Telecopy: STEVEN LEBOW -------------------------------------- 150 North Cliffwood Los Angeles, California 90049 Telephone: 310-282-6165 Telecopy: 310-282-6178 55 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. EDWARD J. MATHIAS -------------------------------------- 5120 Cammack Drive Bethesda, Maryland 20816 Telephone: 202-626-1228 Telecopy: 202-347-1818 WILLIAM A. ALLEN /s/ WILLIAM A. ALLEN -------------------------------------- 7710 Sweetgum Avenue Los Colinas, Texas 75063 Telephone: Telecopy: STEVEN LEBOW -------------------------------------- 150 North Cliffwood Los Angeles, California 90049 Telephone: 310-282-6165 Telecopy: 310-282-6178 56 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. EDWARD J. MATHIAS -------------------------------------- 5120 Cammack Drive Bethesda, Maryland 20816 Telephone: 202-626-1228 Telecopy: 202-347-1818 WILLIAM A. ALLEN -------------------------------------- 7710 Sweetgum Avenue Los Colinas, Texas 75063 Telephone: Telecopy: STEVEN LEBOW /s/ STEVEN LEBOW -------------------------------------- 150 North Cliffwood Los Angeles, California 90049 Telephone: 310-282-6165 Telecopy: 310-282-6178 57 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. SUSAN C. SCHNABEL and EDWARD L. PLUMMER, JOINTLY /s/ Susan C. Schnabel ----------------------------------- /s/ Edward L. Plummer ----------------------------------- c/o Donaldson, Lufkin & Jenrette 2121 Avenue of the Stars Suite 3000 Los Angeles, California 90067 Telephone: 310-282-6172 Telecopy: 310-282-6178 YVES SISTERON ----------------------------------- 602 North Crescent Avenue Beverly Hills, California 90210 Telephone: 310-858-8042 Telecopy: 310-550-1876 58 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. SUSAN C. SCHNABEL and EDWARD L. PLUMMER, JOINTLY ------------------------------------------------ ------------------------------------------------ c/o Donaldson, Lufkin & Jenrette 2121 Avenue of the Stars Suite 3000 Los Angeles, California 90067 Telephone: 310-282-6172 Telecopy: 310-282-6178 YVES SISTERON /s/ YVES SISTERON ------------------------------------------------ 602 North Crescent Avenue Beverly Hills, California 90210 Telephone: 310-858-8042 Telecopy: 310-550-1876 59 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. RICHARD FEDERICO /s/ RICHARD FEDERICO -------------------------------------- c/o P.F. Chang's China Bistro, Inc. 2201 East Camelback Road Suite 225-B Phoenix, Arizona 85016 Telephone: 602-957-8986 Telecopy: 602-957-8998 EX-10.8 11 EX-10.8 1 EXHIBIT 10.8 STOCK PURCHASE AGREEMENT by and among P.F. CHANG'S CHINA BISTRO, INC.; and the INVESTORS listed on Schedule 1; Dated as of APRIL 28, 1997 2 TABLE OF CONTENTS ARTICLE 1 DEFINITIONS....................................................................................... 1 1.1 Definitions......................................................................... 1 1.2 Accounting Terms; Financial Statements.............................................. 7 1.3 Knowledge Standard.................................................................. 8 1.4 Other Defined Terms................................................................. 8 ARTICLE 2 AUTHORIZATION OF PREFERRED STOCK; PURCHASE AND SALE OF SECURITIES................................................................... 8 2.1 Preferred Stock..................................................................... 8 2.2 Purchase and Sale of Securities..................................................... 9 2.3 Closing............................................................................. 9 ARTICLE 3 CONDITIONS TO THE OBLIGATION OF THE PURCHASERS TO PURCHASE THE PREFERRED SHARES................................................ 9 3.1 Representations and Warranties...................................................... 9 3.2 Compliance with Terms and Conditions of this Agreement.............................. 9 3.3 Delivery of Certificates Evidencing the Securities.................................. 10 3.4 Closing Certificates................................................................ 10 3.5 Secretary's Certificates............................................................ 10 3.6 Documents........................................................................... 10 3.7 Purchase Permitted by Applicable Laws............................................... 10 3.8 Opinion of Counsel.................................................................. 10 3.9 Approval of Counsel to Purchasers................................................... 10 3.10 Consents and Approvals.............................................................. 11 3.11 Certain Waivers..................................................................... 11 3.12 No Material Adverse Change.......................................................... 11 3.13 Certificate. ...................................................................... 11 3.14 No Material Judgment or Order....................................................... 11 3.15 Financial Statements................................................................ 11 3.16 Registration Rights Agreement....................................................... 12 3.17 Shareholders Agreement.............................................................. 12 3.18 Board of Directors.................................................................. 12 3.19 Concurrent Purchases................................................................ 12 ARTICLE 4 CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE.............................................. 12
i 3 4.1 Representations and Warranties...................................................... 12 4.2 Compliance with Terms and Conditions of this Agreement.............................. 12 4.3 Issuance Permitted by Applicable Laws............................................... 12 4.4 Payment of Purchase Price........................................................... 13 4.5 No Material Judgment or Order....................................................... 13 ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF THE COMPANY..................................................... 13 5.1 Corporate Existence and Authority................................................... 13 5.2 Corporate Authorization; No Contravention........................................... 13 5.3 Governmental Authorization; Third Party Consents.................................... 13 5.4 Binding Effect...................................................................... 14 5.5 Other Agreements.................................................................... 14 5.6 Capitalization...................................................................... 14 5.7 Company Affiliates.................................................................. 15 5.8 Private Offering.................................................................... 16 5.9 Litigation.......................................................................... 16 5.10 Financial Statements................................................................ 16 5.11 Title and Condition of Assets....................................................... 16 5.12 Contractual Obligations............................................................. 17 5.13 Patents, Trademarks, Etc............................................................ 17 5.14 Tax Matters......................................................................... 18 5.15 Severance Arrangements.............................................................. 19 5.16 No Material Adverse Change.......................................................... 19 5.17 Environmental Matters............................................................... 20 5.18 Investment Company/Government Regulations. ......................................... 21 5.19 Broker's, Finder's or Similar Fees. ................................................ 21 5.20 Labor Relations and Employee Matters................................................ 21 5.21 Employee Benefits Matters........................................................... 21 5.22 Undisclosed Liabilities............................................................. 23 5.23 Solvency............................................................................ 23 5.24 Compliance with Law................................................................. 24 5.25 No Other Agreements to Sell the Assets or Capital Stock of the Company.............. 24 5.26 Hart-Scott-Rodino................................................................... 24 5.27 Budget.............................................................................. 24 5.28 Insurance........................................................................... 24 5.29 Disclosure.......................................................................... 25 ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS.................................................. 25 6.1 Existence and Authority............................................................. 25 6.2 Authorization; No Contravention..................................................... 25
ii 4 6.3 Governmental Authorization; Third Party Consent..................................... 25 6.4 Binding Effect...................................................................... 26 6.5 Purchase for Own Account............................................................ 26 6.6 Accredited Investor Status.......................................................... 26 6.7 Investment Risk..................................................................... 27 6.8 Broker's, Finder's or Similar Fees.................................................. 27 ARTICLE 7 COVENANTS OF THE COMPANY.......................................................................... 27 7.1 Further Assurances.................................................................. 27 7.2 Notification of Certain Matters..................................................... 28 7.3 Access to Information............................................................... 28 7.4 Conduct of Business................................................................. 28 ARTICLE 8 COVENANTS OF THE COMPANY WITH RESPECT TO THE PERIOD FOLLOWING THE CLOSING............................................................... 28 8.1 Reservation of Shares............................................................... 29 8.2 Books and Records................................................................... 29 8.3 Use of Proceeds..................................................................... 29 8.4 New Lines of Business............................................................... 29 8.5 Compensation of Directors........................................................... 29 ARTICLE 9 INDEMNIFICATION................................................................................... 29 9.1 Indemnification..................................................................... 29 9.2 Notification........................................................................ 30 9.3 Registration Rights Agreement....................................................... 31 ARTICLE 10 MISCELLANEOUS..................................................................................... 31 10.1 Termination......................................................................... 31 10.2 Survival of Representations and Warranties.......................................... 32 10.3 Confidential Information............................................................ 32 10.4 Notices............................................................................. 32 10.5 Successors and Assigns.............................................................. 34 10.6 Amendment and Waiver................................................................ 34 10.7 Counterparts........................................................................ 34 10.8 Headings............................................................................ 34 10.9 Governing Law....................................................................... 34 10.10 Jurisdiction........................................................................ 34
iii 5 10.11 Severability........................................................................ 35 10.12 Rules of Construction............................................................... 35 10.13 Entire Agreement.................................................................... 35 10.14 Transaction Expenses................................................................ 35 10.15 Severability of Representations, Warranties and Covenants........................... 35
iv 6 TABLE OF EXHIBITS AND SCHEDULES EXHIBITS Registration Rights Agreement A Shareholders Agreement B Certificate of Incorporation C Opinion of Company Counsel D SCHEDULES Securities Being Purchased 1 Shareholders 5.6 Company Affiliates 5.7 Environmental 5.17 7 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement") is entered into as of the 28th day of April, 1997 by and among P.F. CHANG'S CHINA BISTRO, INC., a Delaware corporation (the "Company"), and the INVESTORS listed on Schedule 1 attached hereto (the "Investors"). RECITALS: A. WHEREAS, upon the terms and subject to the conditions set forth in this Agreement, the Company proposes to issue and sell shares of its Series B Preferred Stock (as defined herein) to the Investors (each being referred to herein as a "Purchaser" and collectively referred to herein as the "Purchasers"). B. WHEREAS, upon the terms and subject to the conditions set forth in this Agreement, the Purchasers desire to contribute capital to the Company in the amount of $4.35 per share in exchange for the issuance to the Purchasers of shares of the Series B Preferred Stock of the Company as set forth herein. C. WHEREAS, the Purchasers desire that, upon the Closing (as defined in herein), the Purchasers will collectively own one hundred percent (100%) of the Company's outstanding Series B Preferred Stock. D. WHEREAS, the Company, the Purchasers and the holders of the Company's Common Stock (as defined herein) and Series A Preferred Stock (as defined herein) desire to set forth the objectives and agreements that will govern their relations and responsibilities with respect to each other by entering into concurrently with the sale and purchase of securities hereunder a Shareholders Agreement (as defined herein). AGREEMENTS: NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereby agree as follows: ARTICLE 1 DEFINITIONS 1.1 Definitions. As used in this Agreement, and unless the context requires a different meaning, the following terms have the meanings indicated: "Affiliate" means, with respect to any specified Person, any Person that, directly or indirectly, controls, is controlled by, or is under common control with, such 8 specified Person, whether by contract, through one or more intermediaries, or otherwise. "Benefit Arrangement" means any employment, consulting, severance or other similar contract, arrangement or policy and each plan, arrangement (written or oral), program, agreement or commitment providing for insurance coverage (including any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, life, health, disability or accident benefits (including, without limitation, any "voluntary employees' beneficiary association" as defined in Section 501(c)(9) of the Code providing for the same or other benefits) or for deferred compensation, profit-sharing bonuses, stock options, stock appreciation rights, stock purchases or other forms of incentive compensation or post-retirement insurance, compensation or benefits which (A) is not a Welfare Plan, Pension Plan or Multiemployer Plan, (B) is entered into, maintained, contributed to or required to be contributed to, as the case may be, by the Company or an ERISA Affiliate or under which the Company or any ERISA Affiliate may incur any liability, and (C) covers any employee or former employee of the Company or any ERISA Affiliate (with respect to their relationship with such entities). "Code" means the Internal Revenue Code of 1986, as amended, or any successor statute thereto. "Commission" means the Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act. "Common Stock" means the common stock, par value $.001 per share, of the Company, or any other capital stock of the Company into which such stock is reclassified or reconstituted. "Company Affiliates" means (i) PFCCB Scottsdale, L.L.C., an Arizona limited liability company; (ii) PFCCB Newport Beach, L.L.C., an Arizona limited liability company; (iii) P.F. Chang's III, L.L.C., an Arizona limited liability company; (iv) P.F. Chang's IV, L.L.C., an Arizona limited liability company; (v) PFC Building III Limited Partnership, an Arizona limited partnership; (vi) PFCCB LouTex Joint Venture, an Arizona general partnership; and (vii) PFCCB NUC LLC, an Arizona limited liability company. "Condition of the Company" means the assets, business, properties, operations, financial condition or prospects (excluding prospects arising out of general economic or business conditions affecting the restaurant industry generally) of the Company and the Company Affiliates taken as a whole. "Contractual Obligation" means as to any Person, any provision of any security issued by such Person or any provision of any agreement, lease of real or personal property, undertaking, contract, indenture, mortgage, deed of trust or other 2 9 instrument to which such Person is a party or by which it or any of its property is bound. "Defined Benefit Plan" means a defined benefit plan within the meaning of Section 3(35) of ERISA or Section 414(j) of the Code, whether funded or unfunded, qualified or nonqualified (whether or not subject to ERISA or the Code). "Employee Plans" means all Benefit Arrangements, Multiemployer Plans, Pension Plans and Welfare Plans. "Environmental Expenses" means any liability, loss, cost or expense arising from any Pre-Closing Environmental Matter, including, without limitation, costs of investigation, cleanup, removal, remedial, corrective or response action, the costs associated with posting financial assurances for the completion of investigation, cleanup, removal, remedial, corrective or response actions, the preparation of any closure or other necessary or required plans or analyses, or other reports or analyses submitted to or prepared by regulating agencies, including the cost of health assessments, epidemiological studies and the like, retention of engineers and other expert consultants, legal counsel, capital improvement, operation and maintenance testing and monitoring costs, power and utility costs and pumping taxes or fees, and administrative costs or damages. "Environmental Laws" means any federal, state, territorial, provincial or local law, common law doctrine, rule, order, decree, judgment, injunction, license, permit or regulation relating to environmental matters, including those pertaining to land use, air, soil, surface water, ground water (including the protection, cleanup, removal, remediation or damage thereof), public or employee health or safety or any other environmental matter, together with any other laws (federal, state, territorial, provincial or local) relating to emissions, discharges, releases or threatened releases of any pollutant or contaminant including, without limitation, medical, chemical, biological, biohazardous or radioactive waste and materials, into ambient air, land, surface water, groundwater, personal property or structures, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation, discharge or handling of any contaminant, including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. 9601 et seq.), the Hazardous Material Transportation Act (49 U.S.C. 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. 6901 et seq.), the Federal Water Pollution Control Act (33 U.S.C. 1251 et seq.), the Clean Air Act (42 U.S.C. 1251 et seq.), the Toxic Substances Control Act (15 U.S.C. 2601 et seq.), and the Occupational Safety and Health Act (29 U.S.C. 651 et seq.), as such laws have been, or are, amended, modified or supplemented heretofore or from time to time hereafter and any analogous future federal, or present or future state or local laws, statutes and regulations promulgated thereunder. 3 10 "Equipment" means all of the tangible personal property owned or leased by the Company or any Company Affiliate and used in or held for use in the operations of the business of the Company or any Company Affiliate. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means any Person that is (or at any relevant time was) a member of a "controlled group of corporations" with or under "common control" with the Company as defined in Section 414(b), (c), (m) or (o) of the Code. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder. "Facilities" means the buildings, plants, offices, stores, restaurants and all other improvements on any real property (including fixtures affixed thereto) which are owned or leased by the Company or any Company Affiliate and used or held for use in the operation of the business of the Company or any Company Affiliate. "Financial Statements Date" means December 29, 1996. "GAAP" means United States generally accepted accounting principles, in effect from time to time, consistently applied. "Governmental Authority" means the government of any nation, state, city, locality or other political subdivision or any agency thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity exercising public functions owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Hazardous Materials" means those substances which are regulated by or form the basis of liability under any Environmental Laws, including, without limitation, petroleum products, radon and asbestos. "Indebtedness" means, as to any Person: (a) all obligations, whether or not contingent, of such Person for borrowed money (including, without limitation, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured), (b) all obligations of such Person evidenced by notes, bonds, debentures or similar instruments, (c) all obligations of such Person representing the balance of deferred purchase price of property or services, except trade accounts payable and accrued commercial or trade liabilities arising in the ordinary course of business, (d) all interest rate and currency swaps, caps, collars and similar agreements or hedging devices under which payments are obligated to be made by such Person, whether periodically or upon the happening of a contingency, (e) all indebtedness created or arising under any conditional sale or other title retention 4 11 agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (f) all obligations of such Person under leases which have been or should be, in accordance with GAAP, recorded as capital leases, (g) all indebtedness secured by any Lien (other than Liens in favor of lessors under leases other than leases included in clause (f)) on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is non-recourse to the credit of that Person, and (h) all Indebtedness of any other Person referred to in clauses (a) through (f) above, guaranteed, directly or indirectly, by that Person. "Initial Issue Date" shall mean the date that shares of Series B Preferred Stock are first issued by the Company. "Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment, encumbrance, lien (statutory or other) or other security interest of any kind or nature whatsoever (excluding preferred stock or equity related preferences) including, without limitation, those created by, arising under or evidenced by any conditional sale or other title retention agreement, the interest of a lessor under a capital lease obligation, or any financing lease having substantially the same economic effect as any of the foregoing. "Material Adverse Effect" means any event or condition which individually or in the aggregate has a material adverse effect on the Condition of the Company or on the ability of the Company to perform its obligations under the Transaction Agreements. "Multiemployer Plan" means any "multiemployer plan," as defined in Section 4001(a)(3) or Section 3(37) of ERISA, (A) which the Company or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or, after September 25, 1980, maintained, administered, contributed to or was required to contribute to, or under which the Company or any ERISA Affiliate may incur any liability and (B) which covers any employee or former employee of the Company or any ERISA Affiliate (with respect to their relationship with such entities). "Outstanding Borrowings" means all Indebtedness of the Company and the Company Affiliates for borrowed money (including without limitation, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured), excluding obligations with respect to trade payables incurred in the ordinary course of business. "Pension Plan" means any "employee pension benefit plan" as defined in Section 3(2) of ERISA (other than a Multiemployer Plan) (A) which the Company or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or, within the five years prior to the Closing Date, maintained, administered, 5 12 contributed to or was required to contribute to, or under which the Company or any ERISA Affiliate may incur any liability and (B) which covers any employee or former employee of the Company or any ERISA Affiliate (with respect to their relationship with such entities). "Permitted Liens" means (i) Liens for taxes, governmental charges or levies which (a) are not yet due and payable, or (b) are being diligently contested in good faith by appropriate proceedings; provided, that for any such taxes being diligently contested in good faith, the Company has set aside adequate reserves, (ii) Liens imposed by law, such as mechanic's, materialman's, landlord's, warehouseman's and carrier's liens, securing obligations incurred in the ordinary course of business which are not yet overdue or which are being diligently contested in good faith by appropriate proceeding and, with respect to such obligations which are being contested, for which the Company has set aside adequate reserves, and (iii) Liens which (x) in each case, secure obligations of less than $10,000, and (y) do not, individually or in the aggregate, interfere with the use and enjoyment of the property subject thereto. "Person" means any individual, firm, corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, limited liability company, Governmental Authority or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. "Pre-Closing Environmental Matters" means (i) the production, use, generation, storage, treatment, recycling, disposal, discharge, release, or other handling or disposition of any kind at any time on or prior to the Closing Date (collectively "Handling") of any Hazardous Material, either in, on, or under any real property or facility (including the Facilities) owned, leased or used at any time by the Company (or a predecessor or affiliate of the Company) including without limitation the effects of such Handling of Hazardous Materials on resources, persons, or property within or outside the boundaries of any facility owned, operated or otherwise used by the Company; (ii) the presence as of the Closing Date of Hazardous Materials in, on or under any facility (including the Facilities) owned, leased or used at any time by the Company regardless of how the Hazardous Materials came to rest at, on or under such facility, (iii) the failure on or prior to the Closing Date of any facility or any operations of the Company to be in compliance with an Environmental Laws, and (iv) any other act, omission or condition existing prior to the Closing Date which gives rise to liability under any Environmental Laws with respect to the Company. "Preferred Stock" means the Series A Preferred Stock and the Series B Preferred Stock. "Qualified Initial Public Offering" shall mean a public offering, underwritten by a reputable and nationally recognized underwriter, pursuant to an effective registration statement under the Securities Act of shares of the Common Stock, (i) the aggregate gross proceeds of which equal or exceed $ 15,000,000 and (ii) 6 13 the per share offering price to the public of which equals or exceeds $10.00; provided, however, that the per share offering price referred to in clause (ii) shall be adjusted to reflect the effect of any stock split or any subdivision, reclassification, combination or like event of or with respect to outstanding shares of Common Stock occurring after the Initial Issue Date. "Registration Rights Agreement" means the Amended and Restated Registration Rights Agreement in the form attached hereto as Exhibit A. "Requirements of Law" means, as to any Person, the provisions of the certificate of incorporation and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule, regulation, right, privilege, qualification, license or franchise, order, judgment, or determination, in each case, of an arbitrator or a court or other Governmental Authority, in each case, applicable to or binding upon such Person or any of its property (or to which such Person or any of its property is subject) or applicable to any or all of the transactions contemplated by or referred to in the Transaction Agreements. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder. "Series A Preferred Stock" means the Series A Convertible Preferred Stock, par value $.001 per share, of the Company, or any other capital stock of the Company into which such stock is reclassified or reconstituted. "Series B Preferred Stock" means the Series B Convertible Preferred Stock, par value $.001 per share, of the Company, or any other capital stock of the Company into which such stock is reclassified or reconstituted. "Shareholders Agreement" means the Amended and Restated Shareholders Agreement among the Company, the Purchasers and the holders of the Common Stock and the Series A Preferred Stock in the form attached hereto as Exhibit B. "Tax" or "Taxes" shall mean all federal, state, local, foreign and other taxes, assessments or other government charges, including, without limitation, income, estimated income, business, occupation, franchise, property, sales, transfer, use, employment, commercial rent or withholding taxes, including interest, penalties and additions in connection therewith for which the Company may be liable. "Transaction Agreements" means collectively, this Agreement, the Registration Rights Agreement, and the Shareholders Agreement. "Welfare Plan" means any "employee welfare benefit plan" as defined in Section 3(1) of ERISA, (A) which the Company or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or under which the Company 7 14 or any ERISA Affiliate may incur any liability and (B) which covers any employee or former employee of the Company or any ERISA Affiliate (with respect to their relationship with such entities). 1.2 Accounting Terms; Financial Statements. All accounting terms used herein not expressly defined in this Agreement shall have the respective meanings given to them in accordance with GAAP. 1.3 Knowledge Standard. When used herein, the phrase "to the knowledge of" any Person, "to the best knowledge of" any Person or any similar phrase shall mean, (i) with respect to any individual, the actual knowledge of such Person (ii) with respect to any corporation (or a limited liability company), the actual knowledge of officers and directors, or Persons acting in similar capacities, of such corporation and the knowledge of such facts that such persons should have in the exercise of their duties after reasonable inquiry and (iii) with respect to a partnership, the actual knowledge of the officers and directors of the general partner of such partnership and the knowledge of such facts that such persons should have in the exercise of their duties after reasonable inquiry. When used herein, the phrase "to the knowledge of the Company," "to the best knowledge of the Company" or any similar phrase shall mean "to the best knowledge of the Company and each Company Affiliate" using the standards set forth in the previous sentence. 1.4 Other Defined Terms. The following terms shall have the meanings specified in the Sections set forth below: Term Section Actions 5.9 Audited Financial Statements 3.15 Certificate 2.1 Closing 2.3 Closing Date 2.3 Indemnified Party 9.1 Indemnifying Party 9.1 Intellectual Property 5.13 Liability (and Liabilities) 9.1 Preferred Shares 2.1 Purchase Price 2.2 Taxpayers 5.14 ARTICLE 2 AUTHORIZATION OF PREFERRED STOCK; PURCHASE AND SALE OF SECURITIES 8 15 2.1 Preferred Stock. The Company has authorized the issuance and sale to the Purchasers of 1,517,131 shares of Series B Preferred Stock (the "Preferred Shares") and has duly adopted resolutions establishing the rights, preferences, privileges and restrictions of the Series B Preferred Stock. The Series B Preferred Stock will have the respective rights, preferences and privileges set forth in the Company's Certificate of Incorporation, including the Certificate of Designations, Preferences, and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof of Series B Convertible Preferred Stock of P.F. Chang's China Bistro, Inc., in the form attached hereto as Exhibit C (the "Certificate"). 2.2 Purchase and Sale of Securities. Upon the terms and subject to the conditions herein contained, at the Closing (as defined herein) on the Closing Date (as defined herein), the Company agrees that it will issue to each of the Purchasers, and each Purchaser agrees that it will purchase from the Company, the number of Preferred Shares listed next to such Purchaser's name on Schedule 1 hereto. The aggregate purchase price of the Preferred Shares, to be paid by the Purchasers in the amounts listed next to each Purchaser's name on Schedule 1 hereto, shall be Six Million, Five Hundred Ninety-Nine Thousand, Five Hundred Nineteen Dollars and Eighty-Five Cents ($6,599,519.85) (the "Purchase Price"). 2.3 Closing. The closing of the sale to and purchase by the Purchasers of the Preferred Shares (the "Closing") shall occur at the offices of Lewis and Roca LLP, 40 North Central, Suite 1900, Phoenix, Arizona 85004 at 10:00 a.m., Phoenix, Arizona time on April 30, 1997 or on such different date and time as the Purchasers and the Company shall agree (the "Closing Date"). At the Closing, (i) the Company shall deliver to each Purchaser certificates evidencing the Preferred Shares being purchased by such Purchaser, free and clear of any Liens of any nature whatsoever, other than those created by the Certificate, registered in such Purchaser's name, and (ii) each Purchaser shall deliver to the Company the portion of the Purchase Price listed next to such Purchaser's name on Schedule 1 hereto, by cashier's check or wire transfer of immediately available funds. ARTICLE 3 CONDITIONS TO THE OBLIGATION OF THE PURCHASERS TO PURCHASE THE PREFERRED SHARES The obligation of each Purchaser to purchase the Preferred Shares, to pay the purchase prices therefor and to perform any obligations hereunder on the Closing Date (unless otherwise specified) shall be subject to the satisfaction as determined by, or waiver by, such Purchaser of the following conditions on or before the Closing Date: 3.1 Representations and Warranties. The representations and warranties of the Company contained in Article 5 hereof shall be true and correct at and as of the Closing Date (both before and after giving effect to the transactions contemplated under 9 16 this Agreement) as if made at and as of such date, except that the timely filing and payment of Taxes as set forth in Section 5.14(a) and Section 5.14(b) shall be true and correct at and as of the Closing Date (both before and after giving effect to the transactions contemplated under this Agreement) as if made at and as of such date to the extent that any failure to timely file or pay such Taxes shall not have a Material Adverse Effect. 3.2 Compliance with Terms and Conditions of this Agreement. The Company shall have performed and complied with all of the agreements and conditions set forth herein that are required to be performed or complied with by the Company on or before the Closing Date. 3.3 Delivery of Certificates Evidencing the Securities. The Company shall contemporaneously deliver to each Purchaser the certificates evidencing the Preferred Shares as set forth in Section 2.3. 3.4 Closing Certificates. The Company shall have delivered to each Purchaser a certificate executed by an authorized officer of the Company certifying that the representations and warranties of the Company contained in the Agreement are true and correct on and as of the Closing Date, and that the conditions set forth in this Section 3 to be satisfied by the Company have been satisfied on and as of the Closing Date. 3.5 Secretary's Certificates. Each Purchaser shall have received a certificate from the Company, dated as of the Closing Date and signed by the Secretary or an Assistant Secretary of the Company, certifying that the attached copies of the Certificate, Bylaws of the Company and resolutions of the Board of Directors of the Company approving the Transaction Agreements and the transactions contemplated thereby, are all true, complete and correct and remain unamended and in full force and effect. 3.6 Documents. Each Purchaser shall have received true, complete and correct copies of such documents and such other information as it may have reasonably requested in connection with or relating to the sale of the Preferred Shares and the transactions contemplated by the Transaction Agreements, or the business of the Company, all in form and substance reasonably satisfactory to the Purchasers prior to the Closing. 3.7 Purchase Permitted by Applicable Laws. The acquisition of and payment for the Preferred Shares to be acquired by the Purchasers hereunder and the consummation of the transactions contemplated by the Transaction Agreements shall not (a) violate any Requirements of Law, (b) result in a material breach or default (i) under any of the Contractual Obligations of the Company or (ii) under any order, writ, judgment, injunction, decree, determination or award of any court, arbitrator, or commission, board, bureau, agency or other governmental instrumentality, or (c) result 10 17 in, or require, the creation or imposition of any Lien upon or with respect to any of the property of the Company. 3.8 Opinion of Counsel. Each Purchaser shall have received an opinion of Lewis and Roca LLP, counsel to the Company, dated as of the Closing Date in the form attached as Exhibit D. 3.9 Approval of Counsel to Purchasers. All actions and proceedings required to be performed on or prior to the Closing Date hereunder and all documents required to be delivered by the Company on or prior to the Closing Date as required by this Agreement, shall have been acceptable to counsel to such Purchaser, in its reasonable judgment as to their form and substance. 3.10 Consents and Approvals. All consents, exemptions, authorizations, or other actions by, or notices to, or filings with, Governmental Authorities and other Persons in respect of all Requirements of Law and with respect to those material Contractual Obligations of the Company, necessary or required in connection with the execution, delivery or performance of the Transaction Agreements (including, without limitation, the issuance of the Preferred Shares, based solely on the Requirements of the Law and facts and circumstances in effect as of the Closing Date, and issuance of the Common Stock upon conversion or exercise of the Preferred Shares) by the Company, and shall have been obtained and be in full force and effect, and the Purchasers shall have been furnished with appropriate evidence thereof, and all waiting periods shall have lapsed without extension or the imposition of any conditions or restrictions. 3.11 Certain Waivers. Each holder of the shares of the capital stock of the Company (or any other party who may possess such rights) shall have waived any and all preemptive rights, rights of first refusal, "tag along" rights, rights of co-sale and any similar rights with respect to the issuance of the Preferred Shares contemplated hereby. 3.12 No Material Adverse Change. Since the Financial Statements Date, there shall have been no Material Adverse Effect. 3.13 Certificate. The Company shall have amended and filed the Certificate in the form of Exhibit C hereto (with such changes as agreed to by each Purchaser). 3.14 No Material Judgment or Order. There shall not be on the Closing Date any judgment or order of a court of competent jurisdiction or any ruling of any Governmental Authority affecting the Company or any Company Affiliate or any condition imposed under any Requirement of Law affecting the Company or any Company Affiliate which, in the reasonable judgment of the Purchasers, would (i) prohibit the purchase of the Preferred Shares or the consummation of the other transactions contemplated hereunder, (ii) subject the Purchasers to any penalty if the 11 18 Preferred Shares were to be purchased hereunder, (iii) question the validity or legality of the transactions contemplated hereby, or (iv) be reasonably expected to materially adversely affect the value of the capital stock of the Company or have a Material Adverse Effect. 3.15 Financial Statements. The Company shall have delivered to the Purchasers a copy of the audited consolidated financial statements of the Company and the Company Affiliates as of and for the year ended December 29, 1996 (the "Audited Financial Statements"), which Audited Financial Statements shall fairly present in all material respects the financial position and the results of operations and cash flows of the Company and the Company Affiliates as of and for such period in conformity with GAAP. 3.16 Registration Rights Agreement. The Company, the Purchasers and the holders of the Common Stock and Series A Preferred Stock shall contemporaneously execute and deliver the Registration Rights Agreement in the form attached hereto as Exhibit A. 3.17 Shareholders Agreement. The Company, the Purchasers and the holders of the Common Stock and Series A Preferred Stock shall contemporaneously execute and deliver a Shareholders Agreement in the form attached hereto as Exhibit B. 3.18 Board of Directors. Immediately following the Closing, the Board of Directors of the Company shall consist of Paul Fleming, Richard Federico, Michael Welborn, J. Michael Chu, Gerald Gallagher, Yves Sisteron and James Shennan. 