e10vq

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 þ No o

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

As of September 29, 2002, there were outstanding 24,949,538 shares of the Registrant’s Common Stock.

As of September 29, 2002, P.F. Chang’s China Bistro, Inc. owned and operated 73 full service restaurants throughout the United States under the name of “P.F. Chang’s China Bistro.” We also owned and operated 15 limited service restaurants 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 accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States, have been condensed or omitted pursuant to such SEC rules and regulations. Operating results for the nine month period ended September 29, 2002 are not necessarily indicative of the results that may be expected for the year ending December 29, 2002.

The balance sheet at December 30, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the financial statements and notes thereto for the fiscal year ended December 30, 2001 included in our Form 10-K.

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 outstanding under our stock option plans and outstanding warrants. There were no shares excluded from the net income per share computation due to their anti-dilutive effect for the quarter ended September 30, 2001 nor for the nine months ended September 30, 2001. The weighted average number of options that were anti-dilutive for the three and nine months ended September 29, 2002 was 330,000 and 68,000, respectively.

For purposes of computing net income per share, the number of common shares has been restated to reflect a dividend of one share of common stock for each share of common stock outstanding, paid on May 1, 2002 to stockholders of record as of April 17, 2002. All references to the number of shares, per share amounts and any other reference to the shares in the financial statements and the accompanying notes, unless otherwise noted, have been adjusted to reflect the dividend on a retroactive basis. Previously awarded stock options and other stock programs have been adjusted to reflect the stock dividend.

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 P.F. Chang’s 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. P.F. Chang’s was in compliance with these restrictions and conditions as of September 29, 2002. A portion of our assets serve as collateral for the credit facility. We had no borrowings under the credit facility as of September 29, 2002.

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (SFAS 141), Business Combinations, and No. 142 (SFAS 142), Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized, but will be subject to annual impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives.

P.F. Chang’s adopted the standard effective January 1, 2002. The standard affects the treatment of goodwill acquired in the purchase of interests in various restaurants at the formation of the Company. In accordance with SFAS 142, P.F. Chang’s ceased amortizing goodwill totaling $6.8 million as of that date. Had the standard been in effect for the three month period ended September 30, 2001, net income would have increased by $71,000, resulting in no impact in basic or diluted net income per share. Had the standard been in effect for the nine months ended September 30, 2001, net income would have increased by $218,000, resulting in no impact in basic net income per share and a one cent increase in diluted net income per share.

P.F. Chang’s is required to perform goodwill impairment tests on an annual basis at a minimum and more frequently under certain circumstances. As of September 29, 2002, no impairment of goodwill has been recognized. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings.

Intangible assets consist of the excess of fair market value over cost as a result of the acquisition of certain minority partnership interests in the operating rights of certain of P.F. Chang’s partnerships and/or operating restaurants. Intangible assets are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally fifteen years. Amortization expense of intangible assets totaled $102,000 and $307,000 for the three and nine months ended September 29, 2002 and $25,000 and $38,000 for the three and nine months ended September 30, 2001. Estimated amortization expense for intangible assets as of September 29, 2002 for each of the five succeeding fiscal years is as follows: 2002 — $476,000; and for 2003 — 2006, $417,000 for each year.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement establishes a single accounting model for long-lived assets to be disposed of by sale and resolves significant implementation issues related to SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” and is effective for fiscal years beginning after December 15, 2001 with earlier adoption encouraged. P.F. Chang’s adoption of SFAS 144 had no effect on the Company’s financial position or results of operation.

At September 29, 2002, P.F. Chang’s took advantage of additional tax deductions available relating to the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options. Accordingly, for the nine months ended September 29, 2002, P.F. Chang’s recorded a $11.4 million increase to equity with a corresponding $11.4 million reduction to income tax liability. Quarterly adjustments for the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options may vary as they relate to the actions of the option holder or shareholder.

