10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended April 1, 2001

or

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

For the transition period from                  to                  .

Commission File Number: 0-25123

P.F. CHANG’S CHINA BISTRO, INC

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization) 86-0815086
(I.R.S. Employer
Identification No.)

15210 N. Scottsdale Rd., Ste. 300, Scottsdale, Arizona
(Address of principal executive offices) 85254
(Zip Code)

Registrant’s telephone number, including area code: (602) 957-8986

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act

Common Stock, $.001 par value

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days.

Yes          No  

      Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

      As of April 1, 2001, there were outstanding 11,889,361 shares of the Registrant’s Common Stock.

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
	Item 1. Unaudited Condensed Financial Statements
	CONSOLIDATED BALANCE SHEETS
	CONSOLIDATED STATEMENTS OF INCOME
	CONSOLIDATED STATEMENTS OF CASH FLOWS
	NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risks
PART II OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
EX-10.1

TABLE OF CONTENTS

Item			Page
PART I FINANCIAL INFORMATION
	1.	Unaudited Condensed Financial Statements		2
		Consolidated Balance Sheets as of December 31, 2000 and April 1, 2001.		2
		Consolidated Statements of Income for the Three Months Ended April 2, 2000 and April 1, 2001.		3
		Consolidated Statements of Cash Flows for the Three Months Ended April 2, 2000 and April 1, 2001.		4
		Notes to Unaudited Condensed Consolidated Financial Statements		5
	2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		6
	3.	Quantitative and Qualitative Disclosures About Market Risk		15
PART II OTHER INFORMATION
	1.	Legal Proceedings		15
	2.	Changes in Securities and Use of Proceeds		15
	3.	Defaults upon Senior Securities		15
	4.	Submission of Matters to a Vote of Security Holders		15
	5.	Other Information		15
	6.	Exhibits and Reports on Form 8-K		15

1

PART I FINANCIAL INFORMATION

Item 1.  Unaudited Condensed Financial Statements

P.F. CHANG’S CHINA BISTRO, INC.

CONSOLIDATED BALANCE SHEETS

			Note 1		Unaudited
			December 31,		April 1,
			2000		2001
			(In thousands)
ASSETS
Current assets:
	Cash and cash equivalents		$	6,390	$	32,299
	Receivables			1,671		919
	Inventories			1,683		1,609
	Current portion of notes receivable from related parties			72		38
	Prepaids and other current assets			2,161		1,570
Total current assets				11,977		36,435
Construction-in-progress				2,213		9,409
Property and equipment, net				92,284		89,518
Goodwill, net				7,386		7,537
Notes receivable from related parties, less current portion				20		120
Other assets				2,046		2,368
		Total assets	$	115,926	$	145,387
LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable — trade		$	3,128	$	2,750
	Construction payable			2,356		1,207
	Accrued payroll			3,269		3,265
	Sales and use tax payable			1,792		1,831
	Property tax payable			1,474		1,632
	Other accrued expenses			3,711		3,689
	Income tax liability			—		257
	Unearned revenue			2,793		2,221
	Current portion of long-term debt			207		201
Total current liabilities				18,730		17,053
Long-term debt				1,485		1,441
Short-term credit facility expected to be refinanced				15,000		—
Deferred income tax liability				2,318		2,512
Interests of minority members and partners in consolidated limited liability companies and partnerships				1,051		1,029
Common stockholders’ equity:
	Common stock, $0.001 par value, 20,000,000 shares authorized: 10,453,144 shares issued and outstanding at December 31, 2000 and 11,889,361 at April 1, 2001			10		12
	Additional paid-in capital			66,757		108,875
	Retained earnings			10,575		14,465
Total common stockholders’ equity				77,342		123,352
Total liabilities and common stockholders’ equity			$	115,926	$	145,387

See accompanying notes to unaudited condensed consolidated financial statements.

2

P.F. CHANG’S CHINA BISTRO, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

				Three Months Ended
				April 2,			April 1,
				2000			2001
Revenues				$	51,414		$	72,420
Costs and expenses:
	Restaurant operating costs:
		Cost of sales			14,077			20,080
		Labor			15,274			21,739
		Operating			8,795			12,261
		Occupancy			3,233			4,463
			Total restaurant operating costs		41,379			58,543
	General and administrative				2,807			3,673
	Depreciation and amortization				1,680			2,514
	Preopening				746			642
Income from operations					4,802			7,048
Interest income, net					21			377
Income before elimination of minority members’ and partners’ interests and provision for income taxes					4,823			7,425
Elimination of minority members’ and partners’ interests					(931	)		(1,301	)
Income before provision for income taxes					3,892			6,124
Provision for income taxes					(1,501	)		(2,234	)
Net income				$	2,391		$	3,890
Net income per share:
	Basic			$	0.23		$	0.33
	Diluted			$	0.21		$	0.31
Weighted average shares used in computation:
	Basic				10,303			11,669
	Diluted				11,279			12,554

See accompanying notes to unaudited condensed consolidated financial statements.

3

P.F. CHANG’S CHINA BISTRO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

			Three Months Ended
			April 2,			April 1,
			2000			2001
			(in thousands)
OPERATING ACTIVITIES:
Net income			$	2,391		$	3,890
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			1,569			2,401
	Amortization of goodwill			111			113
	Deferred income taxes			299			194
	Minority members’ and partners’ interests			931			1,301
	Changes in operating assets and liabilities:
		Receivables		55			752
		Inventories		(6	)		74
		Prepaids and other current assets		(132	)		591
		Other assets		(304	)		(322	)
		Accounts payable — trade		905			(378	)
		Accrued payroll		679			(4	)
		Sales and use tax payable		84			39
		Property tax payable		286			158
		Other accrued expenses		259			(22	)
		Income tax liability		(547	)		1,038
		Unearned revenue		(395	)		(572	)
Net cash provided by operating activities				6,185			9,253
INVESTING ACTIVITIES:
Capital expenditures				(7,379	)		(7,980	)
Decrease (increase) in notes receivable from related parties				322			(66	)
Net cash used in investing activities				(7,057	)		(8,046	)
FINANCING ACTIVITIES:
Repayments on credit facility				—			(15,000	)
Repayments of long-term debt				(139	)		(50	)
Net proceeds from sale of common stock				—			40,781
Proceeds from stock options exercised and employee stock purchases				512			554
Proceeds from minority partners contributions				211			79
Purchase of minority interests				—			(311	)
Distributions to minority members and partners				(1,120	)		(1,351	)
Net cash provided by (used in) financing activities				(536	)		24,702
Net decrease in cash and cash equivalents				(1,408	)		25,909
Cash and cash equivalents at the beginning of the period				5,333			6,390
Cash and cash equivalents at the end of the period			$	3,925		$	32,299
Supplemental disclosure of cash flow information:
Cash paid for interest				49			139
Cash paid for income taxes				1,749			33
Benefit from disqualifying stock option dispositions credited to equity				207			781

See accompanying notes to unaudited condensed consolidated financial statements.

4

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

1.  Basis of Presentation

      P.F. Chang’s China Bistro, Inc. owned and operated 52 full service restaurants (as of April 1, 2001) throughout the United States under the name of “P.F. Chang’s China Bistro.” We also owned and operated one limited service restaurant under the name of “Pei Wei Asian Diner.”

      The accompanying condensed financial statements have been prepared by P.F. Chang’s without audit and reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of financial position and the results of operations for the interim periods. The statements have been prepared in accordance with generally accepted accounting principles and with the regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such SEC rules and regulations. Operating results for the three month period ended April 1, 2001 are not necessarily indicative of the results that may be expected for the year ending December 30, 2001.

      The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and notes thereto for the fiscal year ended December 31, 2000 included in our Form 10-K.

2.  Net Income Per Share

      Net income per share is computed in accordance with SFAS No. 128, “Earnings per Share.” Basic net income per share is computed based on the weighted average of common shares outstanding during the period. Diluted net income per share is computed based on the weighted average number of common shares and common stock equivalents, which includes options under our stock option plans and outstanding warrants.

3.  Credit Facility

      In December of 1999, P.F. Chang’s entered into a revolving credit facility with a commercial lending institution. The credit facility allowed for borrowings up to $15 million at an interest rate ranging from 150 to 225 basis points over the applicable London Interbank Offered Rate. In June of 2000, the credit facility was amended to allow for borrowings up to a total of $45 million at an interest rate ranging from 100 to 225 basis points over the applicable London Interbank Offered Rate. The revolving credit facility expires on November 30, 2002. All of the borrowings under this facility are short-term in nature and have maturity dates ranging from one to six months. The credit facility contains certain restrictions and conditions which require the Company to: maintain a minimum tangible net worth, a maximum leverage ratio of 3.75: 1.00 and a minimum fixed-charge ratio of 1.25: 1.00. The credit facility has been collateralized by a portion of the assets of P.F. Chang’s. The Company had borrowings totaling $15 million under the credit facility as of December 31, 2000, all of which was repaid during the first quarter of 2001. Since all borrowings under the credit facility have been to fund the construction of new restaurants, interest incurred to date on the credit facility has been capitalized to the extent allowable in accordance with generally accepted accounting principles. Interest paid under the credit facility for the three months ended April 1, 2001 was $139,000.

4.  Equity Transactions

      On January 11, 2001, P.F. Chang’s sold 1.25 million shares of its common stock at a price of $32.667 per share. Net proceeds from the transaction amounted to $40.8 million. Of this $40.8 million, $15 million was used to pay all of the outstanding borrowings under its credit facility. The remaining proceeds will be used to fund future development of both P.F. Chang’s China Bistro and Pei Wei Asian Diner.

5

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS — (Continued)

      In connection with the original capitalization of the Company, a warrant to purchase 124,380 shares of preferred stock, convertible into 62,190 shares of common stock with an exercise price of $4.00 per common share, was issued to an investment bank. This warrant was exercised in the first quarter of 2001 in accordance with the cashless exercise provision contained therein for an aggregate of 55,545 shares of common stock.

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

      The following section contains forward-looking statements concerning P.F. Chang’s which involve risks and uncertainties. Such forward-looking statements may be deemed to include those regarding anticipated restaurant openings, anticipated costs and sizes of future restaurants and the adequacy of anticipated sources of cash to fund our future capital requirements. P.F. Chang’s actual results may differ materially from those discussed in the forward-looking statements. Factors that might cause actual events or results to differ materially from those indicated by such forward-looking statements may include matters noted elsewhere in this Form 10-Q, such as development and construction risks, potential labor shortages, fluctuations in operating results, and changes in food costs. Words such as “believes,” “anticipates,” “expects,” “intends,” “plans” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.

Overview

      As of April 1, 2001, we owned and operated 52 full service restaurants, or Bistros, that combine a distinctive blend of high quality, traditional Chinese cuisine and American hospitality in a sophisticated, contemporary bistro setting. P.F. Chang’s 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, P.F. Chang’s Chief Executive Officer and Chief Financial Officer, respectively, to support P.F. Chang’s founder, Paul Fleming. Utilizing a partnership management philosophy, we embarked on a strategic expansion of the concept targeted at major metropolitan areas throughout the United States and opened three additional restaurants in 1996, six in 1997, 10 in 1998, 13 in 1999 and 16 in 2000.

      We also owned and operated one limited service restaurant as of April 1, 2001. We believe that there is an opportunity to leverage our knowledge and expertise in Chinese and Asian cuisine. Accordingly, we have developed Pei Wei Asian Diner, or Pei Wei, a new concept that will cater to a quicker, more casual dining experience as compared to that of P.F. Chang’s China Bistro. Pei Wei opened its first unit in July 2000 in the Phoenix, Arizona area. We have committed to opening two additional Pei Wei units in the Phoenix area and two in the Dallas, Texas area in 2001. Capital required for these units will approximate $700,000 each. Additional resources and infrastructure will be allocated to Pei Wei in the coming months as we prepare to push forward with the development of the Pei Wei concept.

      We intend to open 14 new Bistros and four new Pei Wei restaurants in 2001 (none of which were open as of April 1, 2001). The full service units that we intend to develop in 2001 will be located in approximately seven new cities across the United States. The four Pei Wei units that we intend to develop in 2001 will be in the Phoenix and Dallas markets. We have signed lease agreements or letters of intent for all of our development planned for fiscal year 2001. We intend to continue to develop full service restaurants that typically range in size from 6,000 square feet to 7,000 square feet, and that require, on average, a total cash investment of approximately $2.2 million and total invested capital of between $2.8 million and $3.4 million per restaurant. Preopening expenses are expected to average approximately $325,000 per restaurant. This total capitalized investment includes the capitalized lease value of the property, which can vary greatly depending on the specific trade area. Capital required for the Pei Wei units will approximate $700,000 each and we expect preopening expenses for these units to approximate $100,000 each. See “Risk Factors — Development and Construction Risks.”

6

      Elimination of minority interests represents the portion of our net earnings or losses which are attributable to the collective ownership interests of our partners. Elimination of minority interests for all periods subsequent to 1996 includes the effect of our partnership management structure. P.F. Chang’s has entered into a series of partnership agreements with each of our regional managers, certain general managers and certain executive chefs. These partnership agreements typically provide that the regional manager partner is entitled to a specified percentage of the cash flows from the restaurants that partner has invested in, developed and oversees as the regional manager. Similarly, the general manager partners and executive chef partners receive a percentage of the cash flows from the restaurant in which they invest and work.

Results of Operations

      The following table sets forth certain unaudited quarterly information for the three months ended April 2, 2000 and April 1, 2001, expressed as a percentage of revenues, except for revenues which are expressed in thousands. This quarterly information has been prepared on a consistent basis with the audited financial statements and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented. P.F. Chang’s quarterly operating results may fluctuate significantly as a result of a variety of factors, and operating results for any quarter are not necessarily indicative of results for a full fiscal year.

      Historically, we have experienced variability in the amount and percentage of revenues attributable to preopening expenses. We typically incur the most significant portion of preopening expenses associated with a given restaurant within the two months immediately preceding and the month of the opening of the restaurant. In addition, our experience to date has been that labor and operating costs associated with a newly opened restaurant (for approximately its first four to six months of operation) are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Accordingly, the volume and timing of new restaurant openings has had, and is expected to continue to have, a meaningful impact on preopening expenses, labor and operating costs until such time as a larger base of restaurants in operation mitigates such impact.