3.19 Concurrent Purchases. Each Purchaser shall concurrently purchase its Preferred Shares. ARTICLE 4 CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE The obligation of the Company to issue and sell the Preferred Shares and the other obligations of the Company hereunder, shall be subject to the satisfaction as determined by, or waiver by, the Company of the following conditions on or before the Closing Date: 4.1 Representations and Warranties. The representations and warranties of the Purchasers contained in Section 6 hereof shall be true and correct at and as of the Closing Date (both before and after giving effect to the transactions contemplated under this Agreement) as if made at and as of such date. 12 19 4.2 Compliance with Terms and Conditions of this Agreement. The Purchasers shall have performed and complied with all of the agreements and conditions set forth herein that are required to be performed or complied with by the Purchasers on or before the Closing Date. 4.3 Issuance Permitted by Applicable Laws. The issuance of the Preferred Shares by the Company hereunder, acquisition of the Preferred Shares by the Purchaser hereunder and the consummation of the transactions contemplated by the Transaction Agreements shall not (a) violate any Requirements of Law, or (b) result in a breach or default (i) under any of the Contractual Obligations of the Purchasers, or (ii) under any order, writ, judgment, injunction, decree, determination or award of any court, arbitrator, or commission, board, bureau, agency or other governmental instrumentality, or (c) require any consents, approvals, exemptions, authorizations, registrations, declarations or filings by the Purchasers. 4.4 Payment of Purchase Price. The Purchasers shall tender to the Company the Purchase Price in the manner set forth in Section 2.2 in the respective amounts specified on Schedule 1 hereto. 4.5 No Material Judgment or Order. There shall not be on the Closing Date any judgment or order of a court of competent jurisdiction or any ruling of any Governmental Authority or any condition imposed under any Requirements of Law which, in the reasonable judgment of the Company would (i) prohibit the sale of the Preferred Shares or the consummation of the other transactions contemplated hereunder, (ii) subject the Company to any penalty if the Preferred Shares were to be sold hereunder, or (iii) question the validity or legality of the transactions contemplated hereby. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to the Purchasers as of the date hereof as follows: 5.1 Corporate Existence and Authority. The Company (a) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, (b) has all requisite corporate power and authority to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently, or is currently proposed to be engaged, (c) is duly qualified as a foreign corporation, licensed and in good standing in each jurisdiction where the failure to do so would have a Material Adverse Effect, and (d) has the corporate power and authority to execute, deliver and perform its obligations under each Transaction Agreement to which it is or will be a party. 13 20 5.2 Corporate Authorization; No Contravention. The execution, delivery and performance by the Company of each of the Transaction Agreements and the consummation of the transactions contemplated thereby, including without limitation, the issuance of the Preferred Shares (a) has been duly authorized by all necessary corporate action, including, if required, stockholder action, (b) does not and will not conflict with or contravene the terms of the Certificate or the By-Laws of the Company, or any amendment thereof; and (c) does not and will not violate, conflict with or result in any material breach or contravention of (i) any Contractual Obligation of the Company or any Company Affiliate, or (ii) any Requirements of Law applicable to the Company or any Company Affiliate. 5.3 Governmental Authorization; Third Party Consents. No approval, consent, compliance, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person in respect of any applicable Requirements of Law, and no lapse of a waiting period under any applicable Requirements of Law, is necessary or required in connection with the execution, delivery or performance (including, without limitation, the issuance of the Preferred Shares and the issuance of the Common Stock upon the conversion of the Preferred Shares) by the Company or the enforcement against the Company of the Transaction Agreements, or the transactions contemplated thereby. 5.4 Binding Effect. The Transaction Agreements have been duly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as enforceability may be limited by applicable bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity relating to enforceability. 5.5 Other Agreements. Neither the Company nor the Company Affiliates have previously entered into any agreements which are currently in effect or to which the Company or the Company Affiliates is currently bound, granting any registration or other material rights to any Person, the provision or performance of which would render the provision or performance (including, without limitation, the issuance of the Preferred Shares and the issuance of the Common Stock upon the conversion of the Preferred Shares) of the material rights to be granted to the Purchasers by the Company in the Transaction Agreements impracticable. 5.6 Capitalization. (a) Immediately prior to the Closing, the authorized capital stock of the Company will consist solely of (i) 20,000,000 shares of Common Stock and (ii) 10,000,000 shares of Preferred Stock (7,700,000 shares of Series A Preferred Stock and 2,300,000 shares of Series B Preferred Stock). Immediately following the Closing (i) 5,000,000 shares of Common Stock will be issued and outstanding; (ii) 11,383,358 14 21 shares of Common Stock will be reserved for issuance upon (a) the exercise of options to purchase such shares, (b) the conversion of Preferred Stock and (c) the conversion of Series A Preferred Stock issued upon the exercise of certain warrants issued to Montgomery Securities; (iii) 6,871,401 shares of Preferred Stock will be issued and outstanding (of which 5,354,270 shares will be shares of Series A Preferred Stock and 1,517,131 shares will be shares of Series B Preferred Stock); (iv) 124,380 shares of Series A Preferred Stock will be reserved for issuance upon exercise of certain warrants issued to Montgomery Securities; (v) (a) 2,189,905 shares of Series A Preferred Stock will be reserved for issuance as "payment-in-kind" dividends of Series A Preferred Stock and (b) 467,155 shares of Series B Preferred Stock will be reserved for issuance as "payment-in-kind" dividends of Series B Preferred Stock; and (vi) options to purchase 1,730,517 shares of Common Stock will be outstanding. A total of 13,726,298 fully diluted shares of Common Stock will be outstanding immediately following the Closing, assuming the conversion of all outstanding shares of Preferred Stock and the exercise of all outstanding options and warrants. All outstanding shares of capital stock of the Company are, and the shares of Series B Preferred Stock (when issued, sold and delivered against payment therefor), the shares of Preferred Stock issuable as "payment-in-kind" shares in respect of Preferred Stock (when declared and paid), and the shares of Common Stock issuable upon conversion of the Preferred Stock (when issued upon conversion) will be, duly authorized and validly issued, fully paid, nonassessable and free and clear of any Liens, preferential rights, priorities, claims, options, charges or other encumbrances or restrictions, other than those created by the Certificate and the Shareholders Agreement. (b) Schedule 5.6 sets forth the name of each holder of the issued and outstanding capital stock of the Company, the number of shares of such capital stock held of record by each such holder, the name of each Person holding any options, warrants or other rights to purchase any capital stock of the Company, the number, class and series of shares of capital stock subject to each such option, warrant or right and the exercise price of each such option, warrant or right. Except as set forth on Schedule 5.6, and except for the Preferred Stock, there are no outstanding securities convertible into or exchangeable for capital stock of the Company or options, warrants or other rights to purchase or subscribe to capital stock of the Company or contracts, commitments, agreements, understandings or arrangements of any kind to which the Company or any such holder of capital stock is a party relating to the issuance of any capital stock of the Company, any such convertible or exchangeable securities or any such options, warrants or rights. (c) Except as set forth on Schedule 5.6 and in the Transaction Agreements, no Person has any preemptive rights, rights of first refusal, "tag along" rights, rights of co-sale or any similar rights with respect to the issuance of the Preferred Shares contemplated hereby. 5.7 Company Affiliates. Schedule 5.7 sets forth a complete and accurate list of all of the Company Affiliates and all entities that own or operate a P.F. Chang's 15 22 China Bistro together with the Company's ownership interest therein. Each Company Affiliate that is a corporation or a limited liability company is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, with the corporate or requisite power and authority to own its properties and conduct its business. Each Company Affiliate that is a partnership is an existing partnership under the laws of the jurisdiction of its formation and has full partnership power and authority to own its properties and conduct its business. Each Company Affiliate is qualified and licensed to transact business in each jurisdiction where the failure to do so would have a Material Adverse Effect. All of the outstanding shares of capital stock of the Company Affiliates that are corporations have been duly authorized and validly issued and are fully paid and nonassessable. All of the outstanding shares of capital stock of, or other ownership interests in, each of the Company Affiliates are owned by the Company free and clear of any Liens, claims, options, charges or other encumbrances, except as expressly provided in the organizational documents of the Company Affiliates. No Company Affiliate has outstanding options, warrants, subscriptions, calls, rights, convertible securities or other agreements or commitments obligating the Company Affiliate to issue, transfer or sell any securities of the Company Affiliate. 5.8 Private Offering. No form of general solicitation or general advertising was used by the Company or its representatives in connection with the offer or sale of the Preferred Shares. No registration of the Preferred Shares pursuant to the provisions of the Securities Act or any state securities or "blue sky" laws will be required by the offer, sale or issuance of the Preferred Shares pursuant to this Agreement. 5.9 Litigation. There is no complaint, action, order, writ, injunction, judgment or decree outstanding, or claim, suit, litigation, proceeding, labor dispute, arbitral action or investigation (collectively, "Actions") pending or, to the knowledge of the Company, threatened against, relating to or affecting (i) the assets of the Company or the Company Affiliates or (ii) the transactions required to be performed under this Agreement or by the Transaction Agreements. Neither the Company nor any of the Company Affiliates is in default with respect to any judgment, order, writ, injunction or decree of any court or governmental agency, and there are no unsatisfied judgments against the Company or any Company Affiliate. There is not a reasonable likelihood of an adverse determination of any pending Action that would, individually or in the aggregate, have a Material Adverse Effect. 5.10 Financial Statements. The Audited Financial Statements have been prepared in accordance with GAAP and fairly present in all material respects the consolidated financial position of the Company and the Company Affiliates as of the date thereof and the results of operations and cash flows of the Company and the Company Affiliates for the period set forth therein. 5.11 Title and Condition of Assets. 16 23 (a) The Company and each Company Affiliate has good title to all of the personal property reflected on the balance sheet included in the Audited Financial Statements or acquired by the Company or any of the Company Affiliates since the date thereof, and all real and personal property reflected on such balance sheet or acquired by the Company or the Company Affiliates since the date thereof is free and clear of any Liens or defects of title, other than Permitted Liens. The Company and each Company Affiliate has a valid and enforceable leasehold interest in all real property leased by it pursuant to the terms of the respective lease agreements (assuming that each respective landlord has good and marketable title to all real property that is subject to such leases and except as enforceability may be limited by applicable bankruptcy laws or rights of creditors generally). (b) The Facilities and Equipment are in good operating condition and repair (except for ordinary wear and tear and any defect the cost of repairing which would not be material), are sufficient for the operation of the business of the Company and each Company Affiliate and are in conformity in all material respects with applicable laws, ordinances, orders, regulations and other requirements (including applicable zoning, environmental, motor vehicle safety standards, occupational safety and health laws and regulations) relating thereto, except where such failure to conform would not have a Material Adverse Effect. The Company and each Company Affiliate enjoy peaceful and undisturbed possession of all Facilities owned or leased by the Company or such Company Affiliate, and, to the best knowledge of the Company, such Facilities are not subject to any encroachments, building or use restrictions, exceptions, reservations or limitations which in any material respect interfere with or impair the present and continued use thereof in the usual and normal conduct of the business of the Company or each Company Affiliate. There are no pending or, to the best knowledge of the Company, threatened, condemnation proceedings relating to any of the Facilities. The Facilities and the Equipment are insured and are, to the best of the Company's knowledge, structurally sound with no material defects. (c) All assets are valued on the books of the Company or the Company Affiliate at or below actual cost less appropriate depreciation charges. Neither the Company nor any Company Affiliate has depreciated any of the Assets for tax purposes in any manner inconsistent with the Code or the rules, regulations, or guidelines of the Internal Revenue Service. 5.12 Contractual Obligations. Neither the Company nor any of the Company Affiliates is in default or breach under or with respect to any Contractual Obligation to which it is a party (and to the best knowledge of the Company and such Company Affiliates no other party to any such Contractual Obligation is in default or breach thereunder), except any such default which, individually or together with all such defaults, would not have a Material Adverse Effect. 5.13 Patents, Trademarks, Etc. As of the Closing, the Company owns or is licensed or otherwise has the right to use all patents, trademarks, service marks, trade 17 24 names, copyrights, licenses, franchises and other intellectual property rights that are material to the operation of the businesses of the Company (the "Intellectual Property"). To the best knowledge of the Company, no product, process, method, substance or other material presently sold by or employed by the Company, or which the Company contemplates selling or employing, infringes upon the patents, trademarks, service marks, trade names, copyrights, licenses or other intellectual property rights that are owned by others. No litigation is pending and no claim has been made against the Company or any Company Affiliate or, to the best knowledge of the Company, is threatened, contesting the right of the Company or any Company Affiliate to sell or use any product, process, method, substance or other material presently sold by or employed by the Company or any Company Affiliate. To the best knowledge of the Company, no patent, invention, devise, principal or any statute, law, rule, regulation, standard or code is pending or proposed, which would have a material adverse effect on the Condition of the Company. The Company has not licensed any Intellectual Property to any Person other than the Company Affiliates and no Person other than the Company Affiliates has the right to license or use any Intellectual Property to identify, or in connection with the operation of, its business. 5.14 Tax Matters. (a) Filing of Tax Returns. Each of the Company and the Company Affiliates (each such entity hereinafter a "Taxpayer" or collectively the "Taxpayers") have timely filed with the appropriate taxing authorities all returns (including without limitation information returns and other material information) in respect of Taxes required to be filed through the date hereof and will timely file any such returns required to be filed on or prior to the Closing Date. The returns and other information filed (or to be filed) are complete and accurate in all material respects. (b) Payment of Taxes. All Taxes of each of the Taxpayers in respect of periods beginning before the Closing Date have been timely paid, or will be timely paid prior to the Closing Date, to the extent due and payable prior to the Closing Date, and no Taxpayer has any material liability for Taxes in excess of the amounts so paid. All Taxes that each Taxpayer has been required to collect or withhold have been duly collected or withheld and, to the extent required when due, have been or will be (prior to the Closing Date) duly paid to the proper taxing authority. (c) Audits Investigations or Claims. The federal income tax returns of each of the Taxpayers have not been examined by the Internal Revenue Service, and no material deficiencies for Taxes of any of the Taxpayers have been claimed, proposed or assessed by any taxing or other governmental authority against any of the Taxpayers which have not been reserved for in the Audited Financial Statements. There are no pending or, to the best knowledge of the Taxpayers, threatened audits, investigations or claims for or relating to any material additional liability to any of them in respect of Taxes, and there are no matters under discussion with any governmental authorities with respect to Taxes that in the reasonable judgment of any of the Taxpayers, or its or their counsel, is likely to result in a material additional liability to any of them for 18 25 Taxes. None of the Taxpayers' federal, state and local returns for Taxes are currently under audit by the relevant taxing authorities and the results of any prior audit are fairly presented in the Audited Financial Statements. None of the Taxpayers have been notified that any taxing authority intends to audit a return for any period. No extension of a statute of limitations relating to Taxes is in effect with respect to any of the Taxpayers. (d) Lien. There are no liens for Taxes (other than for current Taxes not yet due and payable) on any assets of any Taxpayer. (e) Partnership Status. Each of the Company Affiliates which purports to be a limited liability company or a partnership is properly treated as a partnership for federal income tax purposes and not as an association or publicly traded partnership taxable as a corporation, and has been properly so treated since the time of its organization. (f) Tax Elections; Tax Sharing Arrangements. (i) None of the Taxpayers have made an election, and none of them are required, to treat any asset as owned by another person or as tax-exempt bond financed property or tax-exempt use property within the meaning of section 168 of the Code or under any comparable state or local income tax or other tax provision. (ii) None of the Taxpayers are a party to or bound by any binding tax sharing, tax indemnity or tax allocation agreement or other similar arrangement with any other party. (iii) None of the Taxpayers have filed a consent pursuant to the collapsible corporation provisions of Section 341(f) of the Code (or any corresponding provision of state or local law) or agreed to have Section 341(f)(2) of the Code (or any corresponding provision of state or local law) apply to any disposition of any asset owned by it. (g) Affiliated Group. None of the Taxpayers have ever been a member of an affiliated group of corporations, within the meaning of Section 1504 of the Code. (h) Section 481(a). None of the Taxpayers have agreed to make, or are required to make, any adjustment under Section 481(a) of the Code by reason of a change in accounting method or otherwise. (i) Excess Parachute Payments. None of the Taxpayers are a party to any agreement, contract, arrangement or plan that has resulted or would result, separately or in the aggregate, in the payment of any "excess parachute payments" within the meaning of Section 280G of the Code. 19 26 (j) No Joint Venture. Other than the Company Affiliates which are partnerships or limited liability companies, none of the Taxpayers is a party to any joint venture, partnership, or other arrangement or contract which could be treated as a partnership for federal income tax purposes. 5.15 Severance Arrangements. Except pursuant to the employment agreements between the Company and Paul M. Fleming, Richard L. Federico and John Middleton, neither the Company nor any Company Affiliate has entered into any severance or similar arrangement in respect of any present or former employee that will result in any obligation (absolute or contingent) of the Company or any Company Affiliate to make any payment to any present or former employee following termination of employment. 5.16 No Material Adverse Change. To the best knowledge of the Company, since the Financial Statements Date, there has not been any Material Adverse Effect, nor to the best knowledge of the Company is any such Material Adverse Effect threatened. 5.17 Environmental Matters. (a) Except as set forth on Schedule 5.17, the property, assets and operations of the Company and each Company Affiliate are and have been in compliance in all material respects with all applicable Environmental Laws; there are no Hazardous Materials stored or otherwise located in, on or under any of the property or assets of the Company and each Company Affiliate, including the groundwater; and, to the best knowledge of the Company, there have been no releases or threatened releases of Hazardous Materials in, on or under any property adjoining any of the property or assets of the Company and each Company Affiliate. Neither the Company nor any Company Affiliate has stored or caused to be stored any Hazardous Materials on or under any of the property or assets of the Company, including the groundwater, other than in compliance with Environmental Laws; and the Company has not generated, released or discharged any Hazardous Materials other than in compliance with Environmental Laws. (b) None of the property, assets or operations of the Company or any Company Affiliate is the subject of any federal, state or local investigation evaluating whether (i) any remedial action is needed to respond to a release or threatened release of any Hazardous Materials into the environment or (ii) any release or threatened release of any Hazardous Materials into the environment is in contravention of any Environmental Law. (c) There are no pending, or, to the best knowledge of the Company, threatened lawsuits or proceedings against the Company or any Company Affiliate, with respect to violations of an Environmental Law or in connection with the presence of or exposure to any Hazardous Materials in the environment or any release or 20 27 threatened release of any Hazardous Materials into the environment, and neither the Company nor any Company Affiliate is or was the owner or operator of any property which (i) pursuant to any Environmental Law has been placed on any list of Hazardous Materials disposal sites, including without limitation, the "National Priorities List" or "CERCLIS List," (ii) has or, to the best knowledge of the Company, had any subsurface storage tanks located thereon; or (iii) to the knowledge of the Company, has ever been used as or for a waste disposal facility, a mine, a gasoline service station or a petroleum products storage facility. (d) Neither the Company nor any Company Affiliate has any present or contingent liability in connection which the presence either on or off the property or assets of the Company or any Company Affiliate of any Hazardous Materials in the environment or any release or threatened release of any Hazardous Materials into the environment, except for any such liability that would not have a material adverse effect on the Condition of the Company. 5.18 Investment Company/Government Regulations. Immediately following the Closing, after giving effect to the transactions contemplated by the Transaction Agreements, neither the Company nor any Person controlling, controlled by or under common control with the Company will be an "investment company" within the meaning of the Investment Company Act of 1940, as amended. The Company is not subject to regulation under the Public Utility Holding Company Act of 1935, as amended, the Federal Power Act, or any federal or state statute or regulation limiting its ability to incur Indebtedness. 5.19 Broker's, Finder's or Similar Fees. There are no brokerage commissions, finder's fees or similar fees or commissions payable in connection with the transactions contemplated hereby based on any agreement, arrangement or understanding with the Company or any officer, director, shareholder, or Affiliate of the Company, or any action taken by any such person except for the fee payable to Montgomery Securities in the amount of $100,000 pursuant to the engagement letter dated September 10, 1995, as evidenced by the invoice dated April 24, 1997. 5.20 Labor Relations and Employee Matters. Neither the Company nor any Company Affiliate is engaged in any unfair labor practice. There is (i) no unfair labor practice complaint pending or, to the best knowledge of the Company, threatened against the Company or any Company Affiliate before the National Labor Relations Board, and no grievance or arbitration proceeding arising out of or under collective bargaining agreements is so pending or, to the best knowledge of the Company, threatened against the Company or any Company Affiliate, (ii) no strike, labor dispute, slowdown or stoppage pending or, to the best knowledge of the Company, threatened against the Company or any Company Affiliate, and (iii) no union representation question existing with respect to the employees of the Company or any Company Affiliate and, to the knowledge of the Company, no union organizing activities are 21 28 taking place. The Company is not a party to any collective bargaining agreement or covenant not to compete. 5.21 Employee Benefits Matters. (a) Pension Plans and Multiemployer Plans. Neither the Company nor any ERISA Affiliate sponsors, maintains, contributes to, is required to contribute to or otherwise has a liability or potential liability with respect to, or has at any time sponsored, maintained, contributed to, or been required to contribute to, a Pension Plan or a Multiemployer Plan. (b) Welfare Plans. (i) Each Welfare Plan which covers or has covered employees or former employees of the Company or a Company Affiliate (with respect to their relationship with such entities) has been maintained in material compliance with its terms and, both as to form and operation, with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Welfare Plan, including but not limited to ERISA and the Code. (ii) None of the Company, any ERISA Affiliate or any Welfare Plan has any present or future obligation to make any payment to or with respect to any present or former employee of the Company or any ERISA Affiliate pursuant to any retiree medical benefit plan, or other retiree Welfare Plan, and no condition exists which would prevent the Company from amending or terminating any such benefit plan or Welfare Plan. (iii) Each Welfare Plan which covers or has covered employees or former employees of the Company or a Company Affiliate and which is a "group health plan," as defined in Section 607(1) of ERISA, has been operated in material compliance with the provisions of Part 6 of Title I, Subtitle B of ERISA and Sections 162K and 4980B of the Code at all times. (c) Benefit Arrangements. Each Benefit Arrangement which covers or has covered employees or former employees of the Company or a Company Affiliate (with respect to their relationship with such entities) has been maintained in compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Benefit Arrangement, including but not limited to the Code. (d) Unrelated Business Taxable Income. No Employee Plan (or trust or other funding vehicle pursuant thereto) is subject to any tax under Code Section 511. (e) Deductibility of Payments. There is no contract, agreement, plan or arrangement covering any employee or former employee of the Company or a 22 29 Company Affiliate (with respect to their relationship with such entities) that, individually or collectively, provides for the payment by the Company of any amount (i) that is not deductible under Section 162(a)(1) or 404 of the Code or (ii) for which the deduction by Company would be disallowed under Section 162(m) of the Code. (f) Fiduciary Duties and Prohibited Transactions. Neither the Company nor any plan fiduciary of any Welfare Plan which covers or has covered employees or former employees of the Company or any ERISA Affiliate, has engaged in any transaction in violation of Sections 404 or 406 of ERISA or any "prohibited transaction," as defined in Section 4975(c)(1) of the Code, for which no exemption exists under Section 408 of ERISA or Section 4975(c)(2) or (d) of the Code. (g) Validity and Enforceability. Each Welfare Plan, related trust agreement or other funding instrument and Benefit Arrangement which covers or has covered employees or former employees of the Company or a Company Affiliate (with respect to their relationship with such entities) is legally valid and binding and in full force and effect. (h) Litigation. There is no action, order, writ, injunction, judgment or decree outstanding or claim, suit, proceeding, arbitral action, governmental audit or investigation relating to or seeking benefits under any Employee Plan that is pending, or, to the best knowledge of the Company, threatened against the Company, any ERISA Affiliate or any Employee Plan other than a domestic relations order or a qualified domestic relations order. (i) No Amendments. Neither the Company nor any ERISA Affiliate has any announced plan or legally binding commitment to create any additional Employee Plans which are intended to cover employees or former employees of the Company or a Company Affiliate (with respect to their relationship with such entities) or to amend or modify any existing Employee Plan which covers or has covered employees or former employees of the Company or a Company Affiliate (with respect to their relationship with such entities). (j) No Other Material Liability. No event has occurred in connection with which the Company or any ERISA Affiliate or any Employee Plan, directly or indirectly, could be subject to any material liability (i) under any statute, regulation or governmental order relating to any Employee Plans or (ii) pursuant to any obligation of the Company or any Company Affiliate to indemnify any person against liability incurred under, any such statute, regulation or order as they relate to the Employee Plans. The Company has performed all of its obligations under all Employee Plans including, without limitation, the full payment when due of all amounts required to be made as contributions to any Employee Plan or otherwise and there is no unfunded liability for vested or non-vested benefits under any funded Employee Plan. 23 30 (k) No Acceleration or Creation of Rights. Neither the execution and delivery of this Agreement or other related agreements by the Company nor the consummation of the transactions contemplated hereby or the related transactions will result in the acceleration or creation of any rights of any person to benefits under any Employee Plan. 5.22 Undisclosed Liabilities. Neither the Company nor any Company Affiliate have any liabilities or obligations (absolute, accrued, contingent or otherwise) to the best knowledge of the Company except (i) liabilities that are reflected and reserved against on the balance sheet included in the Audited Financial Statements (including the notes thereto), or (ii) liabilities incurred in the ordinary course of business and consistent with the past practice of the Company. 5.23 Solvency. Neither the Company nor any Company Affiliate has (i) made a general assignment for the benefit of its creditors, (ii) filed any voluntary petition in bankruptcy or suffered the filing of any involuntary petition in bankruptcy by its creditors, (iii) suffered the appointment of a receiver to take possession of all or substantially all of its assets or properties, (iv) suffered the attachment or other judicial seizure of all or substantially all of its assets or (v) admitted in writing its inability to pay its debts as they come due. After giving effect to the transactions contemplated by the Transaction Agreements, the Company will not (i) have liabilities which exceed the stated value of its assets, or (ii) be left with unreasonably small capital with which to engage in its respective business for the foreseeable future, or (iii) have incurred debts beyond its ability to pay such debts as they mature. 5.24 Compliance with Law. To the best knowledge of the Company, the Company and the Company Affiliates and the conduct of their businesses is in compliance with all applicable laws, statutes, ordinances and regulations, whether federal, state or local, except where the failure to comply would not have a Material Adverse Effect. Neither the Company nor any Company Affiliate has received any written notice to the effect that, or to the knowledge of the Company, it is not in compliance with any of such statutes, regulations, orders, ordinances or other laws where the failure to comply would have a material adverse effect on the Condition of the Company or, to the best knowledge of the Company has no reason to anticipate that any presently existing circumstances are likely to result in violations of any such regulations which would, in any one case or in the aggregate, have a Material Adverse Effect. 5.25 No Other Agreements to Sell the Assets or Capital Stock of the Company. Neither the Company nor any Company Affiliate has any legal obligation, absolute or contingent, other than the obligations of the Company and each Company Affiliate under the Transaction Agreements, to any person or firm to (i) sell or license the assets other than in the ordinary course of business consistent with past practices, (ii) sell any capital stock of the Company (other than as set forth in Section 5.6) or 24 31 effect any merger, consolidation or other reorganization of the Company or (iii) enter into any agreement with respect to any of the foregoing. 5.26 Hart-Scott-Rodino. The Person (as that term is defined in 16 C.F.R. 801.1(a)(1)) of which the Company is a part does not have total assets or annual net sales of $100,000,000 or more, as measured under the applicable rules and regulations interpreting the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). 5.27 Budget. The Company's budget for the fiscal year ending December 31, 1997 represents the Company's management's good faith estimate of the future financial and operating performance of the Company (for the period set forth therein), based upon the best currently available information. As of the Closing Date, no event shall have occurred that would result in a material adverse change in such budget or the assumptions underlying such budget. 5.28 Insurance. The Company maintains fire, theft, casualty, liability and such other insurance policies as are customary and adequate for the Company's business. 5.29 Disclosure. (a) Agreement and Other Documents. This Agreement does not, and the documents and certificates executed by the Company or otherwise furnished by the Company to the Purchasers at the Closing will not, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading. (b) Material Adverse Effects. There is no fact known to the Company, which the Company has not disclosed to the Purchasers in writing, which materially adversely affects, or insofar as the Company can reasonably foresee, will have a Material Adverse Effect. ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS Each Purchaser, severally and not jointly, hereby represents and warrants to the Company as of the date hereof as follows: 6.1 Existence and Authority. Such Purchaser (a) is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation, (b) has all requisite power and authority to own its assets and operate its business, and (c) has all requisite power and authority to execute, deliver and perform 25 32 its obligations under each of the Transaction Agreements to which it is or will be a party. 6.2 Authorization; No Contravention. The execution, delivery and performance by such Purchaser of the Transaction Agreements to which it is a party and the consummation of the transactions contemplated thereby, including, without limitation, the acquisition of the Preferred Shares: (a) is within such Purchaser's power and authority and has been duly authorized by all necessary action on the part of such Purchaser; (b) does not conflict with or contravene the terms of such Purchaser's organizational documents or any amendment thereof; and (c) will not violate, conflict with or result in any material breach or contravention of (i) any Contractual Obligation of such Purchaser, or (ii) the Requirements of Law or any order or decree applicable to such Purchaser. 6.3 Governmental Authorization; Third Party Consent. No approval, consent, compliance, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person in respect of any Requirements of Law, and no lapse of a waiting period under any Requirements of Law, is necessary or required in connection with the execution, delivery or performance by such Purchaser (including, without limitation, the acquisition of the Preferred Shares and issuance of Common Stock upon the conversion or exercise of the Preferred Shares) or enforcement against such Purchaser of this Agreement or the other Transaction Agreements to which it is a party, or the transactions contemplated thereby. 6.4 Binding Effect. This Agreement has been duly executed and delivered by such Purchaser, and this Agreement constitutes the legal, valid and binding obligation of such Purchaser, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. 6.5 Purchase for Own Account. The Preferred Shares and the Common Stock to be issued upon conversion of the Preferred Shares, are being or will be acquired by such Purchaser for its own account and with no intention of distributing or reselling such securities or any part thereof in any transaction that would be in violation of the securities laws of the United States of America, or any state, without prejudice, however, to the rights of such Purchaser at all times to sell or otherwise dispose of all or any part of the Preferred Shares or the shares of Common Stock issuable upon conversion of the Preferred Shares under an effective registration statement under the Securities Act, or under an exemption from such registration available under the Securities Act, and subject, nevertheless, to the disposition of such Purchaser's property being at all times within its control. Such Purchaser agrees not to dispose of any of the Preferred Shares or the shares of Common Stock issuable upon conversion of the Preferred Shares, unless it does so only in compliance with the Securities Act and applicable state securities laws, as then in effect. Such Purchaser agrees to the 26 33 imprinting, so long as required by law, of a legend on certificates representing all of the Preferred Shares or the shares of Common Stock to be issued upon conversion of the Preferred Shares to the following effect: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS SET FORTH IN AN AMENDED AND RESTATED SHAREHOLDERS AGREEMENT DATED AS OF MAY 1, 1997. A COPY OF SUCH AGREEMENT MAY BE OBTAINED FROM THE COMPANY UPON REQUEST." 