During the third quarter of 2002, P.F. Chang’s executed employment agreements with the Chief Executive Officer, Richard Federico; the President of P.F. Chang’s China Bistro, Inc., Robert Vivian; and the President of Pei Wei Asian Diner, Inc., Russell Owens. The term for these agreements is three years and the agreements prohibit Mr. Federico, Mr. Vivian and Mr. Owens from competing with P.F. Chang’s China Bistro and Pei Wei Asian Diner in the area of Chinese and Asian food concepts during the term of the agreements and for one year after termination.

Certain prior year amounts have been reclassified to conform to the current period presentation.

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. These forward-looking statements 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.

As of September 29, 2002, we owned and operated 73 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 President, 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.

We also owned and operated 15 limited service restaurants as of September 29, 2002. 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 P.F. Chang’s China Bistro. Pei Wei opened its first unit in July 2000 in the Phoenix, Arizona area, four units in 2001 (three in Phoenix and one in the Dallas, Texas area) and 10 additional units in the nine months ended September 29, 2002 (five in Phoenix, two in Southern California and three in Texas).

We intend to open 14 new Bistros by the end of 2002, eight of which were open by the end of the third quarter of 2002. In 2003, we intend to develop 15 to 17 new Bistros. The majority of full service units that we intend to develop in 2002 and 2003 will be located in new markets across the United States. We have signed lease agreements or letters of intent for all of our development planned for fiscal 2003. 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 $2.3 million and total invested capital of approximately $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. See “Risk Factors — Development and Construction Risks.”

We also intend to develop 11 Pei Wei restaurants by the end of 2002, ten of which were open by the end of the third quarter of 2002. These new Pei Wei units will be in the Phoenix, Dallas and Southern California markets. In 2003, we intend to develop 13 to 15 new Pei Wei restaurants, both in existing markets as well as three new markets (Houston, Denver and Las Vegas). We have signed leases or letters of intent for our development planned for fiscal 2003. Our Pei Wei restaurants are generally 2,800 to 3,200 square feet in size and require an average total cash investment of approximately $750,000 and total invested capital of approximately $1.3 million per restaurant. Preopening expenses at Pei Wei are expected to total approximately $110,000 per restaurant.

Elimination of minority interests represents the portion of our net earnings or losses which is attributable to the collective ownership interests of our partners. 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

The following table sets forth certain unaudited quarterly information for the three months ended September 30, 2001 and September 29, 2002 and for the nine months ended September 30, 2001 and September 29, 2002, 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.

P.F. Chang’s revenues are derived entirely from food and beverage sales. Revenues increased by $26.5 million, or 32.9%, to $107.1 million in the three months ended September 29, 2002 from $80.6 million in the three months ended September 30, 2001. Revenues increased by $76.8 million, or 33.5%, to $306.2 million in the nine months ended September 29, 2002 from $229.4 million in the nine months ended September 30, 2001. The increase in third quarter 2002 revenues compared to third quarter 2001 revenues was primarily attributable to revenues of $17.1 million generated by new restaurants (both Bistro and Pei Wei) opened subsequent to September 30, 2001 and a $9.4 million increase in revenues in the three months ended September 29, 2002 for existing restaurants (both Bistro and Pei Wei). Increased customer visits at the Bistro produced sales gains of 5.5% for comparable restaurants (stores open for at least eighteen months) in this period. The increase in revenues for the nine months ended September 29, 2002 compared to the nine months ended September 30, 2001 was primarily attributable to revenues of $37.0 million generated by new restaurants opened subsequent to September 30, 2001, and a $39.8 million increase in revenues in the nine months ended September 29, 2002 for existing restaurants (both Bistro and Pei Wei). Increased customer visits as well as a modest price increase at the Bistro in the last half of the second quarter of 2001 produced sales gains of 5.4% in the nine months ended September 29, 2002 for comparable restaurants.

Cost of sales. Cost of sales is composed of the cost of food and beverages. Cost of sales decreased as a percentage of revenues to 26.7% in the three months ended September 29, 2002 compared to 27.0% for the three months ended September 30, 2001. Cost of sales decreased as a percentage of revenues to 26.7% for the nine months ended September 29, 2002 as compared to 27.3% for the nine months ended September 30, 2001. The decrease in cost of sales in both periods is due primarily to a decrease in seafood costs.