				Three Months Ended
				April 2,			April 1,
				2000			2001
STATEMENTS OF OPERATIONS DATA:
Revenues (in thousands)				$	51,414		$	72,420
Costs and expenses:
	Restaurant operating costs:
		Cost of sales			27.4	%		27.7	%
		Labor			29.7			30.0
		Operating			17.1			16.9
		Occupancy			6.3			6.2
			Total restaurant operating costs		80.5			80.8
	General and administrative				5.4			5.1
	Depreciation and amortization				3.3			3.5
	Preopening expense				1.5			0.9
Income from operations					9.3			9.7
Interest income (expense), net					0.0			0.5
Elimination of minority interests					(1.8	)		(1.8	)
Income before provision for income taxes					7.5			8.4
Provision for income taxes					(2.9	)		(3.1	)
Net income					4.6	%		5.3	%

7

  Revenues

      P.F. Chang’s revenues are derived entirely from food and beverage sales. Revenues increased by $21.0 million, or 40.9%, to $72.4 million in the three months ended April 1, 2001 from $51.4 million in the three months ended April 2, 2000. The increase in first quarter 2001 revenues compared to first quarter 2000 revenues was primarily attributable to revenues of $16.6 million generated by new restaurants opened subsequent to April 2, 2000, a $3.5 million increase in revenues in the three months ended April 1, 2001 for existing restaurants and $879,000 of revenues generated by Pei Wei Asian Diner. Increased customer visits and a modest price increase in the fourth quarter of 2000 produced comparable restaurant sales gains of 5.4% in the three months ended April 1, 2001.

  Costs and expenses

      Cost of sales. Cost of sales is composed of the cost of food and beverages. Cost of sales increased as a percentage of revenues to 27.7% in the three months ended April 1, 2001 compared to 27.4% for the three months ended April 2, 2000. This increase is due primarily to a slight increase in commodity prices in the areas of seafood, produce and beef offset by decreases in poultry and dry food expense.

      Labor. Labor expenses consist of restaurant management salaries, hourly staff payroll costs and other payroll-related items. Labor expenses as a percentage of revenues increased to 30.0% in the three months ended April 1, 2001 from 29.7% in the three months ended April 2, 2000. The increase in labor expenses was primarily due to an increase in California’s hourly minimum wage from $5.75 to $6.25 as well as higher workers compensation costs and higher wage rates in general across our system. These increases were partially offset by improvements in the management of hourly staff levels in the restaurants as our restaurants mature. We expect that tighter labor markets will continue to exert upward pressure on our labor costs for the remainder of 2001.

      Operating. Operating expenses consist primarily of various fixed and variable restaurant-level costs. In addition, our experience to date has been that operating costs associated with a newly opened restaurant (for approximately its first four to six months of operation) are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Operating expenses decreased as a percentage of revenues to 16.9% in the three months ended April 1, 2001 from 17.1% in the three months ended April 2, 2000. This decrease was due to the fact that we had three new restaurants opened during the first quarter of 2000 compared to no new restaurants opened in the first quarter of 2001, as well as an increase in average weekly sales volumes which allowed us to leverage our fixed operating costs. These decreases more than offset higher utility costs incurred in 2001.

      Occupancy. Occupancy costs include both fixed and variable portions of rent, common area maintenance charges, property insurance and property taxes. Occupancy costs decreased nominally as a percentage of revenues to 6.2% in the three months ended April 1, 2001 from 6.3% in the three months ended April 2, 2000. The decrease in occupancy was primarily the result of the increased revenue base and, to a lesser extent, more favorable lease terms associated with new restaurants.

      General and administrative. General and administrative expenses are composed of expenses associated with corporate and administrative functions that support development and restaurant operations and provide an infrastructure to support future growth, including management and staff salaries, employee benefits, travel, legal and professional fees, technology and market research. General and administrative expenses increased to $3.7 million (5.1% of revenues) in the three months ended April 1, 2001 from $2.8 million (5.4% of revenues) in the three months ended April 2, 2000. The increase was due primarily to the addition of corporate management personnel which resulted in approximately $670,000 of additional compensation and benefits expense for the three months ended April 1, 2001, as well as additional costs to support a larger restaurant base, including additional travel expenses, consulting fees and accounting and legal fees. The decrease as a percentage of revenues was due primarily to our expanding revenue base and our ability to leverage the duties and responsibilities of our regional manager partners (See “Elimination of minority interests” below).

8

      Depreciation and amortization. Depreciation and amortization expenses include the depreciation of fixed assets and the amortization of goodwill costs associated with the acquisition of minority ownership interests. Depreciation and amortization increased to $2.5 million in the three months ended April 1, 2001 from $1.7 million in the three months ended April 2, 2000. The increase was primarily due to depreciation and amortization on fixed assets purchased for new restaurants opened subsequent to April 2, 2000 totaling $720,000 for the three months ended April 1, 2001; as well as a full quarter’s depreciation and amortization on fixed assets in restaurants opened during the first quarter of 2000.

      Preopening. Preopening costs, which are expensed as incurred, consist of expenses incurred prior to opening a new restaurant and are comprised principally of manager salaries and relocation expenses, employee payroll and related training costs. Preopening expenses in the three months ended April 1, 2001 decreased to $642,000 from $746,000 in the three months ended April 2, 2000. Preopening expenses in the three month period ended April 1, 2001 decreased primarily due to the fact that we opened three restaurants in the first three months of 2000 compared to no new restaurants in the first three months of 2001.

      Interest income (expense), net. Interest income increased to $377,000 in the three months ended April 1, 2001 from $21,000 in the three months ended April 2, 2000. The increase was due to the infusion of cash from the private equity placement that occurred in January of 2001.

  Elimination of minority interests

      Elimination of minority interests represents the portion of P.F. Chang’s net earnings which are attributable to the collective ownership interests of our partners. We have provided for a partnership management structure in which P.F. Chang’s has entered into a series of partnership agreements with our regional managers (“Market Partners”), certain of our general managers (“Operating Partners”) and certain of our executive chefs (“Culinary Partners”). Elimination of minority interests increased to $1.3 million for the three months ended April 1, 2001 from $931,000 for the three months ended April 2, 2000. The increase was due primarily to the addition of new restaurants and an increase in the operating profit of those restaurants.

  Provision for income taxes

      The provision for income taxes increased to $2.2 million for the three months ended April 1, 2001 from $1.5 million for the three months ended April 2, 2000. The increase in the tax provision was due primarily to higher profitability of our current restaurants. The income tax provisions for 2000 and 2001 differ from the expected provision for income taxes, derived by applying the statutory income tax rate, due primarily to state income tax benefits and wage related tip credits.

Liquidity and Capital Resources

      P.F. Chang’s has funded its capital requirements since its inception through sales of equity securities, debt financing and cash flows from operations. Net cash provided by operating activities was $9.3 million and $6.2 million for the three months ended April 1, 2001 and April 2, 2000, respectively. Net cash provided by operating activities exceeded net income for the three months ended April 1, 2001 due principally to the effect of minority interest, depreciation and amortization, and an increase in income tax liability. Net cash provided by operating activities exceeded net income for the three months ended April 2, 2000 due principally to the effect of minority interest, depreciation and amortization.

      We use cash primarily to fund the development and construction of new restaurants. Net cash used in investing activities for the three months ended April 1, 2001 and April 2, 2000 was $8.0 million and $7.1 million, respectively. Capital expenditures made up the majority of our investing activities in both periods. We intend to open 14 new Bistros and four new Pei Wei restaurants in 2001. We expect that our planned future Bistro restaurants will require, on average, a total cash investment per restaurant of approximately $2.2 million. Preopening expenses are expected to average approximately $325,000 per Bistro restaurant, however, any unexpected delays in construction, labor shortages, or other factors could result in higher than anticipated

9

preopening costs. We anticipate that each Pei Wei restaurant will require, on average, a total cash investment of $700,000 and will incur preopening costs of approximately $100,000.

      Net cash provided by (used in) financing activities for the three months ended April 1, 2001 was $24.7 million compared to net cash used in financing activities for the three months ended April 2, 2000 of ($536,000). Financing activities in the first three months of 2001 consisted principally of net proceeds from the $40.8 million private equity placement that took place in January of 2001 as well as the repayment of our $15 million in borrowings on our credit facility and distributions to minority partners. Financing activities in the first three months of 2000 consisted principally of distributions to minority partners.

      In December of 1999, P.F. Chang’s entered into a revolving credit facility with a commercial lending institution. The credit facility allowed for borrowings up to $15 million at an interest rate ranging from 150 to 225 basis points over the applicable London Interbank Offered Rate. In June of 2000, the credit facility was amended to allow for borrowings up to a total of $45 million at an interest rate ranging from 100 to 225 basis points over the applicable London Interbank Offered Rate. The revolving credit facility expires on November 30, 2002. All of the borrowings under this facility are short-term in nature and have maturity dates ranging from one to six months. The credit facility contains certain restrictions and conditions which require us to: maintain a minimum tangible net worth, a maximum leverage ratio of 3.75: 1.00 and a minimum fixed-charge ratio of 1.25: 1.00. The credit facility has been collateralized by a portion of the assets of P.F. Chang’s. We had borrowings totaling $15 million under the credit facility as of December 31, 2000, all of which was repaid during the first quarter of 2001.

      On January 11, 2001, P.F. Chang’s sold 1.25 million shares of our common stock at a price of $32.667 per share. Net proceeds from the transaction amounted to $40.8 million. Of this $40.8 million, $15 million was used to pay all of the outstanding borrowings under our credit facility. The remaining proceeds will be used to fund future development of both P.F. Chang’s China Bistro and Pei Wei Asian Diner.

      Our capital requirements, including development costs related to the opening of additional restaurants, have been and will continue to be significant. Our 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. We believe that our cash flow from operations together with our current cash reserves and borrowings available under our credit facility will be sufficient to fund our capital requirements through 2002. In the event that additional capital is required, we may seek to raise such capital through public or private equity or debt financings. Future capital funding transactions may result in dilution to current shareholders. We can not assure you that such capital will be available on favorable terms, if at all.

Risk Factors

Failure of our existing or new restaurants to achieve predicted results could have a negative impact on our revenues and performance results.

      We operated 52 full service, or Bistro, restaurants and one limited service, or Pei Wei, restaurant, as of April 1, 2001, 14 of which have been opened within the last twelve months. The results achieved by these restaurants may not be indicative of longer term performance or the potential market acceptance of restaurants in other locations. We can’t assure you that any new restaurant which we open will have similar operating results to those of prior restaurants. We anticipate that our new restaurants will commonly take several months to reach planned operating levels due to inefficiencies typically associated with new restaurants, including lack of market awareness, inability to hire sufficient staff and other factors. The failure of our existing or new restaurants to perform as predicted could negatively impact our revenues and results of operations.

     If we do not expand our restaurant operations, our operating revenue could decline.

      Critical to our future success is our ability to successfully expand our operations. We have expanded from seven restaurants at the end of 1996 to 53 restaurants as of April 1, 2001. We expect to open 14 Bistros and

10

four Pei Wei restaurants in 2001. Our ability to expand successfully will depend on a number of factors, including:

•  identification and availability of suitable locations;

•  competition for restaurant sites;

•  negotiation of favorable lease arrangements;

•  timely development of commercial, residential, street or highway construction near our 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;

•  weather conditions;

•  competition in new markets; and

•  general economic conditions.

      The opening of additional restaurants in the future will depend in part upon our ability to generate sufficient funds from operations or to obtain sufficient equity or debt financing on favorable terms to support our expansion. We may not be able to open our planned new operations on a timely basis, if at all, and, if opened, these restaurants may not be operated profitably. We have experienced, and expect to continue to experience, delays in restaurant openings from time to time. Delays or failures in opening planned new restaurants could have an adverse effect on our business, financial condition, results of operations or cash flows.

Implementing our growth strategy may strain our management resources and negatively impact our competitive position.

      Our growth strategy may strain our management, financial and other resources. We must maintain a high level of quality and service at our existing and future restaurants, continue to enhance our operational, financial and management capabilities and locate, hire, train and retain experienced and dedicated operating personnel, particularly managers and chefs. We may not be able to effectively manage these and other factors necessary to permit us to achieve our expansion objectives, and any failure to do so could negatively impact our competitive position.

The inability to develop and construct our restaurants within projected budgets and time periods will adversely affect our business and financial condition.

      Each P.F. Chang’s full service and limited service restaurant is distinctively designed to accommodate particular characteristics of each location and to blend local or regional design themes with our principal trade dress and other common design elements. This presents each location with its own development and construction risks. Many factors may affect the costs associated with the development and construction of our restaurants, including:

•  labor disputes;

•  shortages of materials and skilled labor;

•  weather interference;

•  unforeseen engineering problems;

•  environmental problems;

•  construction or zoning problems;

•  local government regulations;

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•  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.

      If we are not able to develop additional P.F. Chang’s and Pei Wei restaurants within anticipated budgets or time periods, our business, financial condition, results of operations or cash flows will be adversely affected.

Potential labor shortages may delay planned openings or damage customer relations.

      Our success will continue to be dependent on our ability to attract and retain a sufficient number of qualified employees, including kitchen staff and waitstaff, to keep pace with our expansion schedule. Qualified individuals needed to fill these positions are in short supply in certain areas. Our inability to recruit and retain qualified individuals may delay the planned openings of new restaurants while high employee turnover in existing restaurants may negatively impact customer service and customer relations, resulting in an adverse effect on our revenues or results of operations.

Fluctuations in operating results may cause market price of our common stock to decline.

      Our 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;

•  timing of new restaurant openings and related expenses;

•  revenues contributed by new restaurants; and

•  increases or decreases in comparable restaurant revenues.

      Historically, we have experienced variability in the amount and percentage of revenues attributable to preopening expenses. We typically incur the most significant portion of preopening expenses associated with a given restaurant within the two months immediately preceding and the month of the opening of the restaurant. Our experience to date has been that labor and operating costs associated with a newly opened restaurant for the first several months of operation are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Accordingly, the volume and timing of new restaurant openings has had, and is expected to continue to have, a meaningful impact on preopening expenses and labor and operating costs. Therefore, 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, our results of operations may be below the expectations of public market analysts and investors. This discrepancy could cause the market price of our common stock to decline. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Intense competition in the restaurant industry could prevent us from increasing or sustaining our revenues and profitability.

      The restaurant industry is intensely competitive with respect to food quality, price-value relationships, ambiance, service and location, and many restaurants compete with us at each of our locations. Our 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 ours, and many of our competitors are well established in the markets where we have restaurants, or in which we intend to locate restaurants. Additionally, other companies may develop restaurants that operate with similar concepts.