6.6 Accredited Investor Status. Such Purchaser is an "accredited investor" as such term is defined in Rule 501(a) of Regulation D, promulgated under the Securities Act. Each Purchaser shall provide such information with respect to its status as an "accredited investor" that the Company shall have reasonably requested prior to the Closing Date. 6.7 Investment Risk. Each Purchaser has the ability to bear the economic risks of the Purchaser's prospective investment and the Purchaser is able, without materially impairing its financial condition, to hold the Preferred Stock for an indefinite period of time and to suffer complete loss on its investment. Each Purchaser understands and has fully considered for purposes of this investment the risks of this investment and understands that: (i) this investment is suitable only for an investor who is able to bear the economic consequences of losing his or its entire investment; (ii) the Preferred Shares represent an extremely speculative investment which involves a high degree of risk of loss; (iii) there are substantial restrictions on the transferability of the Preferred Shares and, accordingly, it may not be possible for the Purchaser to liquidate his or its investment in the Preferred Shares; and (iv) there have been no representations as to the possible future value, if any, of the Preferred Shares. Each Purchaser acknowledges that it has been provided the opportunity to ask questions and receive answers from duly authorized officers or other representatives of the Company concerning the Company. Each Purchaser acknowledges that its acquisition of the Preferred Shares hereunder may involve tax consequences to such Purchaser and that the Company has not provided such Purchaser with tax advice. Each Purchaser understands and acknowledges that the sale of the Preferred Shares pursuant to this Agreement will not be registered under the Securities Act on the grounds that the offering and sale of securities contemplated by this Agreement are exempt from registration pursuant to Section 4(2) of the Securities Act, and that the 27 34 Company's reliance upon such exemption is predicated in part upon the Purchaser's representations set forth in this Agreement. 6.8 Broker's, Finder's or Similar Fees. There are no brokerage commissions, finder's fees or similar fees or commissions payable by the Company in connection with the transactions contemplated hereby based on any agreement, arrangement or understanding with the Purchasers. ARTICLE 7 COVENANTS OF THE COMPANY From the date hereof until the Closing Date, the Company hereby covenants and agrees with the Purchasers as follows: 7.1 Further Assurances. Upon the terms and subject to the conditions contained herein, each of the parties hereto agrees, both before and after the Closing, (i) to use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement, (ii) to execute any documents, instruments or conveyances of any kind which may be reasonably necessary or advisable to carry out any of the transactions contemplated hereunder, and (iii) to cooperate with each other in connection with the foregoing, including using their reasonable respective best efforts (A) to obtain all necessary waivers, consents and approvals from other parties that may be required; (B) to obtain all necessary permits as are required to be obtained under any federal, state, local or foreign law or regulations, and (C) to fulfill all conditions to this Agreement. 7.2 Notification of Certain Matters. From the date hereof through the Closing, the Company shall give prompt notice upon obtaining knowledge thereof to Purchaser of (a) the occurrence, or failure to occur, of any event which occurrence or failure would be likely to cause any representation or warranty contained in this Agreement or in any exhibit or schedule hereto to be untrue or inaccurate in any material respect and (b) any material failure of the Company to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it under this Agreement or any exhibit or schedule hereto. 7.3 Access to Information. From the date hereof through the Closing, the Company shall, and shall cause its officers, directors, employees and agents to, afford the Purchasers (or its representatives) access at all times to the Company's records for the purpose of inspecting the same, and subject to prior written request, to the officers, employees, agents, attorneys, accountants, properties, and contracts of the Company, and shall furnish Purchasers all financial, operating and other data and information as the Purchasers or their representatives, may reasonably request. 28 35 7.4 Conduct of Business. From the date hereof through the Closing, the Company shall, except as contemplated by this Agreement, or as consented to by Purchaser in writing which consent will not be unreasonably withheld, operate the Company in the ordinary course of business and in accordance with past practice and will not take any action inconsistent with this Agreement or with the consummation of the Closing. The Company agrees that neither it, nor anyone acting on its behalf, will offer or sell the Preferred Shares or any other security in a manner that would require the issuance and sale of the Preferred Shares to be registered or qualified pursuant to the provisions of the Securities Act or any state securities or "blue sky" laws. ARTICLE 8 COVENANTS OF THE COMPANY WITH RESPECT TO THE PERIOD FOLLOWING THE CLOSING Until (a) all shares of Preferred Stock are no longer outstanding due to conversion, redemption or otherwise, and (b) the Company has paid to the Purchasers all other amounts due to them under the Transaction Agreements or the Certificate, the Company hereby covenants and agrees with the Purchasers as follows: 8.1 Reservation of Shares. The Company shall at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issue or delivery upon conversion of the Preferred Shares as provided in the Certificate, the maximum number of shares of Common Stock that may be issuable or deliverable upon such conversion, as well as the number of shares of Common Stock that may be issuable or deliverable upon conversion of the Series B Preferred Stock issued to the Purchasers as dividends. Such shares of Common Stock shall, when issued or delivered in accordance with the provisions of the Certificate, be duly authorized, validly issued and fully paid and non-assessable. The Company shall issue such Common Stock in accordance with the provisions of the Certificate and shall otherwise comply with the terms thereof. 8.2 Books and Records. The Company shall, and shall cause each of the Company Affiliates, together with any newly formed subsidiaries of the Company, to, keep proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Company and each of such Company Affiliates or subsidiaries in accordance with GAAP, to the extent GAAP is applicable. The Company shall provide the Purchasers with reasonable access to all such books and records during regular business hours and allow the Purchasers to make copies and abstracts thereof. 8.3 Use of Proceeds. The Company shall use the proceeds of the sale of Preferred Shares hereunder only (a) as working capital for the Company, (b) for 29 36 expansion of the Company, and (c) for the payment of fees and expenses in connection with the Transaction Agreements. 8.4 New Lines of Business. The Company shall not without the prior written consent of holders of a majority in interest of the Preferred Shares, engage in any business other than the preparation and distribution of Chinese food products or any line of business that is related thereto. 8.5 Compensation of Directors. Each member of the Board of Directors shall be reimbursed by the Company for all out-of-pocket expenses, including, without limitation, travel expenses, incurred by such director in connection with the performance of such director's duties. ARTICLE 9 INDEMNIFICATION 9.1 Indemnification. In addition to all other sums due hereunder or provided for in this Agreement and all other remedies that may be otherwise available, the Company (the "Indemnifying Party") agrees to indemnify and hold harmless each Purchaser and its Affiliates and its respective officers, directors, agents, employees, partners and assigns (each, an "Indemnified Party") to the fullest extent permitted by law from and against any and all (i) Environmental Expenses and (ii) tax liabilities, losses, costs, claims, damages, expenses (including reasonable fees, disbursements and other charges of counsel) and other liabilities (collectively, "Liabilities") based upon, relating to or arising out of any breach of any representation or warranty, covenant or agreement of such Indemnifying Party in this Agreement or any legal, administrative or other actions (including actions brought by any of the Purchasers or any Indemnifying Party or any equity holders of the Company or derivative actions brought by any Person claiming through or in the Company's name), proceedings or investigations (whether formal or informal), or written threats thereof, based upon, relating to or arising out of (A) the status of the Purchasers as shareholders of the Company and the existence or exercise of the rights and powers of the Purchasers (including without limitation, any claim against any Indemnified Party relating to Environmental Matters), (B) violations of applicable securities laws by the Company in connection with the offering of the Preferred Shares, or (C) third party claims that the Preferred Shares hereunder violate preexisting understandings or arrangements with the Company; provided, however, that no Indemnifying Party shall be liable under this Section 9.1 to an Indemnified Party: (a) for any amount paid in settlement of claims without such Indemnifying Party's consent (which consent shall not be unreasonably withheld), (b) to the extent that it is finally judicially determined that such Liabilities resulted solely from the willful misconduct or gross negligence of such Indemnified Party, or (c) to the extent that it is finally judicially determined that such Liabilities resulted solely from the material breach by such Indemnified Party of any representation, warranty, covenant or other agreement of such Indemnified Party contained in this Agreement; provided, further, that if and to the 30 37 extent that such indemnification is unenforceable for any reason, the Indemnifying Party shall make the maximum contribution to the payment and satisfaction of such indemnified liability which shall be permissible under applicable laws. In connection with the obligation of the Indemnifying Party to indemnify for expenses as set forth above, the Indemnifying Party further agrees to reimburse each Indemnified Party for all such expenses (including reasonable fees, disbursements and other charges of counsel) as they are incurred by such Indemnified Party. The Company shall be liable for losses pursuant to this Section 9.1 only to the extent that the aggregate amount of such losses exceed $100,000 (the "Basket Amount"), whereupon the Company shall be liable for all such losses in excess of the Basket Amount. Notwithstanding any other provision of this Agreement, the Basket Amount shall not apply to Liabilities (collectively, the "Exceptional Liabilities") incurred by the Purchasers based upon, relating to or arising out of (i) any breach of the representations and warranties in Section 5.14 of the this Agreement; (ii) the Company's ownership of the assets it purports to own after giving effect to the transactions contemplated by this Agreement; and (iii) the organization and corporate or other governance of the Company Affiliates prior to the Closing. 9.2 Notification. Each Indemnified Party under this Article 9 will, promptly after the receipt of notice of the commencement of any action, investigation, claim or other proceeding against such Indemnified Party in respect of which indemnity may be sought from any Indemnifying Party under this Article 9, notify the Indemnifying Party in writing of the commencement thereof. The omission of any Indemnified Party to so notify the Indemnifying Party of any such action shall not relieve the Indemnifying Party from any liability which it may have to such Indemnified Party under this Article 9 except to the extent that such failure to notify results in a loss of a material defense of such Indemnified Party in actual prejudice due to such action. In case any such action, claim or other proceeding shall be brought against any Indemnified Party and such Indemnified Party shall notify the Indemnifying Party of the commencement thereof, the Indemnifying Party shall be entitled to assume the defense thereof at its own expense, with counsel satisfactory to such Indemnified Party in its reasonable judgment; provided, however, that any Indemnified Party may, at its own expense, retain separate counsel to participate in such defense. Notwithstanding the foregoing, in any action, claim or proceeding in which both the Indemnifying Party, on the one hand, and an Indemnified Party, on the other hand, is, or is reasonably likely to become, a party, such Indemnified Party shall have the right to employ separate counsel at the Indemnifying Party's expense and to control its own defense of such action, claim or proceeding if, in the reasonable opinion of counsel to such Indemnified Party, a conflict or potential conflict exists between the Indemnifying Party, on the one hand, and such Indemnified Party, on the other hand, that would make such separate representation advisable. The Indemnifying Party agrees that it will not, without the prior written consent of the Purchasers (such consent not to be unreasonably withheld), 31 38 settle, compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding relating to the matters contemplated hereby (if any Indemnified Party is a party thereto or has been actually threatened to be made a party thereto) unless such settlement, compromise or consent includes an unconditional release of the Purchasers and each other Indemnified Party from all liability arising or that may arise out of such claim, action or proceeding. The rights accorded to Indemnified Parties hereunder shall be in addition to any rights that any Indemnified Party may have at common law, by separate agreement or otherwise. 9.3 Registration Rights Agreement. Notwithstanding anything to the contrary in this Article 9, the indemnification and contribution provisions of the Registration Rights Agreement shall govern any claim made with respect to registration statements filed pursuant thereto or sales made thereunder. ARTICLE 10 MISCELLANEOUS 10.1 Termination. This Agreement may be terminated at any time prior to the Closing Date by the mutual written consent of the Purchasers and the Company. In the event of a termination, no party hereto (or any of its directors or officers or shareholders, partner, members or Affiliates) shall have any liability or further obligation to any other party hereto or directors or officers in respect thereof, other than as provided under Section 10.3, except that nothing herein will relieve any party from liability for any breach of this Agreement. 10.2 Survival of Representations and Warranties. All of the representations and warranties made herein shall survive the Closing Date of this Agreement for a period of two (2) years from the date hereof except the representations and warranties in (i) Sections 5.11(a) and 5.17 shall survive until the statute of limitations period has expired for such representations and warranties and (ii) Section 5.14 shall survive until thirty days after the expiration of the statute of limitations period has expired for such representations and warranties. 10.3 Confidential Information. The Company and the Purchasers shall each maintain as confidential any non-public, confidential and proprietary information (collectively, "Confidential Information") provided by one to the other regarding the matters contained in the Transaction Agreements or with respect to the other. The Company and Purchasers and each of their partners, officers, directors, members, employees, agents and representative (collectively, "Representatives") will not disclose, use or otherwise appropriate the Confidential Information in any way detrimental to the other party, and the Confidential Information will be kept confidential by each party; provided, however, that any Confidential Information may be disclosed by Purchasers to their partners and shareholders and to prospective investors who require such information for the purpose of evaluating the transactions contemplated by the 32 39 Transaction Agreements. If no transaction is effected pursuant to the terms of the Transaction Agreements, the Company and Purchasers shall each promptly deliver to the other party any Confidential Information of such other party, without retaining any copy thereof. 10.4 Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, courier service or personal delivery: (a) if to Purchasers: Catterton Partners Corporation 115 East Putnam Avenue Greenwich, Connecticut 06830 Attention: J. Michael Chu Oak Investment Partners 4550 Norwest Center Minneapolis, Minnesota 55402 Attention: Gerald Gallagher Trinity Ventures, Ltd. 155 Bovet Road, Suite 660 San Mateo, California 94402 Attention: James G. Shennan, Jr. Global Retail Partners, L.P. 221 Avenue of the Stars 30th Floor Los Angeles, California 90067 Attention: Yves Sisteron Jackson National Life Insurance Company c/o PPM America, Inc. 225 West Wacker Drive Suite 1200 Chicago, Illinois 60606 Attention: Private Finance Group with a copy to: Latham & Watkins 1001 Pennsylvania Avenue, N.W, Suite 1300 Washington, DC 20004-2505 Attention: Michael Bell, Esq. 33 40 (b) if to the Company: P.F. Chang's China Bistro, Inc. 5090 North 40th Street Suite 160 Phoenix, Arizona 85018 Attention: Robert T. Vivian with a copy to: Lewis and Roca LLP 40 North Central Suite 1900 Phoenix, Arizona 85004 Attention: Kevin G. Hunter, Esq. All such notices and communications shall be deemed to have been duly given when delivered by hand, if personally delivered; when delivered by courier, if delivered by commercial overnight courier service; when mailed, five business days after being deposited in the mail, postage prepaid. 10.5 Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties hereto. This Agreement may not be assigned by any Purchaser subsequent to the Closing without the written consent of the Company. The Company may not assign any of its rights under this Agreement without the written consent of each of the Purchasers. 10.6 Amendment and Waiver. (a) No failure or delay on the part of the Company or the Purchasers in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the Company or the Purchasers at law, in equity or otherwise. (b) Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure by any party from the terms of any provision of this Agreement, shall be effective (i) only if it is made or given in writing and signed by the Company and all holders of the Preferred Shares or by the party or parties to be bound hereby, and (ii) only in the specific instance and for the specific purpose for which made or given. Except where notice is specifically required by this Agreement, no notice to or demand 34 41 on any party in any case shall entitle any party hereto to any other or further notice or demand in similar or other circumstances. 10.7 Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 10.8 Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 10.9 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the principles of conflicts of law of such state. 10.10 Jurisdiction. Each party to this Agreement hereby irrevocably agrees that any legal action or proceeding arising out of or relating to this Agreement or any agreements or transactions contemplated hereby shall be brought in the courts of the State of New York or of the United States of America for the District of New York and hereby expressly submits to the personal jurisdiction and venue of such courts for the purposes thereof and expressly waives any claim of improper venue and any claim that such courts are an inconvenient forum. Each party hereby irrevocably consents to the service of process of any of the aforementioned courts in any such suit, action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the address set forth in Section 10.2, such service to become effective 10 days after such mailing. 10.11 Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provision or provisions held invalid, illegal or unenforceable shall substantially impair the remaining provisions hereof. 10.12 Rules of Construction. Unless the context otherwise requires, "or" is not exclusive, and references to sections or subsections refer to sections or subsections of this Agreement. 10.13 Entire Agreement. This Agreement, together with the exhibits and schedules hereto and the other Transaction Agreements, is intended by the parties as a final expression of their agreement and is intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth herein or therein. This Agreement, together with the exhibits and schedules hereto and the other Transaction 35 42 Agreements, supersedes all prior agreements and understandings between the parties with respect to such subject matter. 10.14 Transaction Expenses. Each party will pay its own expenses incurred in connection with the transactions contemplated by this Agreement, regardless whether the transactions contemplated hereby are consummated. 10.15 Severability of Representations, Warranties and Covenants. Each Purchaser shall be liable to the Company solely for its own breach or violation, if any, of any representation, warranty or covenant made or to be complied with by such Purchaser. The Company shall not be liable to the Purchasers for the breach or violation, if any, of any representation, warranty or covenant made or to be complied with by any Purchaser, but the Company shall be liable to the Purchasers solely for its breach or violation, if any, of any representation, warranty, or covenant made or to be complied with by the Company. 36 43 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. P.F. CHANG'S CHINA BISTRO, INC. By: --------------------------------- Richard L. Federico, President 5090 North 40th Street, Suite 160 Phoenix, Arizona 85018 Attention: Robert T. Vivian Telephone: 602-957-8986 Telecopy: 602-957-8998 37 44 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. CATTERTON-PFC, L.L.C. By: CATTERTON PARTNERS CORPORATION its Managing Member By: --------------------------------- Name: Title: 115 East Putnam Avenue Greenwich, Connecticut 06830 Attention: J. Michael Chu Telephone: 203-629-4901 Telecopy: 203-629-4903 38 45 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. CATTERTON-PFC PARTNERS II, L.L.C. By: CATTERTON PARTNERS CORPORATION its Managing Member By: --------------------------------- Name: Title: 115 East Putnam Avenue Greenwich, Connecticut 06830 Attention: J. Michael Chu Telephone: 203-629-4901 Telecopy: 203-629-4903 39 46 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. OAK INVESTMENT PARTNERS VI, LIMITED PARTNERSHIP By: --------------------------------- Gerald R. Gallagher Managing Member of Oak Associates VI, LLC, the General Partner of Oak Investment Partners VI, Limited Partnership Oak Investment Partners 4550 Norwest Center Minneapolis, Minnesota 55402 Attention: Gerald Gallagher Telephone: 612-339-9322 Telecopy: 612-337-8017 OAK VI AFFILIATES FUND, LIMITED PARTNERSHIP By: --------------------------------- Gerald R. Gallagher Managing Member of Oak VI Affiliates, LLC, the General Partner of Oak VI Affiliates Fund, Limited Partnership Oak Investment Partners 4550 Norwest Center Minneapolis, Minnesota 55402 Attention: Gerald Gallagher Telephone: 612-339-9322 Telecopy: 612-337-8017 40 47 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. TRINITY VENTURES V, L.P. By: --------------------------------- James G. Shennan, Jr. General Partner Trinity Ventures 155 Bovet Road, Suite 660 San Mateo, California 94402 Attention: James G. Shennan, Jr. Telephone: 415-358-9700 Telecopy: 415-358-9785 TRINITY VENTURES V SIDE-BY-SIDE FUND, L.P. By: --------------------------------- James G. Shennan, Jr. General Partner Trinity Ventures 155 Bovet Road, Suite 660 San Mateo, California 94402 Attention: James G. Shennan, Jr. Telephone: 415-358-9700 Telecopy: 415-358-9785 41 48 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. ARABELLA S.A. By: --------------------------------- Name: Title: c/o Scorpion Holdings 599 Lexington Avenue, Suite 2700 Attention: Kevin McCarthy Telephone: (212) 207-9020 Telecopy: (212) 207-9050 ALBA, LTD. By: --------------------------------- Name: Title: c/o Scorpion Holdings 599 Lexington Avenue, Suite 2700 Attention: Kevin McCarthy Telephone: (212) 207-9020 Telecopy: (212) 207-9050 42 49 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. YVES SISTERON --------------------------------- 602 North Crescent Avenue Beverly Hills, California 90210 Telephone: 310-858-8042 Telecopy: 310-550-1876 STEVEN LEBOW --------------------------------- 150 North Cliffwood Los Angeles, California 90049 Telephone: 310-282-6165 Telecopy: 310-282-6178 43 50 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. SUSAN C. SCHNABEL AND EDWARD L. PLUMMER, JOINTLY --------------------------------- Susan C. Schnabel --------------------------------- Edward L. Plummer 40858 N. 109th Place Scottsdale, Arizona 85262 Telephone: (602) 595-1366 Telecopy: (602) 595-1041 44 51 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. JOSEPH SCHELL --------------------------------- 3983 Happy Valley Road Lafayette, California 94549 Telephone: 415-627-2000 Telecopy: 415-249-5513 KARL MATTHIES --------------------------------- 7 Bellagio Road P. O. Box 1322 Ross, California 94957 Telephone: 415-627-2250 Telecopy: 415-249-5513 MURRAY HUNEKE --------------------------------- 315 Ambar Way Menlo Park, California 94025 Telephone: 415-627-2873 Telecopy: 415-249-5512 45 52 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. DAVID JACQUIN --------------------------------- c/o Montgomery Securities 600 Montgomery Street San Francisco, California 94111 Telephone: (415) 627-2000 Telecopy: (415) 249-5513 PAUL S. MADERA AND JOAN K. MADERA, JTWROS --------------------------------- Paul S. Madera --------------------------------- Joan K. Madera 1205 Vancouver Avenue Burlingame, California 94010 Telephone: 415-627-3174 Telecopy: 413-249-5704 KENNETH LANG --------------------------------- c/o Putnam Investments One Post Office Square Boston, Massachusetts 02109 Telephone: (617) 760-7443 Telecopy: (617) 292-1784 46 53 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. EDWARD J. MATHIAS --------------------------------- 5120 Cammack Drive Bethesda, Maryland 20816 Telephone: 202-626-1228 Telecopy: 202-347-1818 A. WILLIAM ALLEN --------------------------------- 7710 Sweetgum Avenue Los Colinas, Texas 75063 Telephone: (972) 401-0668 Telecopy: (972) 444-8375 47 54 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. J. RICHARD FREDERICKS --------------------------------- 2395 Vallejo Street San Francisco, California 94010 Telephone: 415-627-2000 Telecopy: 413-249-5513 C. DONALD DORSEY --------------------------------- 1225 E. Warner Road, Lot 18 Tempe, Arizona 85284-3245 Telephone: (602) 491-3109 Telecopy: (602) 491-1505 48 55 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. MICHAEL G. MUELLER AND CHRISTINE ELLEN CULLENS, TRUSTEES OF THE MUELLER-CULLENS FAMILY TRUST U/D/T DATED JULY 9, 1996 --------------------------------- Michael G. Mueller, Trustee --------------------------------- Christine Ellen Cullens, Trustee 2710 Filbert Street San Francisco, California 94123 Telephone: 415-775-4528 49 56 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. MICHAEL WELBORN --------------------------------- c/o Bank One, Arizona 201 North Central Avenue 35th Floor Phoenix, Arizona 85004 Telephone: (602) 221-1674 Telecopy: (602) 221-2684 50 57 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. GLOBAL RETAIL PARTNERS, L.P. By: GLOBAL RETAIL PARTNERS, INC., its General Partner By: --------------------------------- Name: Title: Global Retail Partners, L.P. 277 Park Avenue, 19th Floor New York, New York 10172 Attention: Nicole Arnaboldi/Theo Rand Telephone: (212) 892-3000 Telecopy: (212) 892-7552 Global Retail Partners, L.P. 2121 Avenue of the Stars, 30th Floor Los Angeles, California 90067 Attention: Osamu Watanabe Telephone: (310) 282-6100 Telecopy: (310) 282-6178 51 58 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. DLJ DIVERSIFIED PARTNERS, L.P. By: DLJ DIVERSIFIED PARTNERS, INC., its General Partner By: --------------------------------- Name: Title: DLJ Diversified Partners, L.P. 277 Park Avenue, 19th Floor New York, New York 10172 Attention: Nicole Arnaboldi/Theo Rand Telephone: (212) 892-3000 Telecopy: (212) 892-7552 with copy to: DLJ Diversified Partners, L.P. 277 Park Avenue, 23rd Floor New York, New York 10172 Attention: Ivy Dodes Telephone: (212) 892-3000 Telecopy: (212) 892-2689 52 59 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. GRP PARTNERS, L.P. By: GLOBAL RETAIL PARTNERS, INC., its General Partner By: --------------------------------- Name: Title: GRP Partners, L.P. 277 Park Avenue, 19th Floor New York, New York 10172 Attention: Nicole Arnaboldi/Theo Rand Telephone: (212) 892-3000 Telecopy: (212) 892-7552 with copy to: GRP Partners, L.P. 2121 Avenue of the Stars, 30th Floor Los Angeles, California 90067 Attention: Osamu Watanabe Telephone: (310) 282-6100 Telecopy: (310) 282-6178 53 60 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. GLOBAL RETAIL PARTNERS FUNDING, INC. By: --------------------------------- Name: Title: Global Retail Partners Funding, Inc. 277 Park Avenue, 19th Floor New York, New York 10172 Attention: Nicole Arnaboldi/Theo Rand Telephone: (212) 892-3000 Telecopy: (212) 892-7552 with copy to: Global Retail Partners Funding, Inc. 2121 Avenue of the Stars Los Angeles, California 90067 Attention: Osamu Watanabe Telephone: (310) 282-6100 Telecopy: (310) 282-6178 54 61 P.F. CHANG'S CHINA BISTRO, INC. STOCK PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or caused this Agreement to be executed and delivered by their authorized representatives as of the date first above written. DLJ FIRST ESC L.L.C. By: DLJ LBO PLANS MANAGEMENT CORPORATION, its Manager By: -------------------------------------- Name: Title: DLJ First ESC L.L.C. 277 Park Avenue, 19th Floor New York, New York 10172 Attention: Ed Poletti Telephone: (212) 892-3005 Telecopy: (212) 892-7272 with copy to: DLJ First ESC L.L.C. 277 Park Avenue, 23rd Floor New York, New York 10172 Attention: Ivy Dodes Telephone: (212) 892-3000 Telecopy: (212) 892-2689 55 EX-10.9 12 EX-10.9 1 Exhibit 10.9 AMENDED AND RESTATED REVOLVING LINE OF CREDIT LOAN AGREEMENT THIS AMENDED AND RESTATED REVOLVING LINE OF CREDIT LOAN AGREEMENT (this "Agreement") is made as of June 29, 1998 (the "Effective Date"), by and between FRANCHISE FINANCE CORPORATION OF AMERICA, a Delaware corporation ("FFCA"), whose address is 17207 North Perimeter Drive, Scottsdale, Arizona 85255, and P. F. CHANG'S CHINA BISTRO, INC., a Delaware corporation ("Debtor"), whose address is 5090 North 40th Street, Suite 160, Phoenix, Arizona 85018. PRELIMINARY STATEMENT: Unless otherwise expressly provided herein, all defined terms used in this Agreement shall have the meanings set forth in Section 1. Debtor and FFCA entered into that certain Revolving Line of Credit Loan Agreement dated as of October , 1997 (the "Original Agreement"). Subsequently, FFCA has agreed to increase the amount of the Loan and Debtor has agreed to pledge its interest in the Collateral pursuant to the Security Agreement in order to provide security for the Loan. This Agreement amends and restates the Original Agreement in order to reflect the terms and conditions associated with an increase of the Loan and a pledge of the Collateral. AGREEMENT: In consideration of the mutual covenants and provisions of this Agreement, the parties agree as follows: 1. DEFINITIONS. The following terms shall have the following meanings for all purposes of this Agreement: "Acceleration Event" means (a) a breach or default, after the passage of all applicable notice and cure or grace periods, under any other agreement, instrument or promissory note other than the Loan Documents between, among or by (i) Debtor or any Affiliate of Debtor, and, or for the benefit of, (ii) FFCA and/or any Affiliate of FFCA, (b) the consummation of a sale of shares of stock or other ownership interests in Debtor by Paul Fleming, Kelly Fleming, Robert Vivian and Richard Federico (collectively, the "Primary Shareholders") other than sales of such stock or ownership interests in Debtor among the Primary Shareholders, members of the immediate family of the Primary Shareholders or family trusts, foundations or other legal entities which are owned by and created for the benefit of the Primary Shareholders, (c) the consummation of a sale of stock or other ownership interests in Debtor pursuant to a public offering or private placement pursuant to the Securities Act of 1933 or (d) at any time that the Primary Shareholders, members of the immediate family of the Primary Shareholders or family trusts, foundations or other legal entities which are owned by and created for the benefit of the Primary Shareholders do not own more than 40% of the stock or other ownership interests in Debtor. "Action" has the meaning set forth in Section 7. 2 "Advance" means any advance of the proceeds of the Loan made by FFCA pursuant to the terms of Section 2. "Affiliate" means any Person which directly or indirectly controls, is under common control with, or is controlled by any other Person. For purposes of this definition, "controls", "under common control with" and "controlled by" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through ownership of voting securities or otherwise. "Business Day" means any day on which banks are open for general banking business in the State of Arizona other than a Saturday, Sunday, a legal holiday or any other day on which banks in the State of Arizona are required or authorized by law to close. "Code" means the United States Bankruptcy Code, 11 U.S.C. Sec. 101 et seq., as amended. "Collateral" means Debtor's membership or partnership interest in the Companies as more particularly described in the Security Agreement. "Commitment" means that certain Commitment Letter dated March , 1998 between FFCA and Debtor with respect to the transaction described in this Agreement, and any amendments or supplements thereto. "Companies" means the Arizona general partnerships and the Arizona limited liability companies identified on Exhibit G attached hereto. "Counsel" means Lewis and Roca LLP, licensed in the State of Arizona (where Debtor maintains its principal place of business) or such other legal counsel as selected by Debtor and reasonably approved by FFCA. "Debt" means as to such Person at any time (without duplication): (a) all obligations of such Person for borrowed money; (b) all obligations of such Person evidenced by bonds, notes, debentures or other similar instruments; (c) all obligations of such Person to pay the deferred purchase price of property or services; (d) all capital lease obligations of such Person; (e) all contingent obligations or other obligations of others guaranteed by such Person; (f) all obligations secured by a lien existing on property owned by such Person, whether or not the obligations secured thereby have been assumed by such Person or are nonrecourse to the credit of such Person; and (g) all reimbursement obligations of such Person (whether contingent or otherwise) in respect of letters of credit, bankers' acceptances, surety or other bonds and similar instruments. "Effective Date" has the meaning set forth in the introductory paragraph of this Agreement. "Event of Default" has the meaning set forth in Section 7. "Fee" means a draw fee equal to .5% of the amount of each Advance. 2 3 "Indemnified Parties" has the meaning set forth in Section 9. "Joint Venture Agreements" means those Joint Venture Agreements and Operating Agreements between Debtor and the respective Partners of each Company. "Loan" means the revolving line of credit in the Maximum Loan Amount and as described in Section 2. "Loan Documents" means, collectively, this Agreement, the Note, the Security Agreement, the UCC Financing Statements, the Negative Pledges and all other documents, instruments and agreements executed in connection therewith or contemplated thereby. "Management Agreements" means the management agreements between Debtor and a Company with respect to each of the Premises. "Material Adverse Effect" means a material adverse effect on (i) the financial condition of Debtor or the Companies, as applicable or (ii) the ability of Debtor or the Companies, as applicable, to perform its obligations under the Loan Documents. "Maturity Date" shall have the meaning set forth in the Note. "Maximum Loan Amount" means $20,000,000.00. "Negative Pledges" means the negative pledge agreements dated as of the Effective Date executed by the Companies in favor of FFCA in the form of Exhibit F attached hereto. A Negative Pledge will be executed for each of the Premises. "Note" means the promissory note dated as of the Effective Date executed by Debtor in favor of FFCA in the form of Exhibit A attached to this Agreement, as such Note may be amended and/or amended and restated and/or substituted from time to time as contemplated by Section 2. The term "Note" shall also include all additional promissory notes executed and delivered by Debtor to FFCA from time to time as contemplated by Section 2. "Partners" means, as applicable, the general partners (other than Debtor) for each of the Companies that are general partnerships and the members (other than Debtor) of the Companies that are limited liability companies. "Person" shall mean any individual, corporation, partnership, limited liability company, trust, unincorporated organization, governmental authority or any other form of entity. "Premises" means the parcels of real estate owned or leased by the Debtor described in Exhibit D attached hereto, all rights, privileges and appurtenances associated therewith, and all buildings, fixtures and other improvements now or hereafter located thereon (whether or not affixed to such real estate). "Security Agreement" means the security agreement dated as of the Effective Date executed by Debtor in favor of FFCA in the form of Exhibit E attached to this Agreement, as such Security Agreement may be amended from time to time. 3 4 "Subsidiary" means any corporation or other entity of which at least a majority of the outstanding shares of stock or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors (or Persons performing similar functions) of such corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation or entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by Debtor or one or more of the Subsidiaries or by Debtor and one or more of the Subsidiaries. "UCC Financing Statements" means those UCC financing statements required by FFCA to be executed and delivered by Debtor that are necessary to perfect FFCA's security interest in the Collateral. 2. REVOLVING LINE OF CREDIT. A. On the terms and subject to the satisfaction by Debtor of the conditions set forth in this Agreement, FFCA agrees to make the Loan to Debtor, which Loan will be in the form of Advances made from time to time as provided in this Agreement. The outstanding aggregate principal amount of the Loan shall not exceed the Maximum Loan Amount at any time. So long as no event has occurred which is, or with the passage of time or the giving of notice or both under the Loan Documents would constitute, an Event of Default or an Acceleration Event, Debtor may borrow, prepay and reborrow, from the Effective Date until the Maturity Date, an amount up to the Maximum Loan Amount. Debtor shall not request an Advance in an amount less than $500,000.00 and no more than once in a calendar month. B. Simultaneously with the execution and delivery of this Agreement, Debtor shall execute and deliver to FFCA the Note. The obligation of Debtor to pay the outstanding aggregate principal amount of all Advances plus accrued interest thereon shall be evidenced by the Note. Debtor irrevocably authorizes FFCA to make or cause to be made, at or about the time of any Advance or at the time of FFCA's receipt of any payment of the principal amount of the Note, an appropriate notation in FFCA's records reflecting the amount of such Advance or payment, as applicable. The outstanding aggregate principal amount of the Note plus accrued interest thereon set forth in FFCA's records maintained with respect to the Note (which may include computer records) shall, absent manifest error, be prima facie evidence of the outstanding aggregate principal amount plus accrued interest thereon due and owing to FFCA, but the failure to record, or any error in so recording, any such amount on FFCA's records shall not limit or otherwise affect the obligations of Debtor under the Note to make payments when due. Notwithstanding the foregoing, Debtor agrees to execute such amendments to the Note, amendments and restatements of the Note and/or substitute and/or additional promissory notes in the form of the Note as FFCA may reasonably request to evidence Debtor's obligations to FFCA under the Loan Documents. C. Debtor shall notify FFCA at least five Business Days before the Business Day on which Debtor desires to receive an Advance; provided, however, Debtor acknowledges that each Advance shall be made on the first Business Day of the month immediately following the month in which Debtor notifies FFCA of its desire to receive such Advance. Each such notice shall be in the form of Exhibit B attached hereto (each, a "Notice"), and shall set forth the requested amount of each Advance and such other information required by the Notice. Each Notice shall constitute a certification by Debtor that the representations and warranties of Debtor set forth in 4 5 the Loan Documents, are true, correct and complete in all material respects as of the date of such Notice and as of the date of such requested Advance and that Debtor has satisfied each of the conditions precedent set forth in this Agreement. FFCA's obligation to fund each Advance shall be subject to the satisfaction of the following conditions precedent as of the date of the requested Advance: (i) no event shall have occurred which is, or with the passage of time or the giving of notice or both under the Loan Documents would constitute, an Event of Default or an Acceleration Event; (ii) Debtor shall be in compliance with each of the covenants set forth in Section 5; (iii) the outstanding principal balance of the Loan, together with the amount of the requested Advance, must not exceed the Maximum Loan Amount; and (iv) there shall have been no material adverse change in Debtor's business, operations, assets or financial condition since the Effective Date, as determined by FFCA in its reasonable discretion. Upon Debtor's satisfaction of the foregoing conditions, FFCA will disburse the requested Advance in immediately available funds to such account as Debtor shall have specified in the Notice or as otherwise directed by Debtor in the Notice. D. The Loan shall bear interest at a variable rate of interest as set forth in the Note and shall be payable in arrears on the first day of each month based on the then outstanding principal balance of the Note. Debtor shall have the right to prepay (without premium or penalty) the Note in whole or in part at any time provided that any such prepayment shall only be made on a regularly scheduled payment date upon not less than 10 days prior written notice from Debtor to FFCA. Debtor shall pay on the Maturity Date, and there shall become absolutely due and payable on the Maturity Date, the outstanding principal amount of the Loan and all accrued but unpaid interest thereon. E. As security for the Loan, Debtor agrees to pledge its interest in the Collateral pursuant to the Security Agreement. In addition, Debtor will execute and deliver the Negative Pledges. A Negative Pledge will be recorded in the real estate records of each county where each of the Premises is located. E. All costs and expenses of the transaction described in this Agreement shall be paid by Debtor, including, without limitation, the attorneys' fees of Debtor and the reasonable attorneys' fees and expenses of FFCA. F. FFCA's obligation to provide the Loan is further subject to the delivery to FFCA of Counsel's opinion in form and substance reasonably satisfactory to FFCA. G. The Fee shall be paid at the time of each Advance from each Advance and shall be deemed nonrefundable and fully earned with each Advance. 