Labor. Labor expenses consist of restaurant management salaries, hourly staff payroll costs, workers compensation and health insurance costs as well as other payroll-related items. Labor expenses as a percentage of revenues increased to 31.9% in the three months ended September 29, 2002 from 30.4% in the three months ended September 30, 2001. Labor expenses increased to 31.7% in the nine months ended September 29, 2002 from 30.4% in the nine months ended September 30, 2001. The increase in labor expenses was primarily due to higher workers compensation and health insurance costs, higher hourly wage rates in California and the additional impact of increased Pei Wei labor expenses associated with the seven new restaurants opened during the three months ended September 29, 2002 and the ten new restaurants opened during the nine months ended September 29, 2002.

Operating. Operating expenses consist primarily of various fixed and variable restaurant-level costs, including utility expenses, advertising costs and other facility-related items. Operating expenses as a percentage of revenues decreased to 17.0% in the three months ended September 29, 2002 from 17.2% in the three months ended September 30, 2001. This decrease was due primarily to the sales leverage achieved on the portion of these operating costs that are fixed in nature. Operating expenses decreased to 16.7% in the nine months ended September 29, 2002 from 17.1% in the nine months ended September 30, 2001. This decrease was due primarily to reduced utility costs as a percentage of revenues as well as sales leverage achieved on the portion of these operating costs that are fixed in nature.

Occupancy. Occupancy costs include both fixed and variable portions of rent, common area maintenance charges, property and general liability insurance and property taxes. Occupancy costs as a percentage of revenues decreased to 6.0% in the three months ended September 29, 2002 from 6.4% in the three months ended September 30, 2001 and to 6.1% in the nine months ended September 29, 2002 from 6.3% in the nine months ended September 30, 2001 due primarily to sales leverage obtained on occupancy costs that are fixed in nature and more favorable lease terms associated with new restaurants, both of which were partially offset by higher property and general liability insurance costs.

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 $5.3 million (5.0% of revenues) in the three months ended September 29, 2002 from $4.1 million (5.1% of revenues) in the three months ended September 30, 2001. General and administrative expenses increased to $15.7 million (5.1% of revenues) in the nine months ended September 29, 2002 from $11.9 million (5.2% of revenues) in the nine months ended September 30, 2001. The increase was due primarily to the addition of corporate management personnel for both the Bistro and Pei Wei which resulted in approximately $874,000 and $2.6 million of additional compensation and benefits expense for the three and nine months ended September 29, 2002, respectively, as well as additional costs to support a larger restaurant base, including additional accounting and legal fees and insurance costs. Additionally, the company accrued $750,000 during the first nine months of 2002 for an operations team management function to be held in fiscal 2003 assuming that certain sales goals are achieved by the company. If these sales goals are met, an additional amount (estimated to total $250,000) will be accrued in the fourth quarter of fiscal 2002. If the sales goals are not met, the company will hold no function and therefore will reverse the accrual as an expense reduction in the fourth quarter of 2002.

Depreciation and amortization. Depreciation and amortization expenses include the depreciation of fixed assets and the amortization of certain intangibles associated with the acquisition of ownership interests in our restaurants. Depreciation and amortization increased to $3.7 million in the three months ended September 29, 2002 from $2.8 million in the three months ended September 30, 2001. Depreciation and amortization increased to $10.5 million in the nine months ended September 29, 2002 from $8.0 million in the nine months ended September 30, 2001. The increase was primarily due to depreciation and amortization on fixed assets purchased for new restaurants opened subsequent to September 30, 2001 totaling approximately $629,000 and $1.3 million for the three and nine months ended September 29, 2002, respectively; as well as a full three and nine months’ worth of depreciation and amortization on fixed assets in restaurants opened during the first three quarters of 2001.

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 September 29, 2002 increased to $2.3 million from $1.7 million in the three months ended September 30, 2001 and increased to $4.4 million in the nine months ended September 29, 2002 from $3.7 million in the nine months ended September 30, 2001. The majority of the increase was due to the addition of seven new Pei Wei restaurants in the three months ended September 29, 2002 as compared to none added in the three months ended September 30, 2001 and the addition of ten new Pei Wei restaurants in the nine months ended September 29, 2002 as compared to one added in the nine months ended September 30, 2001.