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      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 prevent us from increasing or sustaining our revenues and profitability and result in a material adverse effect on our business, financial condition, results of operations or cash flows. We may also need to modify or refine elements of our restaurant system to evolve our concept in order to compete with popular new restaurant formats or concepts that develop from time to time. We cannot assure you that we will be successful in implementing these modifications.

Increases in the minimum wage may have a material adverse effect on our business and financial results.

      A number of our employees are subject to various minimum wage requirements. The federal minimum wage has remained at $5.15 per hour since September 1, 1997. However, many of our employees work in restaurants located in California and receive salaries equal to the California minimum wage, which rose from $5.75 per hour effective March 1, 1998 to $6.25 per hour effective January 1, 2001. There may be similar increases implemented in other jurisdictions in which we operate or seek to operate. The possibility exists that the federal minimum wage will be increased within the next 12 months. These minimum wage increases may have a material adverse effect on our business, financial condition, results of operations or cash flows.

Our inability to retain key personnel could negatively impact our business.

      Our success will continue to be highly dependent on our key operating officers and employees, including Richard Federico, our Chief Executive Officer, Robert Vivian, our President and Chief Financial Officer, and Frank Ziska, Chief Development Officer. We must continue to attract, retain and motivate a sufficient number of qualified management and operating personnel, including regional managers (market partners), general managers (operating partners) and executive chefs (chef partners), to keep pace with an aggressive expansion schedule. Individuals of this caliber are historically in short supply and this shortage may limit our ability to effectively penetrate new market areas. Additionally, the ability of these key personnel to maintain consistency in the quality and atmosphere of our restaurants is a critical factor in our success. Any failure to do so may harm our reputation and result in a loss of business.

Changes in food costs could negatively impact our revenues and results of operations.

      Our profitability is dependent in part on our ability to anticipate and react to changes in food costs. Other than for produce, which is purchased locally by each restaurant, we rely on Distributors Marketing Alliance as the primary distributor of our food. Distributors Marketing Alliance is a cooperative of multiple food distributors located throughout the nation. We have a non-exclusive short-term contract with Distributors Marketing Alliance on terms and conditions which we believe are consistent with those made available to similarly situated restaurant companies. Although we believe that alternative distribution sources are available, any increase in distribution prices or failure to perform by the Distributors Marketing Alliance could cause our food costs to fluctuate. Additional factors beyond our control, including adverse weather conditions and governmental regulation, may affect our food costs. We may not be able to anticipate and react to

13

changing food costs through our purchasing practices and menu price adjustments in the future, and failure to do so could negatively impact our revenues and results of operations.

Rising energy costs in several of our significant markets may continue to affect profitability.

      Our success depends in part on our ability to absorb increase in utility costs. Several regions of the United States in which we operate multiple restaurants, particularly California, have recently experienced significant increase in utility prices. If these increases continue, this will have an adverse effect on our profitability.

Failure to comply with governmental regulations could harm our business and our reputation.

      We 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:

•  environment;

•  building construction;

•  zoning requirements; and

•  the preparation and sale of food and alcoholic beverages.

      Our 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. We may not 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 our operations and our relationship with our employees, including minimum wage, overtime, working conditions, fringe benefit and citizenship requirements. In particular, we are subject to the regulations of the INS. Given the location of many of our restaurants, even if we operate those restaurants in strict compliance with INS requirements, our employees may not all meet federal citizenship or residency requirements, which could lead to disruptions in our work force.

      Approximately 20% of our revenues at the Bistro and 5% at Pei Wei are attributable to the sale of alcoholic beverages. We are required to comply with the alcohol licensing requirements of the federal government, states and municipalities where our 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. If we fail to comply with federal, state or local regulations our licenses may be revoked and we may be forced to terminate the sale of alcoholic beverages at one or more of our restaurants.

      The federal Americans with Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment. We are 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.

      Failure to comply with these regulations could negatively impact our business and our reputation.

Litigation could have a material adverse effect on our business.

      We are from time to time the subject of complaints or litigation from guests alleging illness, injury or other food quality, health or operational concerns. We may be adversely affected by publicity resulting from such allegations, regardless of whether such allegations are valid or whether we are liable. We are also subject to complaints or allegations from former or prospective employees from time to time. A lawsuit or claim could result in an adverse decision against us that could have a materially adverse effect on our business.

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      We are 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 we carry liquor liability coverage as part of our existing comprehensive general liability insurance, we may still be subject to a judgment in excess of our insurance coverage and we may not be able to obtain or continue to maintain such insurance coverage at reasonable costs, or at all.

Item 3.  Quantitative and Qualitative Disclosures about Market Risks

      We believe that the market risk associated with our market risk sensitive instruments as of April 1, 2001 is not material, and therefore, disclosure is not required.

PART II OTHER INFORMATION

Item 1.  Legal Proceedings

      We were not involved in any material legal proceedings as of April 1, 2001.

Item 2.  Changes in Securities and Use of Proceeds

      None

Item 3.  Defaults Upon Senior Securities

      None

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

      None

Item 5.  Other Information

      None

Item 6.  Exhibits and Reports on Form 8-K

      (a)  Exhibits:

Exhibit
Number		Description Document
	10.1	Common Stock Purchase Agreement dated January 11, 2001

      (b)  Report on Form 8-K

      No reports on Form 8-K have been filed by the Company during the three months ended April 1, 2001.

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SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 3, 2001.

P.F. CHANG’S CHINA BISTRO, INC.

By:  /s/RICHARD FEDERICO

Richard Federico

Chairman and Chief Executive Officer

      Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ RICHARD L. FEDERICO Richard L. Federico	Chairman and Chief Executive Officer, (Principal Executive Officer) President and Chief	May 3, 2001
/s/ ROBERT T. VIVIAN Robert T. Vivian	Financial Officer (Principal Financial and Accounting Officer)	May 3, 2001

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INDEX TO EXHIBITS

Exhibit
Number		Description Document
	10.1	Common Stock Purchase Agreement dated January 11, 2001