5 6 3. REPRESENTATIONS AND WARRANTIES OF FFCA. The representations and warranties of FFCA contained in this Section are being made by FFCA as of the Effective Date to induce Debtor to enter into this Agreement and consummate the transactions contemplated herein, and Debtor has relied, and will continue to rely, upon such representations and warranties from and after the execution of this Agreement. FFCA represents and warrants to Debtor as follows: A. Organization of FFCA. FFCA has been duly formed, is validly existing and has taken all necessary action to authorize the execution, delivery and performance by FFCA of this Agreement. B. Authority of FFCA. The person who has executed this Agreement on behalf of FFCA is duly authorized so to do. C. Enforceability. Upon execution by FFCA, this Agreement shall constitute the legal, valid and binding obligation of FFCA, enforceable against FFCA in accordance with its terms. All representations and warranties of FFCA made in this Agreement shall survive the execution of this Agreement. 4. REPRESENTATIONS AND WARRANTIES OF DEBTOR. The representations and warranties of Debtor contained in this Section are being made by Debtor as of the Effective Date and the date of each Advance to induce FFCA to enter into this Agreement and consummate the transactions contemplated herein, and FFCA has relied, and will continue to rely, upon such representations and warranties from and after the Effective Date and the date of each Advance. Debtor represents and warrants to FFCA as follows: A. Information and Financial Statements. Debtor has delivered to FFCA financial statements (either audited financial statements or, if Debtor does not have audited financial statements, certified financial statements) and certain other information concerning itself, which financial statements and other information are true, correct and complete in all material respects; and no material adverse change has occurred with respect to any such financial statements and other information provided to FFCA since the date such financial statements and other information were prepared or delivered to FFCA. Debtor understands that FFCA is relying upon such financial statements and information and Debtor represents that such reliance is reasonable. All such financial statements were prepared in accordance with generally accepted accounting principles consistently applied (except as otherwise noted in such financial statements) and accurately reflect as of the Effective Date the financial condition of each individual or entity to which they pertain. B. Organization and Authority of Debtor. Debtor is duly organized or formed, validly existing and in good standing under the laws of the State of Delaware and qualified as a foreign corporation to do business in any jurisdiction where such qualification is required. All necessary corporate action has been taken to authorize the execution, delivery and performance of the Loan Documents. The person(s) who have executed the Loan Documents on behalf of Debtor are duly authorized so to do. 6 7 C. Organization and Authority of Companies. The Companies are duly organized or formed, validly existing and in good standing under the laws of the states where they were organized and qualified as foreign partnerships or foreign limited liability companies to do business in any jurisdiction where such qualification is required. D. Enforceability of Documents. Upon execution by Debtor, the Loan Documents shall constitute the legal, valid and binding obligations of Debtor, enforceable against Debtor in accordance with their respective terms. E. Litigation. There are no suits, actions, proceedings or investigations pending or, to the actual knowledge of Debtor, threatened against or involving Debtor, the Companies, the Collateral, the Premises or any of Debtor's or any of the Companies' assets before any court, arbitrator, or administrative or governmental body which might reasonably result in a Material Adverse Effect. F. Absence of Breaches or Defaults. Neither Debtor nor any of the Companies are in default beyond any applicable grace period under any other document, instrument or agreement to which Debtor or any of the Companies is a party (including, without limitation, the Partnership Agreements and the Management Agreements) or by which the Debtor, the Companies, the Collateral, the Premises or any of the property of Debtor or any of the Companies is subject or bound which would have a Material Adverse Effect or would materially interfere with or prevent Debtor's or the Companies performance under the Loan Documents. The authorization, execution, delivery and performance of the Loan Documents will not result in a Material Adverse Effect or result in any breach or default under any other document, instrument or agreement to which Debtor or any of the Companies is a party (including, without limitation, the Partnership Agreements and the Management Agreements) or by which Debtor, the Companies, the Collateral, the Premises or any of the property of Debtor is subject or bound which would materially interfere with or prevent Debtor's or the Companies' performance under the Loan Documents. The authorization, execution, delivery and performance of the Loan Documents will not violate any applicable law, statute, regulation, rule, ordinance, code, rule or order. G. Licenses, Permits, Consents and Approvals. Debtor or the Companies has all required licenses, permits, consents and approvals, both governmental and private, to use and operate the Collateral, the Premises and the rest of their assets and conduct their business in the intended manner. H. Insolvency; Net Worth. Debtor is not insolvent within the meaning of the Code. Debtor has a net worth of at least $10,000,000.00, as determined in accordance with generally accepted accounting principles consistently applied, except that for purposes of calculating Debtor's net worth hereunder, convertible preferred stock issued by Debtor shall be treated as equity. I. Taxes. Debtor and the Companies have paid, in the ordinary course of business, all taxes, assessments, levies and other governmental charges which have been levied or imposed upon Debtor, the Companies, the Collateral, the Premises and/or Debtor's and properties and would be due and payable. 7 8 J. Title to Collateral; First Priority Security Interest. Debtor owns, and with respect to Collateral acquired after the date hereof, Debtor will own, legally and beneficially, the Collateral, free and clear of any lien, security interest, pledge, hypothecation, claim or other encumbrance, or any right or option on the part of any third person to purchase or otherwise acquire or obtain any lien or security interest in the Collateral or any part thereof, except for the lien and security interest granted in the Security Agreement in favor of FFCA. Upon the execution of the Loan Documents by the applicable parties, Secured Party shall have a valid first priority lien upon and security interest in the Collateral. K. Title to Premises. Debtor holds either (i) fee title to the Premises, (ii) a leasehold interest in the land relating to the Premises and fee title to the buildings and improvements located thereon or (iii) a leasehold interest in the Premises, free and clear of all liens, encumbrances, charges and security interests of any nature whatsoever, except as otherwise disclosed in writing to FFCA. L. Collateral Genuine. The Collateral is genuine, free from any restriction on transfer, duly and validly authorized and issued, constitutes the valid and legally binding obligation of the Companies, enforceable in accordance with its terms, is fully paid and non-assessable, and is hereby duly and validly pledged and hypothecated to FFCA in accordance with law. The interests listed on Schedule II represent one hundred (100%) percent of the issued and outstanding interests of the Companies. There are no other interests issued and outstanding and there are no other interests in the Companies. M. No Actions. No action has been brought or is threatened which would in any way prohibit or restrict the execution and delivery of any of the Loan Documents by Debtor or the performance in all respects of Debtor thereunder. All representations and warranties of Debtor made in this Agreement shall survive the execution of this Agreement and each Advance. 5. COVENANTS. Debtor covenants to FFCA from and after the Effective Date as follows: A. Books, Records and Inspections. Debtor shall, at all reasonable times upon prior written notice from FFCA and during normal business hours, (i) provide FFCA and FFCA's officers, employees, agents, advisors, attorneys and accountants with access to Debtor's personal and real properties and books and records, and (ii) allow such persons to make such inquires of Debtor's officers and employees and to make copies and perform such verifications as FFCA considers reasonably necessary; provided, however, all such inspections, copies and verifications shall be at FFCA's sole cost and expense and FFCA shall reasonably attempt to minimize, during any such activity, interference with the operation of Debtor's business and FFCA shall keep any information obtained confidential; provided, however, FFCA shall not be required to keep confidential (1) any information which had previously been made public, (2) information that FFCA is required to disclose by court order, subpoena or under federal or state law, or (3) information received by FFCA from a third party. 8 9 B. Net Worth. At all times while the obligations of Debtor to FFCA pursuant to the Loan Documents are outstanding, Debtor shall maintain a net worth of at least $10,000,000.00, as determined in accordance with generally accepted accounting principles consistently applied, except that for purposes of calculating Debtor's net worth hereunder convertible preferred stock issued by Debtor shall be treated as equity. C. Reporting Obligations. Debtor will provide FFCA with each of the following: (i) Financial Statements. Within 45 days after the end of each fiscal quarter and within 120 days after the end of each fiscal year of Debtor, Debtor shall deliver to FFCA complete financial statements of Debtor including a balance sheet, profit and loss statement, cash flow statement and all other related schedules for the fiscal period then ended. All such financial statements shall be prepared in accordance with generally accepted accounting principles, consistently applied from period to period, and shall be certified to be accurate and complete by Debtor (or the Treasurer or other appropriate officer of Debtor). Debtor understands that FFCA is relying upon such financial statements and Debtor represents that such reliance is reasonable. The financial statements delivered to FFCA need not be audited, but Debtor shall deliver to FFCA copies of any audited financial statements of Debtor which may be prepared, as soon as they are available. (ii) Event of Default or Acceleration Event. Promptly, but in any event within five days, after Debtor becomes aware of an Event of Default or an Acceleration Event, written notification to an officer of FFCA specifying the nature and period of existence thereof and what action Debtor is taking or proposes to take with respect thereto. (iii) Litigation. Within ten days after Debtor becomes aware of any action, suit or proceeding pending or threatened in writing against or involving Debtor and/or Debtor's properties, except for those actions, suits or proceedings (1) for which damages of less than $250,000 have been sought, threatened or are likely to be incurred and (2) which Debtor in good faith determines will be covered by its insurance (including worker's compensation claims), Debtor shall notify FFCA of such action, suit or proceeding and in such notice specify the nature thereof, whether the alleged liability therein is covered by insurance then in effect and, if so covered, the monetary coverage thereof, and what action Debtor is taking or proposes to take with respect thereto. (iv) Certificates. At the time of each Advance, a certificate of an officer of Debtor, substantially in the form attached hereto as Exhibit B. (v) Auditors' Reports. Promptly upon receipt thereof, a copy of each report submitted to Debtor by its independent accountants in connection with any annual, interim or special audit made by it of the books of Debtor. 9 10 (vi) Other Information. Debtor shall deliver to FFCA promptly after the receipt of written request therefor information concerning Debtor requested by FFCA that is required to satisfy all requirements applicable to FFCA pursuant to the Securities Exchange Act of 1934 and all other regulatory laws applicable to FFCA or to which FFCA is subject or bound. D. Payment of Taxes, Etc. Unless Debtor shall contest the amount or validity thereof in the manner described below, Debtor shall pay all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which penalties attach thereto, and all lawful claims which, if unpaid, might become a lien upon any of its properties. Debtor may, at its own expense, contest or cause to be contested such taxes, assessments, governmental charges or levies or other claims (i) in good faith, (ii) by proper proceedings, and (iii) against which adequate reserves in accordance with generally accepted accounting principles are being maintained. E. Organization of Debtor. Debtor will continue to be a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction and qualified to do business in any jurisdiction where such qualification is required. F. Licenses, Permits, Consents and Approvals. Debtor shall maintain in full force and effect all required licenses, permits, consents and approvals, both governmental and private, to use and operate its assets and conduct its business in the intended manner. G. Use of Proceeds. Debtor shall use the proceeds of the Loan for (i) the purchase of interests of minority owners of Debtor, (ii) working capital and (iii) construction or renovation of P.F. Chang's China Bistro restaurants. H. Debt. Debtor shall not, and shall not permit any Subsidiary to, incur, create, assume or permit to exist any Debt, except (a) Debt to FFCA or Affiliates of FFCA; (b) Debt incurred pursuant to trade accounts arising in the ordinary course of business that are not past due by more than 30 days; (c) letters of credit for deposits not to exceed $15,000.00 each and (d) existing Debt described on the attached Exhibit C and any extensions, substitutions or renewals thereof. I. Fundamental Changes. Debtor shall not consolidate with or merge into any Person or permit any Person to merge into it; provided that the Companies may enter into a consolidation or merger with any person if (i) the survivor formed by or resulting from such consolidation or merger is the Companies and (ii) at the time of such consolidation or merger and immediately after giving effect thereto no Event of Default or Acceleration Event shall have occurred and be continuing. J. Disposition of Assets. Without the prior written consent of FFCA, Debtor shall not, directly or indirectly, sell, assign, lease, transfer or otherwise dispose of all or substantially all of its assets (other than in the ordinary course of business for full and fair consideration). 10 11 K. No New Subsidiaries. Without the prior written consent of FFCA, Debtor shall not, and shall not permit any of its Subsidiaries to, acquire, incorporate or otherwise organize any Subsidiary, which was not in existence as of the Effective Date. L. Transactions With Affiliates. Without the prior written consent of FFCA, Debtor will not enter into, and will not permit any Subsidiary to enter into, any transaction, including, without limitation, the purchase, sale, or exchange of property or the rendering of any service, with any Affiliate of Debtor or such Subsidiary, except transactions for fair value in accordance with reasonable commercial standards. M. Maintenance of Assets. Debtor shall maintain, keep and preserve, and will cause each Subsidiary to maintain, keep and preserve, all of its tangible and intangible property and other assets that are necessary and useful in proper conduct of its business. N. Amendment of Joint Venture Agreements. Without the prior written approval of FFCA in its sole and absolute discretion, Debtor shall not amend or terminate any of the Joint Venture Agreements or the Management Agreements nor shall it permit any of the Joint Venture Agreements or the Management Agreements to be amended or terminated. O. Title; First Priority Lien. Debtor shall maintain good and marketable fee simple title to the Collateral, free and clear of all liens, encumbrances, charges and other exceptions to title. Debtor shall maintain good and marketable title to or valid and binding leasehold interests in, as applicable, the Premises, free and clear of all liens, encumbrances, charges and other exceptions to title. 6. TRANSACTION CHARACTERIZATION. This Agreement is a contract to extend a financial accommodation (as such term is used in the Code) for the benefit of Debtor. It is the intent of the parties hereto that the business relationship created by this Agreement, the Note and the other Loan Documents is solely that of creditor and debtor and has been entered into by both parties in reliance upon the economic and legal bargains contained in the Loan Documents. None of the agreements contained in the Loan Documents is intended, nor shall the same be deemed or construed, to create a partnership between Debtor and FFCA, to make them joint venturers, to make Debtor an agent, legal representative, partner, subsidiary or employee of FFCA, nor to make FFCA in any way responsible for the debts, obligations or losses of Debtor. 7. DEFAULT AND REMEDIES. A. Each of the following shall be deemed an event of default by Debtor, after notice, to the extent required hereunder, and after the expiration of any applicable grace or cure period without the cure thereof (each, an "Event of Default"): (1) If any representation or warranty of Debtor set forth in any of the Loan Documents is false in any material respect when made or becomes false in any material respect, or if Debtor renders any materially false statement or account; (2) If any principal, interest or other monetary sum due under the Note or any other Loan Document is not paid within five days from the date when due and FFCA shall have given notice of such failure to Debtor and such failure shall not have been cured by Debtor within five days from the delivery of such notice; 11 12 (3) If Debtor fails to observe or perform any of the other covenants (except as otherwise provided below), conditions, or obligations of this Agreement other than the covenants in Sections 5.B., 5.H., 5.I, 5.J, 5.N and 5.O of this Agreement or there is a breach or default under any other Loan Document beyond any applicable notice or cure period; provided, however, if any such event does not involve the payment of any monetary sum, is not the result of a willful or intentional act or omission of Debtor, does not place any rights or property of FFCA in immediate jeopardy, and is within the reasonable power of Debtor to promptly cure after receipt of notice thereof, all as determined by FFCA in its reasonable discretion, then such event shall not constitute an Event of Default hereunder, unless otherwise expressly provided herein, unless and until FFCA shall have given Debtor notice thereof and a period of 30 days shall have elapsed, during which period Debtor may correct or cure such event, upon failure of which an Event of Default shall be deemed to have occurred hereunder (except as otherwise provided in the following sentence) without further notice or demand of any kind being required. If such nonmonetary event cannot reasonably be cured within such 30-day period, as determined by FFCA in its reasonable discretion, and Debtor is diligently pursuing a cure of such event, then an Event of Default shall not be deemed to have occurred hereunder upon the expiration of such 30-day period and Debtor shall have a reasonable period to cure such event beyond such 30-day period, which shall not exceed 90 days after receiving notice of the event from FFCA. If Debtor shall fail to correct or cure such event within such 90-day period, an Event of Default shall be deemed to have occurred hereunder without further notice or demand of any kind being required; (4) If Debtor fails to observe or perform any of the covenants in Sections 5.B, 5.H, 5.I, 5.J, 5.N or 5.O of this Agreement; or (5) If Debtor becomes insolvent within the meaning of the Code, files or notifies FFCA that it intends to file a petition under the Code, initiates a proceeding under any similar law or statute relating to bankruptcy, insolvency, reorganization, winding up or adjustment of debts (collectively, an "Action"), becomes the subject of either an involuntary Action or petition under the Code without such involuntary Action or petition being dismissed within 30 days of filing or, if Debtor is diligently proceeding to dismiss such petition, such longer period of time as if required, but in no event shall such longer period of time be greater than 90 days, or is not generally paying its debts as the same become due. B. Upon and during the continuance of an Event of Default, subject to the limitations, notices and cure periods set forth in subsection A, or an Acceleration Event, FFCA shall have no obligation to fund any Advance to Debtor and FFCA may declare all obligations of Debtor under the Note, this Agreement and any other Loan Document to be due and payable, and the same shall thereupon become due and payable without any presentment, demand, protest or notice of any kind except as expressly provided herein. Thereafter, FFCA may exercise, at its option, concurrently, successively or in any combination, all remedies available at law or in equity, including without limitation any one or more of the remedies available under the Note or any other Loan Document. Neither the acceptance of this Agreement nor its enforcement shall prejudice or in any manner affect FFCA's right to realize upon or enforce any other security now or hereafter held by FFCA, it being agreed that FFCA shall be entitled to enforce this Agreement and any other security now or hereafter held by FFCA in such order and manner as it may in its absolute discretion 12 13 determine. No remedy herein conferred upon or reserved to FFCA is intended to be exclusive of any other remedy given hereunder or now or hereafter existing at law or in equity or by statute. Every power or remedy given by any of the Loan Documents to FFCA, or to which FFCA may be otherwise entitled, may be exercised, concurrently or independently, from time to time and as often as may be deemed expedient by FFCA. 8. ASSIGNMENTS BY FFCA. FFCA may assign in whole or in part its rights under this Agreement. Upon any unconditional assignment of FFCA's entire right and interest hereunder, FFCA shall automatically be relieved, from and after the date of such assignment, of liability for the performance of any obligation of FFCA contained herein arising after the date of the assignment provided that any assignee shall be bound by all of FFCA's obligations hereunder accruing from and after the date of such assignment. 9. INDEMNITY. Debtor agrees to indemnify, hold harmless and defend FFCA and each of its directors, officers, shareholders, employees, successors, assigns, agents, experts, licensees, affiliates, lenders, mortgagees and trustees, as applicable (collectively, the "Indemnified Parties"), from and against any and all losses, costs, claims, liabilities, damages and expenses, including, without limitation, reasonable attorneys' fees (collectively, "Losses"), arising as the result of a breach of any of the representations, warranties, covenants, agreements or obligations of Debtor set forth in this Agreement, but excluding Losses suffered by an Indemnified Party directly arising out of such Indemnified Party's gross negligence or willful misconduct. 10. MISCELLANEOUS PROVISIONS. A. Notices. All notices, consents, approvals or other instruments required or permitted to be given by either party pursuant to this Agreement shall be in writing and given by (i) hand delivery, (ii) facsimile, (iii) express overnight delivery service or (iv) certified or registered mail, return receipt requested, and shall be deemed to have been delivered upon (a) receipt, if hand delivered, (b) transmission, if delivered by facsimile (and if a copy of such notice is also mailed by certified or registered mail, return receipt requested, and deposited with the U.S. Postal Service no later than the first business day after the notice was transmitted by facsimile), (c) the next business day following the date of deposit with the delivery service, if delivered by express overnight delivery service, or (d) the third business day following the day of deposit of such notice with the United States Postal Service, if sent by certified or registered mail, return receipt requested. Notices shall be provided to the parties and addresses (or facsimile numbers, as applicable) specified below: If to Debtor: P. F. Chang's China Bistro, Inc. 5090 North 40th Street, Suite 160 Phoenix, AZ 85018 Attention: Mr. Robert T. Vivian Telephone: (602) 957-8986 Telecopy: (602) 957-8998 13 14 With a copy to: Kenneth Van Winkle, Jr., Esq. Lewis and Roca LLP 40 North Central Avenue Phoenix, AZ 85004-4429 Telephone: (602) 262-5311 Telecopy: (602) 262-5747 If to FFCA: Dennis L. Ruben, Esq. Executive Vice President and General Counsel Franchise Finance Corporation of America 17207 North Perimeter Drive Scottsdale, AZ 85255 Telephone: (602) 585-4500 Telecopy: (602) 585-2226 B. Waiver and Amendment. No provisions of this Agreement shall be deemed waived or amended except by a written instrument unambiguously setting forth the matter waived or amended and signed by the party against which enforcement of such waiver or amendment is sought. Waiver of any matter shall not be deemed a waiver of the same or any other matter on any future occasion. C. Captions. Captions are used throughout this Agreement for convenience of reference only and shall not be considered in any manner in the construction or interpretation hereof. D. FFCA's Liability. Notwithstanding anything to the contrary provided in this Agreement, it is specifically understood and agreed, such agreement being a primary consideration for the execution of this Agreement by FFCA, that (i) there shall be absolutely no personal liability on the part of any shareholder, director, officer or employee of FFCA, with respect to any of the terms, covenants and conditions of this Agreement or the other Loan Documents, (ii) Debtor waives all claims, demands and causes of action against FFCA's officers, directors, employees and agents in the event of any breach by FFCA of any of the terms, covenants and conditions of this Agreement or the other Loan Documents to be performed by FFCA and (iii) Debtor shall look solely to the assets of FFCA for the satisfaction of each and every remedy of Debtor in the event of any breach by FFCA of any of the terms, covenants and conditions of this Agreement or the other Loan Documents to be performed by FFCA, such exculpation of liability to be absolute and without any exception whatsoever. E. Severability. The provisions of this Agreement shall be deemed severable. If any part of this Agreement shall be held unenforceable, the remainder shall remain in full force and effect, and such unenforceable provision shall be reformed by such court so as to give maximum legal effect to the intention of the parties as expressed therein. F. Construction Generally. This is an agreement between parties who are experienced in sophisticated and complex matters similar to the transaction contemplated by 14 15 this Agreement and is entered into by both parties in reliance upon the economic and legal bargains contained herein and shall be interpreted and construed in a fair and impartial manner without regard to such factors as the party which prepared the instrument, the relative bargaining powers of the parties or the domicile of any party. Debtor and FFCA were each represented by legal counsel competent in advising them of their obligations and liabilities hereunder. G. Other Documents. Each of the parties agrees to sign such other and further documents as may be reasonably necessary to carry out the intentions expressed in this Agreement. H. Attorneys' Fees. In the event of any judicial or other adversarial proceeding between the parties concerning this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and other costs in addition to any other relief to which it may be entitled. References in this Agreement to the attorneys' fees and/or costs of a party shall mean both the reasonable fees and costs of independent outside counsel retained by such party with respect to this transaction and the reasonable fees and costs of the party's in-house counsel incurred in connection with this transaction. I. Entire Agreement. This Agreement and the other Loan Documents, together with any other certificates, instruments or agreements to be delivered in connection therewith, constitute the entire agreement between the parties with respect to the subject matter hereof, and there are no other representations, warranties or agreements, written or oral, between Debtor and FFCA with respect to the subject matter of this Agreement. Notwithstanding anything in this Agreement to the contrary, upon the execution and delivery of this Agreement by Debtor and FFCA, the Commitment shall be deemed null and void and of no further force and effect and the terms and conditions of this Agreement shall control notwithstanding that such terms may be inconsistent with or vary from those set forth in the Commitment. J. Forum Selection; Jurisdiction; Venue; Choice of Law. Debtor acknowledges that this Agreement was substantially negotiated in the State of Arizona, the Agreement was signed and delivered by FFCA and Debtor in the State of Arizona, all payments under the Note will be delivered in the State of Arizona and there are substantial contacts between the parties and the transactions contemplated herein and the State of Arizona. For purposes of any action or proceeding arising out of this Agreement or any of the other Loan Documents, the parties hereto hereby expressly submit to the jurisdiction of all federal and state courts located in the State of Arizona and Debtor consents that it may be served with any process or paper by registered mail or by personal service within or without the State of Arizona in accordance with applicable law. Furthermore, Debtor waives and agrees not to assert in any such action, suit or proceeding that it is not personally subject to the jurisdiction of such courts, that the action, suit or proceeding is brought in an inconvenient forum or that venue of the action, suit or proceeding is improper. It is the intent of the parties hereto that all provisions of this Agreement shall be governed by and construed under the laws of the State of Arizona. Nothing in this Section shall limit or restrict the right of FFCA to commence any proceeding in the federal or state courts located in a state other than Arizona to the extent FFCA deems such proceeding necessary or 15 16 advisable to exercise remedies available under this Agreement or the other Loan Documents. K. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original. L. Binding Effect. This Agreement shall be binding upon and inure to the benefit of Debtor and FFCA and their respective successors and permitted assigns, including, without limitation, any United States trustee, any debtor in possession or any trustee appointed from a private panel. M. Survival. All representations, warranties, agreements, obligations and indemnities of Debtor and FFCA set forth in this Agreement shall survive the execution of this Agreement and each Advance. N. Waiver of Jury Trial and Punitive, Consequential, Special and Indirect Damages. DEBTOR AND FFCA HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT EITHER MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY AND ALL ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER OR ITS SUCCESSORS WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY DOCUMENT CONTEMPLATED HEREIN OR RELATED HERETO. THIS WAIVER BY THE PARTIES HERETO OF ANY RIGHT EITHER MAY HAVE TO A TRIAL BY JURY HAS BEEN NEGOTIATED AND IS AN ESSENTIAL ASPECT OF THEIR BARGAIN. FURTHERMORE, DEBTOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT IT MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL AND INDIRECT DAMAGES FROM FFCA WITH RESPECT TO ANY AND ALL ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY DEBTOR AGAINST FFCA OR ITS SUCCESSORS WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY DOCUMENT CONTEMPLATED HEREIN OR RELATED HERETO. THE WAIVER BY DEBTOR OF ANY RIGHT IT MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL AND INDIRECT DAMAGES HAS BEEN NEGOTIATED BY THE PARTIES HERETO AND IS AN ESSENTIAL ASPECT OF THEIR BARGAIN. 16 17 IN WITNESS WHEREOF, Debtor and FFCA have entered into this Agreement as of the date first above written. FFCA: FRANCHISE FINANCE CORPORATION OF AMERICA, a Delaware corporation By ------------------------------------------- Printed Name --------------------------------- Its ------------------------------------------ DEBTOR: P. F. CHINA BISTRO, INC., a Delaware corporation By /s/ Robert Vivian ------------------------------------------- Printed Name Robert Vivian --------------------------------- Its CFO ------------------------------------------ 17 18 STATE OF ARIZONA ] ] SS. COUNTY OF MARICOPA ] The foregoing instrument was acknowledged before me on , 1998 by , of Franchise Finance Corporation of America, a Delaware corporation, on behalf of the corporation. --------------------------------- Notary Public My Commission Expires: - --------------------------------- STATE OF ARIZONA ] ] SS. COUNTY OF MARICOPA ] The foregoing instrument was acknowledged before me on June 29 , 1998 by Robert Vivian , CFO of P. F. Chang's China Bistro, Inc., a Delaware corporation, on behalf of the corporation. /s/ Kim Kuharske --------------------------------- Notary Public My Commission Expires: 7/25/99 - --------------------------------- 18 19 AMENDED AND RESTATED PROMISSORY NOTE Dated as of June 29, 1998 $20,000,000.00 Scottsdale, Arizona THIS AMENDED AND RESTATED PROMISSORY NOTE (this "Note") executed by P.F. CHANG'S CHINA BISTRO, INC., a Delaware corporation ("Debtor"), amends and restates that certain Promissory Note dated as of October , 1997 in the principal amount of $10,000,000.00, payable to FRANCHISE FINANCE CORPORATION OF AMERICA, a Delaware corporation ("FFCA"). Debtor, for value received, hereby promises to pay to FFCA, whose address is 17207 North Perimeter Drive, Scottsdale, Arizona 85255, or order, on or before the Maturity Date (as defined below), the principal sum of TWENTY MILLION AND NO/100 DOLLARS ($20,000,000.00), or such much thereof as may be outstanding from time to time, in accordance with that certain Amended and Restated Revolving Line of Credit Loan Agreement dated as of the date of this Note between Debtor and FFCA, as such agreement may be amended from time to time (the "Loan Agreement"). Initially capitalized terms which are not otherwise defined in this Note shall have the meanings set forth in the Loan Agreement. The following terms shall have the following meanings for all purposes of this Note: "Applicable Margin" means an annual percentage equal to 3.50%. "Adjustable Rate" means an annual interest rate equal to the sum of the Adjustable Rate Basis plus the Applicable Margin. "Adjustable Rate Basis" means, for any Interest Period, the annual interest rate (rounded upwards, if necessary, to the nearest 1/100th of one percent) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in dollars at approximately 11:000 a.m. (London time) on the Adjustable Rate Reset Date for a term comparable to such Interest Period. If for any reasons such rate is not available, the term "Adjustable Rate Basis" shall mean, for any Interest Period, the annual interest rate (rounded upwards, if necessary, to the nearest 1/100th of one percent) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in dollars at approximately 11:00 a.m. (London time) on the Adjustable Rate Reset Date for a term comparable to such Interest Period provided, however, if more than one rate is specified on the Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates. Notwithstanding the provisions of the foregoing two sentences, if, the annual interest rate charge to FFCA under its then existing LIBOR based credit facility (the "FFCA Credit Facility") is determined by a methodology other than as described in such sentences, the Adjustable Rate Basis shall be determined in accordance with the methodology for determining the annual interest rate under the FFCA Credit Facility. 