Interest income (expense), net. Interest income (expense) decreased to $33,000 in the three months ended September 29, 2002 from $169,000 in the three months ended September 30, 2001. Interest income (expense) decreased to $6,000 in the nine months ended September 29, 2002 from $823,000 in the nine months ended September 30, 2001. The decrease was a result of lower interest earned on our cash reserves given current interest rates, offset by interest expense incurred on our outstanding debt at higher interest rates.

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, certain of our general managers and certain of our executive chefs. Elimination of minority interests increased to $1.5 million (1.4% of revenues) for the three months ended September 29, 2002 from $1.3 million (1.7% of revenues) for the three months ended September 30, 2001. Elimination of minority interests increased to $4.6 million (1.5% of revenues) for the nine months ended September 29, 2002 from $3.9 million (1.7% of revenues) for the nine months ended September 30, 2001. The increase in dollars was due primarily to the addition of new restaurants and an increase in the operating profit of those restaurants. The decrease as a percentage of sales was due primarily to the purchase of certain of our minority partners’ interests.

The provision for income taxes increased to $2.4 million (approximately 35% of pre-tax income) for the three months ended September 29, 2002 from $2.0 million (approximately 36% of pre-tax income) for the three months ended September 30, 2001 and increased to $7.7 million (approximately 35% of pre-tax income) for the nine months ended September 29, 2002 from $6.1 million (approximately 36% of pre-tax income) for the nine months ended September 30, 2001. The dollar increase in the tax provision was due primarily to higher profitability of our current restaurants. The decrease in the tax rates as a percentage of pre-tax income and the variance from the expected provision for income taxes derived by applying the statutory income tax rate is due primarily to state income tax benefits and wage related tip credits for both periods.

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 $37.2 million and $30.9 million for the nine months ended September 29, 2002 and September 30, 2001, respectively. Net cash provided by operating activities exceeded net income for the nine months ended September 29, 2002 due principally to the effect of minority interest and depreciation and amortization as well as an increase in income tax liability that was satisfied by the tax benefit of stock option exercises recorded in equity. Net cash provided by operating activities exceeded net income for the nine months ended September 30, 2001 due principally to the effect of minority interest and depreciation and amortization as well as an increase in income tax liability that was partially satisfied by the tax benefit of stock option exercises recorded in equity and an increase in accounts payable.

We use cash primarily to fund the development and construction of new restaurants. Net cash used in investing activities for the nine months ended September 29, 2002 and September 30, 2001 was $35.5 million and $42.2 million, respectively. Capital expenditures made up the majority of our investing activities in both periods. In the nine months ended September 30, 2001, investing activities also included a significant purchase of short-term investments. We intend to open 14 new Bistros in 2002, eight of which were open as of September 29, 2002. We also intend to open 11 new Pei Wei restaurants in 2002, ten of which were open as of September 29, 2002. We expect that our planned future Bistro restaurants will require, on average, a total cash investment per restaurant of approximately $2.3 million. Preopening expenses are expected to average approximately $325,000 per Bistro restaurant. We anticipate that each Pei Wei restaurant will require, on average, a total cash investment of $750,000 and will incur preopening costs of approximately $110,000. Any unexpected delays in construction, labor shortages, or other factors could result in higher than anticipated preopening costs.

Net cash used in financing activities for the nine months ended September 29, 2002 was $801,000 compared to net cash provided by financing activities for the nine months ended September 30, 2001 of $23.5 million. Financing activities in the first nine months of 2002 consisted principally of distributions to minority partners as well as the repayment of high interest rate debt, offset by proceeds from stock options exercised and employee stock purchases. Financing activities in the first nine months of 2001 consisted principally of net proceeds from the $40.8 million private equity placement that took place in January of 2001 offset by the repayment of our $15.0 million in borrowings on our credit facility and 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. Any borrowings made 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. P.F. Chang’s was in compliance with these restrictions and conditions as of

September 29, 2002. A portion of P.F. Chang’s assets serves as collateral for the credit facility. 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. We had no borrowings outstanding under the credit facility as of September 29, 2002.