17 EX-10.1 2 p65012ex10-1.txt EX-10.1 1 P.F. CHANG'S CHINA BISTRO, INC. COMMON STOCK PURCHASE AGREEMENT THIS COMMON STOCK PURCHASE AGREEMENT (this "Agreement") is made and entered into as of January 11, 2001 by and among P.F. Chang's China Bistro, Inc., a Delaware corporation (the "Company"), and the parties listed on the Schedule of Investors attached hereto as Exhibit A (the "Schedule of Investors") (each hereinafter individually referred to as an "Investor" and collectively referred to as the "Investors"). 1. AGREEMENT TO PURCHASE AND SELL STOCK. 1.1 Authorization. As of the Closing (as defined below) the Company will have authorized the issuance, pursuant to the terms and conditions of this Agreement, of up to one million five hundred thousand (1,500,000) shares of the Company's Common Stock, $.001 par value (the "Common Stock"). 1.2 Agreement to Purchase and Sell. The Company agrees to sell to each Investor at the Closing, and each Investor agrees, severally and not jointly, to purchase from the Company at the Closing, the number of shares of Common Stock for the aggregate price set forth beside such Investor's name on the Schedule of Investors, at the price per share for such Investor set forth on the Schedule of Investors. The shares of Common Stock purchased and sold pursuant to this Agreement will be collectively hereinafter referred to as the "Purchased Shares." 2. CLOSING. 2.1 The Closing. The purchase and sale of the Purchased Shares will take place at the offices of Gray Cary Ware & Freidenrich LLP, 4365 Executive Drive, Suite 1600, San Diego, CA 92121, at 10:00 AM local San Diego time on January 11, 2001, or at such other time and place as the Company and Investors who have agreed to purchase a majority of the Purchased Shares listed on the Schedule of Investors mutually agree upon (which time and place are referred to in this Agreement as the "Closing"), provided that the Closing may not be delayed for more than five business days without the consent of all Investors. At the Closing, the Company will deliver to each Investor a certificate representing the number of Purchased Shares that such Investor has agreed to purchase hereunder as shown on the Schedule of Investors against delivery to the Company by such Investor of the full purchase price of such Purchased Shares, paid by (i) a check payable to the Company's order, (ii) wire transfer of funds to the Company or (iii) any combination of the foregoing. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to each Investor that, except as set forth in the Disclosure Schedule (the "Disclosure Schedule") separately delivered by the Company to the Investors (which Disclosure Schedule shall be deemed to be representations and warranties to the Investors by the Company under this Section and to qualify each of the representations and warranties set forth herein), the statements in the following paragraphs of this Section 3 are all true and correct: 1 2 3.1 Organization, Good Standing and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has all requisite corporate power and authority to conduct its business as currently conducted. The Company is qualified to do business as a foreign corporation in each jurisdiction where failure to be so qualified could reasonably be expected to have a material adverse effect on the business, assets, financial condition or results of operations or assets of the Company (the "Business") (such effect referred to as a "Material Adverse Effect"). 3.2 Capitalization. Immediately before the Closing the capitalization of the Company will consist of the following: (a) Preferred Stock. A total of 10,000,000 authorized shares of Preferred Stock, $.001 par value per share (the "Preferred Stock"), none of which are issued and outstanding. (b) Common Stock. A total of 20,000,000 authorized shares of Common Stock, of which approximately 10,432,900 shares were issued and outstanding as of December 31, 2000. There are no stockholder agreements, voting agreements or other similar agreements with respect to the Common Stock to which the Company is a party, or to the knowledge of the Company, between or among any of the Company's stockholders. (c) Options, Warrants, Reserved Shares. Except for: (i) the approximately 1,418,542 shares of Common Stock issuable upon exercise of options outstanding as of December 31, 2000, (ii) approximately 157,500 additional shares of Common Stock reserved for issuance under the Company's 1998 Stock Option Plan, (iii) approximately 354,000 additional shares of Common Stock reserved for issuance under the Company's Employee Stock Purchase Plan and (iv) a warrant to purchase an aggregate of approximately 62,190 shares of Common Stock issued to Bank of America, there are not outstanding any options, warrants, rights or agreements for the purchase or acquisition from the Company of any shares of its capital stock or any securities convertible into or ultimately exchangeable or exercisable for any shares of the Company's capital stock. 3.3 Subsidiaries. Except for the subsidiaries of the Company listed on the Disclosure Schedule, each of which is not a "significant subsidiary" as defined in Rule 1-02 of Regulation S-X, the Company does not presently own or control, directly or indirectly, any interest in any other corporation, partnership, trust, joint venture, association, or other entity. 3.4 Due Authorization; No Violation. All corporate action on the part of the Company and its officers, directors and stockholders necessary for the authorization, execution and delivery of, and the performance of all obligations of the Company under, this Agreement, and the authorization, issuance, reservation for issuance and delivery of all of the Purchased Shares being sold under this Agreement, has been taken or will be taken prior to the Closing, and this Agreement constitutes a valid and legally binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting the enforcement of creditors' rights generally and (ii) the effect of rules of law governing the availability of equitable remedies. Neither the execution, delivery or performance 2 3 by the Company of this Agreement nor the consummation by the Company of the transactions contemplated hereby will (i) conflict with or result in a breach of any provision of the Company's Amended and Restated Certificate of Incorporation or the Company's Bylaws, (ii) conflict with, result in a violation or breach of, or cause a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any agreement, instrument or obligation to which the Company is a party, which default could reasonably be expected to have a Material Adverse Effect or (iii) violate any law, statute, rule or regulation or judgment, order, writ, injunction or decree of any governmental authority, in each case applicable to the Company or its properties or assets and which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. 3.5 Valid Issuance of Stock. The Purchased Shares, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration provided for herein, will be duly and validly issued, fully paid and nonassessable and are not subject to preemptive or other similar rights of any stockholder of the Company. 3.6 Governmental Consents. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement, the offer, sale and issuance of the Purchased Shares, or the consummation of the transactions contemplated by this Agreement, except for qualifications or filings under the Securities Act of 1933, as amended (the "Act") and the applicable rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under the Act, and all other applicable securities laws as may be required in connection with the transactions contemplated by this Agreement. All such qualifications will be effective on the Closing, and all such filings be made within the time prescribed by law. 3.7 Absence of Changes. After the respective dates as of which information is given in the Company's Proxy Statement for the annual meeting of stockholders held on April 26, 2000, the Company's Annual Report on Form 10-K for the period ended January 2, 2000, and the Company's Quarterly Report on Form 10-Q for the quarter ended October 1, 2000, respectively (such documents, together with the Disclosure Schedule, referred to collectively as the "Disclosure Documents"), there has not been (i) any material adverse change in the Business, (ii) any transaction or event that is material to the Company, (iii) any obligation, direct or contingent, that is material to the Company, incurred by the Company, (iv) any change in the outstanding indebtedness of the Company that is material to the Company, (v) any dividend declared, paid or made on the capital stock of the Company, (vi) any loss or damage (whether or not insured) to the property of the Company which has been sustained which could reasonably be expected to have a Material Adverse Effect, or (vii) any material change in the accounting methods or practices followed by the Company. 3.8 Litigation. There is no action, suit, proceeding, claim, arbitration or investigation ("Action") pending (or, to the Company's knowledge, currently threatened) against the Company, its activities, properties or assets, which (i) might prevent the consummation of the transactions contemplated hereby or (ii) if adversely resolved against the Company could reasonably be expected to have a Material Adverse Effect. 3 4 3.9 Nasdaq Listing. The Common Stock is registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is listed on the Nasdaq Stock Market (Nasdaq National Market). The Company has not received any notification that the Commission or the National Association of Securities Dealers, Inc. is contemplating the termination of such registration or listing. Before the Shelf Registration Statement (as defined in Section 7.2) is declared effective by the Commission, the Purchased Shares will, if required by the listing rules of the Nasdaq Stock Market, have been approved for quotation on the Nasdaq Stock Market, subject to notice of issuance. 3.10 Exchange Act Filings. The Company has filed in a timely manner all reports and other information required to be filed ("Filings") with the Commission pursuant to the Exchange Act during the preceding twelve calendar months. On their respective dates of filing, the Filings complied as to form in all material respects with the requirements of the Exchange Act, and the published rules and regulations of the Commission promulgated thereunder. On their respective dates of filing, the Filings did not include any untrue statement of a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, and all financial statements contained in the Filings fairly present the financial position of the Company on the dates of such statements and the results of operations for the periods covered thereby in accordance with generally accepted accounting principles consistently applied throughout the periods involved and prior periods, except as otherwise indicated in the notes to such financial statements. 3.11 Disclosure. The representations and warranties made by the Company in this Agreement (including the Disclosure Schedule) and the Filings when read together do not contain any untrue statement of a material fact and do not omit to state a material fact necessary to make the statements herein as a whole not misleading. 3.12 Governmental Permits, Etc. The Company possesses all licenses, franchises, governmental approvals, permits or other governmental authorizations (collectively, "Authorizations") relating to the operation of the Business, except for those Authorizations the failure of which to possess would not, separately or in the aggregate, have a Material Adverse Effect. To the Company's knowledge, the Company is in compliance with the terms of all Authorizations and all laws, ordinances, regulations and decrees which to the Company's knowledge are applicable to the Business, except for such non-compliance which does not, separately or in the aggregate, have a Material Adverse Effect. 3.13 Insurance. The Company is covered by insurance with companies the Company believes to be responsible and in such amounts and covering such risks as it believes to be adequate for the conduct of its Business and the value of its properties and which, it believes, is customary for companies engaged in similar businesses in similar industries. The Company has no knowledge that any such carrier has grounds or intends to cancel or fail to renew such policies. 3.14 Intellectual Property. To the Company's knowledge after reasonable investigation, the Company owns or possesses the patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) and other rights or interests in 4 5 items of intellectual property as are necessary for the operation of the Business operated by it (the "Patent and Proprietary Rights"), except where the failure to own or possess such rights would not have a Material Adverse Effect; the Company has not received notice of any asserted rights with respect to any of the Patent and Proprietary Rights which, if determined unfavorably with respect to the interests of the Company would have a Material Adverse Effect; and the Company has not received notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any of the Patent or Proprietary Rights, which infringement or conflict (if the subject of any unfavorable decision, ruling or finding), individually or in the aggregate, would result in a Material Adverse Effect. 3.15 Employees. The Company is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with the Company, nor does the Company have any present intention to terminate the employment of any officer, key employee or group of key employees. 4. REPRESENTATIONS, WARRANTIES AND CERTAIN AGREEMENTS OF INVESTORS. Each Investor hereby represents and warrants to, and agrees with, the Company, that: 4.1 Authorization. All corporate action on the part of the Investor and its officers, directors and stockholders necessary for the authorization, execution and delivery of, and the performance of all obligations of the Investor under, this Agreement has been taken or will be taken prior to the Closing, and this Agreement constitutes a valid and legally binding obligation of the Investor, enforceable against the Investor in accordance with its terms, except as enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting the enforcement of creditors' rights generally and (ii) the effect of rules of law governing the availability of equitable remedies. 4.2 Purchase for Own Account. The Purchased Shares to be purchased by such Investor hereunder will be acquired for investment for such Investor's own account, not as a nominee or agent, and not with a view to the public resale or distribution thereof within the meaning of the Act, and such Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. If not an individual, such Investor also represents that such Investor has not been formed for the specific purpose of acquiring Purchased Shares. 4.3 Disclosure of Information. The Investor has received a copy of the Disclosure Documents and has received or has had full access to all the information it considers necessary or appropriate to make an informed investment decision with respect to the Purchased Shares to be purchased by the Investor under this Agreement. Investor further has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Purchased Shares and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify any information furnished to the Investor or to which the Investor had access. The foregoing, however, does not in any way limit or modify the representations and warranties made by the Company in Section 3. 5 6 4.4 Investment Experience. Such Investor understands that the purchase of the Purchased Shares involves substantial risk. Such Investor: (i) has experience as an investor in securities of companies in the development stage and acknowledges that such Investor is able to fend for itself, can bear the economic risk of such Investor's investment in the Purchased Shares and has such knowledge and experience in financial or business matters that such Investor is capable of evaluating the merits and risks of this investment in the Purchased Shares and protecting its own interests in connection with this investment or (ii) has a preexisting personal or business relationship with the Company and certain of its officers, directors or controlling persons of a nature and duration that enables such Investor to be aware of the character, business acumen and financial circumstances of such persons. 4.5 Accredited Investor Status. Unless otherwise expressly indicated on the Schedule of Investors to this Agreement, such Investor is an "accredited investor" within the meaning of Regulation D promulgated under the Act. 4.6 Restricted Securities. Such Investor understands that the Purchased Shares are characterized as "restricted securities" under the Act inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under the Act and the Rules and Regulations such securities may be resold without registration under the Act only in certain limited circumstances. In this connection, such Investor represents that such Investor is familiar with Rule 144 of the Commission and understands the resale limitations imposed thereby and by the Act. Such Investor understands that the Company is under no obligation to register any of the Purchased Shares except as provided in Section 7 below. 4.7 Further Limitations on Disposition. Without in any way limiting the representations set forth above, such Investor further agrees not to make any disposition of all or any portion of the Purchased Shares unless and until: (a) there is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with such registration statement and the provisions of Section 7 of this Agreement; or (b) (i) such Investor shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and (ii) such Investor shall have furnished the Company, at the expense of such Investor or its transferee, with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such securities under the Act. Notwithstanding the provisions of paragraphs (a) and (b) above, no such registration statement or opinion of counsel shall be required: (i) for any routine transfer of any Purchased Shares in compliance with Rule 144 or Rule 144A (except that an opinion of counsel may be required for other than routine Rule 144 transactions), or (ii) for any transfer of Purchased Shares by an Investor that is a partnership or a corporation to (A) a partner of such partnership or stockholder of such corporation, or (B) the estate of any such partner or stockholder, or (iii) for the transfer by gift, will or intestate succession by any Investor to his or her spouse or lineal descendants or ancestors or any trust for any of the foregoing; provided, that 6 7 in each of the foregoing cases the transferee agrees in writing to be subject to the terms of this Section 4 (other than Section 4.5) to the same extent as if the transferee were an original Investor hereunder. 4.8 Legends. It is understood that the certificates evidencing the Purchased Shares will bear the legends set forth below: (a) THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. (b) THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO THE PROVISIONS OF, AND MAY HAVE CERTAIN REGISTRATION RIGHTS PURSUANT TO, THE PROVISIONS OF A PURCHASE AGREEMENT BETWEEN THE COMPANY AND THE HOLDER, WHICH MAY RESTRICT THE TRANSFER OF SUCH SHARES IN CERTAIN CIRCUMSTANCES. A COPY OF SUCH AGREEMENT MAY BE OBTAINED, WITHOUT CHARGE, AT THE COMPANY'S PRINCIPAL OFFICE. (c) After consultation with counsel for the Investor, any legend that counsel to the Company reasonably deems appropriate under the laws of the State of Delaware. The legends set forth in (a) and (b) above shall, upon the request of an Investor, be promptly removed by the Company from any certificate evidencing Purchased Shares upon delivery to the Company of an opinion of counsel to the Company, that the legended security can be freely transferred in a public sale without a registration statement being in effect under the Act and in compliance with exemption requirements under applicable state securities laws and that such transfer will not jeopardize the exemption or exemptions from registration pursuant to which the Company issued the Purchased Shares; provided, however, that no such opinion shall be required in connection with routine sales of Purchased Shares pursuant to the Shelf Registration Statement (as defined below). In connection with any such opinion, the Investor shall provide such certifications as may be reasonably be deemed necessary for the delivery of such opinion. 5. CONDITIONS TO INVESTOR'S OBLIGATIONS AT CLOSING. 5.1 Closing. The obligations of each Investor under Section 2 of this Agreement to purchase the Purchased Shares at the Closing are subject to the fulfillment or 7 8 waiver, on or before the Closing, of each of the following conditions, and the Company shall use all reasonable efforts to cause such conditions to be satisfied on or before the Closing: 5.1.1 Representations and Warranties True. Each of the representations and warranties of the Company contained in Section 3 shall be true and correct on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 5.1.2 Performance. The Company shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing and shall have obtained all approvals, consents and qualifications necessary to complete the purchase and sale described herein. 5.1.3 Compliance Certificate. The Company shall have delivered to the Investors at the Closing a certificate signed on its behalf by its President, Chief Executive Officer, Chief Financial Officer or Secretary certifying that the conditions specified in Sections 5.1.1 and 5.1.2 have been fulfilled. 5.1.4 Registration; Securities Exemptions. The offer and sale of the Purchased Shares to the Investors pursuant to this Agreement shall be exempt from the registration requirements under the Act, as amended, and the rules thereunder and the registration and/or qualification requirements of all other applicable state securities laws (the "Law"). 5.1.5 No Material Change. There shall have been no material adverse change in the Business from the date of this Agreement. 5.1.6 Opinion of Counsel. The Investors shall have received an opinion of counsel to the Company substantially in the form of Exhibit B attached hereto. 6. CONDITIONS TO THE COMPANY'S OBLIGATIONS AT CLOSING. 6.1 Closing. The obligations of the Company under this Agreement to sell the Purchased Shares to the Investors at the Closing are subject to the fulfillment or waiver on or before the Closing of each of the following conditions by the Investor, and each Investor shall use all reasonable efforts to cause such conditions to be satisfied on or before the Closing: 6.1.1 Representations and Warranties. The representations and warranties of the Investor contained in Section 4 shall be true and correct on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 6.1.2 Payment of Purchase Price. The Investor shall have delivered to the Company the purchase price for the Purchased Shares specified for such Investor on the Schedule of Investors attached hereto, in accordance with the provisions of Section 2. 8 9 6.1.3 Registration; Securities Exemptions. The offer and sale of the Purchased Shares to the Investor pursuant to this Agreement shall be exempt from the registration requirements under the Act and shall be exempt from the qualification requirements of the Law and the registration and/or qualification requirements of all other applicable state securities laws. 7. REGISTRATION RIGHTS. 7.1 Definitions. For purposes of this Agreement: (a) Form S-3. The term "Form S-3" means such form under the Act as is in effect on the date hereof or any successor registration form under the Act subsequently adopted by the Commission which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the Commission. (b) Holder. The term "Holders" shall mean holders of Registrable Securities that have registration rights pursuant to this Agreement. (c) Registration. The terms "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement. (d) Registrable Securities. The term "Registrable Securities" means: (1) all of the Purchased Shares, and (2) any shares of Common Stock of the Company issued as a dividend or other distribution with respect to, or in exchange for or in replacement of, any of the Purchased Shares; provided, however, that the term "Registrable Securities" shall exclude in all events (and such securities shall not constitute "Registrable Securities") (i) any Registrable Securities sold or transferred by a person in a transaction in which the registration rights granted under this Agreement are not assigned in accordance with the provisions of this Agreement, (ii) any Registrable Securities sold in a public offering pursuant to a registration statement filed with the Commission or sold pursuant to Rule 144 promulgated under the Act ("Rule 144") or (iii) as to any Holder, the Registrable Securities held by such Holder if all of such Registrable Securities can be publicly sold without volume restriction within a three-month period pursuant to Rule 144. (e) Prospectus: The term "Prospectus" shall mean the prospectus included in any Shelf Registration Statement (including, without limitation, a prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Act), as amended or supplemented by any prospectus supplement (including, without limitation, any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by such Shelf Registration Statement), and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. (f) Shelf Registration Statement. See Section 7.2(a). 