20 "Adjustable Rate Reset Date" means the fifteenth day of each calendar month, or the next succeeding Business Day if such day is not a Business Day, prior to the next Interest Period. "Business Day" means any day on which FFCA is open for business in the State of Arizona, other than a Saturday, Sunday or a legal holiday. "Interest Period" means (i) initially, the period beginning on the date of this Note and ending on the last day of the calendar month in which such date occurs, and (ii) thereafter, the period beginning on the first day of the calendar month and ending on the last day of such calendar month. "Maturity Date" means July 1 , 1999. Debtor shall pay FFCA interest on the outstanding principal amount of this Note at the Adjustable Rate, on the basis of a 360-day year for the actual number of days elapsed, in arrears. Commencing on August 1 , 1998, and on the first day of each calendar month thereafter until the Maturity Date, Debtor shall pay FFCA interest which has accrued at the Adjustable Rate on the outstanding principal balance of this Note during the preceding Interest Period. FFCA shall notify Debtor in writing on or before the twenty-fifth day of each calendar month during the term of this Note of FFCA's determination of the interest payable on the first day of the next succeeding calendar month. All outstanding principal and unpaid accrued interest shall be paid on the Maturity Date. Each payment hereunder shall be applied first to any past due payments under this Note (including payment of all Costs (as herein defined)), then to accrued interest at the Adjustable Rate, and the balance, after the payment of such accrued interest, if any, shall be applied to the unpaid principal balance of this Note; provided, however, each payment hereunder while an Event of Default under this Note has occurred and is continuing shall be applied as FFCA in its sole discretion may determine. Upon execution of this Note, Debtor shall establish arrangements whereby all payments hereunder are transferred by wire or other means directly from Debtor's bank account to such account as FFCA may designate or as FFCA may otherwise designate. Debtor may prepay this Note as provided in the Loan Agreement. An "Event of Default" shall be deemed to have occurred under this Note if any principal, interest or other monetary sum due under this Note is not paid within five days from the date when due and FFCA shall have given notice of such failure to Debtor and such failure shall not have been cured by Debtor within five days from the delivery of such notice. Upon the occurrence of (i) an Event of Default under this Note or (ii) an Event of Default or an Acceleration Event under any of the other Loan Documents, then, in any of such events, time being of the essence hereof, FFCA may declare the entire unpaid principal balance of this Note, accrued interest, if any, and all other sums due under this Note, the other Loan Documents and 2 21 any other document further securing this Note, due and payable at once without written notice to Debtor. All past-due principal and/or interest shall bear interest at the lesser of the highest rate for which the undersigned may legally contract or the rate of 18% per annum (the "Default Rate"), and such Default Rate shall continue to apply following a judgment in favor of FFCA under this Note. If Debtor fails to make any payment or installment due under this Note within five days of its due date, Debtor shall pay to FFCA in addition to any other sum due FFCA under this Note or any other Loan Document a late charge equal to 10% of such past-due payment or installment. All payments of principal and interest due hereunder shall be made (i) without deduction of any present and future taxes, levies, imposts, deductions, charges or withholdings, which amounts shall be paid by Debtor, and (ii) without any other right of abatement, reduction, setoff, defense, counterclaim, interruption, deferment or recoupment for any reason whatsoever. Debtor will pay the amounts necessary such that the gross amount of the principal and interest received by FFCA is not less than that required by this Note. No delay or omission on the part of FFCA in exercising any remedy, right or option under this Note shall operate as a waiver of such remedy, right or option. In any event, a waiver on any one occasion shall not be construed as a waiver or bar to any such remedy, right or option on a future occasion. Debtor hereby waives presentment, demand for payment, notice of dishonor, notice of protest, and protest, and except as otherwise provided in the Loan Documents, all other notices or demands in connection with delivery, acceptance, performance, default or endorsement of this Note. All notices, consents, approvals or other instruments required or permitted to be given by either party pursuant to this Note shall be in writing and given by (i) hand delivery, (ii) facsimile, (iii) express overnight delivery service or (iv) certified or registered mail, return receipt requested, and shall be deemed to have been delivered upon (a) receipt, if hand delivered, (b) transmission, if delivered by facsimile (and if a copy of such notice is also mailed by certified or registered mail, return receipt requested, and deposited with the U.S. Postal Service no later than the first business day after the notice was transmitted by facsimile), (c) the next business day, following the date of deposit with the delivery service, if delivered by express overnight delivery service, or (d) the third business day following the day of deposit of such notice with the United States Postal Service, if sent by certified or registered mail, return receipt requested. Notices shall be provided to the parties and addresses (or facsimile numbers, as applicable) specified below: If to Debtor: P. F. Chang's China Bistro, Inc. 5090 North 40th Street, Suite 160 2201 East Camelback Road Phoenix, AZ 85018 Attention: Mr. Robert T. Vivian Telephone: (602) 957-8986 Telecopy: (602) 957-8998 3 22 With a copy to: Kenneth Van Winkle, Jr., Esq. Lewis and Roca LLP 40 North Central Avenue Phoenix, AZ 85004-4429 Telephone: (602) 262-5311 Telecopy: (602) 262-5747 If to FFCA: Dennis L. Ruben, Esq. Executive Vice President and General Counsel Franchise Finance Corporation of America 17207 North Perimeter Drive Scottsdale, AZ 85255 Telephone: (602) 585-4500 Telecopy: (602) 585-2226 or to such other address or such other person as either party may from time to time hereafter specify to the other party in a notice delivered in the manner provided above. Should any indebtedness represented by this Note be collected at law or in equity, or in bankruptcy or other proceedings, or should this Note be placed in the hands of attorneys for collection after default, Debtor shall pay, in addition to the principal and interest due and payable hereon, all costs of collecting or attempting to collect this Note (the "Costs"), including reasonable attorneys' fees and expenses of FFCA (including those fees and expenses incurred in connection with any appeal and those of FFCA's in-house counsel) whether or not a judicial action is commenced by FFCA. This Note may not be amended or modified except by a written agreement duly executed by Debtor and FFCA. In case any one or more of the provisions contained in this Note shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Note, and this Note shall be construed as if such provision had never been contained herein or therein. Notwithstanding anything to the contrary contained in any of the Loan Documents, the obligations of Debtor to FFCA under this Note and any other Loan Documents are subject to the limitation that payments of interest and late charges to FFCA shall not be required to the extent that receipt of any such payment by FFCA would be contrary to provisions of applicable law limiting the maximum rate of interest that may be charged or collected by FFCA. The portion of any such payment received by FFCA that is in excess of the maximum interest permitted by such provisions of law shall be credited to the principal balance of this Note or if such excess portion exceeds the outstanding principal balance of this Note, then such excess portion shall be refunded to Debtor. All interest paid or agreed to be paid to FFCA shall, to the extent permitted by applicable law, be amortized, prorated, allocated and/or spread throughout the full term of this Note (including, without limitation, the period of any renewal or extension thereof) so that interest for such full term shall not exceed the maximum amount permitted by applicable law. 4 23 It is the intent of the parties hereto that the business relationship created by this Note and the other Loan Documents is solely that of creditor and debtor and has been entered into by both parties in reliance upon the economic and legal bargains contained in the Loan Documents. None of the agreements contained in the Loan Documents, is intended, nor shall the same be deemed or construed, to create a partnership between FFCA and Debtor, to make them joint venturers, to make Debtor an agent, legal representative, partner, subsidiary or employee of FFCA, nor to make FFCA in any way responsible for the debts, obligations or losses of Debtor. FFCA, by accepting this Note, and Debtor acknowledge and warrant to each other that each has been represented by independent counsel and Debtor has executed this Note after being fully advised by said counsel as to its effect and significance. This Note shall be interpreted and construed in a fair and impartial manner without regard to such factors as the party which prepared the instrument, the relative bargaining powers of the parties or the domicile of any party. Debtor acknowledges that this Note was substantially negotiated in the State of Arizona, the Note was executed and delivered in the State of Arizona, all payments under this Note will be delivered in the State of Arizona and there are substantial contacts between the parties and the transactions contemplated herein and the State of Arizona. For purposes of any action or proceeding arising out of this Note, the parties hereto expressly submit to the jurisdiction of all federal and state courts located in the State of Arizona. Debtor consents that it may be served with any process or paper by registered mail or by personal service within or without the State of Arizona in accordance with applicable law. Furthermore, Debtor waives and agrees not to assert in any such action, suit or proceeding that it is not personally subject to the jurisdiction of such courts, that the action, suit or proceeding is brought in an inconvenient forum or that venue of the action, suit or proceeding is improper. It is the intent of Debtor and FFCA that all provisions of this Note shall be governed by and construed under the laws of the State of Arizona. Nothing contained in this paragraph shall limit or restrict the right of FFCA to commence any proceeding in the federal or state courts located in any state in which FFCA deems such proceeding necessary or advisable to exercise remedies available under the Loan Documents. FFCA, BY ACCEPTING THIS NOTE, AND DEBTOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT EITHER MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY AND ALL ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER OR ITS SUCCESSORS WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS NOTE, THE RELATIONSHIP OF FFCA AND DEBTOR AND/OR ANY CLAIM FOR INJURY OR DAMAGE, OR ANY EMERGENCY OR STATUTORY REMEDY. THIS WAIVER BY THE PARTIES HERETO OF ANY RIGHT EITHER MAY HAVE TO A TRIAL BY JURY HAS BEEN NEGOTIATED AND IS AN ESSENTIAL ASPECT OF THEIR BARGAIN. FURTHERMORE, DEBTOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT IT MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL AND INDIRECT DAMAGES FROM FFCA WITH RESPECT TO ANY AND ALL ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY DEBTOR AGAINST FFCA OR ITS SUCCESSORS WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS 5 24 NOTE OR ANY DOCUMENT CONTEMPLATED HEREIN OR RELATED HERETO. THE WAIVER BY DEBTOR OF ANY RIGHT IT MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL AND INDIRECT DAMAGES HAS BEEN NEGOTIATED BY THE PARTIES HERETO AND IS AN ESSENTIAL ASPECT OF THEIR BARGAIN. This obligation shall bind Debtor and its successors and assigns, and the benefits hereof shall inure to FFCA and its successors and assigns. FFCA may assign its rights under this Note as set forth in the Loan Agreement. 6 25 IN WITNESS WHEREOF, Debtor has executed and delivered this Note effective as of the date first set forth above. P. F. CHANG'S CHINA BISTRO, INC., a Delaware corporation By /s/ Robert Vivian ----------------------------------- Printed Name Robert Vivian ------------------------- Title CFO -------------------------------- 7 26 SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "Agreement") is made and entered into as of June 29, 1998 by and between P.F. CHANG'S CHINA BISTRO, INC., a Delaware corporation ("Debtor"), whose principal place of business is located at 5090 North 40th Street, Suite 160, Phoenix, Arizona 85015, and FRANCHISE FINANCE CORPORATION OF AMERICA, a Delaware corporation ("FFCA"), whose address is 17207 North Perimeter Drive, Scottsdale, Arizona 85255. PRELIMINARY STATEMENT: FFCA has agreed to make the Loan to Debtor. To secure the Loan, Debtor has agreed to grant FFCA a security interest in the Collateral on the terms and conditions set forth in this Agreement. Capitalized terms not defined herein shall have the respective meanings set forth in that certain Amended and Restated Revolving Line of Credit Loan Agreement dated as of the date hereof between Debtor and FFCA. NOW, THEREFORE, for and in consideration of the mutual covenants and promises hereinafter set forth, FFCA and Debtor agree as follows: 1. DEBTOR'S OBLIGATION; SECURITY INTEREST CREATED. FFCA has agreed to advance to Debtor the Loan, as evidenced by the execution and delivery of the Note to FFCA, and Debtor shall pay other sums advanced or expended by FFCA pursuant to the terms of the Loan Documents, and perform all other terms and conditions of Debtor set forth in the Loan Documents (collectively, the "Obligations"). To secure the payment of the Obligations, Debtor hereby grants to FFCA a security interest in its general partnership or membership interests in the Companies identified on Exhibit A attached hereto (the "Collateral"). 2. DEFAULT. Any action or event which would constitute an Event of Default (a "Default") and shall permit FFCA to exercise and pursue the remedies specified in Section 3 below. 3. REMEDIES FOR DEFAULT. In the event that Debtor is, or is deemed to be, in Default hereunder, FFCA shall have all rights and remedies of a secured party in, to and against the Collateral granted by the Uniform Commercial Code in the State of Arizona and otherwise available at law or in equity, including, without limitation: (i) the right to declare all payments due under the Loan Documents immediately due and payable and the right to recover all fees and expenses (including reasonable attorney fees) in connection with the collection or enforcement thereof, which fees and expenses shall constitute additional Obligations of Debtor hereunder; (ii) the right to act as, and Debtor hereby constitutes and appoints FFCA, Debtor's true, lawful and irrevocable attorney-in-fact (which appointment shall be deemed coupled with an interest) to demand, receive and enforce payments and to give receipts, releases, satisfaction for and to sue for moneys payable to Debtor under or with respect to any of the Collateral under this Agreement, and actions taken pursuant to this appointment may be taken either in the name of 27 Debtor or in the name of FFCA with the same force and effect as if this appointment had not been made; (iii) the right to take immediate and exclusive possession of the Collateral, or any part thereof; (iv) the right to hold, maintain, preserve and prepare the Collateral for sale, until disposed of; (v) the right to dispose of the Collateral; (vi) the right to require Debtor to assemble and package the Collateral and make it available to FFCA for its possession at a place to be designated by FFCA which is reasonably convenient to the FFCA; (vii) the right to sell, hold or otherwise dispose of all or any part of the Collateral; (viii) the right to sue for specific performance of any obligation under the Loan Documents or to recover damages for breach thereof; (ix) the right at any time to amend or terminate the Management Agreements and/or the Joint Venture Agreements; (x) the right to receive all cash distributions or payments payable in respect of the Collateral; and (xi) the right to exercise or cause to be exercised all voting rights and partnership or limited liability company, as applicable, powers in respect of the Collateral. The remedies of FFCA hereunder are cumulative and the exercise of any one or more of the remedies provided for herein or under the Uniform Commercial Code or other applicable law shall not be construed as a waiver of any of the other remedies of FFCA so long as any part of the Obligations secured hereby remains unsatisfied. FFCA shall be entitled to receive on demand, as additional Obligations hereunder, interest at the lower of 18% per annum or the highest rate permitted by applicable law on all amounts not paid when due under the Note or this Agreement, for the period such amounts are overdue. FFCA shall have no duty to mitigate any loss to the Debtor occasioned by enforcement of any remedy hereunder and shall have no duty of any kind to any subordinated creditor of Debtor. 4. APPLICATION OF PROCEEDS. Should FFCA exercise the rights and remedies specified in Section 3 hereof, any proceeds received thereby shall be first applied to pay the costs and expenses, including reasonable attorneys' fees, incurred by FFCA as a result of Debtor's Default. The remainder of any proceeds, net of FFCA's costs and expenses, shall be applied to the satisfaction of the Obligations and, so long as Debtor is not in Default hereunder, any excess shall be paid over to Debtor. If Debtor is in Default hereunder, any excess may be held by FFCA for a reasonable time and either applied to the Obligations or paid over to Debtor. 5. APPLICABLE LAW. Debtor acknowledges that this Agreement was substantially negotiated in the State of Arizona, the executed Agreement was delivered in the State of Arizona, all payments under the Loan Documents will be delivered in the State of Arizona and there are substantial contacts between the parties and the transactions contemplated herein and the State of Arizona. For purposes of any action or proceeding arising out of this Agreement, the parties hereto expressly submit to the jurisdiction of all federal and state courts located in the State of Arizona. Debtor consents that it may be served with any process or paper by registered mail or by personal service within or without the State of Arizona in accordance with applicable law. Furthermore, Debtor waives and agrees not to assert in any such action, suit or proceeding that it is not personally subject to the jurisdiction of such courts, that the action, suit or proceeding is brought in an inconvenient forum or that venue of the action, suit or proceeding is improper. It is the intent of the parties hereto that all provisions of this Agreement shall be governed by and construed in accordance with the laws of the State of Arizona. To the extent that a court of competent jurisdiction finds Arizona law inapplicable with respect to any 2 28 provisions hereof, then, as to those provisions only, the laws of the state where the Collateral is located shall be deemed to apply. Nothing contained in this paragraph shall limit or restrict the right of FFCA to commence any proceeding in the federal or state courts located in the state in which the Collateral is located to the extent FFCA deems such proceeding necessary or advisable to exercise remedies available under the Loan Documents. 6. NONASSIGNABILITY. This Agreement may not by assigned by Debtor without the consent of FFCA. However, FFCA may assign its rights under this Agreement to any third party without the prior consent of Debtor. 7. POSSESSION. Until a Default occurs, Debtor may retain possession of the Collateral, shall be entitled to all distributions as a result of its interests in the Companies and may use it in any lawful manner not inconsistent with this Agreement, with the provisions of any policies of insurance thereon or the other Loan Documents. 8. WAIVER. No Default hereunder by Debtor shall be deemed to have been waived by FFCA except by a writing to that effect signed by FFCA and no waiver of any Default shall operate as a waiver of any other Default on a future occasion. No modification, rescission, waiver, release or amendment of any provision of this Agreement shall be made except by a written agreement signed by Debtor and FFCA. 9. SEVERABILITY. In case any one or more of the provisions contained herein or in the Note shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such provision had never been contained herein or therein. 10. NOTICES; AMENDMENTS; WAIVERS. All notices, demands, designations, certificates, requests, offers, consents, approvals, appointments and other instruments given pursuant to this Agreement (collectively called "Notices") shall be in writing and given by (i) hand delivery, (ii) facsimile, (iii) express overnight delivery service or (iv) certified or registered mail, return receipt requested, and shall be deemed to have been delivered upon (a) receipt, if hand delivered, (b) transmission, if delivered by facsimile, (c) the next business day, if delivered by express overnight delivery service, or (d) the third business day following the day of deposit of such notice with the United States Postal Service, if sent by certified or registered mail, return receipt requested. Notices shall be provided to the parties and addresses (or facsimile numbers, as applicable) specified below: If to Debtor: P. F. Chang's China Bistro, Inc. 5090 North 40th Street, Suite 160 Phoenix, AZ 85018 Attention: Mr. Robert T. Vivian Telephone: (602) 957-8986 Telecopy: (602) 957-8998 3 29 With a copy to: Kenneth Van Winkle, Jr., Esq. Lewis and Roca LLP 40 North Central Avenue Phoenix, AZ 85004-4429 Telephone: (602) 262-5357 Telecopy: (602) 262-5747 If to FFCA: Dennis L. Ruben, Esq. Senior Vice President and General Counsel Franchise Finance Corporation of America 17207 North Perimeter Drive Scottsdale, AZ 85255 Telephone: (602) 585-4500 Telecopy: (602) 585-2226 or to such other address or such other person as either party may from time to time hereafter specify to the other party in a notice delivered in the manner provided above. Whenever in this Agreement the giving of Notice is required, the giving thereof may be waived in writing at any time by the person or persons entitled to receive such Notice. 11. COUNTERPARTS. This Agreement may be executed in any number of counterparts and each thereof shall be deemed to be an original, and all such counterparts shall constitute but one and the same instrument. 12. HEADINGS. The headings appearing in this Agreement have been inserted for convenient reference only and shall not modify, define, limit or expand the express provisions of this Agreement. 13. CHARACTERIZATION; INTERPRETATION. It is the intent of the parties hereto that the business relationship created by the Note, this Agreement and the other Loan Documents is solely that of creditor and debtor and has been entered into by both parties in reliance upon the economic and legal bargains contained in the Loan Documents. None of the agreements contained in the Loan Documents is intended, nor shall the same be deemed or construed, to create a partnership between FFCA and Debtor, to make them joint venturers, to make Debtor an agent, legal representative, partner, subsidiary or employee of FFCA, nor to make FFCA in any way responsible for the debts, obligations or losses of Debtor. FFCA and Debtor acknowledge and warrant to each other that each has been represented by independent counsel and has executed this Agreement after being fully advised by said counsel as to its effect and significance. This Agreement shall be interpreted and construed in a fair and impartial manner without regard to such factors as the party, which prepared the instrument, the relative bargaining powers of the parties or the domicile of any party. 14. TIME OF THE ESSENCE. Time is of the essence in the performance of each and every obligation under this Agreement. 4 30 15. WAIVER OF JURY TRIAL AND PUNITIVE, CONSEQUENTIAL, SPECIAL AND INDIRECT DAMAGES. FFCA AND DEBTOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT EITHER MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY AND ALL ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER OR ITS SUCCESSORS WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, THE RELATIONSHIP OF FFCA AND DEBTOR, DEBTOR'S USE OR OCCUPANCY OF THE COLLATERAL, AND/OR ANY CLAIM FOR INJURY OR DAMAGE, OR ANY EMERGENCY OR STATUTORY REMEDY. THIS WAIVER BY THE PARTIES HERETO OF ANY RIGHT EITHER MAY HAVE TO A TRIAL BY JURY HAS BEEN NEGOTIATED AND IS AN ESSENTIAL ASPECT OF THEIR BARGAIN. FURTHERMORE, DEBTOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT IT MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL AND INDIRECT DAMAGES FROM FFCA WITH RESPECT TO ANY AND ALL ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY DEBTOR AGAINST FFCA OR ITS SUCCESSORS WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY DOCUMENTS CONTEMPLATED HEREIN OR RELATED HERETO. THE WAIVER BY DEBTOR OF ANY RIGHT IT MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL AND INDIRECT DAMAGES HAS BEEN NEGOTIATED BY DEBTOR AND FFCA AND IS AN ESSENTIAL ASPECT OF THEIR BARGAIN. 5 31 IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the day and year first above written. DEBTOR: P.F.CHANG'S CHINA BISTRO, INC., a Delaware corporation By /s/ Robert Vivian --------------------------------------- Printed Name Robert Vivian ----------------------------- Its CFO -------------------------------------- SECURED PARTY: FRANCHISE FINANCE CORPORATION OF AMERICA, a Delaware corporation By --------------------------------------- Printed Name ----------------------------- Title ------------------------------------ 6 32 EXHIBIT A COMPANIES PFCCB NUC LLC, an Arizona limited liability company PFCCB Southeastern LLC, an Arizona limited liability company PFCCB Mid-Atlantic LLC, an Arizona limited liability company PFCCB LouTex Joint Venture, an Arizona general partnership PFCCB Florida Joint Venture, an Arizona general partnership 33 FORM OF NEGATIVE PLEDGE AGREEMENT THIS NEGATIVE PLEDGE AGREEMENT (this "Agreement") is made as of June 29, 1998 by P.F. CHANG'S CHINA BISTRO, INC., a Delaware corporation ("Debtor") whose principal place of business is located at 5090 North 40th Street, Suite 160, Phoenix, Arizona 85015 for the benefit of FRANCHISE FINANCE CORPORATION OF AMERICA, a Delaware corporation ("FFCA"), whose address is 17207 North Perimeter Drive, Scottsdale, Arizona 85255. PRELIMINARY STATEMENTS Capitalized terms not defined herein shall have the respective meanings set forth in that certain Amended and Restated Revolving Line of Credit Loan Agreement (the "Loan Agreement") dated as of the date hereof between FFCA and Debtor. Debtor either holds (i) fee title to the property legally described on the attached Exhibit A (ii) a leasehold interest in the land legally described on the attached Exhibit A and fee title to the buildings and improvements located thereon or (iii) a leasehold interest in the real property legally described on the attached Exhibit A (in any case, the "Premises"). FFCA has agreed to make the Loan to Debtor. In consideration of the Loan and as security for the Loan, Debtor has agreed to execute and deliver this Agreement. AGREEMENT 1. NEGATIVE PLEDGE. Debtor agrees that it shall not sell, assign, mortgage, grant, bargain, convey, pledge or encumber by deed of trust, security agreement or other consensual monetary lien in or on Debtor's interest in the Premises or any portion thereof or permit Debtor's interest in the Premises or any part thereof to be sold, assigned, mortgaged, granted, bargained, conveyed, pledged or encumbered by deed of trust, security agreement or other consensual monetary lien without the prior written consent of FFCA, which consent may be withheld in FFCA's sole discretion. Any sale, assignment, mortgage, grant, bargain, conveyance, pledge or consensual encumbrance in breach of the preceding sentence shall be null and void, and of no force and effect, and shall constitute an "Event of Default" under the Loan Agreement. Debtor acknowledges that a material inducement to FFCA's willingness to advance the Loan is the execution and delivery by Debtor of this Agreement. 2. RECORDATION. Debtor agrees that is Agreement will be recorded in the real property records of the county where the Premises is located to provide constructive notice of the terms and conditions of this Agreement; provided, however, that this Agreement does not encumber or affect any landlord's or lessor's interest in the Premises. 3. RELEASE. FFCA agrees that at such time as the obligations of Debtor under the Loan Documents are paid and satisfied in full, FFCA shall execute a release of this Agreement. 4. MISCELLANEOUS PROVISIONS. A. Notices. All notices, consents, approvals or other instruments required or permitted to be given by either party pursuant to this Agreement shall be in writing and given by 34 (i) hand delivery, (ii) facsimile, (iii) express overnight delivery service or (iv) certified or registered mail, return receipt requested, and shall be deemed to have been delivered upon (a) receipt, if hand delivered, (b) electronic confirmation of transmission, if delivered by facsimile, (c) the next business day, if delivered by express overnight delivery service, or (d) the third business day following the day of deposit of such notice with the United States Postal Service, if sent by certified or registered mail, return receipt requested. Notices shall be provided to the parties and addresses (or facsimile numbers, as applicable) specified below: If to Debtor: P.F. Chang's China Bistro, Inc. 5090 North 40th Street, Suite 160 Phoenix, AZ 85018 Attention: Mr. Robert T. Vivian Telephone: (602) 957-8986 Telecopy: (602) 957-8998 With a copy to: Kenneth Van Winkle, Jr., Esq. Lewis and Roca LLP 40 North Central Avenue Phoenix, AZ 85004-4429 Telephone: (602) 262-5311 Telecopy: (602) 262-5747 If to FFCA: Dennis L. Ruben, Esq. Executive Vice President and General Counsel Franchise Finance Corporation of America 17207 North Perimeter Drive Scottsdale, AZ 85255 Telephone: (602) 585-4500 Telecopy: (602) 585-2226 B. Waiver and Amendment. No provisions of this Agreement shall be deemed waived or amended except by a written instrument unambiguously setting forth the matter or amended except by a written instrument unambiguously setting forth the matter waived or amended and signed by the party against which enforcement of such waiver or amendment is sought. Waiver of any matter shall not be deemed a waiver of the same or any other matter on any future occasion. C. Captions. Captions are used throughout this Agreement for convenience of reference only and shall not be considered in any manner in the construction or interpretation hereof. D. Severability. The provisions of this Agreement shall be deemed severable. If any part of this Agreement shall be held unenforceable, the remainder shall remain in full force and effect, and such unenforceable provision shall be reformed by such court so as to give maximum legal effect to the intention of the parties as expressed therein. 2 35 E. Binding Effect. This Agreement shall be binding upon and inure to the benefit of Debtor and FFCA and their respective successors and permitted assigns, including, without limitation, any United States trustee, any debtor in possession or any trustee appointed from a private panel. F. Forum Selection; Jurisdiction; Venue; Choice of Law. Debtor and FFCA acknowledge that this Agreement was substantially negotiated in the State of Arizona, the Agreement was signed and delivered by Debtor in the State of Arizona, and there are substantial contacts between the parties and the transactions contemplated herein and the State of Arizona. For purposes of any action or proceeding arising out of this Agreement, the parties hereto hereby expressly submit to the jurisdiction of all federal and state courts located in the State of Arizona and Debtor consents that it may be served with any process or paper by registered mail or by personal service within or without the State of Arizona in accordance with applicable law. Furthermore, Debtor waives and agrees not to assert in any such action, suit or proceeding that it is not personally subject to the jurisdiction of such courts, that the action, suit or proceeding is brought in an inconvenient forum or that venue of the action, suit or proceeding is improper. It is the intent of the parties hereto that all provisions of this Agreement shall be governed by and construed under the laws of the State of Arizona. To the extent that a court of competent jurisdiction finds Arizona law inapplicable with respect to any provisions hereof, then, as to those provisions only, the laws of the state where the Premises is located shall be deemed to apply. Nothing in this Section shall limit or restrict the right of FFCA to commence any proceeding in the federal or state courts located in the state in which the Premises are located to the extent FFCA deems such proceeding necessary or advisable to exercise remedies available under this Agreement. H. Waiver of Jury Trial and Punitive, Consequential, Special and Indirect Damages. DEBTOR AND FFCA HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT EITHER MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY AND ALL ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER OR ITS SUCCESSORS WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY DOCUMENT CONTEMPLATED HEREIN OR RELATED HERETO. THIS WAIVER BY THE PARTIES HERETO OF ANY RIGHT EITHER MAY HAVE TO A TRIAL BY JURY HAS BEEN NEGOTIATED AND IS AN ESSENTIAL ASPECT OF THEIR BARGAIN. FURTHERMORE, DEBTOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT IT MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL AND INDIRECT DAMAGES FROM FFCA WITH RESPECT TO ANY AND ALL ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY DEBTOR AGAINST FFCA OR ITS SUCCESSORS WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY DOCUMENT CONTEMPLATED HEREIN OR RELATED HERETO. THE WAIVER BY DEBTOR OF ANY RIGHT IT MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL AND INDIRECT DAMAGES HAS BEEN 3 36 NEGOTIATED BY THE PARTIES HERETO AND IS AN ESSENTIAL ASPECT OF THEIR BARGAIN. I. Costs. Debtor shall be responsible for the payment of all out-of-pocket costs and expenses incurred by Debtor and FFCA in connection with this Agreement, including, without limitation, reasonable attorneys' fees and recording and filing fees and charges. 4 37 STATE OF ARIZONA ) ) SS. COUNTY OF MARICOPA) The foregoing instrument was acknowledged before me on June 29, 1998 by Robert Vivian, CFO of P.F. Chang's China Bistro, Inc. a Delaware corporation, on behalf of the corporation. /s/ Kim Kuharske ---------------------------------- Notary Public My Commission Expires: 7-25-99 - ---------------------- 6 EX-10.10 13 EX-10.10 1 EXHIBIT 10.10 OFFICE LEASE THIS OFFICE LEASE is entered into by Landlord and Tenant as described in the following Basic Lease Information on the Date which is set forth for reference only in the following Basic Lease Information. Landlord and Tenant agree: ARTICLE 1--BASIC LEASE INFORMATION 1.1 Basic Lease Information. In addition to the terms which are defined elsewhere in this Lease, the following defined terms are used in this Lease: (a) DATE: February 15, 1997. (b) LANDLORD: U S WEST Business Resources, Inc., a Colorado corporation. (c) LANDLORD'S ADDRESS: with a copy at the same time to: U S WEST Business Resources, Inc. U S WEST, Inc. 3640 East Indian School Road, Room 300 7800 East Orchard Road, Room 480 Phoenix, AZ 85018 Englewood, CO 80111 Attn: Manager--Real Estate Attn: Law Department
(d) TENANT: P.F. Chang's China Bistro, Inc., a Delaware corporation. (e) TENANT'S ADDRESS: P.F. Chang's China Bistro, Inc. 5090 North 40th Street, Suite 160 Phoenix, AZ 85018 (f) BUILDING ADDRESS: 5090 North 40th Street Phoenix, AZ 85018 (g) PREMISES: The Premises shown on Exhibit A to this Lease, known as Suite 160. (h) RENTABLE AREA OF THE PREMISES: Approximately 4,410 rentable square feet. (i) RENTABLE AREA OF THE BUILDING: 175,186 rentable square feet. (j) TERM: Approximately 60 months, beginning on the Commencement Date and expiring on the Expiration Date. (k) COMMENCEMENT DATE: May 1, 1997, as the same may be extended pursuant to Article 3 below. (l) EXPIRATION DATE: April 30, 2002, as the same may be extended pursuant to Section 3.2 below. (m) SECURITY DEPOSIT: $-0-. (n) MONTHLY RENT: $8,085.00 per month. For purposes of this subsection (n), month 1 will be considered the first full calendar month of the Term; from the Commencement Date until the beginning of month 1, the Monthly Rent shall be $8,085.00 per month on a prorated basis. The Monthly Rent includes the product of 1/12th of the Operating Expenses Base times the Rentable Area of the Premises. The Monthly Rent does not include the Arizona state and local transaction privileges tax. (o) OPERATING EXPENSES BASE: Actual operating expenses for calendar year 1997, expressed on a per square foot basis. (p) TENANT'S SHARE: 2.517% (determined by dividing the Rentable Area of the Premises by the total rentable area of the building). (q) PARKING SPACES: Landlord shall provide six covered, reserved parking stalls. Upon Tenant's request, Landlord shall provide twenty-five covered unreserved parking stalls. Tenant shall notify Landlord if it desires any additional unreserved stalls. (r) PARKING CHARGE: $45 per month per stall for the covered reserved parking stalls, and $26 per month per stall for covered unreserved Parking stalls. (s) BROKER: CB Commercial. 2 (t) TENANT IMPROVEMENTS: Landlord shall provide space based on a mutually acceptable space plan. Landlord's obligation and costs for tenant improvements shall not exceed $7.00 per rentable square foot. 1.2 Definitions: (a) ADDITIONAL RENT: Any amounts which this Lease requires Tenant to pay in addition to Monthly Rent, including, but not limited to, the Arizona state and local transaction privilege tax. (b) BUILDING: The building which is located on the Land and of which the Premises are a part (c) LAND: The land on which the Project is located and which is described on Exhibit B. (d) PRIME RATE: The rate of interest from time to time announced by Norwest Banks, or any successor to it, as its prime rate. If Norwest Banks or any successor to it ceases to announce its prime rate, the Prime Rate will be a comparable interest rate designated by Landlord which replaces the Prime Rate. (e) PROJECT: The development consisting of the Land and all improvements built on the Land including without limitation the Building, parking lot, parking structure, if any, walkways, driveways, fences, and landscaping. (f) RENT: The Monthly Rent and Additional Rent. If any other provision of this Lease contradicts any definition of this Article, the other provision will prevail. 1.3 Exhibits. The following addendum and exhibits are attached to this Lease and are made part of this Lease: EXHIBIT A--The Premises EXHIBIT B--Legal Description of the Land EXHIBIT C--Work Letter EXHIBIT D--Rules and Regulations EXHIBIT E--Commencement Date Certificate ARTICLE 2--AGREEMENT Landlord leases the Premises to Tenant, and Tenant leases the Premises; from Landlord, according to this Lease. The duration of this Lease will be the Term. The Term will commence on the Commencement Date, and will expire on the Expiration Date. ARTICLE 3--DELIVERY OF PREMISES Landlord will perform the Tenant Improvements as described in the attached Exhibit C above. Subject to Landlord's obligation to complete the Tenant Improvements, Landlord shall have delivered possession of the Premises to Tenant on the Commencement Date, AS-IS in its present condition on the Commencement Date. Tenant acknowledges that neither Landlord nor its agents or employees have made any representations or warranties as to the suitability or fitness of the Premises for the conduct of Tenant's business or for any other purpose, nor has Landlord or its agents or employees agreed to undertake any alterations or construct any tenant improvements to the Premises except as expressly provided in this Lease. If for any reason, Landlord cannot deliver possession of the Premises to Tenant on the Commencement Date, (a) this Lease will not be void or voidable and Landlord will not be liable to Tenant for any resultant loss or damage, and (b) the Commencement Date and Expiration Date shall each be delayed by one day for each day of such delay; provided, however, if the Commencement Date is delayed by more than 90 days, Tenant, by written notice to Landlord prior to the Commencement Date, may terminate this Lease. Tenant will execute the Commencement Date Certificate attached to this Lease as Exhibit E within 15 days of Landlord's request. ARTICLE 4--MONTHLY RENT Throughout the Term of this Lease, Tenant will pay Monthly Rent to Landlord as rent for the Premises. Monthly Rent will be paid in advance on or before the first day of each calendar month of the Term. If the Term commences on a day other than the first day of a calendar month or ends on a day other than the last day of a calendar month, then Monthly Rent will be appropriately prorated by Landlord based on the actual number of calendar days in such month. If the Term commences on a day other than the first day of a calendar month, then the prorated Monthly Rent for such month will be paid on or before the first day of the Term. Monthly Rent will be paid to Landlord, without written notice or demand, and without deduction or offset, in lawful money of the United States of America at Landlord's Address, or to such other address as Landlord may from time to time designate in writing. -2- 3 ARTICLE 5--OPERATING EXPENSES 5.1 General. (a) In addition to Monthly Rent, beginning on January 1, 1998, Tenant will pay Tenant's Share of the amount by which the Operating Expenses paid, payable or incurred by Landlord in each calendar year or partial calendar year during the Term exceeds the product of (i) the Operating Expenses Base times (ii) the Rentable Area of the Building. If Operating Expenses are calculated for a partial calendar year, the Operating Expenses Base will be appropriately prorated. (b) As used in this Lease, the term "Operating Expenses" means: (1) All reasonable costs of management, operation and maintenance of the Project, including without limitation, real and personal property taxes and assessments (and any tax levied in whole or in part in lieu of or in addition to real property taxes); wages, salaries and compensation of employees employed at or allocated to the Project; consulting, accounting, legal, janitorial, maintenance, guard, and other services; management fees and costs (charged by Landlord, any affiliate of Landlord, or any other entity managing the Project and determined at a rate consistent with prevailing market rates for comparable services and projects); reasonable reserves for Operating Expenses; that part of office rent or rental value of space in the Project used or furnished by Landlord to enhance, manage, operate, and maintain the Project; power, water, waste disposal, and other utilities; materials and supplies; maintenance and repairs; insurance obtained with respect to the Project; depreciation on personal property and equipment (except as set forth in (c) below or which is or should be capitalized on the books of Landlord); and any other costs, charges, and expenses which, under generally accepted accounting principles, would be regarded as management, maintenance, and operating expenses; and (2) The cost (amortized over such period as Landlord will reasonably determine) together with interest at the greater of (A) the Prime Rate prevailing plus 2% or (B) Landlord's borrowing rate for such capital improvements plus 2%, on the unamortized balance of any capital improvements (i) which are made to the Project by Landlord for the purpose of reducing Operating Expenses, or (ii) which are required under any governmental law or regulation that was not applicable to the Project at the time it was constructed and which are not a result of special requirements for any tenant's use of the Building (whether or not such law or regulation is applicable to the Building as a result of Landlord's or any tenant's status under such law or regulation, Landlord's or any tenant's use, occupancy, or alteration of any portion of the Building, or improvements made by or for any tenant in its premises). Notwithstanding the foregoing, the Building's Operating Expenses will not include the cost of capital improvements which are required to be made to any tenant's premises by Such tenant pursuant to Section 8.1. (c) The Operating Expenses will not include: (1) depreciation on the Project (other than depreciation on personal property, equipment, window coverings on exterior windows provided by Landlord and carpeting in public corridors and common areas); (2) costs of alterations of space or other improvements made for tenants of the Project; (3) finders' fees and real estate brokers' commissions; (4) ground lease payments, mortgage principal or interest; (5) capital items other than those referred to in clause (b)(2) above; (6) costs of replacements to personal property and equipment for which depreciation costs are included as an Operating Expense; (7) costs of excess or additional services provided to any tenant in the Building which are directly billed to such tenants; (8) the cost of repairs due to casualty or condemnation which are reimbursed by third parties; (9) any cost due to Landlord's breach of this Lease; (10) any income, estate, inheritance, or other transfer tax and any excess profit, franchise, or similar taxes on Landlord's business; (11) all costs, including legal fees, relating to activities for the solicitation and execution of leases of space in the Building; and (12) any legal fees incurred by Landlord in enforcing its rights under other leases for premises in the Building. (d) The Operating Expenses which vary with occupancy and which are attributable to any part of the Term in which less than 95% of the Rentable Area of the Building is occupied by tenants, will be adjusted by Landlord to the amount which Landlord reasonably believes that they would have been if 95% of the Rentable Area of the Building had been so occupied. (e) Tenant acknowledges that Landlord has not made any representation or given Tenant any assurances that the Operating Expenses Base will equal or approximate the actual Operating Expenses per square foot of Rentable Area of the Premises for any calendar year during the Term. In no event shall Operating Expenses within the control of Landlord exceed 5% per year. 5.2 Estimated Payments. Commencing on January 1, 1998 and hereafter during each calendar year or partial calendar year in the Term, in addition to Monthly Rent, Tenant will pay to Landlord on the first day of each month an amount equal to 1/12 of the product of Tenant's Share multiplied by the "Estimated Operating Expenses" (defined below) for such calendar year. "Estimated Operating Expenses" for any calendar year shall mean Landlord's reasonable estimate of Operating Expenses for such calendar year less the product of the Operating Expenses Base multiplied by the Rentable Area of the Building and shall be subject to revision according to the further provisions of this Section 5.2 and Section 5.3. During any partial calendar year during the Term, Estimated Operating Expenses will be estimated on a full-year basis. During each December during the Term, or as soon after each December as practicable, Landlord will give Tenant written notice of Estimated Operating Expenses for the ensuing calendar year. On or before the first day of each month during the ensuing calendar year (or each month of the Term, if a partial calendar year), Tenant will pay to Landlord 1/12 of the product of Tenant's Share multiplied by the Estimated Operating Expenses for such calendar year; however, if such written notice is not given in December, Tenant will continue to make monthly payments on the basis of the prior year's Estimated Operating Expenses until the month after such written notice is given, at which -3- 4 time Tenant will commence making monthly payments based upon the revised Estimated Operating Expenses. In the month Tenant first makes a payment based upon the revised Estimated Operating Expenses, Tenant will pay to Landlord the difference between the amount payable based upon the revised Estimated Operating Expenses and the amount payable based upon the prior year's Estimated Operating Expenses, for each month which has elapsed since December. If at any time or times it reasonably appears to Landlord that the actual Operating Expenses for any calendar year will vary from the Estimated Operating Expenses for such calendar year, Landlord may, by written notice to Tenant, revise the Estimated Operating Expenses for such calendar year, and subsequent payments by Tenant in such calendar year will be based upon such revised Estimated Operating Expenses. 