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 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 2003 and 2004. 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 stockholders. We can not assure you that such capital will be available on favorable terms, if at all.

P.F. Chang’s has implemented a partnership structure to facilitate the development, leadership and operation of its restaurants. Each partner is required to make a capital contribution in exchange for a specified interest in the restaurant or region the partner is employed to manage. The ownership interest purchased by each partner generally ranges between two and seven percent of the restaurant or region the partner oversees. At the end of a specific term (generally five years), P.F. Chang’s has the right, but not the obligation, to purchase the minority partner’s interest in the partner’s respective restaurant or region at fair market value. Fair market value is determined by reference to current industry purchase metrics as well as the discounted cash flows of the subject restaurant’s/region’s financial results. We have the option to pay the agreed upon purchase price in cash or common stock of the company over a period of time not to exceed five years. Pei Wei Asian Diner has a similar partnership structure.

As of September 29, 2002, there were 113 partners within the P.F. Chang’s China Bistro, Inc. system. During the nine months ended September 29, 2002, we purchased the interests of six of our minority partners for a total of approximately $4.5 million, of which the majority was recorded as intangibles in accordance with accounting principles generally accepted in the United States and will be amortized over generally 15 years. Approximately $1.4 million of the total purchase price was paid in cash while the remaining balance has been recorded as amounts due to related parties on the balance sheet at September 29, 2002. During the remainder of 2002, we will have the opportunity to purchase two additional partnership interests. If both of these interests were fully purchased, the total purchase price would approximate $1.0 to $2.0 million based upon the estimated fair value of the respective interests at September 29, 2002. Such amounts are subject to change based upon changes in the estimated fair value of the respective interests from September 29, 2002 through the date of purchase.

We operated 73 full service, or Bistro, restaurants and 15 limited service, or Pei Wei, restaurants, as of September 29, 2002, 25 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.

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 88 restaurants as of September 29, 2002. We expect to open 14 Bistros and 11 Pei Wei restaurants in 2002 and 15 to 17 Bistros and 13 to 15 Pei Wei restaurants in 2003. 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.

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.

Each P.F. Chang’s full service and each Pei Wei 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


	•	labor disputes;

	•	shortages of materials and skilled labor;

	•	weather interference;

	•	unforeseen engineering problems;

	•	environmental problems;

	•	construction or zoning problems;

	•	local government regulations;

	•	modifications in design to the size and scope of the projects; and

	•	other unanticipated increases in costs, any of which could give rise to delays or cost overruns.

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.

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.

Our country remains in a recessionary environment and we believe that these weak general economic conditions will continue through 2002 and into 2003. As the economy struggles, we are concerned that our customers may become more apprehensive about the economy and reduce their level of discretionary spending. We believe that a decrease in discretionary spending could impact the frequency with which our customers choose to dine out or the amount they spend on meals while dining out, thereby decreasing our revenues. Additionally, the recent terrorist attacks on the United States and its interests abroad, continued military responses to the attacks, possible future terrorist attacks as well as the continued volatility in the United States stock markets may exacerbate current economic conditions and lead to further weakening in the economy. Adverse economic conditions and any related decrease in discretionary spending by our customers could have an adverse effect on our revenues and operating results.

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.”

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.

Any inability to successfully compete with the other restaurants in our markets will 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 $6.25 per hour effective January 1, 2001 to $6.75 per hour effective January 1, 2002. 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 success will continue to be highly dependent on our key operating officers and employees. We must continue to attract, retain and motivate a sufficient number of qualified management and operating personnel, including regional managers, general managers and executive chefs, 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

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 Distribution Marketing Advantage as the primary distributor of our food. Distribution Marketing Advantage is a cooperative of multiple food distributors located throughout the nation. We have a non-exclusive, short-term, renewable contract with Distribution Marketing Advantage on terms and conditions which we believe are consistent with those made available to similarly situated restaurant companies. Any increase in distribution prices or failure to perform by the Distribution Marketing Advantage 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 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.