9 10 7.2 Form S-3 Shelf Registration. (a) Registration. The Company shall prepare and file with the Commission within 60 days following the Closing and use all reasonable efforts to have declared effective as soon as practicable thereafter, a registration statement on Form S-3 (or, if the Company is not then eligible to use Form S-3, then another appropriate form) providing for the resale by the Holders of all of the Registrable Securities (the "Shelf Registration Statement"). The Shelf Registration Statement may include securities other than those held by Holders. If the Shelf Registration Statement is not declared effective by June 1, 2001 and does not remain effective for 45 continuous days after its effective date (except for the duration of any Blackout Notice as described in Section 7.2(b) below), then the Investors holding Registrable Securities shall be entitled to receive from the Company (pro rata in accordance with their ownership of Registrable Securities) an aggregate number of shares of Common Stock equal to 1% of the number of Purchased Shares for each full month after June 1, 2001, that the Shelf Registration Statement is not declared effective (or does not remain effective), up to a maximum aggregate amount of 5% of the Purchased Shares. The Company shall use its best efforts to keep the Shelf Registration Statement continuously effective (subject to Section 7.2(b)), pursuant to the Act and the Rules and Regulations promulgated thereunder, until (i) the date when such Registrable Securities cease to meet the definition of Registrable Securities pursuant to Section 7.1, or (ii) the Company's obligations hereunder terminate (the "Permitted Window"). In the event that the Shelf Registration Statement shall cease to be effective, the Company shall promptly prepare and file a new registration statement covering the Registrable Securities and shall use its best efforts to have such registration statement declared effective as soon as possible. Any such registration statement shall be considered a "Shelf Registration Statement" hereunder. The registration rights granted hereunder are not subject or subordinate to any prior registration rights granted to any other securityholder of the Company. (b) Blackout Notice. In the event (i) that the Company concludes that it is necessary for the Company to supplement the Prospectus or make an appropriate filing under the Exchange Act so as to cause the Prospectus to become current, or (ii) that, in the reasonable and good faith judgment of the President, Chief Executive Officer or the Company's Board of Directors, it is advisable to suspend use of the Prospectus for a discrete period of time due to material undisclosed pending corporate developments or pending public filings with the Commission (which need not be described in detail), the Company shall deliver a written notice (the "Blackout Notice") to each Holder to the effect of the foregoing and, upon delivery of the Blackout Notice, each Holder shall not sell any Purchased Shares or any other securities of the Company that are held by such Holder, shall not otherwise engage in any other Disposition with respect to the Company's securities, and shall not disclose to any third party that such a notice has been given or the contents of the notice. The Permitted Window shall resume upon the Holders' receipt of copies of the supplemented or amended Prospectus, or at such time as each Holder is advised in writing by the Company that the Prospectus may be used, and at such time as each Holder has received copies of any additional or supplemental filings that are incorporated or deemed incorporated by reference in such Prospectus and which are required to be delivered as part of the Prospectus. In any event, such restrictions shall terminate no later than 45 days after the date of delivery of the Blackout Notice. If the Company has delivered a Blackout Notice within 90 days of the date that it delivers another Blackout Notice pursuant this section, then the 45-day time period set forth in the preceding sentence shall be shortened so that the 10 11 restrictions imposed by the Blackout Notice shall expire no later than 10 days after delivery of such Blackout Notice. (c) Expenses. The registration fees and expenses incurred by the Company in connection with the Shelf Registration Statement and actions taken by the Company in connection with each Permitted Window shall be borne by the Company. Each Holder shall be responsible for any fees and expenses of its counsel or other advisers. 7.3 Obligations of the Company. Whenever required to effect the registration of any Registrable Securities under this Agreement, the Company shall, as expeditiously as reasonably possible: (a) Furnish to each Holder such number of copies of a Prospectus, including a preliminary Prospectus, in conformity with the requirements of the Act, and such other documents as it may reasonably request in order to facilitate the disposition of the Registrable Securities owned by it that are included in such registration. (b) Use all reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (c) Notify each Holder promptly (i) of any request by the Commission or any other federal or state governmental authority during the period of effectiveness of a registration statement for amendments or supplements to such registration statement or related prospectus or for additional information, (ii) of the issuance by the Commission or any other federal or state governmental authority of any stop order suspending the effectiveness of a registration statement or the initiation of any proceedings for that purpose and (iii) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. (d) Make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the Shelf Registration Statement at the earliest possible time. 7.4 Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to Section 7.2 that each Holder shall furnish to the Company such information regarding it, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to timely effect the registration of its Registrable Securities. 7.5 Indemnification. In the event any Registrable Securities are included in a registration statement under this Agreement: (a) By the Company. To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the officers and directors of such Holder, each person, if any, who controls a Holder and any underwriter (as defined in the Act) acting on 11 12 behalf of a Holder (such persons and entities referred to as "Holder Indemnified Parties"), against any losses, expenses, damages or liabilities to which they may become subject under the Act, the Exchange Act or other federal or state law (a "Loss"), insofar as such Losses (or actions in respect thereof) arise out of any claim, action or proceeding brought by a third party arising out of or based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in a registration statement filed pursuant to this Section 7; (ii) the omission or alleged omission to state in a registration statement filed pursuant to this Section 7 a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (iii) any violation or alleged violation by the Company of the Act, the Exchange Act, any federal or state securities law or any rule or regulation promulgated under the Act, the Exchange Act or any federal or state securities law, in each case in connection with the offering covered by such registration statement; and the Company will reimburse each Holder Indemnified Party for any legal or other expenses reasonably incurred by them, as incurred, in connection with investigating or defending any such Violation; provided, however, that the indemnity agreement contained in this subsection shall not apply to amounts paid in settlement of any such Loss, if such settlement is effected without the consent of the Company, nor shall the Company be liable in any such case for any such Loss to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration statement by the Holder Indemnified Party; and provided further, that the Company will not be liable for the reasonable legal fees and expenses of more than one counsel to the Holder Indemnified Parties. (b) By the Holders. To the extent permitted by law, each Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the registration statement, and each person, if any, who controls the Company within the meaning of the Act (such persons and entities referred to as "Company Indemnified Parties") against any Losses to which such Company Indemnified Parties may become subject under the Act, the Exchange Act or other federal or state law, insofar as such Losses (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by the Holders expressly for use in connection with such registration statement; and the Holders will reimburse any legal or other expenses reasonably incurred by such Company Indemnified Parties in connection with investigating or defending any such Violation; provided, however, that the indemnity agreement contained in this subsection shall not apply to amounts paid in settlement of any such Loss if such settlement is effected without the consent of the Holders; provided further, 12 13 that the Holders shall not be liable for the reasonable legal fees and expenses of more than one counsel to the Company Indemnified Parties; and provided further, that the total amounts payable in indemnity by the Holders under this subsection in respect of any Violation shall not exceed the net proceeds received by the Holders in the registered offering out of which such Violation arises. (c) Notice. Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim for indemnification in respect thereof is to be made against any indemnifying party under this Section, deliver to the indemnifying party a written notice of the commencement of such an action and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel selected by the indemnifying party and reasonably acceptable to a majority in interest of the indemnified parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the reasonable fees and expenses to be paid by the indemnifying party, if the indemnified party has been advised in writing by counsel that representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual conflict of interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall relieve such indemnifying party of liability to the indemnified party under this Section to the extent such delay caused material prejudice to the indemnified party, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section. (d) Defect Eliminated in Final Prospectus. The foregoing indemnity agreements of the Company and the Holders are subject to the condition that, insofar as they relate to any Violation made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the Commission at the time the registration statement in question becomes effective or in the amended prospectus filed with the Commission pursuant to Rule 424(b) of the Commission (the "Final Prospectus"), such indemnity agreements shall not inure to the benefit of any person if a copy of the Final Prospectus was furnished in a timely manner to the indemnified party and was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Act. (e) Survival. The obligations of the Company and the Holder under this Section shall survive the completion of any offering of Registrable Securities in a registration statement, and otherwise. 7.6 Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Registrable Securities to the public without registration, for so long as each Holder owns any Registrable Securities, the Company agrees to: (a) Make and keep adequate, current public information available, as those terms are understood and defined in Rule 144 under the Act, at all times; 13 14 (b) File with the Commission in a timely manner all reports and other documents required of the Company under the Exchange Act; and (c) So long as such Holder owns any Registrable Securities, to furnish to such Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company as such Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing the Holder to sell any such securities without registration. 7.7 Termination of the Company's Obligations. The Company shall have no obligation to register, or maintain, a registration statement governing Registrable Securities, (i) if all Registrable Securities have been registered and sold pursuant to registrations effected pursuant to this Agreement, or (ii) with respect to any particular Holder, at such time as all Registrable Securities held by such Holder may be sold without any volume restrictions within a three month period under Rule 144, as it may be amended from time to time, including but not limited to amendments that reduce that period of time that securities must be held before such securities may be sold pursuant to such rule. 7.8 Piggyback Registrations. (a) The Company shall use its best efforts to notify all Holders of Registrable Securities in writing at least twenty (20) days before filing any registration statement under the Act for purposes of effecting an underwritten public offering by the Company of securities of the Company (excluding registration statements relating to any employee benefit plan or a corporate merger, acquisition or reorganization, or any Form S-3 or similar shelf registration statements relating to the non-underwritten offer and sale of securities for the account of persons or entities other than the Company) and will afford each such Holder an opportunity to include in such registration statement all or any part of the Registrable Securities then held by such Holder. Each Holder desiring to include in any such registration statement all or any part of the Registrable Securities held by such Holder shall, within ten (10) days after receipt of the above-described notice from the Company, so notify the Company in writing, and in such notice shall inform the Company of the number of Registrable Securities such Holder wishes to include in such registration statement. If a Holder decides not to include all of its Registrable Securities in any such registration statement filed by the Company, such Holder shall nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein. The Holders' rights to include any Registrable Securities in any offering under this Section are subject in all events to the ability of the managing underwriter for such offering to exclude some or all of the Registrable Securities requested to be registered on the basis of a good faith determination that inclusion of such securities might adversely affect the success of the offering or otherwise adversely affect the Company. Any such exclusion shall be pro rata among all Holders who have requested to sell Registrable Securities in such registration. (b) Underwriting. If a registration statement under which the Company gives notice under this Section is for an underwritten offering, then the Company shall 14 15 so advise the Holders of Registrable Securities. In such event, the right of any such Holder's Registrable Securities to be included in a registration pursuant to this Section shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form with the managing underwriter or underwriters selected for such underwriting and shall furnish such information and documents as the Company or the managing underwriter or underwriters may reasonably request. Notwithstanding any other provision of this Agreement, if the managing underwriter determine(s) in good faith that marketing factors require a limitation of the number of shares to be underwritten, then the managing underwriter(s) may exclude Registrable Securities from the registration and the underwriting, pro rata among all Holders who have requested to sell Registrable Securities in such registration. If any Holder disapproves of the terms of any such underwriting, such Holder may elect to withdraw therefrom by written notice to the Company and the underwriter, delivered at least ten (10) business days prior to the effective date of the registration statement. Any Registrable Securities excluded or withdrawn from such underwriting shall be excluded and withdrawn from the registration. (c) Expenses. The Holders shall be responsible for their pro rata share of registration fees and underwriters' and brokers' discounts and commissions relating to any Registrable Securities included in such registration. Other registration expenses (such as legal and accounting fees of counsel to the Company, printing fees, road show expenses, and the like) shall be shall be borne by the Company. (d) Number of Piggyback Registrations. The piggyback registration rights granted to the Holders under this Section shall apply to the first three registrations filed by the Company after the Closing (excluding any registrations filed under Section 7.2 of this Agreement.. 8. ASSIGNMENT. Notwithstanding anything herein to the contrary, the registration rights of a Holder under Section 7 hereof may be assigned only to a party who acquires from such Holder at least 375,000 shares of Registrable Securities (as such number may be adjusted to reflect subdivisions, combinations and stock dividends of the Company's Common Stock), (such party is referred to as an "Assignee"); provided, however, that (i) no party may be assigned any of the foregoing rights until the Company is given written notice by the assigning party at the time of such assignment stating the name and address of the Assignee and identifying the securities of the Company as to which the rights in question are being assigned; (ii) that any such Assignee shall receive such assigned rights subject to all the terms and conditions of this Agreement; and (iii) no such assignment or assignments shall increase the obligations of the Company hereunder. 9. MISCELLANEOUS. 9.1 Survival of Warranties. The representations, warranties and covenants of the Company and the Investors contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing and shall in no way be affected by 15 16 any investigation of the subject matter thereof made by or on behalf of the Investors, their counsel or the Company, as the case may be. 9.2 Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. 9.3 Governing Law; Consent to Jurisdiction. This Agreement shall be governed by and construed under the internal laws of the State of Delaware as applied to agreements among Delaware residents entered into and to be performed entirely within Delaware, without reference to principles of conflict of laws or choice of laws. 9.4 Counterparts. This Agreement may be executed in two or more counterparts and by facsimile, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 9.5 Headings. The headings and captions used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. All references in this Agreement to sections, paragraphs, exhibits and schedules shall, unless otherwise provided, refer to sections and paragraphs hereof and exhibits and schedules attached hereto, all of which exhibits and schedules are incorporated herein by this reference. 9.6 Notices. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified, by telecopier or upon deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified in the case of the Company, at 15210 N. Scottsdale Rd., Suite 300, Scottsdale, Arizona 85254, Attn: Robert T. Vivian with a copy to Gray Cary Ware & Freidenrich LLP, 4365 Executive Drive, Suite 1600, San Diego, CA 92121, Attn: Cameron Jay Rains, Esq., or in the case of Investor, at the record address for such Investor as reflected on the books of the Company, or at such other address as any party may designate by giving ten (10) days advance written notice to the other party. Notices shall be deemed delivered upon delivery if personally delivered, one business day after transmission with confirmation of receipt if sent by telecopier, or three days after deposit in the mails if mailed. 9.7 No Finder's Fees. Each party represents that it neither is nor will be obligated for any finder's or broker's fee or commission in connection with this transaction. Each Investor agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finder's or broker's fee (and any asserted liability) for which the Investor or any of its officers, partners, employees, or representatives is responsible. The Company agrees to indemnify and to hold harmless each Investor from any liability for any commission or compensation in the nature of a finder's or broker's fee (and any asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 9.8 Costs, Expenses. Each party's costs in connection with the preparation, execution delivery and performance of this Agreement (including without limitation legal fees) shall be borne by that party. 16 17 9.9 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Investors holding a majority of the Purchased Shares purchased hereunder; provided, however, that no amendment or waiver of the Company's obligations under Section 7 of this Agreement that significantly and adversely affects the rights of a holder of Purchased Shares shall be binding upon that holder unless that holder has consented in writing to such amendment or waiver. Subject to the limitations set forth in the preceding sentence, any amendment or waiver effected in accordance with this Section shall be binding upon each holder of any Purchased Shares at the time outstanding (even if such Investor or other holder did not vote with respect to, or voted against, such amendment or waiver), each future holder of such securities, and the Company. The Investors acknowledge that by virtue of this provision, holders of a majority of the Purchased Shares may bind other holders to amendment or waivers that such other holders may have voted to oppose. 9.10 Severability. If one or more provisions of this Agreement are held to be invalid, illegal or unenforceable under applicable law, such provision(s) shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision(s) were so excluded and shall be enforceable in accordance with its terms. 9.11 Entire Agreement. This Agreement, together with any exhibits or schedules hereto, constitutes the entire agreement and understanding of the parties with respect to the subject matter hereof and supersedes any and all prior negotiations, correspondence, agreements, understandings duties or obligations between the parties with respect to the subject matter hereof. 9.12 Further Assurances. From and after the date of this Agreement, upon the request of an Investor or the Company, the Company and the Investors shall execute and deliver such instruments, documents or other writings as may be reasonably necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 17 18 IN WITNESS WHEREOF, the parties hereto have executed this Common Stock Purchase Agreement as of the date first above written. THE COMPANY: INVESTOR: P.F. Chang's China Bistro, Inc., SMALLCAP World Fund, Inc. a Delaware corporation By: Capital Research and Management Company, its investment adviser By: By: ---------------------------- ---------------------------- Name: Name: Michael J. Downer ---------------------------- ---------------------------- Title: Title: Secretary ---------------------------- ---------------------------- American Funds Insurance Series - Global Small Capitalization Fund By: Capital Research and Management Company, its investment adviser By: ---------------------------- Name: Michael J. Downer ---------------------------- Title: Secretary ---------------------------- [COUNTERPART SIGNATURE PAGE COMMON STOCK PURCHASE AGREEMENT] 18 19 INVESTOR: T. Rowe Price New Horizons Fund, Inc. By: ---------------------------- Name: ---------------------------- Title: ---------------------------- [COUNTERPART SIGNATURE PAGE COMMON STOCK PURCHASE AGREEMENT] 19 20 Exhibit A Schedule Of Investors