5.3 Annual Settlement. Within 120 days after the end of each calendar year or as soon after such 120-day period as practicable, Landlord will deliver to Tenant a statement of amounts payable under Section 5.1 for such calendar year prepared and certified by Landlord. Such certified statement will be final and binding upon Landlord and Tenant unless Tenant objects to it in writing to Landlord within 60 days after it is given to Tenant. If such statement shows an amount owing by Tenant that is less than the estimated payments previously made by Tenant for such calendar year, the excess will be held by Landlord and credited against the next payment of Rent; however, if the Term has ended and Tenant was not in default at its end, Landlord will refund the excess to Tenant. If such statement shows an amount owing by Tenant that is more than the estimated payments previously made by Tenant for such calendar year, Tenant will pay the deficiency to Landlord within 30 days after the delivery of such statement. Tenant may review Landlord's records of the Operating Expenses, at Tenant's sole cost and expense, at the place Landlord normally maintains such records during Landlord's normal business hours upon reasonable advance written notice. 5.4 Final Proration. If this Lease ends on a day other than the last day of a calendar year, the amount of increase (if any) in the Operating Expenses payable by Tenant applicable to the calendar year in which this Lease ends will be calculated on the basis of the number of days of the Term falling within such calendar year and Tenant's obligation to pay any increase or Landlord's obligation to refund any overage will survive the expiration or other termination of this Lease. If Tenant's audit reveals an overstatement of the total Operating Expense of more than 5%, then Landlord shall pay the cost of Tenant's audit. 5.5 Other Taxes. (a) Tenant will reimburse Landlord upon demand for any and all taxes payable by Landlord (other than as set forth in subparagraph (b) below), whether or not now customary or within the contemplation of Landlord and Tenant: (1) Upon or measured by Rent, including without limitation, any gross revenue tax, excise tax, or value added tax levied by the federal government or any other governmental body with respect to the receipt of Rent, including, but not limited to, the Arizona state and local transaction privileges tax; and (2) Upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. (b) Tenant will not be obligated to pay any inheritance tax, gift tax, transfer tax, franchise tax, income tax (based on net income), profit tax, or capital levy imposed upon Landlord. (c) Tenant will pay promptly when due all personal property taxes on Tenant's personal property in the Premises and any other taxes payable by Tenant, the non-payment of which might give rise to a lien on the Premises or Tenant's interest in the Premises. 5.6 Additional Rent. Amounts payable by Tenant according to this Article 5 will be payable as Rent, without deduction or offset. If Tenant fails to pay any amounts due according to this Article 5, Landlord will have all the rights and remedies available to it on account of Tenant's failure to pay Rent. ARTICLE 6--INSURANCE 6.1 Landlord's Insurance. At all times during the Term, Landlord will carry and maintain: (a) Fire and extended coverage insurance covering the Project and its equipment and common area furnishings; (b) Bodily injury and property damage insurance; and (c) Such other insurance as Landlord reasonably determines from time to time or required by any Superior Lien (as defined in Section 19.1). The insurance coverages and amounts in this Section 6.1 will be reasonably determined by Landlord, based on coverages carried by prudent owners of comparable buildings in the vicinity of the Project. 6.2 Tenant's Insurance. At all times during the Term, Tenant will carry and maintain, at Tenant's expense, the following insurance, in the amounts specified below or such other amounts as Landlord may from time to time reasonably request and which are customary for projects similar to the Project in the Phoenix area, with insurance companies and on forms reasonably satisfactory to Landlord: -4- 5 (a) Bodily injury and property damage liability insurance, with a combined single occurrence limit of not less than $1,000,000. All such insurance will be equivalent to coverage offered by a Commercial General Liability form including, without limitation, personal injury and contractual liability coverage for the performance by Tenant of the indemnity agreements set forth in Article 12 of this Lease; (b) Insurance covering all of Tenant's furniture and fixtures, machinery, equipment, stock and any other personal property owned and used in Tenant's business and found in, on or about the Project. Property forms will provide coverage on a broad form basis insuring against "all risks of direct physical loss." All policy proceeds will be used for the repair or replacement of the property damaged or destroyed; however, if this Lease ceases under the provisions of Article 18, Tenant will be entitled to any proceeds resulting from damage to Tenant's furniture and fixtures, machinery and equipment, stock and any other personal property; (c) Worker's compensation insurance insuring against and satisfying Tenant's obligations and liabilities under the worker's compensation laws of the state in which the Premises are located, including employer's liability insurance in the limits required by the laws of the state in which the Project is located; and (d) If Tenant operates owned, hired or nonowned vehicles on the Project, comprehensive automobile liability will be carried at a limit of liability not less than $500,000 combined bodily injury and property damage. 6.3 Forms of the Policies. Certificates of insurance, together with copies of the endorsements when applicable naming Landlord and any others specified by Landlord as additional insureds, will be delivered to Landlord prior to Tenant's occupancy of the Premises and from time to time at least 10 days prior to the expiration of the term of each such policy. All Commercial General Liability or comparable policies maintained by Tenant will name Landlord and such other persons or firms having an interest in the Project (whether as owner or mortgagee) as Landlord specifies (in writing) from time to time as additional insureds entitling them to recover under such policies for any loss sustained by them, their agents and employees as a result of the negligent acts or omissions of Tenant. All such policies maintained by Tenant will provide that they may not be terminated nor may coverage be reduced except after 30 days' prior written notice to Landlord. All Commercial General Liability and property policies maintained by Tenant will be written as primary policies, not contributing with and not supplemental to the coverage that Landlord may carry. 6.4 Waiver of Subrogation. Landlord and Tenant each waive any and all rights to recover against the other or against any other tenant, occupant of the Project or Superior Lien holder, or against the officers, directors, shareholders, partners, joint venturers, employees, agents, customers, invitees or business visitors of such other party or of such other tenant or, occupant of the Project, or Superior Lien holder, for any loss or damage to such waiving party arising from any cause covered by any property insurance required to be carried by such party pursuant to this Article 6 or any other property insurance actually carried by such party to the extent of the recovery under such policy. Landlord and Tenant, from time to time, will cause their respective insurers to issue appropriate waiver of subrogation rights endorsements to all property insurance policies carried in connection with the Project or the Premises or the contents of the Project or the Premises. Tenant agrees to cause all other occupants of the Premises claiming by, under or through Tenant to execute and deliver to Landlord such a waiver of claims and to obtain such waiver of subrogation rights endorsements. 6.5 Adequacy of Coverage. Landlord, its agents and employees, make no representation that the limits of liability specified to be carried by Tenant pursuant to this Article 6 are adequate to protect Tenant. If Tenant believes that any of such insurance coverage is inadequate, Tenant will obtain such additional insurance coverage as Tenant deems adequate, at Tenant's sole expense. ARTICLE 7--USE The Premises will be used only for general office purposes and ancillary office purposes. Tenant will not (a) do or permit to be done in or about the Premises, nor bring to, keep, or permit to be brought or kept in the Premises, anything which is prohibited by or will in any way conflict with any law, statute, ordinance, or governmental rule or regulation which is now in force or which may be enacted or promulgated after the Date; (b) do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants of the Building or Project or injure or annoy them; (c) use or allow the Premises to be used for any immoral or unlawful, purpose; (d) cause, maintain, or permit any nuisance in, on, or about the Premises, or (e) commit or allow to be committed any, waste in, on, or about the Premises. ARTICLE 8--REQUIREMENTS OF LAW; FIRE INSURANCE 8.1 General. At its sole cost and expense, Tenant will promptly comply with all laws, statutes, ordinances and governmental rules, regulations, or requirements now in force or in force after the Commencement Date, with the requirements of any board of fire underwriters or other similar body constituted now or after the Date, with any direction or occupancy certificate issued pursuant to any law by any public officer or officers, as well as the provisions of all recorded documents affecting the Premises, insofar as they relate to (a) Tenant's use, occupancy, or alteration of the Premises; (b) the condition of the Premises resulting from Tenant's use, occupancy, or alteration of the Premises; or (c) alterations to the Premises required as a result of Tenant's status under such laws. Tenant will not be required to comply with such laws with respect to structural changes or changes outside the Premises unless related to (y) Tenant's use or occupancy of the Premises, or (z) improvements or alterations made by or for Tenant. -5- 6 8.2 Hazardous Materials. (a) For purposes of this Lease, "Hazardous Materials" means any toxic or caustic substances, explosives, radioactive materials, hazardous wastes, hazardous substances, or petroleum, its derivatives, by-products, or other hydrocarbons, including, without limitation, substances defined as "hazardous substances" or "hazardous waste" in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Sections 9601-9657; the Hazardous Materials Transportation Act of 1975, 49 U.S.C. Sections 1801-1812; the Resource Conservation and Recovery Act of 1976,42 U.S.C. Sections 6901-6987; The Occupational Safety and Health Act of 1970 or any other federal, state, or local statute, law, ordinance, code, rule, regulation, order, or decree regulating, relating to, or imposing liability or standards of conduct concerning hazardous materials, waste, or substances now or at any time hereafter in effect (collectively, "Hazardous Materials Laws"). (b) Tenant will not cause or permit the release, treatment, recycling, storage, use, generation, transportation, or disposition of any Hazardous Materials in, on or about the Premises or the Project by Tenant, its agents, employees, or contractors, except typical office products used in the normal course of business and in accordance with applicable Hazardous Materials Laws. Tenant will not permit the Premises to be used or operated in a manner that may cause the Premises or the Project to be contaminated by any Hazardous Materials in violation of any Hazardous Materials Laws. Tenant will not install or permit the installation on the Project of any underground storage tanks, surface impoundments, or asbestos-containing materials in violation of any Hazardous Materials Laws. Tenant will cause any alterations of the Premises to be made in a way not to expose persons working or visiting the Project to Hazardous Materials in excess of safety levels established by Hazardous Materials Laws. Tenant will immediately advise Landlord in writing of (1) any and all enforcement, cleanup, remedial, removal, or other governmental or regulatory actions instituted, completed, or threatened pursuant to any Hazardous Materials Laws relating to any Hazardous Material affecting the Premises; (2) all claims made or threatened by any third party against Tenant, Landlord, or the Premises relating to damage, contribution, cost recovery, compensation, loss, or injury resulting from any Hazardous Materials on or about the Premises; and (3) the failure of the Premises to comply with any Hazardous Materials Laws. Without Landlord's prior written consent, Tenant will not take any remedial action or enter into any agreements or settlements in response to the presence of any Hazardous Materials in, on, or about the Premises. (c) Tenant will be solely responsible for and will defend, indemnify and hold Landlord, the holders of Superior Liens, their agents, employees, partners, shareholders, officers, and directors (collectively, "Landlord Indemnities") harmless from and against all claims, costs and liabilities, including attorneys' fees and costs, arising out of or in connection with Tenant's breach of its obligations in this Article 8. Tenant will be solely responsible for and will defend, indemnify and hold Landlord Indemnities harmless from and against any and all claims, costs, and liabilities, including attorneys' fees and costs, arising out of or in connection with the removal, clean-up and restoration work and materials necessary to return the Premises and any other property of whatever nature located on the Project to their condition existing prior to the appearance of Tenant's Hazardous Materials on the Premises. Tenant's obligations under this Article 8 will survive the expiration or other termination of this Lease. (d) Landlord will be solely responsible for and will defend, indemnify and hold Tenant, its agents, employees, partners, shareholders, officers and directors ("Tenant Indemnities") harmless from and against all claims, costs and liabilities including attorneys' fees and costs, arising out of or in connection with Landlord's release, treatment, recycling, storage, use, generation, transportation, or disposition of any Hazardous Materials in, on or about the Premises or the Project prior to the date of this Lease ("Tenant Indemnification Event"). Landlord will be solely responsible for and will defend, indemnify and hold Tenant Indemnities harmless from and against any and all claims, costs and liabilities, including attorneys' fees and costs, arising out of or in connection with the removal, cleanup and restoration work required in connection with any Hazardous Materials on the Premises or the Project arising from a Tenant Indemnification Event. Landlord's obligations under this Article 8 will survive the expiration or termination of this Lease. Landlord represents that it has no actual knowledge of any potential claims, costs, or liabilities arising out of or in connection with a Tenant Indemnification Event. (e) Landlord may, from time to time during the Term based on reasonable cause, conduct such environmental assessments or tests as Landlord deems necessary, provided that Landlord will give Tenant reasonable prior notice of its entry on the Premises for such purposes and will cooperate in minimizing any disruption of Tenant's use of the Premises as a result of such activity. Tenant will reimburse Landlord for the cost of such environmental assessment or test if, at the time Landlord causes such assessment or test to be made, Landlord has reasonable grounds to believe that an event has occurred which constitutes a violation by Tenant of one of its covenants under, or which is likely to result in Tenant being liable to Landlord by virtue of, an indemnity given by Tenant under this Section 8.2. 8.3 Certain Insurance Risks. Tenant will not do or permit to be done any act or thing upon the Premises or the Project which would (a) jeopardize or be in conflict with fire insurance policies covering the Project, and fixtures and property in the Project, or (b) increase the rate of fire insurance applicable to the Project to an amount higher than it otherwise would be for general office use of the Project, or (c) subject Landlord to any liability or responsibility for injury to any person or persons or to property by reason of any business or operation being carried on upon the Premises. -6- 7 ARTICLE 9--ASSIGNMENT AND SUBLETTING 9.1 General. Except in connection with the sale or transfer of all of Tenant's assets, Tenant, for itself, its heirs, distributees, executors, administrators, legal representatives, successors and assigns, covenants that it will not assign, mortgage or encumber this Lease, nor sublease, or permit the Premises or any part of the Premises to be used or occupied by others, without the prior written consent of Landlord in each instance, which consent will not be unreasonably withheld or delayed. Any assignment or sublease in violation of this Article 9 will be void. If this Lease is assigned, or if the Premises or any part of the Premises are subleased or occupied by anyone other than Tenant, Landlord may, after default by Tenant, collect rent from the assignee, subtenant or occupant, and apply the net amount collected to Rent. No assignment, sublease, occupancy or collection will be deemed a waiver of the provisions of this Section 9.1, the acceptance of the assignee, subtenant or occupant as tenant, or a release of Tenant from the further performance by Tenant of covenants on the part of Tenant contained in this Lease. The consent by Landlord to an assignment or sublease will not be construed to relieve Tenant from obtaining Landlord's prior written consent to any further assignment or sublease. No permitted subtenant may assign or encumber its sublease or further sublease all or any portion of its subleased space, or otherwise permit the subleased space or any part of its subleased space to be used or occupied by others, without Landlord's prior written consent in each instance. 9.2 Submission of Information. If Tenant requests Landlord's consent to a specific assignment or subletting, Tenant will submit in writing to Landlord (a) the name and address of the proposed assignee or subtenant; (b) the business terms of the proposed assignment or sublease; (c) reasonably satisfactory information as to the nature and character of the business of the proposed assignee or subtenant, and as to the nature of its proposed use of the space; (d) banking, financial, or other credit information reasonably sufficient to enable Landlord to determine the financial responsibility and character of the proposed assignee or subtenant; and (e) the proposed form of assignment or sublease for Landlord's reasonable approval. 9.3 Payments to Landlord. If Landlord consents to a proposed assignment or sublease, then Landlord will have the right to require Tenant to pay to Landlord a sum equal to (a) 75% of any rent or other consideration paid to Tenant by any proposed transferee which (after deducting the costs of Tenant, if any, in effecting the assignment or sublease, including reasonable alteration costs, commissions and legal fees) is in excess of the Rent allocable to the transferred space which is then being paid by Tenant to Landlord pursuant to this Lease; (b) 75% of any other profit or gain (after deducting any necessary expenses incurred) realized by Tenant from any such sublease or assignment; and (c) Landlord's reasonable attorneys' fees and costs incurred in connection with negotiation, review and processing of the transfer. All such sums payable will be payable to Landlord at the time the next payment of Monthly Rent is due. 9.4 Prohibited Transfers. The transfer of a majority of the issued and outstanding capital stock of any corporate tenant or subtenant of this Lease or a majority of the total interest in any partnership tenant or subtenant, however accomplished, and whether in a single transaction or in a series of related or unrelated transactions, will be deemed an assignment of this Lease or of such sublease requiring Landlord's consent in each instance. For purposes of this Article 9, the transfer of outstanding capital stock of any corporate tenant will not include any sale of such stock by persons (other than those deemed "Insiders" within the meaning of the Securities Exchange Act of 1934, as amended) or the issuance of new stock, effected through "over-the- counter-market" or through any recognized stock exchange. 9.5 Permitted Transfer. Landlord consents to an assignment of this Lease, or sublease of all or part of the Premises, to a wholly-owned subsidiary of Tenant or the parent of Tenant or to any corporation into or with which Tenant may be merged or consolidated; provided that Tenant promptly provides Landlord with a fully executed copy of such assignment or sublease and that Tenant is not released from liability under the Lease. ARTICLE 10--RULES AND REGULATIONS Tenant and its employees, agents, licensees and visitors will at all times observe faithfully, and comply strictly with, the rules and regulations set forth on Exhibit D. Landlord may from time to time reasonably amend, delete or modify existing rules and regulations, or adopt reasonable new rules and regulations for the use, safety, cleanliness and care of the Premises, the Building, and the Project, and the comfort, quiet and convenience of occupants of the Project in a nondiscriminatory manner. Modifications or additions to the rules and regulations will be effective upon 30 days' prior written notice to Tenant from Landlord. In the event of any breach of any rules or regulations or any amendments or additions to such rules and regulations, Landlord will have all remedies which this Lease provides for default by Tenant, and will, in addition, have any remedies available at law or in equity, including the right to enjoin any breach of such rules and regulations. Landlord will not be liable to Tenant for violation of such rules and regulations by any other tenant, its employees, agents, visitors of licensees or any other person for so long as Landlord shall proceed with due diligence to enforce the same in a consistent, reasonable, and non-discriminatory manner. Landlord shall not unreasonably enforce the rules and regulations against Tenant. In the event of any conflict between the provisions of this Lease and the rules and regulations, the provisions of this Lease will govern. ARTICLE 11--COMMON AREAS As used in this Lease, the term "common areas" means, without limitation, the hallways, entryways, stairs, elevators, driveways, parking lots, walkways, terraces, docks, loading areas, restrooms, trash facilities and all other areas and facilities in the Project which are provided and designated from time to time by Landlord for the general nonexclusive use and convenience of Tenant with Landlord and other tenants of the Project and -7- 8 their respective employees, invitees, licensees or other visitors. Landlord grants Tenant, its employees, invitees, licensees and other visitors a nonexclusive license for the Term to use the common areas in common with others entitled to use the common areas, subject to the terms and conditions of this Lease. Without advance written notice to Tenant (except with respect to matters covered by subsection (a) below) and without any liability to Tenant in any respect, provided Landlord will take no action permitted under this Article 11 in such a manner so as to materially impair or adversely affect Tenant's substantial benefit and enjoyment of the Premises, Landlord will have the right to: (a) Close off any of the common areas to whatever extent required in the opinion of Landlord and its counsel to prevent a dedication of any of the common areas or the accrual of any rights by any person or the public to the common areas; (b) Temporarily close any of the common areas for maintenance, alteration or improvement purposes; and (c) Change the size, use, shape or nature of any such common areas, including erecting additional buildings on the common areas, expanding the existing Building or other buildings to cover a portion of the common areas, converting common areas to a portion of the Building or other buildings, or converting any portion of the Building (excluding the Premises) or other buildings to common areas. Upon erection of any additional buildings or change in common areas, the portion of the Project upon which buildings or structures have been erected will no longer be deemed to be a part of the common areas. In the event of any such changes in the size or use of the Building or common areas of the Building or Project, Landlord will make an appropriate adjustment in the Rentable Area of the Building or the Building's pro rata share of exterior common areas of the Project, as appropriate, and a corresponding adjustment to Tenant's Share of the Operating Expenses payable pursuant to Article 5 of this Lease. ARTICLE 12--LANDLORD'S SERVICES 12.1 Landlord's Repair and Maintenance. Landlord will maintain, repair and restore the common areas of the Project, including lobbies, stairs, elevators, corridors and restrooms, the windows in the Building, the mechanical, plumbing and electrical equipment serving the Building, and the structure of the Building in reasonably good order and condition. 12.2 Landlord's Services. (a) Landlord will furnish the Premises with those services customarily provided in comparable office buildings in the vicinity of the Project, including, without limitation, (1) electricity for lighting and the operation of low-wattage office machines (such as desk-top micro-computers, desk-top calculators and typewriters), although Landlord will not be obligated to furnish more power to the Premises than is proportionally allocated to the Premises under the Building design; (2) heat and air conditioning reasonably required for the comfortable occupation of the Premises during Business Hours; (3) access and elevator service; (4) lighting replacement during Business Hours (for building standard lights but not any special Tenant lights, which will be replaced at Tenant's sole cost and expense); (5) restroom supplies; (6) window washing with reasonable frequency, as determined by Landlord; and (7) daily cleaning service on weekdays. Landlord may provide, but will not be obligated to provide, any such services (except access and elevator service) on Holidays or weekends. (b) Tenant will have the right to purchase for use during Business Hours and non-Business Hours the services described in clauses (a)(1) and (2) in excess of the amounts which Landlord has agreed to furnish so long as (1) Tenant gives Landlord reasonable prior written notice of its desire to do so; (2) the excess services are reasonably available to Landlord and to the Premises; and (3) Tenant pays as Additional Rent (at the time the next payment of Monthly Rent is due) the cost of such excess service from time to time charged by Landlord; subject to the procedures established by Landlord from time to time for providing such additional or excess services. (c) The term "Business Hours" means 7:00 a.m. to 6:00 p.m. on Monday through Friday, except Holidays (as that term is defined below), and 8:00 a.m. to 12:00 noon on Saturdays, except Holidays. The term "Holidays" means New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. 12.3 Tenant's Costs. Whenever equipment or lighting (other than building standard lights) is used in the Premises by Tenant and such equipment or lighting affects the temperature otherwise normally maintained by the design of the Building's air conditioning system, Landlord will have the right, after prior written notice to Tenant, to install supplementary air conditioning facilities in the Premises or otherwise modify the ventilating and air conditioning system serving the Premises; and the cost of such facilities, modifications, and additional service will be paid by Tenant as Additional Rent. If Landlord reasonably believes that Tenant is using more power than Landlord furnishes pursuant to Section 12.2, Landlord may install separate meters of Tenant's power usage, and Tenant will pay for the cost of such excess power as Additional Rent, together with the cost of installing any risers, meters or other facilities that may be necessary to furnish or measure such excess power to the Premises. 12.4 Limitation on Liability. Provided such is not the result of the gross negligence or intentional misconduct of Landlord, Landlord will not be in default under this Lease or be liable to Tenant or any other person, for direct or consequential damage, or otherwise, for any failure to supply any heat, air conditioning, -8- 9 elevator, cleaning, lighting, security, surges or interruptions of electricity, or other service Landlord has agreed to supply during any period when Landlord uses reasonable diligence to supply such services. Landlord will use reasonable efforts to diligently remedy any interruption in the furnishing of such services. Landlord reserves the right temporarily to discontinue such services at such times as may be necessary by reason of accident, repairs, alterations or improvements, strikes, lockouts, riots, acts of God, governmental preemption in connection with a national or local emergency, any rule, order or regulation of any governmental agency, conditions of supply and demand which make any product unavailable, Landlord's compliance with any mandatory governmental energy conservation or environmental protection program, or any voluntary governmental energy conservation program at the request of or with consent or acquiescence of Tenant, or any other happening beyond the control of Landlord. Landlord will not be liable to Tenant or any other person or entity for direct or consequential damages resulting from the admission to or exclusion from the Building or Project of any person. In the event of invasion, mob, riot, public excitement, strikes, lockouts, or other circumstances rendering such action advisable in Landlord's sole opinion, Landlord will have the right to prevent access to the Building or Project during the continuance of the same by such means as Landlord, in its sole discretion, may deem appropriate, including, without limitation, locking doors and closing parking areas and other common areas. Provided such is not the result of the gross negligence or intentional misconduct of the Landlord, Landlord will not be liable for damages to person or property or for injury to, or interruption of, business for any discontinuance permitted under this Article 12, nor will such discontinuance in any way be construed as an eviction of Tenant or cause an abatement of Rent or operate to release Tenant from any of Tenant's obligations under this Lease. ARTICLE 13--TENANT'S CARE OF THE PREMISES Subject to Landlord's obligations under Article 12, Tenant will maintain the Premises (including Tenant's equipment, personal property and trade fixtures located in the Premises) in their condition at the time they were delivered to Tenant, reasonable wear and tear excluded. Tenant will immediately advise Landlord of any damage to the Premises or the Project. All damage or injury to the Premises, or the Project, or the fixtures, appurtenances and equipment in the Premises or the Project which is caused by Tenant, its agents, employees, or invitees, may be repaired, restored or replaced by Landlord, at the expense of Tenant and such expense (plus 15% of such expense for Landlord's overhead) will be collectible as Additional Rent and will be paid by Tenant within 10 days after delivery of a statement for such expense. ARTICLE 14--ALTERATIONS 14.1 General. (a) During the Term, Tenant will not make or allow to be made any alterations, additions, or improvements ("Alterations") to or of the Premises or any part of the Premises, or attach any fixtures or equipment to the Premises, without first obtaining Landlord's written consent. Landlord's consent to such alterations, additions, or improvements or Landlord's approval of the plans, specifications, and working drawings for such alterations, additions, or improvements shall create no responsibility or liability on the part of Landlord for the completeness, design sufficiency, or compliance with all laws, rules, and regulations of governmental agencies or authorities with respect to such alterations, additions or improvements. No Alterations will be approved by Landlord if such Alterations would not be approved by the holder of a Superior Lien. All such Alterations consented to by Landlord, and capital improvements which are required to be made to the Project as a result of the nature of Tenant's use of the Premises: (1) Will be performed by contractors approved by Landlord and subject to conditions specified by Landlord (which may include requiring the posting of a mechanic's or materialmen's lien bond); (2) Will not be made until Tenant has procured and paid for all permits and authorizations of all municipal and other governmental authorities with jurisdiction over the Premises; (3) Will be expeditiously completed in a good and workmanlike manner in compliance with all Laws; (4) Will not be made until Tenant procures, in addition to insurance required by Section 6.2, completed value builder's risk insurance for the Project, including all building materials thereon, to be maintained during the period of demolition or construction, covering loss or damage from fire, lightning, extended coverage perils, sprinkler, leakage, vandalism, malicious mischief, and perils insured under a difference in conditions policy in an amount not less than the cost, as estimated by Landlord, of the construction of the alterations; (5) Will be of such a character as not to adversely affect the fair market value of the Project; (6) Will be paid for by Tenant when due so that the Project will, at all times, be free of liens for labor and materials supplied or claimed to have been supplied to the Project; (7) Will not be of such a character as to materially adversely affect the character of the Building as a general office Building, a self-contained structural unit, capable of being operated independently of any other buildings or improvements, and as a multi-tenant facility; -9- 10 (8) At Landlord's option, will be made by Landlord for Tenant's, account, and Tenant will reimburse Landlord for their cost (including 10% for Landlord's overhead) within 10 days after receipt of a statement of such cost; (9) If the Alterations have an estimated cost in excess of $10,000: (A) Will be conducted under the supervision of an architect or engineer employed or engaged by Landlord and paid by Tenant; (B) Will not be undertaken except in accordance with detailed plans, specifications, and cost estimates approved by Landlord. Within 30 days of Landlord's receipt of detailed plans, specifications, and cost estimates, Landlord shall either approve the proposed Alterations or disapprove the proposed Alterations by delivering to Tenant a written explanation for such disapproval. (b) Except to the extent such constitute Tenant's trade fixtures or trade dress, and subject to Tenant's rights in Article 16, all alterations, additions, fixtures and improvements, whether temporary or permanent in character, made in or upon the Premises either by Tenant or Landlord, will immediately become Landlord's property and, at the end of the Term will remain on the Premises without compensation to Tenant. 