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 experienced significant increase in utility prices over the past year. If these increases continue, they will have an adverse effect on our profitability.

The cost of workers compensation insurance, general liability insurance and health insurance have risen significantly in the past year and are expected to continue to increase in 2002 and 2003. These increases could have a negative impact on our profitability if we are not able to negate the effect of such increases by continuing to improve upon operating efficiencies.

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 17% of our revenues at the Bistro and 3% 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.

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.

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. We may 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.

We believe that the market risk associated with our market risk sensitive instruments as of September 29, 2002 is not material, and therefore, disclosure is not required.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), within 90 days of the filing date of this report. Based on their evaluation, our principal executive officer and principal accounting officer concluded that our disclosure controls and procedures are effective.

There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph above.

We were not involved in any material legal proceedings as of September 29, 2002.

P.F. Chang’s declared a dividend of one share of common stock for each outstanding share of common stock, paid on May 1, 2002 to stockholders of record on April 17, 2002.


#	Incorporated by reference to the Registrant’s Form 10-Q filed on April 25, 2002.

*	Incorporated by reference to the Registrant’s Form 10-Q filed on October 24, 2001.

No reports on Form 8-K have been filed by the Registrant during the nine months ended September 29, 2002.

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 October 23, 2002.


	By:	/s/ RICHARD L. FEDERICO



	Richard L. 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.


	1. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:


	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


	2. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


	3. The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: October 23, 2002


	/s/ RICHARD L. FEDERICO

	Chairman and Chief Executive Officer


	1. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:


	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


	2. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


	3. The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


#	Incorporated by reference to the Registrant’s Form 10-Q filed on April 25, 2002.

*	Incorporated by reference to the Registrant’s Form 10-Q filed on October 24, 2001.


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

		For the quarterly period ended September 29, 2002

or

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

		For the transition period from to .


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

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


PART I FINANCIAL INFORMATION
	Item 1. Unaudited 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
	Item 4. Controls and Procedures
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
SIGNATURES
INDEX TO EXHIBITS
EX-10.18
EX-10.19
EX-10.20
EX-99.1
EX-99.2


			Note 1
			December 30,		September 29,
			2001		2002

					(Unaudited)

			(In thousands)
ASSETS
Current assets:
	Cash and cash equivalents		$	20,799	$	21,683
	Short-term investments			13,300		15,300
	Receivables			1,960		1,991
	Inventories			2,066		2,188
	Current portion of notes receivable from related parties			145		86
	Income tax deposits			—		4,314
	Prepaids and other current assets			1,346		1,849

Total current assets				39,616		47,411
Construction-in-progress				6,137		13,168
Property and equipment, net				114,020		128,617
Goodwill				6,819		6,819
Intangibles, net				1,773		5,877
Notes receivable from related parties, less current portion				100		—
Other assets				4,565		3,199

		Total assets	$	173,030	$	205,091

LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	5,764	$	6,512
	Construction payable			2,656		2,268
	Accrued payroll			4,396		5,630
	Sales and use tax payable			2,244		2,207
	Property tax payable			2,157		2,774
	Accrued insurance			2,023		1,111
	Accrued rent			2,171		2,564
	Other accrued expenses			2,101		2,871
	Income tax liability			1,190		—
	Unearned revenue			4,150		3,276
	Current portion of long-term debt, including $264,000 and $1,633,000 due to related parties at December 30, 2001 and September 29, 2002, respectively			448		1,633

Total current liabilities				29,300		30,846
Long-term debt, including $458,000 and $1,506,000 due to related parties at December 30, 2001 and September 29, 2002, respectively				1,644		1,506
Deferred income tax liability				3,360		2,520
Interests of minority members and partners in consolidated limited liability companies and partnerships				1,891		2,364
Common stockholders’ equity:
	Common stock, $0.001 par value, 40,000,000 shares
	Authorized: 23,895,566 shares issued and outstanding at December 30, 2001 and 24,949,538 at September 29, 2002			24		25
	Additional paid-in capital			110,617		127,212
	Retained earnings			26,194		40,618