Total Name # of Shares Price Per Share Consideration - ---- ----------- --------------- ------------- SMALLCAP World Fund, Inc. 675,000 $32.667 $22,050,225 American Funds Insurance Series - 75,000 $32.667 $2,450,025 Global Small Capitalization Fund T. Rowe Price New Horizons Fund, 500,000 $32.667 $16,333,500 Inc.

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EX-10.1

   1
                         P.F. CHANG'S CHINA BISTRO, INC.
                         COMMON STOCK PURCHASE AGREEMENT


      THIS COMMON STOCK PURCHASE AGREEMENT (this "Agreement") is made and
entered into as of January 11, 2001 by and among P.F. Chang's China Bistro,
Inc., a Delaware corporation (the "Company"), and the parties listed on the
Schedule of Investors attached hereto as Exhibit A (the "Schedule of Investors")
(each hereinafter individually referred to as an "Investor" and collectively
referred to as the "Investors").

      1. AGREEMENT TO PURCHASE AND SELL STOCK.

            1.1 Authorization. As of the Closing (as defined below) the Company
will have authorized the issuance, pursuant to the terms and conditions of this
Agreement, of up to one million five hundred thousand (1,500,000) shares of the
Company's Common Stock, $.001 par value (the "Common Stock").

            1.2 Agreement to Purchase and Sell. The Company agrees to sell to
each Investor at the Closing, and each Investor agrees, severally and not
jointly, to purchase from the Company at the Closing, the number of shares of
Common Stock for the aggregate price set forth beside such Investor's name on
the Schedule of Investors, at the price per share for such Investor set forth on
the Schedule of Investors. The shares of Common Stock purchased and sold
pursuant to this Agreement will be collectively hereinafter referred to as the
"Purchased Shares."

      2. CLOSING.

            2.1 The Closing. The purchase and sale of the Purchased Shares will
take place at the offices of Gray Cary Ware & Freidenrich LLP, 4365 Executive
Drive, Suite 1600, San Diego, CA 92121, at 10:00 AM local San Diego time on
January 11, 2001, or at such other time and place as the Company and Investors
who have agreed to purchase a majority of the Purchased Shares listed on the
Schedule of Investors mutually agree upon (which time and place are referred to
in this Agreement as the "Closing"), provided that the Closing may not be
delayed for more than five business days without the consent of all Investors.
At the Closing, the Company will deliver to each Investor a certificate
representing the number of Purchased Shares that such Investor has agreed to
purchase hereunder as shown on the Schedule of Investors against delivery to the
Company by such Investor of the full purchase price of such Purchased Shares,
paid by (i) a check payable to the Company's order, (ii) wire transfer of funds
to the Company or (iii) any combination of the foregoing.

      3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to each Investor that, except as set forth in the
Disclosure Schedule (the "Disclosure Schedule") separately delivered by the
Company to the Investors (which Disclosure Schedule shall be deemed to be
representations and warranties to the Investors by the Company under this
Section and to qualify each of the representations and warranties set forth
herein), the statements in the following paragraphs of this Section 3 are all
true and correct:


                                       1
   2
            3.1 Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, and has all requisite corporate power and authority to
conduct its business as currently conducted. The Company is qualified to do
business as a foreign corporation in each jurisdiction where failure to be so
qualified could reasonably be expected to have a material adverse effect on the
business, assets, financial condition or results of operations or assets of the
Company (the "Business") (such effect referred to as a "Material Adverse
Effect").

            3.2   Capitalization.  Immediately before the Closing the
capitalization of the Company will consist of the following:

                  (a)   Preferred Stock.  A total of 10,000,000 authorized
shares of Preferred Stock, $.001 par value per share (the "Preferred Stock"),
none of which are issued and outstanding.

                  (b) Common Stock. A total of 20,000,000 authorized shares of
Common Stock, of which approximately 10,432,900 shares were issued and
outstanding as of December 31, 2000. There are no stockholder agreements, voting
agreements or other similar agreements with respect to the Common Stock to which
the Company is a party, or to the knowledge of the Company, between or among any
of the Company's stockholders.

                  (c) Options, Warrants, Reserved Shares. Except for: (i) the
approximately 1,418,542 shares of Common Stock issuable upon exercise of options
outstanding as of December 31, 2000, (ii) approximately 157,500 additional
shares of Common Stock reserved for issuance under the Company's 1998 Stock
Option Plan, (iii) approximately 354,000 additional shares of Common Stock
reserved for issuance under the Company's Employee Stock Purchase Plan and (iv)
a warrant to purchase an aggregate of approximately 62,190 shares of Common
Stock issued to Bank of America, there are not outstanding any options,
warrants, rights or agreements for the purchase or acquisition from the Company
of any shares of its capital stock or any securities convertible into or
ultimately exchangeable or exercisable for any shares of the Company's capital
stock.

            3.3 Subsidiaries. Except for the subsidiaries of the Company listed
on the Disclosure Schedule, each of which is not a "significant subsidiary" as
defined in Rule 1-02 of Regulation S-X, the Company does not presently own or
control, directly or indirectly, any interest in any other corporation,
partnership, trust, joint venture, association, or other entity.

            3.4 Due Authorization; No Violation. All corporate action on the
part of the Company and its officers, directors and stockholders necessary for
the authorization, execution and delivery of, and the performance of all
obligations of the Company under, this Agreement, and the authorization,
issuance, reservation for issuance and delivery of all of the Purchased Shares
being sold under this Agreement, has been taken or will be taken prior to the
Closing, and this Agreement constitutes a valid and legally binding obligation
of the Company, enforceable against the Company in accordance with its terms,
except as enforceability may be limited by (i) applicable bankruptcy,
insolvency, reorganization or other laws of general application relating to or
affecting the enforcement of creditors' rights generally and (ii) the effect of
rules of law governing the availability of equitable remedies. Neither the
execution, delivery or performance


                                       2
   3
by the Company of this Agreement nor the consummation by the Company of the
transactions contemplated hereby will (i) conflict with or result in a breach of
any provision of the Company's Amended and Restated Certificate of Incorporation
or the Company's Bylaws, (ii) conflict with, result in a violation or breach of,
or cause a default (or give rise to any right of termination, cancellation or
acceleration) under any of the terms, conditions or provisions of any agreement,
instrument or obligation to which the Company is a party, which default could
reasonably be expected to have a Material Adverse Effect or (iii) violate any
law, statute, rule or regulation or judgment, order, writ, injunction or decree
of any governmental authority, in each case applicable to the Company or its
properties or assets and which, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect.

            3.5 Valid Issuance of Stock. The Purchased Shares, when issued, sold
and delivered in accordance with the terms of this Agreement for the
consideration provided for herein, will be duly and validly issued, fully paid
and nonassessable and are not subject to preemptive or other similar rights of
any stockholder of the Company.

            3.6 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the valid execution and delivery of
this Agreement, the offer, sale and issuance of the Purchased Shares, or the
consummation of the transactions contemplated by this Agreement, except for
qualifications or filings under the Securities Act of 1933, as amended (the
"Act") and the applicable rules and regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") under the Act, and all
other applicable securities laws as may be required in connection with the
transactions contemplated by this Agreement. All such qualifications will be
effective on the Closing, and all such filings be made within the time
prescribed by law.

            3.7 Absence of Changes. After the respective dates as of which
information is given in the Company's Proxy Statement for the annual meeting of
stockholders held on April 26, 2000, the Company's Annual Report on Form 10-K
for the period ended January 2, 2000, and the Company's Quarterly Report on Form
10-Q for the quarter ended October 1, 2000, respectively (such documents,
together with the Disclosure Schedule, referred to collectively as the
"Disclosure Documents"), there has not been (i) any material adverse change in
the Business, (ii) any transaction or event that is material to the Company,
(iii) any obligation, direct or contingent, that is material to the Company,
incurred by the Company, (iv) any change in the outstanding indebtedness of the
Company that is material to the Company, (v) any dividend declared, paid or made
on the capital stock of the Company, (vi) any loss or damage (whether or not
insured) to the property of the Company which has been sustained which could
reasonably be expected to have a Material Adverse Effect, or (vii) any material
change in the accounting methods or practices followed by the Company.

            3.8 Litigation. There is no action, suit, proceeding, claim,
arbitration or investigation ("Action") pending (or, to the Company's knowledge,
currently threatened) against the Company, its activities, properties or assets,
which (i) might prevent the consummation of the transactions contemplated hereby
or (ii) if adversely resolved against the Company could reasonably be expected
to have a Material Adverse Effect.


                                       3
   4
            3.9 Nasdaq Listing. The Common Stock is registered pursuant to
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and is listed on the Nasdaq Stock Market (Nasdaq National Market). The
Company has not received any notification that the Commission or the National
Association of Securities Dealers, Inc. is contemplating the termination of such
registration or listing. Before the Shelf Registration Statement (as defined in
Section 7.2) is declared effective by the Commission, the Purchased Shares will,
if required by the listing rules of the Nasdaq Stock Market, have been approved
for quotation on the Nasdaq Stock Market, subject to notice of issuance.

            3.10 Exchange Act Filings. The Company has filed in a timely manner
all reports and other information required to be filed ("Filings") with the
Commission pursuant to the Exchange Act during the preceding twelve calendar
months. On their respective dates of filing, the Filings complied as to form in
all material respects with the requirements of the Exchange Act, and the
published rules and regulations of the Commission promulgated thereunder. On
their respective dates of filing, the Filings did not include any untrue
statement of a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were made,
not misleading, and all financial statements contained in the Filings fairly
present the financial position of the Company on the dates of such statements
and the results of operations for the periods covered thereby in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved and prior periods, except as otherwise indicated in the notes
to such financial statements.

            3.11 Disclosure. The representations and warranties made by the
Company in this Agreement (including the Disclosure Schedule) and the Filings
when read together do not contain any untrue statement of a material fact and do
not omit to state a material fact necessary to make the statements herein as a
whole not misleading.

            3.12 Governmental Permits, Etc. The Company possesses all licenses,
franchises, governmental approvals, permits or other governmental authorizations
(collectively, "Authorizations") relating to the operation of the Business,
except for those Authorizations the failure of which to possess would not,
separately or in the aggregate, have a Material Adverse Effect. To the Company's
knowledge, the Company is in compliance with the terms of all Authorizations and
all laws, ordinances, regulations and decrees which to the Company's knowledge
are applicable to the Business, except for such non-compliance which does not,
separately or in the aggregate, have a Material Adverse Effect.

            3.13 Insurance. The Company is covered by insurance with companies
the Company believes to be responsible and in such amounts and covering such
risks as it believes to be adequate for the conduct of its Business and the
value of its properties and which, it believes, is customary for companies
engaged in similar businesses in similar industries. The Company has no
knowledge that any such carrier has grounds or intends to cancel or fail to
renew such policies.

            3.14 Intellectual Property. To the Company's knowledge after
reasonable investigation, the Company owns or possesses the patents, patent
rights, licenses, inventions, copyrights, know-how (including trade secrets and
other unpatented and/or unpatentable proprietary or confidential information,
systems or procedures) and other rights or interests in


                                       4
   5
items of intellectual property as are necessary for the operation of the
Business operated by it (the "Patent and Proprietary Rights"), except where the
failure to own or possess such rights would not have a Material Adverse Effect;
the Company has not received notice of any asserted rights with respect to any
of the Patent and Proprietary Rights which, if determined unfavorably with
respect to the interests of the Company would have a Material Adverse Effect;
and the Company has not received notice or is otherwise aware of any
infringement of or conflict with asserted rights of others with respect to any
of the Patent or Proprietary Rights, which infringement or conflict (if the
subject of any unfavorable decision, ruling or finding), individually or in the
aggregate, would result in a Material Adverse Effect.

            3.15 Employees. The Company is not aware that any officer or key
employee, or that any group of key employees, intends to terminate their
employment with the Company, nor does the Company have any present intention to
terminate the employment of any officer, key employee or group of key employees.

      4. REPRESENTATIONS, WARRANTIES AND CERTAIN AGREEMENTS OF INVESTORS. Each
Investor hereby represents and warrants to, and agrees with, the Company, that:

            4.1 Authorization. All corporate action on the part of the Investor
and its officers, directors and stockholders necessary for the authorization,
execution and delivery of, and the performance of all obligations of the
Investor under, this Agreement has been taken or will be taken prior to the
Closing, and this Agreement constitutes a valid and legally binding obligation
of the Investor, enforceable against the Investor in accordance with its terms,
except as enforceability may be limited by (i) applicable bankruptcy,
insolvency, reorganization or other laws of general application relating to or
affecting the enforcement of creditors' rights generally and (ii) the effect of
rules of law governing the availability of equitable remedies.

            4.2 Purchase for Own Account. The Purchased Shares to be purchased
by such Investor hereunder will be acquired for investment for such Investor's
own account, not as a nominee or agent, and not with a view to the public resale
or distribution thereof within the meaning of the Act, and such Investor has no
present intention of selling, granting any participation in, or otherwise
distributing the same. If not an individual, such Investor also represents that
such Investor has not been formed for the specific purpose of acquiring
Purchased Shares.

            4.3 Disclosure of Information. The Investor has received a copy of
the Disclosure Documents and has received or has had full access to all the
information it considers necessary or appropriate to make an informed investment
decision with respect to the Purchased Shares to be purchased by the Investor
under this Agreement. Investor further has had an opportunity to ask questions
and receive answers from the Company regarding the terms and conditions of the
offering of the Purchased Shares and to obtain additional information (to the
extent the Company possessed such information or could acquire it without
unreasonable effort or expense) necessary to verify any information furnished to
the Investor or to which the Investor had access. The foregoing, however, does
not in any way limit or modify the representations and warranties made by the
Company in Section 3.


                                       5
   6
            4.4 Investment Experience. Such Investor understands that the
purchase of the Purchased Shares involves substantial risk. Such Investor: (i)
has experience as an investor in securities of companies in the development
stage and acknowledges that such Investor is able to fend for itself, can bear
the economic risk of such Investor's investment in the Purchased Shares and has
such knowledge and experience in financial or business matters that such
Investor is capable of evaluating the merits and risks of this investment in the
Purchased Shares and protecting its own interests in connection with this
investment or (ii) has a preexisting personal or business relationship with the
Company and certain of its officers, directors or controlling persons of a
nature and duration that enables such Investor to be aware of the character,
business acumen and financial circumstances of such persons.

            4.5 Accredited Investor Status. Unless otherwise expressly indicated
on the Schedule of Investors to this Agreement, such Investor is an "accredited
investor" within the meaning of Regulation D promulgated under the Act.

            4.6 Restricted Securities. Such Investor understands that the
Purchased Shares are characterized as "restricted securities" under the Act
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under the Act and the Rules and Regulations
such securities may be resold without registration under the Act only in certain
limited circumstances. In this connection, such Investor represents that such
Investor is familiar with Rule 144 of the Commission and understands the resale
limitations imposed thereby and by the Act. Such Investor understands that the
Company is under no obligation to register any of the Purchased Shares except as
provided in Section 7 below.