14.2 Free-Standing Partitions. Tenant will have the right to install free-standing work station partitions, without Landlord's prior written consent, so long as no building or other governmental permit is required for their installation or relocation; however, if a permit is required, Landlord will not unreasonably withhold its consent to such relocation or installation. The free-standing work station partitions for which Tenant pays will be part of Tenant's trade fixtures for all purposes under this Lease. All other partitions which are installed in the Premises are and will be Landlord's property for all purposes under this Lease. ARTICLE 15--MECHANICS' LIENS Tenant will pay or cause to be paid all costs and charges for work (a) done by Tenant or caused to be done by Tenant, in or to the Premises, and (b) for all materials furnished for or in connection with such work. Tenant will indemnify Landlord against and hold Landlord, the Premises and the Project free, clear and harmless of and from all mechanics' liens and claims of liens, and all other liabilities, liens, claims and demands on account of such work by or on behalf of Tenant. If any such lien, at any time, is filed against the Premises, or any part of the Project, Tenant will cause such lien to be discharged of record within 10 days after the filing of such lien, except that if Tenant desires to contest such lien, it will furnish Landlord, within such 10-day period, security reasonably satisfactory to Landlord of at least 150% of the amount of the claim, plus estimated costs and interest or comply with such statutory procedures as may be available to release the lien. If a final judgment establishing the validity or existence of a lien for any amount is entered, Tenant will pay and satisfy the same at once. If Tenant fails to pay any charge for which a mechanics' lien has been filed, and has not given Landlord security as described above, or has not complied with such statutory procedures as may be available to release the lien, Landlord may, at its option, pay such charge and related costs and interest, and the amount so paid, together with reasonable attorneys' fees incurred in connection with such lien, will be immediately due from Tenant to Landlord as Additional Rent. Nothing contained in this Lease will be deemed the consent or agreement of Landlord to subject Landlord's interest in the Project to liability under any mechanics' or other lien law. If Tenant receives written notice that a lien has been or is about to be filed against the Premises or the Project or any action affecting title to the Project has been commenced on account of work done by or for or materials furnished to or for Tenant, it will immediately give Landlord written notice of such notice. At least 15 days prior to the commencement of any work (including, but not limited to, any maintenance, repairs, alterations, additions, improvements or installations) in or to the Premises, by or for Tenant, Tenant will give Landlord written notice of the proposed work and the names and addresses of the persons supplying labor and materials for the proposed work. Landlord will have the right to post notices of non-responsibility or similar written notices on the Premises in order to protect the Premises against any such liens. Upon request, Tenant will furnish Landlord evidence of any settlement, satisfaction, or payment made of any lien or claim pursuant to this Article 15. ARTICLE 16--END OF TERM At the end of this Lease, Tenant will promptly quit and surrender the Premises broom-clean, in good order and repair, ordinary wear and tear excepted. If Tenant is not then in default, Tenant may remove from the Premises any trade fixtures, equipment and movable furniture placed in the Premises by Tenant, whether or not such trade fixtures or equipment are fastened to the Building; Tenant will not remove any trade fixtures or equipment without Landlord's prior written consent if such fixtures or equipment are used in the operation of the Building, or if the removal of such fixtures or equipment will result in impairing the structural strength of the Building . Tenant will fully repair any damage occasioned by the removal of any trade fixtures, equipment, and furniture. All trade fixtures, equipment, furniture, inventory, and effects on the Premises after the end of the Term will be deemed conclusively to have been abandoned and may be appropriated, sold, stored, destroyed or otherwise disposed of by Landlord without written notice to Tenant or any other person and without obligation to account for them. Tenant will pay Landlord for all expenses incurred in connection with the removal of such property, including, but not limited to, the cost of repairing any damage to the Building or Premises caused by the removal of such property. Tenant's obligation to observe and perform this covenant will survive the expiration or other termination of this Lease. -10- 11 ARTICLE 17--EMINENT DOMAIN If all of the Premises are taken by exercise of the power of eminent domain (or conveyed by Landlord in lieu of such exercise) this Lease will terminate on a date (the "termination date") which is the earlier of the date upon which the condemning authority takes possession of the Premises or the date on which title to the Premises is vested in the condemning authority. If more than 25% of the Rentable Area of the Premises is so taken, Tenant will have the right to cancel this Lease by written notice to Landlord given within 20 days after the termination date. If less than 25% of the Rentable Area of the Premises is so taken, or if the Tenant does not cancel this Lease according to the preceding sentence, the Monthly Rent will be abated in the proportion of the Rentable Area of the Premises so taken to the Rentable Area of the Premises immediately before such taking, and Tenant's Share will be appropriately recalculated. If 25% or more of the Building or the Project is so taken, or such portion of the Building or Project is taken such that the Premises cannot reasonably be used by Tenant an Tenant gives Landlord written notice of that within 30 days of the date of the taking, Landlord and Tenant may cancel this Lease by written notice to the other given within 30 days after the termination date. In the event of any such taking, the entire award will be paid to Landlord and Tenant will have no right or claim to any part of such award; however, Tenant will have the right to assert a claim against the condemning authority in a separate action, so long as Landlord's award is not otherwise reduced, for (a) Tenant's moving expenses and (b) leasehold improvements owned by Tenant. ARTICLE 18--DAMAGE AND DESTRUCTION (a) If the Premises or the Building are damaged by fire or other insured casualty, Landlord will give Tenant written notice of the time which will be needed to repair such damage, as determined by Landlord in its reasonable discretion, and the election (if any) which Landlord has made according to this Article 18. Such notice will be given before the 30th day (the "notice date") after the fire or other insured casualty. (b) If the Premises or the Building are damaged by fire or other insured casualty to an extent which it may be repaired its original condition as of the time of the Commencement Date within 120 days after the notice date, as reasonably determined by Landlord, Landlord will promptly begin to repair the damage after the notice date and will diligently pursue the completion of such repair. In that event this Lease will continue in full force and effect except that Monthly Rent will be abated on a pro rata basis from the date of the damage until the date of the completion of such repairs (the "repair period") based on the proportion of the Rentable Area of the Premises which Tenant is unable to use during the repair period. (c) If the Premises or the Building are damaged by fire or other insured casualty to an extent which may not be repaired within 120 days after the notice date, as reasonably determined by Landlord, then (1) Landlord may cancel this Lease as of the date of such damage by written notice given to Tenant on or before the notice date or (2) Tenant may cancel this Lease as of the date of such damage by written notice given to Landlord within 10 days after Landlord's delivery of a written notice that the repairs cannot be made within such 120-day period. If neither Landlord nor Tenant so elects to cancel this Lease, Landlord will diligently proceed to repair the Building and Premises and Monthly Rent will be abated on a pro rata basis during the repair period based on the proportion of the Rentable Area of the Premises which Tenant is unable to use during the repair period. (d) Notwithstanding the provisions of subparagraphs (a), (b), and (c) above, if the Premises or the Building are damaged by uninsured casualty, or if the proceeds of insurance are insufficient to pay for the repair of any damage to the Premises or the Building, Landlord will have the option to repair such damage or cancel this Lease as of the date of such casualty by written notice to Tenant on or before the notice date. (e) If any such damage by fire or other casualty is the result of the willful conduct or negligence or failure to act of Tenant, its agents, contractors, employees or invitees, there will be no abatement of Monthly Rent as otherwise provided for in this Article 18. Tenant will have no rights to terminate this Lease on account of any damage to the Premises, the Building, or the Project, except as set forth in this Lease. ARTICLE 19--SUBORDINATION 19.1 General. This Lease and Tenant's rights under this Lease are subject and subordinate to any ground or underlying master lease, mortgage, indenture, deed of trust or other lien encumbrance (each a "Superior Lien"), together with any renewals, extensions, modifications, consolidations and replacements of such Superior Lien, now or after the Date affecting or placed, charged or enforced against the Land, the Building, or all or any portion of the Project or any interest of Landlord in them or Landlord's interest in this Lease and the leasehold estate created by this Lease (except to the extent any such instrument will expressly provide that this Lease, is superior to such instrument). This provision will be self-operative and no further instrument of subordination will be required in order to effect it. Notwithstanding the foregoing, provided Landlord provides Tenant with a nondisturbance agreement in a form reasonably satisfactory to Tenant, Tenant will execute, acknowledge and deliver to Landlord, within 20 days after written demand by Landlord, such documents as may be reasonably requested by Landlord or the holder of any Superior Lien to confirm or effect any such subordination. 19.2 Attornment and Non-Disturbance. Tenant agrees that in the event that any holder of a Superior Lien succeeds to Landlord's interest in the Premises, Tenant will pay to such holder all rents subsequently payable under this Lease. Further, Tenant agrees that in the event of the enforcement by the holder of a Superior Lien of the remedies provided for by law or by such Superior Lien, Tenant will, upon request of any -11- 12 person or party succeeding to the interest of Landlord as a result of such enforcement, automatically become the Tenant of and attorn to such successor-in-interest without change in the terms or provisions of this Lease. Such successor-in-interest will not be bound by (a) any payment of Rent for more than one month in advance, except prepayments in the nature of security for the performance by Tenant of its obligations under this Lease; (b) any amendment or modification of this Lease made without the written consent of such successor-in-interest of which Tenant has written notice at the time of the amendment or modifications (if such consent was required under the terms of such Superior Lien); (c) any claim against Landlord arising prior to the date on which such successor-in-interest succeeded to Landlord's interest; or (d) any claim or offset of Rent against the Landlord. Upon request by such successor-in-interest and without cost to Landlord or such successor-in-interest, Tenant will, within 20 days after written demand, execute, acknowledge and deliver an instrument or instruments confirming the attornment, so long as such instrument provides that such successor-in-interest will not disturb Tenant in its use of the Premises in accordance with this Lease. ARTICLE 20--ENTRY BY LANDLORD Landlord, the holder of a Superior Lien, their agents, employees, and contractors may enter the Premises at any time in response to an emergency and at least 24 hours prior telephone notice when possible, at reasonable hours to: (a) Inspect the Premises; (b) Exhibit the Premises to prospective purchasers, lenders or tenants; (c) Determine whether Tenant is complying with all its obligations in this Lease; (d) Supply cleaning service and any other service to be provided by Landlord to Tenant according to this Lease (without notice); (e) Post written notices of non-responsibility or similar notices (without notice); or (f) Make repairs required of Landlord under the terms of this Lease or repairs to any adjoining space or utility services or make repairs, alterations or improvements to any other portion of the Building; however, all such work will be done as promptly as reasonably possible and so as to cause as little interference to Tenant as reasonably possible. Tenant, by this Article 20, waives any claim against Landlord, its agents, employees or contractors for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises or any other loss occasioned by any entry in accordance with this Article 20 except to the extent caused by the gross negligence of Landlord. Landlord will at all times have and retain a key with which to unlock all of the doors in, on or about the Premises (excluding Tenant's vaults, safes and similar areas designated in writing by Tenant in advance). Landlord will have the right to use any and all means which Landlord may deem proper to open doors in and to the Premises in an emergency in order to obtain entry to the Premises, provided that Landlord will promptly repair any damages caused by any forced entry. Any entry to the Premises by Landlord in accordance with this Article 20 will not be construed or deemed to be a forcible or unlawful entry into or a detainer of the Premises or an eviction, actual or constructive, of Tenant from the Premises, or any portion of the Premises, nor will any such entry entitle Tenant to damages or an abatement of Monthly Rent, Additional Rent, or other charges which this Lease requires Tenant to pay. ARTICLE 21--INDEMNIFICATION, WAIVER, AND RELEASE 21.1 Indemnification. Except for any injury or damage to persons or property on the Premises which is proximately caused by or results proximately from the negligence or deliberate act of Landlord, its employees or agents, and subject to the provisions of Section 6.4, Tenant will neither hold nor attempt to hold Landlord, its employees or agents liable for, and Tenant will indemnify and hold harmless Landlord, its employees and agents from and against, any and all demands, claims, causes of action, fines, penalties, damages (including consequential damages), liabilities, judgments, and expenses (including, without limitation, reasonable attorneys' fees) incurred in connection with or arising from: (a) the use or occupancy or manner of use or occupancy of the Premises by Tenant or any person claiming under Tenant; (b) any activity, work, or thing done or permitted by Tenant in or about the Premises, the Building, or the Project; (c) any breach by Tenant or its employees, agents, contractors, or invitees of this Lease; and (d) any injury or damage to the person, property, or business of Tenant, its employees, agents, contractors, or invitees entering upon the Premises under the express or implied invitation of Tenant. If any action or proceeding is brought against Landlord, its employees or agents by reason of any such claim for which Tenant has indemnified Landlord, Tenant, upon written notice from Landlord, will defend the same at Tenant's expense, with counsel reasonably satisfactory to Landlord. (a) Except for any injury or damage to persons or property on the Premises which is proximately caused by or results proximately from the negligence or deliberate act of Tenant, its employees or agents, Landlord will neither hold nor attempt to hold Tenant, its employees or agents liable for, and Landlord will indemnify and hold harmless Tenant, its employees and agents from and against, any and all demands, claims, causes of action, fines, penalties, damages (including consequential damages), liabilities, judgements and expenses (including without limitation reasonable attorneys' fees) incurred in connection with or arising from -12- 13 the acts of Landlord or its agents at the Project. If any action or proceeding is brought against Tenant, or its employees or agents by reason of any such claim for which Landlord has indemnified Tenant, Landlord, upon written notice from Tenant, will defend the same at Landlord's expense, with counsel reasonably satisfactory to Tenant. 21.2 Waiver and Release. Tenant, as a material part of the consideration to Landlord for this Lease, by this Section 21.2, waives and releases all claims against Landlord, its employees and agents with respect to all matters for which Landlord has disclaimed liability pursuant to the provisions of this Lease. ARTICLE 22--SECURITY DEPOSIT Intentionally deleted. ARTICLE 23--QUIET ENJOYMENT Landlord covenants and agrees with Tenant that so long as Tenant pays the Rent, and observes and performs all the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the Premises subject, nevertheless, to the terms and conditions of this Lease and Tenant's possession will not be disturbed by anyone claiming by, through or under Landlord. ARTICLE 24--EFFECT OF SALE A sale, conveyance or assignment of Landlord's interest in the Building or the Project will operate to release Landlord from liability from and after the effective date of such sale, conveyance or assignment upon all of the covenants, terms and conditions of this Lease, express or implied, except those liabilities which arose prior to such effective date, and, after the effective date of such sale, conveyance or assignment, Tenant will look solely to Landlord's successor-in-interest in and to this Lease. This Lease will not be affected by any such sale, conveyance or assignment, and Tenant will attorn to Landlord's successor-in-interest to this Lease, so long as such successor-in-interest assumes Landlord's obligations under the Lease from and after such effective date. ARTICLE 25--DEFAULT 25.1 Events of Default. The following events are referred to, collectively, as "Events of Default" or, individually, as an "Event of Default": (a) Tenant defaults in the due and punctual payment of Rent, and such default continues for 5 days after receipt of written notice from Landlord; however, Tenant will not be entitled to more than 1 written notice for monetary defaults during any 12-month period, and if after such written notice any Rent is not paid within 5 days after due, an Event of Default will be considered to have occurred without further notice; (b) Tenant abandons the Premises; (c) This Lease or the Premises or any part of the Premises are taken upon execution or by other process of law directed against Tenant, or are taken upon or subject to any attachment by any creditor of Tenant or claimant against Tenant, and said attachment is not discharged or disposed of within 30 days after its levy; (d) Tenant files a petition in bankruptcy or insolvency or for reorganization or arrangement under the bankruptcy laws of the United States or under any insolvency act of any state, or admits the material allegations of any such petition by answer or otherwise, or is dissolved or makes an assignment for the benefit of creditors; (e) Involuntary proceedings under any such bankruptcy law or insolvency act or for the dissolution of Tenant are instituted against Tenant, or a receiver or trustee is appointed for all or substantially all of the property of Tenant, and such proceeding is not dismissed or such receivership or trusteeship vacated within 60 days after such institution or appointment; (f) Tenant fails to take possession of the Premises on the Commencement Date of the Term; or (g) Tenant breaches any of the other agreements, terms, covenants or conditions which this Lease requires Tenant to perform, and such breach continues for a period of 30 days after receipt of written notice from Landlord to Tenant or, if such breach cannot be cured reasonably within such 30-day period, if Tenant fails to diligently commence to cure such breach within 30 days after written notice from Landlord and to complete such cure within a reasonable time thereafter. 25.2 Landlord's Remedies. If any one or more Events of Default set forth in Section 25.1 occurs then Landlord has the right, at its election: (a) To give Tenant written notice of Landlord's intention to terminate this Lease on the earliest date permitted by law or on any later date specified in such notice, in which case Tenant's right to possession -13- 14 of the Premises will cease and this Lease will be terminated, except as to Tenant's liability, as if the expiration of the term fixed in such notice were the end of the Term; (b) Without further demand or notice, to reenter and take possession of the Premises or any part of the Premises, repossess the same, expel Tenant and those claiming through or under Tenant, and remove the effects of both or either, using such force for such purposes as may be necessary, without being liable for prosecution, without prejudice to any remedies for arrears of Monthly Rent or other amounts payable under this Lease or as a result of any preceding breach of covenants or conditions; or (c) Without further demand or notice to cure any Event of Default and to charge Tenant for the cost of effecting such cure, including, without limitation, reasonable attorneys' fees and interest on the amount so advanced at the rate set forth in Section 27.21, provided that Landlord will have no obligation to cure any such Event of Default of Tenant. Should Landlord elect to reenter as provided in subsection (b), or should Landlord take possession pursuant to legal proceedings or pursuant to any notice provided by law, Landlord may, from time to time, without terminating this Lease, relet the Premises or any part of the Premises in Landlord's or Tenant's name, but for the account of Tenant, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Term) and on such conditions and upon such other terms (which may include concessions of free rent and alteration and repair of the Premises) as Landlord, in its reasonable discretion, may determine and Landlord may collect and receive the rent. Landlord will in no way be responsible or liable for any failure to relet the Premises, or any part of the Premises, or for any failure to collect any rent due upon such reletting. No such reentry or taking possession of the Premises by Landlord will be construed as an election on Landlord's part to terminate this Lease unless such notice specifically so states. Landlord reserves the right following any such reentry or reletting to exercise its right to terminate this Lease by giving Tenant such written notice, in which event this Lease will terminate as specified in such notice. 25.3 Certain Damages. In the event that Landlord does not elect to terminate this Lease as permitted in Section 25.2(a), but on the contrary, elects to take possession as provided in Section 25.2(b), Tenant will pay to Landlord: (a) Monthly Rent and other sums as provided in this Lease, which would be payable under this Lease if such repossession had not occurred, less (b) the net proceeds, if any, of any reletting of the Premises after deducting all of Landlord's reasonable expenses in connection with such reletting, including, without limitation, all repossession costs, brokerage commissions, attorneys' fees, expenses of employees, alteration and repair costs and expenses of preparation for such reletting. If, in connection with any reletting, the new lease term extends beyond the existing Term, or the premises covered by such new lease include other premises not part of the Premises, a fair apportionment of the rent received from such reletting and the expenses incurred in connection with such reletting as provided in this Section will be made in determining the net proceeds from such reletting, and any rent concessions will be equally apportioned over the term of the new lease. Tenant will pay such rent and other sums to Landlord monthly on the day on which the Monthly Rent would have been payable under this Lease if possession had not been retaken and Landlord will be entitled to receive such rent and other sums from Tenant on each such day. 25.4 Continuing Liability After Termination. If this Lease is terminated on account of the occurrence of an Event of Default, Tenant will remain liable to Landlord for damages in an amount equal to Monthly Rent and other amounts which would have been owing by Tenant for the balance of the Term, had this Lease not been terminated, less the net proceeds, if any, of any reletting of the Premises by Landlord subsequent to such termination, after deducting all of Landlord's expenses in connection with such reletting, including, without limitation, the expenses enumerated in Section 25.3. Landlord will be entitled to collect such damages from Tenant monthly on the day on which Monthly Rent and other amounts would have been payable under this Lease if this Lease had not been terminated, and Landlord will be entitled to receive such Monthly Rent and other amounts from Tenant on each such day. Alternatively, at the option of Landlord, in the event this Lease is so terminated, Landlord will be entitled to recover against Tenant as damages for loss of the bargain and not as a penalty: (a) The worth at the time of award of the unpaid Rent which had been earned at the time of termination; (b) The worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (c) The worth at the time of award of the amount by which the unpaid Rent for the balance of the Term of this Lease (had the same not been so terminated by Landlord) after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; (d) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom. The "worth at the time of award" of the amounts referred to in clauses (a) and (b) above is computed by adding interest at the per annum interest rate described in Section 27.21 on the date on which this Lease is terminated from the date of termination until the time of the award. The worth at the time of award of the amount referred to in clause (c) above is computed by discounting such amount at the discount rate of the Federal Reserve Bank of Kansas City, Missouri, at the time of award plus 1%. -14- 15 25.5 Cumulative Remedies. Any suit or suits for the recovery of the amounts, and damages set forth in Sections 25.3 and 25.4 may be brought by Landlord, from time to time, at Landlord's election, and nothing in this Lease will be deemed to require Landlord to await the date upon which this Lease or the Term would have expired had there occurred no Event of Default. Each right and remedy provided for in this Lease is cumulative and is in addition to every other right or remedy provided for in this Lease or now or after the Date existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by Landlord of any one or more of the rights or remedies provided for in this Lease or now or after the Date existing at law or in equity or by statute or otherwise will not preclude the simultaneous or later exercise by Landlord of any or all other rights or remedies provided for in this Lease or now or after the Date existing at law or in equity or by statute or otherwise. All costs incurred by Landlord in collecting any amounts and damages owing by Tenant pursuant to the provisions of this Lease or to enforce any provision of this Lease, including reasonable attorneys' fees from the date any such matter is turned over to an attorney, whether or not one or more actions are commenced by Landlord, will also be recoverable by Landlord from Tenant. 25.6 Waiver of Redemption. Tenant waives any right of redemption arising as a result of Landlord's exercise of its remedies under this Article 25. ARTICLE 26--PARKING Tenant will be entitled to use the Parking Spaces during the Term subject to the rules and regulations set forth on Exhibit D, and any amendments or additions to them. The parking charges set forth in Section 1.1 (r), if any, will be due and payable in advance at the same time and place as Monthly Rent. Except for six reserved parking spaces described in Section 1.1(q) above, the Parking Spaces will be unassigned, non-reserved, and non-designated. Landlord reserves the right to reasonably adjust the Parking Charges (based on the prevailing rate for similar projects in the Phoenix metro area) in Landlord's sole discretion at any time after 30 days' prior written notice. ARTICLE 27--MISCELLANEOUS 27.1 No Offer. This Lease is submitted to Tenant on the understanding that it will not be considered an offer and will not bind Landlord in any way until Tenant has duly executed and delivered duplicate originals to Landlord and Landlord has executed and delivered one of such originals to Tenant. 27.2 Joint and Several Liability. If Tenant is composed of more than one signatory to this Lease, each signatory will be jointly and severally liable with each other signatory for payment and performance according to this Lease. The act of, written notice to, written notice from, refund to, or signature of, any signatory to this Lease (including without limitation modifications of this Lease made by fewer than all such signatories) will bind every other signatory as though every other signatory had so acted, or received or given the written notice or refund, or signed. 27.3 No Construction Against Drafting Party. Landlord and Tenant acknowledge that each of them and their counsel have had an opportunity to review this Lease and that this Lease will not be construed against Landlord merely because Landlord has prepared it. 27.4 Time of the Essence. Time is of the essence of each and every provision of this Lease. 27.5 No Recordation. Tenant's recordation of this Lease or any memorandum or short form of it will be void and a default under this Lease. 27.6 No Waiver. The waiver by Landlord of any agreement, condition or provision contained in this Lease will not be deemed to be a waiver of any subsequent breach of the same or any other agreement, condition or provision contained in this Lease, nor will any custom or practice which may develop between the parties in the administration of the terms of this Lease be construed to waive or to lessen the right of Landlord to insist upon the performance by Tenant in strict accordance with the terms of this Lease. The subsequent acceptance of Rent by Landlord will not be deemed to be a waiver of any preceding breach by Tenant of any agreement, condition nor provision of this Lease, other than the failure of Tenant to pay the particular Rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent. 27.7 Limitation on Recourse. Tenant specifically agrees to look solely to Landlord's interest in the Project for the recovery of any judgments from Landlord. It is agreed that Landlord (and its shareholders, venturers, and partners, and their shareholders, venturers and partners and all of their officers, directors and employees) will not be personally liable for any such judgments. The provisions contained in the preceding sentences are not intended to, and will not, limit any right that Tenant might otherwise have to obtain injunctive relief against Landlord or relief in any suit or action in connection with enforcement or collection of amounts which may become owing or payable under or on account of insurance maintained by Landlord. 27.8 Estoppel Certificates. At any time and from time to time but within 10 days after prior written request by Landlord, Tenant will execute, acknowledge and deliver to Landlord, promptly upon request, a certificate certifying (a) that this Lease is unmodified and in full force and effect or, if there have been modifications, that this Lease is in full force and effect, as modified, and stating the date and nature of each modification; (b) the date, if any, to which Rent and other sums payable under this Lease have been paid; (c) that no written notice of any default has been delivered to Landlord which default has not been cured, except, as to defaults specified in said certificate; (d) there is no Event of Default under this Lease or an event which, -15- 16 with notice or the passage of time, or both, would result in an Event of Default under this Lease, except for defaults specified in said certificate; and (e) such other matters as may be reasonably requested by Landlord. Any such certificate may be relied upon by any holder of a Superior Lien, prospective purchaser, or existing or prospective mortgagee or beneficiary under any deed of trust of the Building or any part of the Project. Tenant's failure to deliver such a certificate within such time will be conclusive evidence of the matters set forth in it. 27.9 Waiver of Jury Trial. Landlord and Tenant by this Section 27.9 waive trial by jury in any action, proceeding or counterclaim brought by either of the parties to this Lease against the other on any matters whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises, or any other claims (except claims for personal injury or property damage), and any emergency statutory or any other statutory remedy. 27.10 No Merger. The voluntary or other surrender of this Lease by Tenant or the cancellation of this Lease by mutual agreement of Tenant and Landlord or the termination of this Lease on account of Tenant's default will not work a merger, and will, at Landlord's option, (a) terminate all or any subleases and subtenancies or (b) operate as an assignment to Landlord of all or any subleases or subtenancies. Landlord's option under this Section 27.10 will be exercised by written notice to Tenant and all known sublessees or subtenants in the Premises or any part of the Premises. 27.11 Holding Over. Tenant will have no right to remain in possession of all or any part of the Premises after the expiration of the Term. If Tenant remains in possession of all or any part of the Premises after the expiration of the Term, with the express or implied consent of Landlord: (a) such tenancy will be deemed to be a periodic tenancy from month-to-month only; (b) such tenancy will not constitute a renewal or extension of this Lease for any further term; and (c) such tenancy may be terminated by Landlord upon the earlier of 30 days' prior written notice or the earliest date permitted by law. In such event, Monthly Rent will be increased to an amount equal to 150% of the Monthly Rent payable during the last month of the Term, and any other sums due under this Lease will be payable in the amount and at the times specified in this Lease. Such month-to-month tenancy will be subject to every other term, condition, and covenant contained in this Lease. 27.12 Notices. Any notice, request, demand, consent, approval or other communication required or permitted under this Lease must be in writing and will be deemed to have been given when personally delivered, sent by facsimile with receipt acknowledged, deposited with any nationally recognized overnight carrier which routinely issues receipts, or deposited in any depository regularly maintained by the United States Postal Service, postage prepaid, certified mail, return receipt requested, addressed to the party for whom it is intended at its address set forth in Section 1.1. Either Landlord or Tenant may add additional addresses or change its address for purposes of receipt of any such communication by giving 10 days' prior written notice of such change to the other party in the manner prescribed in this Section 27.12. 27.13 Severability. If any provision of this Lease proves to be illegal, invalid or unenforceable, the remainder of this Lease will not be affected by such finding, and in lieu of each provision of this Lease that is illegal, invalid or unenforceable, a provision will be added as a part of this Lease as similar in terms to such illegal, invalid or unenforceable provision as may be possible and legal, valid and enforceable. 27.14 Written Amendment Required. No amendment, alteration, modification of or addition to the Lease will be valid or binding unless expressed in writing and signed by Landlord and Tenant. Tenant agrees to make any modifications of the terms and provisions of this Lease required or requested by any lending institution providing financing for the Building, or Project, as the case may be, provided that no such modifications will materially adversely affect Tenant's rights and obligations under this Lease. 27.15 Entire Agreement. This Lease, the Exhibits and Addenda, if any, contain the entire agreement between Landlord and Tenant. No promises or representations, except as contained in this Lease, have been made to Tenant respecting the condition or the manner of operating the Premises, the Building, or the Project. 27.16 Captions. The captions of the various Articles and Sections of this Lease are for convenience only and do not necessarily define, limit, describe or construe the contents of such Articles or Sections. 27.17 Notice of Landlord's Default. In the event of any alleged default in the obligation of Landlord under this Lease, Tenant will deliver to Landlord written notice listing the reasons for Landlord's default and Landlord will have 30 days following receipt of such notice to cure such alleged default or, in the event the alleged default cannot reasonably be cured within a 30-day period, to commence action and proceed diligently to cure such alleged default. If Landlord fails to timely cure such default, then Tenant shall have the right to exercise its rights to either terminate the Lease, sue for specific performance, or sue for actual damages, but not for consequential damages. A copy of such notice to Landlord will be sent to any holder of a mortgage or other encumbrance on the Building or Project of which Tenant has been notified in writing, and any such holder will also have the same time periods to cure such alleged default. 27.18 Authority. Tenant and the party executing this Lease on behalf of Tenant represent to Landlord that such party is authorized to do so by requisite action of the board of directors, or partners, as the case may be, and agree upon request to deliver to Landlord a resolution or similar document to that effect, 27.19 Brokers. Landlord and Tenant respectively represent and warrant to each other that neither of them has consulted or negotiated with any broker or finder with regard to the Premises except the Broker named in Section 1.1 and Tenant's broker. Each of them will indemnify the other against and hold the other harmless from any claims for fees or commissions from anyone with whom either of them has consulted or -16- 17 negotiated with regard to the Premises except Broker and Tenant's broker. Landlord will pay any fees or commissions due Broker. Tenant shall be responsible for paying Tenant's broker any commission. 27.20 Governing Law. This Lease will be governed by and construed pursuant to the laws of the State in which the Project is located. 27.21 Late Payments. Any Rent which is not paid within 5 days after due will accrue interest at a late rate charge of the Prime Rate plus 5% per annum (but in no event in an amount in excess of the maximum rate allowed by applicable law) from the date on which it was due until the date on which it is paid in full with accrued interest. 27.22 No Easements for Air or Liqht. Any diminution or shutting off of light, air or view by any structure which may be erected on lands adjacent to the Building will in no way affect this Lease or impose any liability on Landlord. 27.23 Tax Credits. Landlord is entitled to claim all tax credits and depreciation attributable to Landlord's leasehold improvements in the Premises. Promptly after Landlord's demand, Landlord and Tenant will prepare a detailed list of the leasehold improvements and fixtures and their respective costs for which Landlord or Tenant has paid. Landlord will be entitled to all credits and depreciation for those items for which Landlord has paid by means of any tenant finish allowance or otherwise. Tenant will be entitled to any tax credits and depreciation for all items for which Tenant has paid with funds not provided by Landlord. 27.24 Relocation of the Premises. Landlord at its sole cost and expense, reserves the right to relocate the Premises to substantially comparable space within the Building, pursuant to this Section 27.24. Landlord will give Tenant a written notice of its intention to relocate the Premises, and Tenant will complete such relocation within 60 days after receipt of such written notice. If the space to which Landlord proposes to relocate Tenant is not substantially comparable to the Premises, Tenant may so notify Landlord, and if Landlord fails to offer space satisfactory to Tenant, Landlord may not relocate the Tenant. If Tenant does relocate within the Project, then effective on the date of such relocation this Lease will be amended by deleting the description of the original Premises and substituting for it a description of such comparable space. Landlord agrees to reimburse Tenant for its actual reasonable moving costs to such other space within the Project, the reasonable costs of reprinting stationery, and the costs of rewiring the new Premises for telephone and computers comparable to the original Premises. Landlord will use best efforts to minimize any disruption to tenant's business. 27.25 Financial Reports. Within 15 days after Landlord's request, Tenant will furnish Tenant's most recent audited financial statements (including any notes to them) to Landlord, or, if no such audited statements have been prepared, such other financial statements (and notes to them) as may have been prepared by an independent certified public accountant, or, failing those, Tenant's internally prepared financial statements. Tenant will discuss its financial statements with Landlord and will give Landlord access to Tenant's books and records in order to enable Landlord to verify the financial statements. Landlord will not disclose any aspect of Tenant's financial statements which Tenant designates to Landlord as confidential except (a) to Landlord's lenders or prospective purchasers of the Project, (b) in litigation between Landlord and Tenant, and (c) if required by court order. 27.26 Landlord's Fees. Whenever Tenant requests Landlord to take any action or give any consent required or permitted under this Lease, Tenant will reimburse Landlord for all of Landlord's reasonable costs incurred in reviewing the proposed action or consent, including, without limitation, reasonable attorneys', engineers' or architects' fees, within 10 days after Landlord's delivery to Tenant of a statement of such costs. Tenant will be obligated to make such reimbursement without regard to whether Landlord consents to any such proposed action. 