Total common stockholders’ equity				136,835		167,855

Total liabilities and common stockholders’ equity			$	173,030	$	205,091



			Three Months Ended						Nine Months Ended

			September 30,			September 29,			September 30,			September 29,
			2001			2002			2001			2002


			(Unaudited)

			(In thousands, except per share)
Revenues			$	80,555		$	107,052		$	229,432		$	306,202
Costs and expenses:
Restaurant operating costs:
	Cost of sales			21,774			28,631			62,674			81,784
	Labor			24,492			34,187			69,637			96,992
	Operating			13,875			18,191			39,122			51,249
	Occupancy			5,118			6,426			14,429			18,769

		Total restaurant operating costs		65,259			87,435			185,862			248,794
	General and administrative			4,121			5,304			11,869			15,720
	Depreciation and amortization			2,816			3,673			7,981			10,495
	Preopening			1,657			2,340			3,662			4,438

Income from operations				6,702			8,300			20,058			26,755
Interest income (expense), net				169			33			823			6

Income before elimination of minority members’ and partners’ interests and provision for income taxes				6,871			8,333			20,881			26,761
Elimination of minority members’ and partners’ interests				(1,339	)		(1,547	)		(3,929	)		(4,602	)

Income before provision for income taxes				5,532			6,786			16,952			22,159
Provision for income taxes				(1,964	)		(2,369	)		(6,104	)		(7,749	)

Net income			$	3,568		$	4,417		$	10,848		$	14,410

Net income per share:
	Basic		$	0.15		$	0.18		$	0.46		$	0.59

	Diluted		$	0.14		$	0.17		$	0.43		$	0.56

Weighted average shares used in computation:
	Basic			23,860			24,944			23,670			24,583

	Diluted			25,610			25,841			25,374			25,914

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Item			Page

		PART I FINANCIAL INFORMATION
	1.	Unaudited Financial Statements		3
		Consolidated Balance Sheets as of December 30, 2001 and September 29, 2002		3
		Consolidated Statements of Income for the Three Months Ended September 30, 2001 and September 29, 2002 and for the Nine Months Ended September 30, 2001 and September 29, 2002		4
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and September 29, 2002		5
		Notes to Unaudited Financial Statements		6
	2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
	3.	Quantitative and Qualitative Disclosures About Market Risk		19
	4.	Controls and Procedures		19
		PART II OTHER INFORMATION
	1.	Legal Proceedings		19
	2.	Changes in Securities and Use of Proceeds		19
	3.	Defaults upon Senior Securities		20
	4.	Submission of Matters to a Vote of Security Holders		20
	5.	Other Information		20
	6.	Exhibits and Reports on Form 8-K		20


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


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


	*Implementing our growth strategy may strain our management resources and 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.*


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


	*Changes in general economic and political conditions affect consumer spending and may harm our revenues and operating results.*


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


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


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


Item 1.	*Unaudited Financial Statements*


	*Revenues*


	*Costs and expenses*


	*Elimination of minority interests*


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


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


	*Rising workers compensation and health insurance costs could negatively impact profitability.*


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


	*Litigation could have a material adverse effect on our business.*


Exhibit
Number			Description Document

	3	.1#	Amended and Restated Certificate of Incorporation of the Company
	3	.2*	Amended and Restated By-laws
	10	.18	Employment Agreement between Richard L. Federico and the Company dated August 3, 2002
	10	.19	Employment Agreement between Robert T. Vivian and the Company dated August 2, 2002
	10	.20	Employment Agreement by and among Russell Owens, Pei Wei Asian Diner, Inc. and the Company dated August 6, 2002
	99	.1	Certification of Chief Executive Officer
	99	.2	Certification of Chief Financial Officer



Signature	Title	Date


/s/ RICHARD L. FEDERICO Richard L. Federico	Chairman and Chief Executive Officer (Principal Executive)	October 23, 2002

/s/ KRISTINA K. CASHMAN Kristina K. Cashman	Chief Financial Officer and Secretary	October 23, 2002


	/s/ KRISTINA K. CASHMAN

	Chief Financial Officer and Secretary