            4.7 Further Limitations on Disposition. Without in any way limiting
the representations set forth above, such Investor further agrees not to make
any disposition of all or any portion of the Purchased Shares unless and until:

                  (a) there is then in effect a registration statement under the
Act covering such proposed disposition and such disposition is made in
accordance with such registration statement and the provisions of Section 7 of
this Agreement; or

                  (b) (i) such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a statement of
the circumstances surrounding the proposed disposition, and (ii) such Investor
shall have furnished the Company, at the expense of such Investor or its
transferee, with an opinion of counsel, reasonably satisfactory to the Company,
that such disposition will not require registration of such securities under the
Act.

            Notwithstanding the provisions of paragraphs (a) and (b) above, no
such registration statement or opinion of counsel shall be required: (i) for any
routine transfer of any Purchased Shares in compliance with Rule 144 or Rule
144A (except that an opinion of counsel may be required for other than routine
Rule 144 transactions), or (ii) for any transfer of Purchased Shares by an
Investor that is a partnership or a corporation to (A) a partner of such
partnership or stockholder of such corporation, or (B) the estate of any such
partner or stockholder, or (iii) for the transfer by gift, will or intestate
succession by any Investor to his or her spouse or lineal descendants or
ancestors or any trust for any of the foregoing; provided, that


                                       6
   7
in each of the foregoing cases the transferee agrees in writing to be subject to
the terms of this Section 4 (other than Section 4.5) to the same extent as if
the transferee were an original Investor hereunder.

            4.8 Legends. It is understood that the certificates evidencing the
Purchased Shares will bear the legends set forth below:

                  (a) THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE
SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS
ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE
REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD
OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED
TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.

                  (b) THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO
THE PROVISIONS OF, AND MAY HAVE CERTAIN REGISTRATION RIGHTS PURSUANT TO, THE
PROVISIONS OF A PURCHASE AGREEMENT BETWEEN THE COMPANY AND THE HOLDER, WHICH MAY
RESTRICT THE TRANSFER OF SUCH SHARES IN CERTAIN CIRCUMSTANCES. A COPY OF SUCH
AGREEMENT MAY BE OBTAINED, WITHOUT CHARGE, AT THE COMPANY'S PRINCIPAL OFFICE.

                  (c) After consultation with counsel for the Investor, any
legend that counsel to the Company reasonably deems appropriate under the laws
of the State of Delaware.

      The legends set forth in (a) and (b) above shall, upon the request of an
Investor, be promptly removed by the Company from any certificate evidencing
Purchased Shares upon delivery to the Company of an opinion of counsel to the
Company, that the legended security can be freely transferred in a public sale
without a registration statement being in effect under the Act and in compliance
with exemption requirements under applicable state securities laws and that such
transfer will not jeopardize the exemption or exemptions from registration
pursuant to which the Company issued the Purchased Shares; provided, however,
that no such opinion shall be required in connection with routine sales of
Purchased Shares pursuant to the Shelf Registration Statement (as defined
below). In connection with any such opinion, the Investor shall provide such
certifications as may be reasonably be deemed necessary for the delivery of such
opinion.

      5.    CONDITIONS TO INVESTOR'S OBLIGATIONS AT CLOSING.

            5.1 Closing. The obligations of each Investor under Section 2 of
this Agreement to purchase the Purchased Shares at the Closing are subject to
the fulfillment or


                                       7
   8
waiver, on or before the Closing, of each of the following conditions, and the
Company shall use all reasonable efforts to cause such conditions to be
satisfied on or before the Closing:

                  5.1.1 Representations and Warranties True. Each of the
representations and warranties of the Company contained in Section 3 shall be
true and correct on and as of the Closing with the same effect as though such
representations and warranties had been made on and as of the Closing.

                  5.1.2 Performance. The Company shall have performed and
complied with all agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing and shall have obtained all approvals, consents and qualifications
necessary to complete the purchase and sale described herein.

                  5.1.3 Compliance Certificate. The Company shall have delivered
to the Investors at the Closing a certificate signed on its behalf by its
President, Chief Executive Officer, Chief Financial Officer or Secretary
certifying that the conditions specified in Sections 5.1.1 and 5.1.2 have been
fulfilled.

                  5.1.4 Registration; Securities Exemptions. The offer and sale
of the Purchased Shares to the Investors pursuant to this Agreement shall be
exempt from the registration requirements under the Act, as amended, and the
rules thereunder and the registration and/or qualification requirements of all
other applicable state securities laws (the "Law").

                  5.1.5 No Material Change.  There shall have been no
material adverse change in the Business from the date of this Agreement.

                  5.1.6 Opinion of Counsel. The Investors shall have received an
opinion of counsel to the Company substantially in the form of Exhibit B
attached hereto.

      6. CONDITIONS TO THE COMPANY'S OBLIGATIONS AT CLOSING.

            6.1 Closing. The obligations of the Company under this Agreement to
sell the Purchased Shares to the Investors at the Closing are subject to the
fulfillment or waiver on or before the Closing of each of the following
conditions by the Investor, and each Investor shall use all reasonable efforts
to cause such conditions to be satisfied on or before the Closing:

                  6.1.1 Representations and Warranties. The representations and
warranties of the Investor contained in Section 4 shall be true and correct on
and as of the Closing with the same effect as though such representations and
warranties had been made on and as of the Closing.

                  6.1.2 Payment of Purchase Price. The Investor shall have
delivered to the Company the purchase price for the Purchased Shares specified
for such Investor on the Schedule of Investors attached hereto, in accordance
with the provisions of Section 2.


                                       8
   9

                  6.1.3 Registration; Securities Exemptions. The offer and sale
of the Purchased Shares to the Investor pursuant to this Agreement shall be
exempt from the registration requirements under the Act and shall be exempt from
the qualification requirements of the Law and the registration and/or
qualification requirements of all other applicable state securities laws.

      7. REGISTRATION RIGHTS.

            7.1   Definitions.  For purposes of this Agreement:

                  (a) Form S-3. The term "Form S-3" means such form under the
Act as is in effect on the date hereof or any successor registration form under
the Act subsequently adopted by the Commission which permits inclusion or
incorporation of substantial information by reference to other documents filed
by the Company with the Commission.

                  (b) Holder. The term "Holders" shall mean holders of
Registrable Securities that have registration rights pursuant to this Agreement.

                  (c) Registration. The terms "register," "registered," and
"registration" refer to a registration effected by preparing and filing a
registration statement in compliance with the Act, and the declaration or
ordering of effectiveness of such registration statement.

                  (d) Registrable Securities. The term "Registrable Securities"
means: (1) all of the Purchased Shares, and (2) any shares of Common Stock of
the Company issued as a dividend or other distribution with respect to, or in
exchange for or in replacement of, any of the Purchased Shares; provided,
however, that the term "Registrable Securities" shall exclude in all events (and
such securities shall not constitute "Registrable Securities") (i) any
Registrable Securities sold or transferred by a person in a transaction in which
the registration rights granted under this Agreement are not assigned in
accordance with the provisions of this Agreement, (ii) any Registrable
Securities sold in a public offering pursuant to a registration statement filed
with the Commission or sold pursuant to Rule 144 promulgated under the Act
("Rule 144") or (iii) as to any Holder, the Registrable Securities held by such
Holder if all of such Registrable Securities can be publicly sold without volume
restriction within a three-month period pursuant to Rule 144.

                  (e) Prospectus: The term "Prospectus" shall mean the
prospectus included in any Shelf Registration Statement (including, without
limitation, a prospectus that discloses information previously omitted from a
prospectus filed as part of an effective registration statement in reliance upon
Rule 430A promulgated under the Act), as amended or supplemented by any
prospectus supplement (including, without limitation, any prospectus supplement
with respect to the terms of the offering of any portion of the Registrable
Securities covered by such Shelf Registration Statement), and all other
amendments and supplements to the Prospectus, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such Prospectus.

                  (f)   Shelf Registration Statement.  See Section 7.2(a).


                                       9
   10
            7.2   Form S-3 Shelf Registration.

                  (a) Registration. The Company shall prepare and file with the
Commission within 60 days following the Closing and use all reasonable efforts
to have declared effective as soon as practicable thereafter, a registration
statement on Form S-3 (or, if the Company is not then eligible to use Form S-3,
then another appropriate form) providing for the resale by the Holders of all of
the Registrable Securities (the "Shelf Registration Statement"). The Shelf
Registration Statement may include securities other than those held by Holders.
If the Shelf Registration Statement is not declared effective by June 1, 2001
and does not remain effective for 45 continuous days after its effective date
(except for the duration of any Blackout Notice as described in Section 7.2(b)
below), then the Investors holding Registrable Securities shall be entitled to
receive from the Company (pro rata in accordance with their ownership of
Registrable Securities) an aggregate number of shares of Common Stock equal to
1% of the number of Purchased Shares for each full month after June 1, 2001,
that the Shelf Registration Statement is not declared effective (or does not
remain effective), up to a maximum aggregate amount of 5% of the Purchased
Shares. The Company shall use its best efforts to keep the Shelf Registration
Statement continuously effective (subject to Section 7.2(b)), pursuant to the
Act and the Rules and Regulations promulgated thereunder, until (i) the date
when such Registrable Securities cease to meet the definition of Registrable
Securities pursuant to Section 7.1, or (ii) the Company's obligations hereunder
terminate (the "Permitted Window"). In the event that the Shelf Registration
Statement shall cease to be effective, the Company shall promptly prepare and
file a new registration statement covering the Registrable Securities and shall
use its best efforts to have such registration statement declared effective as
soon as possible. Any such registration statement shall be considered a "Shelf
Registration Statement" hereunder. The registration rights granted hereunder are
not subject or subordinate to any prior registration rights granted to any other
securityholder of the Company.

                  (b) Blackout Notice. In the event (i) that the Company
concludes that it is necessary for the Company to supplement the Prospectus or
make an appropriate filing under the Exchange Act so as to cause the Prospectus
to become current, or (ii) that, in the reasonable and good faith judgment of
the President, Chief Executive Officer or the Company's Board of Directors, it
is advisable to suspend use of the Prospectus for a discrete period of time due
to material undisclosed pending corporate developments or pending public filings
with the Commission (which need not be described in detail), the Company shall
deliver a written notice (the "Blackout Notice") to each Holder to the effect of
the foregoing and, upon delivery of the Blackout Notice, each Holder shall not
sell any Purchased Shares or any other securities of the Company that are held
by such Holder, shall not otherwise engage in any other Disposition with respect
to the Company's securities, and shall not disclose to any third party that such
a notice has been given or the contents of the notice. The Permitted Window
shall resume upon the Holders' receipt of copies of the supplemented or amended
Prospectus, or at such time as each Holder is advised in writing by the Company
that the Prospectus may be used, and at such time as each Holder has received
copies of any additional or supplemental filings that are incorporated or deemed
incorporated by reference in such Prospectus and which are required to be
delivered as part of the Prospectus. In any event, such restrictions shall
terminate no later than 45 days after the date of delivery of the Blackout
Notice. If the Company has delivered a Blackout Notice within 90 days of the
date that it delivers another Blackout Notice pursuant this section, then the
45-day time period set forth in the preceding sentence shall be shortened so
that the


                                       10
   11
restrictions imposed by the Blackout Notice shall expire no later than 10 days
after delivery of such Blackout Notice.

                  (c) Expenses. The registration fees and expenses incurred by
the Company in connection with the Shelf Registration Statement and actions
taken by the Company in connection with each Permitted Window shall be borne by
the Company. Each Holder shall be responsible for any fees and expenses of its
counsel or other advisers.

            7.3 Obligations of the Company. Whenever required to effect the
registration of any Registrable Securities under this Agreement, the Company
shall, as expeditiously as reasonably possible:

                  (a) Furnish to each Holder such number of copies of a
Prospectus, including a preliminary Prospectus, in conformity with the
requirements of the Act, and such other documents as it may reasonably request
in order to facilitate the disposition of the Registrable Securities owned by it
that are included in such registration.

                  (b) Use all reasonable efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.

                  (c) Notify each Holder promptly (i) of any request by the
Commission or any other federal or state governmental authority during the
period of effectiveness of a registration statement for amendments or
supplements to such registration statement or related prospectus or for
additional information, (ii) of the issuance by the Commission or any other
federal or state governmental authority of any stop order suspending the
effectiveness of a registration statement or the initiation of any proceedings
for that purpose and (iii) of the receipt by the Company of any notification
with respect to the suspension of the qualification or exemption from
qualification of any of the Registrable Securities for sale in any jurisdiction
or the initiation or threatening of any proceeding for such purpose.

                  (d) Make every reasonable effort to obtain the withdrawal of
any order suspending the effectiveness of the Shelf Registration Statement at
the earliest possible time.

            7.4 Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to Section 7.2 that each
Holder shall furnish to the Company such information regarding it, the
Registrable Securities held by it, and the intended method of disposition of
such securities as shall be required to timely effect the registration of its
Registrable Securities.

            7.5   Indemnification.  In the event any Registrable Securities
are included in a registration statement under this Agreement:

                  (a) By the Company. To the extent permitted by law, the
Company will indemnify and hold harmless each Holder, the officers and directors
of such Holder, each person, if any, who controls a Holder and any underwriter
(as defined in the Act) acting on


                                       11
   12
behalf of a Holder (such persons and entities referred to as "Holder Indemnified
Parties"), against any losses, expenses, damages or liabilities to which they
may become subject under the Act, the Exchange Act or other federal or state law
(a "Loss"), insofar as such Losses (or actions in respect thereof) arise out of
any claim, action or proceeding brought by a third party arising out of or based
upon any of the following statements, omissions or violations (collectively a
"Violation"):

                  (i) any untrue statement or alleged untrue statement of a
            material fact contained in a registration statement filed pursuant
            to this Section 7;

                  (ii) the omission or alleged omission to state in a
            registration statement filed pursuant to this Section 7 a material
            fact required to be stated therein, or necessary to make the
            statements therein not misleading; or

                  (iii) any violation or alleged violation by the Company of the
            Act, the Exchange Act, any federal or state securities law or any
            rule or regulation promulgated under the Act, the Exchange Act or
            any federal or state securities law, in each case in connection with
            the offering covered by such registration statement;


and the Company will reimburse each Holder Indemnified Party for any legal or
other expenses reasonably incurred by them, as incurred, in connection with
investigating or defending any such Violation; provided, however, that the
indemnity agreement contained in this subsection shall not apply to amounts paid
in settlement of any such Loss, if such settlement is effected without the
consent of the Company, nor shall the Company be liable in any such case for any
such Loss to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration statement by the Holder
Indemnified Party; and provided further, that the Company will not be liable for
the reasonable legal fees and expenses of more than one counsel to the Holder
Indemnified Parties.