27.27 Disputes. Any claim, controversy or dispute, whether sounding in contract, statute, tort, fraud, misrepresentation or other legal theory, related directly or indirectly to this Agreement, whenever brought and whether between the parties to this Agreement or between the parties to this Agreement or between one of the parties to this Agreement and the employees, agents or affiliated businesses of the other party, shall be resolved by arbitration as prescribed in this section. The Federal Arbitration Act, 9 U.S.C. Sections 1-15, not state law, shall govern the arbitrability of all claims. A single arbitrator engaged in the practice of law who is knowledgeable about the subject matter of this Agreement shall conduct the arbitration under the then current rules of the American Arbitration Association (the "AAA"). The arbitrator shall be selected in accordance with AAA procedures from a list of qualified people maintained by the AAA. The arbitration shall be conducted in the regional AAA office closest to where the claim arose, and all expedited procedures prescribed by the AAA rules shall apply. There shall be no discovery other than the exchange of information which is provided to the arbitrator by the parties. The arbitrator shall have authority only to award compensatory damages and shall not have authority to award punitive damages, or other noncompensatory damages. Each party shall bear its own costs and attorneys' fees, and the parties shall share equally the fees and expenses of the arbitrator. The arbitrator's decision and award shall be final and binding, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. If any party files a judicial or administrative action asserting claims subject to arbitration as prescribed herein, and another party successfully stays such action or compels arbitration of said claims, the -17- 18 party filing said action shall pay the other party's costs and expenses incurred in seeking such stay or compelling arbitration, including reasonable attorneys' fees. 27.28 Binding Effect. The covenants, conditions and agreements contained in this Lease will bind and inure to the benefit of Landlord and Tenant and their respective heirs, distributees, executors, administrators, successors, and, except as otherwise provided in this Lease, their assigns. 27.29 OPTION TO RENEW. (a) Option Period. So long as Tenant is not in default under this Lease, either at the time of exercise or at the time the extended term commences, Tenant will have the option to extend the initial term of this Lease for an additional period of five years, but in no event beyond May 31, 2007, (the "Option Period") on the same terms, covenants, and conditions of this Lease, except that the monthly rent during the Option Period will be determined pursuant to paragraph 27.29(b). Tenant will exercise its option by giving Landlord written notice ("Option Notice") at least 180 days but not more than 270 days prior to the expiration of the initial term of this Lease. (b) Option Period Monthly Rent. The monthly rent for the Option Period will be determined as follows: (1) The then-fair market rental value of the Premises, as defined in paragraph 27.29(b)(2) below, or the current Monthly Rent, whichever is greater. (2) The "then-fair market rental value of the Premises" means what a landlord under no compulsion to lease the Premises and a tenant under no compulsion to lease the Premises would determine as rent (including initial monthly rent and rental increase) for the Option Period, excluding any tenant improvement allowance, as of the commencement of the Option Period, taking into consideration the uses permitted under this Lease, the quality, size, design and location of the Premises, and the rent for comparable buildings located in the vicinity of Phoenix. The then-fair market rental value of the Premises and the rental increases in the monthly rent for the Option Period will not be less than that provided during the initial term, (3) Within 30 days after receiving written notice from Tenant of its intent to exercise this option, Landlord shall determine the then fair market value of the Premises, and advise Tenant in writing. 27.30 EXPANSION SPACE OPTION: If the tenant of either of the premises known as Suites 150 or 165, adjacent to the Premises (either space shall be known as the "Expansion Space"), shall vacate or surrender its premises to Landlord during the term of this Lease, and if Tenant is not in default under this Lease, then Landlord shall offer the Expansion Space to Tenant on the same terms and conditions as this Lease, except as noted herein regarding monthly rent and Tenant's Share. The Monthly Rent will be the monthly rent per rentable square foot of the Premises in effect on the date on which the Expansion Space becomes part of the Premises. The Monthly Rent will be increased as of the day on which the Expansion Space becomes part of the Premises by an amount equal to the product of (1) the number of rentable square feet of the Expansion Space multiplied by (2) the Monthly Rent per rentable square foot of the Premises in effect on the day on which the Expansion Space becomes part of the Premises. Tenant's Share shall be increased as of the day on which any Expansion Space becomes part of the Premises to a percentage determined by adding the Rentable Area of the Expansion Space to the Rentable Area of the Premises, and dividing said product by the total Rentable Area of the Building. If Tenant does not exercise this option to expand in writing within 30 days after Landlord offers the Expansion Space to Tenant, then this option shall expire as to the space offered. If Tenant exercises this option timely, then the Lease shall be amended to incorporate the Expansion Space into the Premises. If Tenant is offered the Expansion Space and exercises its option in writing as to one of the adjacent suites prior to January 1, 2000, Landlord shall provide tenant with a tenant improvement allowance in an amount equal to $5.50 per rentable square foot for the first adjacent suite to which Tenant exercises this option. This tenant improvement allowance shall not apply to any subsequent exercise of this expansion option. Any additional alterations to the Expansion Space or exercise of this option as to a second adjacent suite will be at the sole cost and expense of Tenant and subject to the alterations provisions of the Lease, 27.31 EXTERIOR SIGNAGE: Landlord agrees to provide tenant space for signage on the Building's monument sign. Tenant's sign is subject to the approval of Landlord. Tenant shall be responsible for all costs associated with placing Tenant's sign on the Building monument sign. Landlord and Tenant have executed this Lease as of the day and year first above written. LANDLORD: U S WEST BUSINESS RESOURCES, INC., a Colorado corporation By /s/ ILLEGIBLE SIGNATURE Name ILLEGIBLE Title Attorney-In-Fact -18- 19 APPROVED AS TO LEGAL FORM by Counsel to Landlord: Fisher & Sweetbaum, P.C. By /s/ ILLEGIBLE SIGNATURE Date TENANT: P.F. CHANG'S CHINA BISTRO, INC., a Delaware corporation By /s/ ILLEGIBLE SIGNATURE Name Title -19- 20 EXHIBIT A THE PREMISES EXHIBIT A THE PREMISES To be provided by Landlord prior to execution. 21 EXHIBIT B LEGAL DESCRIPTION OF THE LAND PARCEL NO. 1: BEGINNING at the Northeast corner of the Southeast quarter of the Southeast quarter of Section 13, Township 2 North, Range 3 East of the Gila and Salt River Base and Meridian, Maricopa County, Arizona; thence North 89 degrees 55' 58" West along the North line of said Southeast quarter of the Southeast quarter, 40 feet to the TRUE POINT OF BEGINNING; thence South, 40 feet West of and parallel to the East line of said Southeast quarter of the Southeast quarter, 400 feet; thence North 73 degrees 30' 00" West 400 feet; thence North 16 degrees 30' 00" East 299.06 feet to a point on the North line of said Southeast quarter of the Southeast quarter; thence South 89 degrees 55' 58" East along said North line 298.59 feet to the TRUE POINT OF BEGINNING. PARCEL NO. 2: A non-exclusive easement for pedestrian and vehicle ingress and egress as created in Docket 15938, page 464, records of Maricopa County, Arizona, described as follows: That part of the Southeast quarter of the Southeast quarter of Section 13, Township 2 North, Range 3 East of the Gila and Salt River Base and Meridian, Maricopa County, Arizona, described as follows: FROM the Northeast corner of the said Southeast quarter of the Southeast quarter of Section 13, measure; thence North 89 degrees 55' 56" West along the North line of the said Southeast quarter of the Southeast quarter, Section 13, a distance of 40.00 feet to a point on the West right-of-way line of 40th Street; thence South (bearing of reference) along the West right-of-way line of 40th Street a distance of 426.00 feet to the POINT OF BEGINNING; thence continuing South 40.00 feet to the end of a curve having a radius point bearing North 140.00 feet; thence Westerly 59.01 feet along the arc of this curve through 24 degrees 09' 00" of central angle; thence North 67 degrees 26' 28" West 36.01 feet; thence North 65 degrees 51' 00" West 57.00 feet to the beginning of a curve having point bearing South 24 degrees 09' 00" West 369.00 feet; thence Westerly 108.09 feet along the arc of this curve through 16 degrees 47' 00" of central angle; thence North 82 degrees 38' 00" West 17.18 feet to the beginning of a curve having a radius point bearing North 07 degrees 22' 00" East 1,839.00 feet; thence Westerly 148.47 feet along the arc of this curve through 04 degrees 37' 33" of central angle to a point of a compound curve having a radius point bearing North 11 degrees 59' 33" East 918.00 feet thence Westerly 36.42 feet along the arc of this curve through 02 degrees 16' 23" of central angle to a point of a reverse curve having a radius point bearing South 14 degrees 15' 56" West 10.00 feet; thence Southerly 15.32 feet along the arc of this curve through 87 degrees 45' 56" of central angle; thence South 89 degrees 26' 28" West 31.38 feet to a point at the end of a curve having a radius point bearing North 73 degrees 30' 00" West 10.00 feet; thence Northerly 15.71 feet along the arc of this curve through 90 degrees 00' 00" of central angle; thence North 73 degrees 30' 00" West 6.98 feet; thence North 16 degrees 30' 00" East 28.00 feet to a point at the end of a curve having a radius point bearing North 16 degrees 30' 00" East 10.00 feet; thence Northeasterly 20.54 feet along the arc of this curve through 117 degrees 42' 00" of central angle; thence North 11 degrees 12' 00" West 5.77 feet to the beginning of a curve having a radius point bearing South 78 degrees 48' 00" West 7.00 feet; thence Northwesterly 2.19 feet along the arc of this curve through 17 degrees 53' 05" of central angle; thence South 73 degrees 30' 00" East 39.37 feet to a point on a curve having thence Easterly 18.95 feet along the arc of this curve through 30 degrees 09' 32" of central angle to a point of a compound curve having a radius point bearing North 13 degrees 47' 15" East 882.00 feet; thence Easterly 35.80 feet along the arc of this 22 curve through 02 degrees 19' 33" of central angle to a point of a compound curve having a radius point bearing North 11 degrees 27' 42" East 15.00 feet; thence Northeasterly 22.24 feet along the arc of this curve through 84 degrees 57' 42" of central angle; thence North 16 degrees 30' 00" East 26.65 feet; thence South 73 degrees 30' 00" East 28.00 feet; thence South 16 degrees 30' 00" West 22.40 feet to the beginning of a curve having a radius point bearing South 73 degrees 30' 00" East 10.00 feet; thence Southeasterly 17.30 feet along the arc of this curve through 99 degrees 08' 00" of central angle; thence South 82 degrees 38' 00" East 100.36 feet to the beginning of a curve having a radius point bearing South 07 degrees 22' 00" West 411.00 feet; thence Easterly 120.39 feet along the arc of this curve through 16 degrees 47' 00" of central angle; thence South 65 degrees 51' 00" East 29.00 feet to the beginning of a curve having a radius point bearing North 24 degrees 09' 00" East 10.00 feet; thence Northeasterly 17.04 feet along the arc of this curve through 97 degrees 39' 00" of central angle; thence North 16 degrees 30' 00" East 8.73 feet; thence South 73 degrees 30' 00" East 32.00 feet; thence South 16 degrees 30' 00" West 16.73 feet to the beginning of a curve having a radius point bearing South 73 degrees 30' 00" East 10.00 feet; thence Southeasterly 14.37 feet along the arc of this curve through 82 degrees 21' 00" of central angle; thence South 65 degrees 51' 00" East 11.40 feet to the beginning of a curve having a radius point bearing North 24 degrees 09' 00" East 100.00 feet; thence Easterly 42.15 feet along the arc of this curve through 24 degrees 09' 00" of central angle to the POINT OF BEGINNING. 23 EXHIBIT C WORK LETTER This Work Letter is dated January , 1997, between U S WEST BUSINESS RESOURCES, INC. ("Landlord") and P.F. CHANG'S CHINA BRISTRO, INC. ("Tenant"), and is attached to and forms a part of that certain Office Lease of even date (the "Lease"), whereby Landlord leased to Tenant 4,410 rentable square feet in the building located at 5090 North 40th Street, Phoenix, Arizona (the "Premises"). Tenant desires to make certain improvements to the Premises, and Tenant desires to hire its own architect and contractors to manage the construction of such initial improvements, prior to occupancy, upon the terms and conditions of this Work Letter. In addition, the provisions hereof shall apply to any additional improvements or alterations to the Premises by Tenant, and Landlord has agreed to allow such initial improvements, upon the terms and conditions contained in this Work Letter. 1. Definitions. In this Work Letter, some defined terms are used. They are: (a) Tenant's Representative: John Middleton (b) Landlord's Representative: Mike Reynard (c) Final Space Plan: A drawing of the Premises clearly showing the layout and relationship of all departments and offices, depicting partitions, door locations, and types of electrical/data/telephone outlets and delineation of furniture and equipment, (d) Estimated Construction Costs: A preliminary estimate of the cost for the improvements that are depicted on the Final Space Plan, including all architectural, engineering, contractor, and any other costs as can be determined from the Final Space Plan. (e) Working Drawings: Construction documents detailing the improvements and conforming to applicable codes, complete in form and content. (f) Construction Schedule: A schedule depicting the relative time frames for various activities related to the construction of the improvements in the Premises. (g) Work: The Work is inclusive of the following: (l) The development of Final Space Plans and Working Drawings, including, without limitation, architectural and engineering fees and expenses, and costs of supporting engineering studies (i.e., structural design or analysis, lighting or acoustical evaluations, or others as determined by Tenant's architect). (2) All construction work necessary to augment the Base Building, creating the details and partitioning shown on the Final Space Plan. The Work will create finished ceilings, walls, and floor surfaces, as well as complete HVAC, lighting, electrical, and fire protection systems. (h) Costs of the Work: The Costs of the Work includes, but is not limited to, the following: (l) All architectural and engineering fees and expenses. (2) All contractor and construction manager costs and fees. (3) All permits and taxes. (i) Change Order: Any change, modification, or addition to the Final Space Plan or Working Drawings after Landlord has approved the same. (j) Base Building: Those elements of the core and shell construction that are completed in preparation for the Work to the Premises. This includes Building structure, envelope, and systems. This defines the existing conditions to which improvements are added. (k) Building Standard: Component elements utilized in the design and construction of the improvements that have been pre-selected by the Landlord to ensure uniformity of quality, function, and appearance throughout the Building. These elements include, but are not limited to, ceiling systems, doors, hardware, walls, floor coverings, finishes, window coverings, light fixtures, and HVAC components. Any of the capitalized terms which is used in this Work Letter but not defined in this Work Letter has the meaning set forth for such term in the Lease. 2. Representatives. Landlord appoints Landlord's Representative to act for Landlord in all matters covered by this Work Letter. Tenant appoints Tenant's Representative to act for Tenant in all matters covered by this Work Letter. All inquiries, requests, instructions, authorizations and other communications with respect to the matters covered by this Work Letter will be made to Landlord's Representative or Tenant's Representative, as the case may be. Either party may change its Representative under this Work Letter at any time by providing 3 days' prior written notice to the other party. (C-1) 24 3. Building Standard. Tenant must use Building Standard items in order to assure the consistent quality and appearance of the Building. (a) All Work will be performed by designers, contractors and subcontractors selected and engaged by Tenant. Tenant's contractor and all subcontractors shall be subject to Landlord's written approval, which shall not be unreasonably withheld. (b) Landlord shall receive no fee during construction or move-in for profit, overhead, general conditions, construction supervision, drawing review, freight elevator, utilities, parking or other similar miscellaneous costs. 4. Cost Responsibilities. Landlord agrees that it will contribute up to $7.00 per usable square foot which equals $30,870.00 (such amount is sometimes herein after referred to as the "Construction Allowance") toward the cost of constructing and installing the Tenant Improvements, which amount will be payable within 30 days from the date the Work is completed in accordance with the terms of this Lease and Tenant has submitted to Landlord a written statement requesting such payment, providing that at the time of such request and scheduled payment: a) Tenant is not in default under this Lease; b) No liens have been filed and appropriate waivers, affidavits and releases of liens will have been received by Landlord covering all work for which payment is requested or the time for filing liens has expired; c) The certificate of occupancy for the Premises has been issued; d) Tenant's architect has certified in writing to Landlord that the Work has been completed in substantial accordance with Tenant's Drawings and with applicable law, ordinances, rules, regulations and codes. 5. Landlord's Approval. Landlord, in its sole, but reasonable discretion, may withhold its approval of any Final Space Plan, Working Drawings, or Change Orders, and may consider, among other things, whether any of the same: (a) Exceeds or adversely affects the structural integrity of the Building, or any part of the heating, ventilating, air conditioning, plumbing, mechanical, electrical, communication or other systems of the Building; (b) Would not be approved by a prudent owner of property similar to the Building; (c) Violates any agreement which affects the Project or binds Landlord; (d) Landlord reasonably believes will increase the cost of operation or maintenance of any of the systems of the Project; (e) Landlord reasonably believes will reduce the market value of the Premises or the Project at the end of the Term; (f) Does not conform to applicable building code or is not approved by any governmental authority with jurisdiction over the Premises; (g) Does not conform to the Building Standard; or (h) Is not approved by any holder of a mortgage or other superior lien ("Superior Lien") at the time the work is proposed, unless such approval is not required under the documents evidencing the applicable Superior Lien, or is contained in any agreement now or hereafter executed by such Superior Lien holder. 6. Schedule of Improvement Activities. (a) After Landlord's approval of the Final Space Plan, Tenant will cause to be prepared and delivered to Landlord the Working Drawings, and the Construction Schedule, in accordance with the Final Space Plan for Landlord's review, (b) Following approval of the Working Drawings, Tenant will cause application to be made to the appropriate governmental authorities for necessary approvals and building permits. Within a reasonable time after its receipt of the necessary approvals and permits, Tenant will begin construction of the improvements. (c) Landlord will join in, and will use best efforts to cause the joinder in, to the extent necessary, of all parties holding Superior Liens, all applications and other documents required for Tenant to obtain all permits necessary for its intended use of the Premises (including, but not limited to, any rezoning application.) (C-2) 25 7. Change Orders. Tenant may authorize changes in the Work during construction, only by written instructions to Landlord's Representative on a form approved by Landlord. All such changes will be subject to Landlord's prior written approval in accordance with Paragraph 5. 8. Access to Premises and Conduct of Work. During the construction period, Tenant and its contractors and subcontractors shall have 24-hour access to the Building's freight elevator and to the Premises, subject to Landlord's reasonable generally applicable requirements relating thereto, and shall be provided electrical power and other utilities sufficient for completion of Work. 9. Completion and Commencement Date. Tenant's obligation for payment of Rent pursuant to the Lease will commence on the Commencement Date, regardless of whether the Work has been completed. 11. Condition of the Premises. Except as otherwise provided in the Lease, Tenant acknowledges that neither Landlord nor its agents or employees have made any representations or warranties as to the suitability or fitness of the Premises for the conduct of Tenant's business or for any other purpose, nor has Landlord or its agents or employees agreed to undertake any alterations or construct any tenant improvements to the Premises. 12. Disclaimer of Liability. Landlord's approval of the Final Space Plan, other plans, specifications and the Working Drawings shall create no responsibility or liability on the part of Landlord for the completeness, design sufficiency, or compliance with laws, rules and regulations of governmental agencies or authorities with respect to such plans, specifications and Working Drawings or improvements constructed in conformity therewith. Tenant shall be solely responsible for ensuring that the design and improvements of the interior of the Premises comply with the Americans with Disabilities Act and Tenant shall indemnify and hold harmless Landlord in connection therewith. 13. Landlord's Approval. All approvals by Landlord under this Work Letter shall be granted or withheld, in Landlord's reasonable discretion, within 3 business days after request for each such approval is made. (C-3) 26 EXHIBIT D RULES AND REGULATIONS 1. Landlord may from time to time adopt appropriate systems and procedures for the security or safety of the Building, any persons occupying, using or entering the Building, or any equipment, finishing or contents of the Building, and Tenant will comply with Landlord's reasonable requirements relative to such systems and procedures. 2. The sidewalks, halls, passages, exits, entrances, elevators, and stairways of the Building will not be obstructed by any tenants or used by any of them for any purpose other than for ingress to and egress from their respective premises. The halls, passages, exits, entrances, elevators, escalators and stairways are not for the general public, and Landlord will in all cases retain the right to control and prevent access to such halls, passages, exits, entrances, elevators and stairways of all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation and interests of the Building and its tenants, provided that nothing contained in these Rules and Regulations will be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal activities. No tenant and no employee or invitee of any tenant will go upon the roof of the Building except such roof or portion of such roof as may be contiguous to the premises of a particular tenant and may be designated in writing by Landlord as a roof deck or roof garden area. No tenant will be permitted to place or install any object (including, without limitation, radio and television antenna, loud speakers, sound amplifiers, microwave dishes, solar devices, or similar devices) on the exterior of the Building or on the roof of the Building. 3. No sign, placard, picture, name, advertisement or written notice visible from the exterior of Tenant's premises will be inscribed, painted, affixed or otherwise displayed by Tenant on any part of the Building or the Premises without the prior written consent of Landlord. Landlord will adopt and furnish to Tenant general guidelines relating to signs inside the Building on the office floors. Tenant agrees to conform to such guidelines. All approved signs or lettering on doors will be printed, painted, affixed or inscribed at the expense of the tenant by a person approved by Landlord. Other than draperies expressly permitted by Landlord and building standard mini-blinds, material visible from outside the Building will not be permitted. In the event of the violation of this Rule by Tenant, Landlord may remove the violating items without any liability, and may charge the expense incurred by such removal to the tenant or tenants violating this Rule. 4. No cooking will be done or permitted by any tenant on the Premises, except in areas of the Premises which are specially constructed for cooking and except that use by the tenant of microwave ovens and Underwriters' Laboratory approved equipment for brewing coffee, tea, hot chocolate and similar beverages will be permitted, provided that such use is in accordance with all applicable federal, state and city laws, codes, ordinances, rules and regulations. 5. No tenant will employ any person or persons other than the cleaning service of Landlord for the purpose of cleaning the Premises, unless otherwise agreed to by Landlord in writing. Except with the written consent of Landlord, no person or persons other than those approved by Landlord will be permitted to enter the Building for the purpose of cleaning it. No tenant will cause any unnecessary labor by reason of such tenant's carelessness or indifference in the preservation of good order and cleanliness. Should Tenant's actions result in any increased expense for any required cleaning, Landlord reserves the right to assess Tenant for such expenses. 6. The toilet rooms, toilets, urinals, wash bowls and other plumbing fixtures will not be used for any purposes other than those for which they were constructed, and no sweepings, rubbish, rags, or other foreign substances will be thrown in such plumbing fixtures. All damages resulting from any misuse of the fixtures will be borne by the tenant who, or whose servants, employees, agents, visitors or licensees, caused the same. 7. No tenant will in any way deface any part of the Premises or the Building of which they form a part. In those portions of the Premises where carpet has been provided directly or indirectly by Landlord, Tenant will at its own expense install and maintain pads to protect the carpet under all furniture having casters other than carpet casters, 8. No tenant will alter, change, replace or rekey any lock or install a new lock or a knocker on any door of the Premises. Landlord, its agents or employees, will retain a pass (master) key to all door locks on the Premises. Any new door locks required by Tenant or any change in keying of existing locks will be installed or changed by Landlord following Tenant's written request to Landlord and will be at Tenant's expense. All new locks and, rekeyed locks will remain operable by Landlord's pass (master) key. Landlord will furnish each Tenant, free of charge, with two keys to each door lock on the Premises, and two (2) Building/area access cards. Landlord will have the right to collect a reasonable charge for additional keys and cards requested by any tenant. Each tenant, upon termination of its tenancy, will deliver to Landlord all keys and access cards for its premises and Building which have been furnished to such tenant. 9. The elevator designated for freight by Landlord will be available for use by all tenants in the Building during the hours and pursuant to such procedures as Landlord may determine from time to time. The persons employed to move Tenant's equipment, material, furniture or other property in or out of the Building must be acceptable to Landlord. The moving company must be a locally recognized professional mover, whose primary business is the performing of relocation services, and must be bonded and fully insured. A certificate or other verification of such insurance must be received and approved by Landlord prior to the start of any moving operations. Insurance must be sufficient in Landlord's sole opinion, to cover all personal liability, theft (D-1) 27 or damage to the Project, including, but not limited to, floor coverings, doors, walls, elevators, stairs, foliage and landscaping. Special care must be taken to prevent damage to foliage and landscaping during adverse weather. All moving operations will be conducted at such times and in such a manner as Landlord will direct, and all moving will take place during non-business hours unless Landlord agrees in writing otherwise. Tenant will be responsible for the provision of Building security during all moving operations, and will be liable for all losses and damages sustained by any party as a result of the failure to supply adequate security. Landlord will have the right to prescribe the weight, size and position of all equipment, materials, furniture or other property brought into the Building. Heavy objects will, if considered necessary by Landlord, stand on wood strips of such thickness as is necessary to properly distribute the weight. Landlord will not be responsible for loss of or damage to any such property from any cause, and all damage done to the Building by moving or maintaining such property will be repaired at the expense of Tenant. Landlord reserves the right to inspect all such property to be brought into the Building and to exclude from the Building all such property which violates any of these Rules and Regulations or the Lease of which these Rules and Regulations are a part. Supplies, goods, materials, packages, furniture and all other items of every kind delivered to or taken from the Premises will be delivered or removed through the entrance and route designated by Landlord, and Landlord will not be responsible for the loss or damage of any such property unless such loss or damage results from the negligence of Landlord, its agents or employees. 10. No tenant will use or keep in the Premises or the Building any kerosene, gasoline or inflammable or combustible or explosive fluid or material or chemical substance other than limited quantities of such materials or substances reasonably necessary for the operation or maintenance of office equipment or limited quantities of cleaning fluids and solvents required in such tenant's normal operations in the Premises. Without Landlord's prior written approval, no tenant will use any method of heating or air conditioning other than that supplied by Landlord. No tenant will use or keep or permit to be used or kept any foul or noxious gas or substance in the Premises. 11. Landlord will have the right, exercisable upon written notice and without liability to any tenant, to change the name and street address of the Building. 12. Landlord will have the right to prohibit any advertising by Tenant, mentioning the Building, which, in Landlord's reasonable opinion, tends to impair the reputation of the Building or its desirability as a building for offices, and upon written notice from Landlord, Tenant will refrain from or discontinue such advertising. 13. Tenant will not bring any animals (except "Seeing Eye" dogs) or birds into the Building, and will not permit bicycles or other vehicles inside or on the sidewalks outside the Building except in areas designated from time to time by Landlord for such purposes. 14. All persons entering or leaving the Building between the hours of 6 p.m. and 7 a.m. Monday through Friday, and at all hours on Saturdays, Sundays and holidays will comply with such off-hour regulations as Landlord may establish and modify from time to time. Landlord reserves the right to limit reasonably or restrict access to the Building during such time periods. 15. Each tenant will store all its trash and garbage within its Premises. No material will be placed in the trash boxes or receptacles if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of trash and garbage without being in violation of any law or ordinance governing such disposal. All garbage and refuse disposal will be made only through entryways and elevators provided for such purposes and at such times as Landlord designates. Removal of any furniture or furnishings, large equipment, packing crates, packing materials and boxes will be the responsibility of each tenant and such items may not be disposed of in the Building, trash receptacles nor will they be removed by the Building's janitorial service, except at Landlord's sole option and at the tenant's expense. No furniture, appliances, equipment or flammable products of any type may be disposed of in the Building trash receptacles. 16. Canvassing, peddling, soliciting, and distribution of handbills or any other written materials in the Building are prohibited, and each tenant will cooperate to prevent the same. 17. The requirements of the tenants will be attended to only upon application by written, personal or telephone notice at the office of the Building. Employees of Landlord will not perform any work or do anything outside of their regular duties unless under special instructions from Landlord. 18. A directory of the Building will be provided for the display of the name and location of tenants only and such reasonable number of the principal officers and employees of tenants as Landlord in its sole discretion approves, but Landlord will not in any event be obligated to furnish more than one directory strip for each 2,500 square feet of Rentable Area in the Premises. Any additional name(s) which Tenant desires to place in such directory must first be approved by Landlord, and if so approved, Tenant will pay to Landlord a charge, set by Landlord, for each such additional name. All entries on the building directory display will conform to standards and style set by Landlord in its sole discretion. Space on any exterior signage will be provided in Landlord's sole discretion, No tenant will have any right to the use of the exterior sign. 19. Tenant will see that the doors of the Premises are closed and locked and that all water faucets, water apparatus and utilities are shut off before Tenant or Tenant's employees leave the Premises, so as to prevent waste or damage, and for any default or carelessness in this regard Tenant will make good all injuries sustained by other tenants or occupants of the Building or Landlord. On multiple-tenancy floors, all tenants will keep the doors to the Building corridors closed at all times except for ingress and egress. (D-2) 28 20. Tenant will not conduct itself in any manner which is inconsistent with the character of the Building as a first quality building or which will impair the comfort and convenience of other tenants in the Building. 21. Neither Landlord nor any operator of the parking areas within the Project, as the same are designated and modified by Landlord, in its sole discretion, from time to time (the "Parking Areas") will be liable for loss of or damage to any vehicle or any contents of such vehicle or accessories to any such vehicle, or any property left in any of the Parking Areas, resulting from fire, theft, vandalism, accident, conduct of other users of the Parking Areas and other persons, or any other casualty or cause. Further, Tenant understands and agrees that: (a) Landlord will not be obligated to provide any traffic control, security protection or operator for the Parking Areas; (b) Tenant uses the Parking Areas at its own risk; and (c) Landlord will not be liable for personal injury or death, or theft, loss of or damage to property. Tenant waives and releases Landlord from any and all liability arising out of the use of the Parking Areas by Tenant, its employees, agents, invitees, and visitors, whether brought by any of such persons or any other person. 22. Tenant (including Tenant's employees, agents, invitees, and visitors) will use the Parking Spaces solely for the purpose of parking passenger model cars, small vans and small trucks and will comply in all respects with any rules and regulations that may be promulgated by Landlord from time to time with respect to the Parking Areas. The Parking Areas may be used by tenant, its agents or employees, for occasional overnight parking of vehicles. Tenant will ensure that any vehicle parked in any of the Parking Spaces will be kept in proper repair and will not leak excessive amounts of oil or grease or any amount of gasoline. If any of the Parking Spaces are at any time used (a) for any purpose other than parking as provided above; (b) in any way or manner reasonably objectionable to Landlord; or (c) by Tenant after default by Tenant under the Lease, Landlord, in addition to any other rights otherwise available to Landlord, may consider such default an Event of Default under the Lease. 23. Tenant's right to use the Parking Areas will be in common with other tenants of the Project and with other parties permitted by Landlord to use the Parking Areas. Landlord reserves the right to assign and reassign, from time to time, particular parking spaces for use by persons selected by Landlord provided that Tenant's rights under the Lease are preserved. Landlord will not be liable to Tenant for any unavailability of Tenant's designated spaces, if any, nor will any unavailability entitle Tenant to any refund, deduction, or allowance. Tenant will not park in any numbered space or any space designated as: RESERVED, HANDICAPPED, VISITORS ONLY, or LIMITED TIME PARKING (or similar designation). 24. If the Parking Areas are damaged or destroyed, or if the use of the Parking Areas is limited or prohibited by any governmental authority, or the use or operation of the Parking Areas is limited or prevented by strikes or other labor difficulties or other causes beyond Landlord's control, Tenant's inability to use the Parking Spaces will not subject Landlord or any operator of the Parking Areas to any liability to Tenant and will not relieve Tenant of any of its obligations under the Lease and the Lease will remain in full force and effect. 25. Tenant has no right to assign or sublicense any of its rights in the Parking Spaces, except as part of a permitted assignment or sublease of the Lease; however, Tenant may allocate the Parking Spaces among its employees. 26. No act or thing done or omitted to be done by Landlord or Landlord's agent during the term of the Lease in connection with the enforcement of these Rules and Regulations will constitute an eviction by Landlord of any tenant nor will it be deemed an acceptance of surrender of the Premises by any tenant, and no agreement to accept such termination or surrender will be valid unless in a writing signed by Landlord. The delivery of keys to any employee or agent of Landlord will not operate as a termination of the Lease or a surrender of the Premises unless such delivery of keys is done in connection with a written instrument executed by Landlord approving the termination or surrender. 27. In these Rules and Regulations, "tenant" includes the employees, agents, invitees and licensees of Tenant and others permitted by Tenant to use or occupy the Premises. 28. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenant or tenants, but no such waiver by Landlord will be construed as a waiver of such Rules and Regulations in favor of any other tenant or tenants, nor prevent Landlord from enforcing any such Rules and Regulations against any or all of the tenants of the Building after such waiver. 29. These Rules and Regulations are in addition to, and will not be construed to modify or amend, in whole or in part, the terms, covenants, agreements and conditions of the Lease. (D-3) 29 EXHIBIT E COMMENCEMENT DATE CERTIFICATE This Commencement Date Certificate is entered into by Landlord and Tenant pursuant to Section 3.1 of the Lease. 1. DEFINITIONS. In this Certificate the following terms have the meanings given to them: (a) Landlord: U S WEST Business Resources, Inc. (b) Tenant: P.F. Chang's China Bistro, Inc. (c) Lease: Office Lease dated , 1997 between Landlord and Tenant. (d) Premises: Suite 160. (e) Building Address: 5090 North 40th Street Phoenix, AZ 85018 2. CONFIRMATION OF LEASE COMMENCEMENT. Landlord and Tenant confirm that the Commencement Date of the Lease is and the Expiration Date is and that Sections 1.1(k) and (l) are accordingly amended. Landlord and Tenant have executed this Commencement Date Certificate as of the dates set forth below. LANDLORD: TENANT: U S WEST BUSINESS RESOURCES, INC., P.F. CHANG'S CHINA BISTRO, INC., a a Colorado corporation Delaware corporation By By -------------------------------------- -------------------------------- Name Name ------------------------------------ ------------------------------- Title Title ----------------------------------- ------------------------------ APPROVED AS TO LEGAL FORM by Counsel to Landlord: Fisher & Sweetbaum, P.C. By --------------------------- Date ------------------------ (E-1) EX-21.1 14 EX-21.1 1 Exhibit 21.1 P.F. CHANG'S CHINA BISTRO, INC. LIST OF SUBSIDIARIES Entity Jurisdiction ------ ------------ PFCCB Scottsdale, LLC Arizona PFCCB Newport Beach, LLC Arizona P.F. Chang's III, LLC Arizona P.F. Chang's IV, LLC Arizona La Jolla Building III, L.P. Arizona PFCCB Loutex Joint Venture Arizona PFCCB NUCA, LLC Arizona PFCCB Florida Joint Venture Arizona PFCCB Southeastern, LLC Arizona PFCCB Mid-Atlantic, LLC Arizona EX-27.1 15 EX-27.1
5 1000 6-MOS DEC-28-1997 DEC-29-1997 JUN-28-1998 1000 1,802 0 825 0 362 3,824 16,531 2,297 34,265 17,661 2,159 18,285 0 3 (4,079) 34,265 32,937 32,937 26,296 26,296 4,983 0 520 1,203 11 847 0 0 0 847 0.15 0.13
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