                  (b) By the Holders. To the extent permitted by law, each
Holder will indemnify and hold harmless the Company, each of its directors, each
of its officers who have signed the registration statement, and each person, if
any, who controls the Company within the meaning of the Act (such persons and
entities referred to as "Company Indemnified Parties") against any Losses to
which such Company Indemnified Parties may become subject under the Act, the
Exchange Act or other federal or state law, insofar as such Losses (or actions
in respect thereto) arise out of or are based upon any Violation, in each case
to the extent (and only to the extent) that such Violation occurs in reliance
upon and in conformity with written information furnished by the Holders
expressly for use in connection with such registration statement; and the
Holders will reimburse any legal or other expenses reasonably incurred by such
Company Indemnified Parties in connection with investigating or defending any
such Violation; provided, however, that the indemnity agreement contained in
this subsection shall not apply to amounts paid in settlement of any such Loss
if such settlement is effected without the consent of the Holders; provided
further,


                                       12
   13
that the Holders shall not be liable for the reasonable legal fees and expenses
of more than one counsel to the Company Indemnified Parties; and provided
further, that the total amounts payable in indemnity by the Holders under this
subsection in respect of any Violation shall not exceed the net proceeds
received by the Holders in the registered offering out of which such Violation
arises.

                  (c) Notice. Promptly after receipt by an indemnified party
under this Section of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim for
indemnification in respect thereof is to be made against any indemnifying party
under this Section, deliver to the indemnifying party a written notice of the
commencement of such an action and the indemnifying party shall have the right
to participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume the defense
thereof with counsel selected by the indemnifying party and reasonably
acceptable to a majority in interest of the indemnified parties; provided,
however, that an indemnified party shall have the right to retain its own
counsel, with the reasonable fees and expenses to be paid by the indemnifying
party, if the indemnified party has been advised in writing by counsel that
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual conflict of interests
between such indemnified party and any other party represented by such counsel
in such proceeding. The failure to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any such action shall
relieve such indemnifying party of liability to the indemnified party under this
Section to the extent such delay caused material prejudice to the indemnified
party, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section.

                  (d) Defect Eliminated in Final Prospectus. The foregoing
indemnity agreements of the Company and the Holders are subject to the condition
that, insofar as they relate to any Violation made in a preliminary prospectus
but eliminated or remedied in the amended prospectus on file with the Commission
at the time the registration statement in question becomes effective or in the
amended prospectus filed with the Commission pursuant to Rule 424(b) of the
Commission (the "Final Prospectus"), such indemnity agreements shall not inure
to the benefit of any person if a copy of the Final Prospectus was furnished in
a timely manner to the indemnified party and was not furnished to the person
asserting the loss, liability, claim or damage at or prior to the time such
action is required by the Act.

                  (e) Survival. The obligations of the Company and the Holder
under this Section shall survive the completion of any offering of Registrable
Securities in a registration statement, and otherwise.

            7.6 Rule 144 Reporting. With a view to making available the benefits
of certain rules and regulations of the Commission which may at any time permit
the sale of the Registrable Securities to the public without registration, for
so long as each Holder owns any Registrable Securities, the Company agrees to:

                  (a) Make and keep adequate, current public information
available, as those terms are understood and defined in Rule 144 under the Act,
at all times;


                                       13
   14
                  (b)   File with the Commission in a timely manner all
reports and other documents required of the Company under the Exchange Act;
and

                  (c) So long as such Holder owns any Registrable Securities, to
furnish to such Holder forthwith upon request a written statement by the Company
as to its compliance with the reporting requirements of said Rule 144, a copy of
the most recent annual or quarterly report of the Company, and such other
reports and documents of the Company as such Holder may reasonably request in
availing itself of any rule or regulation of the Commission allowing the Holder
to sell any such securities without registration.

            7.7 Termination of the Company's Obligations. The Company shall have
no obligation to register, or maintain, a registration statement governing
Registrable Securities, (i) if all Registrable Securities have been registered
and sold pursuant to registrations effected pursuant to this Agreement, or (ii)
with respect to any particular Holder, at such time as all Registrable
Securities held by such Holder may be sold without any volume restrictions
within a three month period under Rule 144, as it may be amended from time to
time, including but not limited to amendments that reduce that period of time
that securities must be held before such securities may be sold pursuant to such
rule.

            7.8   Piggyback Registrations.

                  (a) The Company shall use its best efforts to notify all
Holders of Registrable Securities in writing at least twenty (20) days before
filing any registration statement under the Act for purposes of effecting an
underwritten public offering by the Company of securities of the Company
(excluding registration statements relating to any employee benefit plan or a
corporate merger, acquisition or reorganization, or any Form S-3 or similar
shelf registration statements relating to the non-underwritten offer and sale of
securities for the account of persons or entities other than the Company) and
will afford each such Holder an opportunity to include in such registration
statement all or any part of the Registrable Securities then held by such
Holder. Each Holder desiring to include in any such registration statement all
or any part of the Registrable Securities held by such Holder shall, within ten
(10) days after receipt of the above-described notice from the Company, so
notify the Company in writing, and in such notice shall inform the Company of
the number of Registrable Securities such Holder wishes to include in such
registration statement. If a Holder decides not to include all of its
Registrable Securities in any such registration statement filed by the Company,
such Holder shall nevertheless continue to have the right to include any
Registrable Securities in any subsequent registration statement or registration
statements as may be filed by the Company with respect to offerings of its
securities, all upon the terms and conditions set forth herein. The Holders'
rights to include any Registrable Securities in any offering under this Section
are subject in all events to the ability of the managing underwriter for such
offering to exclude some or all of the Registrable Securities requested to be
registered on the basis of a good faith determination that inclusion of such
securities might adversely affect the success of the offering or otherwise
adversely affect the Company. Any such exclusion shall be pro rata among all
Holders who have requested to sell Registrable Securities in such registration.

                  (b) Underwriting. If a registration statement under which the
Company gives notice under this Section is for an underwritten offering, then
the Company shall


                                       14
   15
so advise the Holders of Registrable Securities. In such event, the right of any
such Holder's Registrable Securities to be included in a registration pursuant
to this Section shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders proposing to distribute
their Registrable Securities through such underwriting shall enter into an
underwriting agreement in customary form with the managing underwriter or
underwriters selected for such underwriting and shall furnish such information
and documents as the Company or the managing underwriter or underwriters may
reasonably request. Notwithstanding any other provision of this Agreement, if
the managing underwriter determine(s) in good faith that marketing factors
require a limitation of the number of shares to be underwritten, then the
managing underwriter(s) may exclude Registrable Securities from the registration
and the underwriting, pro rata among all Holders who have requested to sell
Registrable Securities in such registration. If any Holder disapproves of the
terms of any such underwriting, such Holder may elect to withdraw therefrom by
written notice to the Company and the underwriter, delivered at least ten (10)
business days prior to the effective date of the registration statement. Any
Registrable Securities excluded or withdrawn from such underwriting shall be
excluded and withdrawn from the registration.

                  (c) Expenses. The Holders shall be responsible for their pro
rata share of registration fees and underwriters' and brokers' discounts and
commissions relating to any Registrable Securities included in such
registration. Other registration expenses (such as legal and accounting fees of
counsel to the Company, printing fees, road show expenses, and the like) shall
be shall be borne by the Company.

                  (d) Number of Piggyback Registrations. The piggyback
registration rights granted to the Holders under this Section shall apply to the
first three registrations filed by the Company after the Closing (excluding any
registrations filed under Section 7.2 of this Agreement..

      8. ASSIGNMENT. Notwithstanding anything herein to the contrary, the
registration rights of a Holder under Section 7 hereof may be assigned only to a
party who acquires from such Holder at least 375,000 shares of Registrable
Securities (as such number may be adjusted to reflect subdivisions, combinations
and stock dividends of the Company's Common Stock), (such party is referred to
as an "Assignee"); provided, however, that (i) no party may be assigned any of
the foregoing rights until the Company is given written notice by the assigning
party at the time of such assignment stating the name and address of the
Assignee and identifying the securities of the Company as to which the rights in
question are being assigned; (ii) that any such Assignee shall receive such
assigned rights subject to all the terms and conditions of this Agreement; and
(iii) no such assignment or assignments shall increase the obligations of the
Company hereunder.

      9. MISCELLANEOUS.

            9.1 Survival of Warranties. The representations, warranties and
covenants of the Company and the Investors contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closing and shall in no way be affected by


                                       15
   16
any investigation of the subject matter thereof made by or on behalf of the
Investors, their counsel or the Company, as the case may be.

            9.2 Successors and Assigns. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties.

            9.3 Governing Law; Consent to Jurisdiction. This Agreement shall be
governed by and construed under the internal laws of the State of Delaware as
applied to agreements among Delaware residents entered into and to be performed
entirely within Delaware, without reference to principles of conflict of laws or
choice of laws.

            9.4 Counterparts. This Agreement may be executed in two or more
counterparts and by facsimile, each of which shall be deemed an original, but
all of which together shall constitute one and the same instrument.

            9.5 Headings. The headings and captions used in this Agreement are
used for convenience only and are not to be considered in construing or
interpreting this Agreement. All references in this Agreement to sections,
paragraphs, exhibits and schedules shall, unless otherwise provided, refer to
sections and paragraphs hereof and exhibits and schedules attached hereto, all
of which exhibits and schedules are incorporated herein by this reference.

            9.6 Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified, by
telecopier or upon deposit with the United States Post Office, by registered or
certified mail, postage prepaid and addressed to the party to be notified in the
case of the Company, at 15210 N. Scottsdale Rd., Suite 300, Scottsdale, Arizona
85254, Attn: Robert T. Vivian with a copy to Gray Cary Ware & Freidenrich LLP,
4365 Executive Drive, Suite 1600, San Diego, CA 92121, Attn: Cameron Jay Rains,
Esq., or in the case of Investor, at the record address for such Investor as
reflected on the books of the Company, or at such other address as any party may
designate by giving ten (10) days advance written notice to the other party.
Notices shall be deemed delivered upon delivery if personally delivered, one
business day after transmission with confirmation of receipt if sent by
telecopier, or three days after deposit in the mails if mailed.

            9.7 No Finder's Fees. Each party represents that it neither is nor
will be obligated for any finder's or broker's fee or commission in connection
with this transaction. Each Investor agrees to indemnify and to hold harmless
the Company from any liability for any commission or compensation in the nature
of a finder's or broker's fee (and any asserted liability) for which the
Investor or any of its officers, partners, employees, or representatives is
responsible. The Company agrees to indemnify and to hold harmless each Investor
from any liability for any commission or compensation in the nature of a
finder's or broker's fee (and any asserted liability) for which the Company or
any of its officers, employees or representatives is responsible.

            9.8 Costs, Expenses. Each party's costs in connection with the
preparation, execution delivery and performance of this Agreement (including
without limitation legal fees) shall be borne by that party.


                                       16
   17
            9.9 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and Investors
holding a majority of the Purchased Shares purchased hereunder; provided,
however, that no amendment or waiver of the Company's obligations under Section
7 of this Agreement that significantly and adversely affects the rights of a
holder of Purchased Shares shall be binding upon that holder unless that holder
has consented in writing to such amendment or waiver. Subject to the limitations
set forth in the preceding sentence, any amendment or waiver effected in
accordance with this Section shall be binding upon each holder of any Purchased
Shares at the time outstanding (even if such Investor or other holder did not
vote with respect to, or voted against, such amendment or waiver), each future
holder of such securities, and the Company. The Investors acknowledge that by
virtue of this provision, holders of a majority of the Purchased Shares may bind
other holders to amendment or waivers that such other holders may have voted to
oppose.

            9.10 Severability. If one or more provisions of this Agreement are
held to be invalid, illegal or unenforceable under applicable law, such
provision(s) shall be excluded from this Agreement and the balance of the
Agreement shall be interpreted as if such provision(s) were so excluded and
shall be enforceable in accordance with its terms.

            9.11 Entire Agreement. This Agreement, together with any exhibits or
schedules hereto, constitutes the entire agreement and understanding of the
parties with respect to the subject matter hereof and supersedes any and all
prior negotiations, correspondence, agreements, understandings duties or
obligations between the parties with respect to the subject matter hereof.

            9.12 Further Assurances. From and after the date of this Agreement,
upon the request of an Investor or the Company, the Company and the Investors
shall execute and deliver such instruments, documents or other writings as may
be reasonably necessary or desirable to confirm and carry out and to effectuate
fully the intent and purposes of this Agreement.


              [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]


                                       17
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      IN WITNESS WHEREOF, the parties hereto have executed this Common Stock
Purchase Agreement as of the date first above written.

THE COMPANY:                                 INVESTOR:

P.F. Chang's China Bistro, Inc.,             SMALLCAP World Fund, Inc.
  a Delaware corporation
                                          By: Capital Research and Management
                                              Company, its investment adviser



By:                                          By:
       ----------------------------                 ----------------------------
Name:                                        Name:  Michael J. Downer
       ----------------------------                 ----------------------------
Title:                                       Title:    Secretary
       ----------------------------                 ----------------------------
                                             American Funds Insurance Series -
                                             Global Small Capitalization Fund


                                          By:  Capital Research and Management
                                             Company, its investment adviser


                                             By:
                                                    ----------------------------
                                             Name:  Michael J. Downer
                                                    ----------------------------
                                             Title:    Secretary
                                                    ----------------------------


                         [COUNTERPART SIGNATURE PAGE
                       COMMON STOCK PURCHASE AGREEMENT]


                                       18
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                                             INVESTOR:

                                          T. Rowe Price New Horizons Fund,
                                          Inc.




                                             By:
                                                    ----------------------------
                                             Name:
                                                    ----------------------------
                                             Title:
                                                    ----------------------------


                         [COUNTERPART SIGNATURE PAGE
                       COMMON STOCK PURCHASE AGREEMENT]


                                       19
   20
                                    Exhibit A

                              Schedule Of Investors



                                                                        Total
Name                                # of Shares     Price Per Share  Consideration
- ----                                -----------     ---------------  -------------
                                                            
SMALLCAP World Fund, Inc.             675,000        $32.667          $22,050,225

American Funds Insurance Series -      75,000        $32.667          $2,450,025
Global Small Capitalization Fund

T. Rowe Price New Horizons Fund,      500,000        $32.667          $16,333,500
Inc.