e10vk

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K


	þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the Fiscal Year Ended December 28, 2008
or
	o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to .

Commission File Number: 0-25123

P.F. Chang’s China Bistro, Inc.

(Exact name of registrant as specified in its charter)


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

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

Registrant’s telephone number, including area code:

(480) 888-3000

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $0.001 par Value		NASDAQ Global Select Market

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

NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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


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

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

The aggregate market value of the registrant’s common stock held by non-affiliates as of the last day of the registrant’s second fiscal quarter ended, June 29, 2008, was $201,855,149.

On February 6, 2009 there were outstanding 23,987,597 shares of the registrant’s Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE
(to the extent indicated herein)

Specified portions of the registrant’s Proxy Statement with respect to the Annual Meeting of Stockholders to be held April 28, 2009 are incorporated by reference into Part III of this Report.

PART I


Item 1.	*Business*

General

P.F. Chang’s China Bistro, Inc. (“P.F. Chang’s” or the “Company”) was incorporated in January 1996 as a Delaware corporation. We conducted our initial public offering in December 1998. We incorporated our subsidiary, Pei Wei Asian Diner, Inc., in December 1999 as a Delaware corporation. We report our financial and descriptive information according to two reportable operating segments: P.F. Chang’s China Bistro (“Bistro”) and Pei Wei Asian Diner (“Pei Wei”) (see Notes to Consolidated Financial Statements — Note 16 — Segment Reporting). On August 1, 2008, we sold the long-lived assets of Taneko Japanese Tavern (“Taneko”), a third restaurant concept we developed in 2006, which has been classified as a discontinued operation in the Company’s consolidated financial statements since the end of fiscal 2007.

As of December 28, 2008, we owned and operated 189 full service Bistro restaurants that feature a blend of high quality, traditional Chinese cuisine and attentive service, in a high-energy contemporary bistro setting. Our restaurants offer intensely flavored, highly memorable culinary creations, prepared from fresh ingredients, including premium herbs and spices imported directly from China. The menu features traditional Chinese offerings and innovative dishes that illustrate the emerging influence of Southeast Asia on modern Chinese cuisine. Our menu is complemented by a full service bar offering an extensive selection of wines, specialty drinks, Asian beers, sake, cappuccino and espresso. We offer superior customer service in a high energy atmosphere and a decor that includes wood and slate floors, life-size replicas of the terra cotta Xi’an warriors and narrative murals depicting scenes of life in ancient China. Additionally, two Bistro restaurants located in Hawaii are operated under a joint venture agreement, under which we own a minority interest.

As of December 28, 2008, we also owned and operated 159 quick casual Pei Wei restaurants that serve freshly prepared, wok-seared, contemporary pan-Asian cuisine in a relaxed, warm environment with friendly attentive counter service and take-out flexibility. Pei Wei offers the same spirit of hospitality and commitment to providing fresh, high quality Asian food at a great value that has made our Bistro restaurants successful. Pei Wei opened its first unit in the Phoenix, Arizona metro-area in July 2000.

Concept and Strategy

Our objectives are to develop and operate a nationwide system of Asian-inspired restaurants that offer guests a sophisticated dining experience, create a loyal customer base that generates a high level of repeat business and provide superior returns to our investors. To achieve our objectives, we strive to offer high quality Asian cuisine in a memorable atmosphere while delivering superior customer service and an excellent dining value. Key to our expansion strategy and success at the restaurant level is a philosophy that allows regional managers, general managers and executive chefs to participate in the profitability of the restaurants for which they have responsibility. We have established Bistro and Pei Wei restaurants in a wide variety of markets across the United States.

Menu

Bistro

The menu for our Bistro restaurants offers a harmony of taste, texture, color and aroma by balancing the Chinese principles of fan and t’sai, which mean “balance” and “moderation”. Fan foods include rice, noodles, grains and dumplings, while t’sai foods include vegetables, meat, poultry and seafood. To further encourage the Chinese principles of fan and t’sai, our menu is served family-style, the traditional Chinese way of dining. Our chefs are trained to produce distinctive Chinese cuisine using traditional recipes from the major culinary regions of China updated with a contemporary twist. The intense heat of Mandarin-style wok cooking sears in the clarity and distinct flavor of fresh ingredients. Slow-roasted Cantonese-style BBQ spare ribs are prepared in vertical ovens, while handmade shrimp, pork and vegetable dumplings, as well as flavorful fish and vegetables, are prepared in custom-made steamer cabinets. The menu is highlighted by dishes such as Chang’s Spicy Chicken, Mongolian Beef, Peking Dumplings, Chicken in Soothing Lettuce Wrap, Oolong Marinated Sea Bass and Dan Dan Noodles. We also offer

an array of vegetarian dishes and are able to modify dishes to accommodate our customers with special dietary needs. No MSG is added to any ingredients at our restaurants.

As a result of our extensive research and development efforts, we periodically change our menu. For example, during 2007 the Bistro added lunch bowls as well as exciting Chinese grill menu selections and mini-desserts, which are now part of our core menu. Our lunch bowls include some of our traditional menu choices ranging from Moo Goo Gai Pan to Beef with Broccoli and are served with a choice of home-style soups. Our Chinese grill menu includes Asian Marinated New York Strip, Citrus Soy Wild Salmon and Lemongrass Prawns with Garlic Noodles. New selections are developed by our executive chefs to provide our guests with fresh new tastes. To complete the dining experience, we created eight mini-desserts, designed to provide our guests the option of ordering something sweet to finish off their meal without having to order a traditional full-size dessert. Our eight mini-dessert flavors include our signature Great Wall of Chocolate, Tiramisu and Strawberry Cheesecake.

The Bistro’s entrées range in price from $7.00 — $22.00, and our starters range in price from $3.00 — $13.00. The average check per guest, including alcoholic beverages, is approximately $20.00 to $21.00. Sales of alcoholic beverages, featuring an extensive selection of wine, Asian beer and sake, have constituted approximately 15% of total revenues for each of the past three years. Lunch and dinner contribute approximately 33% and 67% of revenues, respectively.

Pei Wei

Pei Wei’s menu also offers a variety of intensely flavored culinary creations; however, this menu is more concise than that of the Bistro and includes not only Chinese cuisine but other Asian fare as well. As with the Bistro, Pei Wei has a high energy exhibition kitchen featuring made-to-order items using traditional Mandarin-style wok cooking. Along with our handmade dim sum, our guests can order traditional favorites such as Chicken Lettuce Wraps and Orange Peel Beef, while sampling a variety of Asian dishes such as Vietnamese Chicken Salad Rolls and Pad Thai.

Entrées at Pei Wei range in price from $6.95 to $9.00, with starters ranging from $2.00 to $6.95. We offer a limited selection of beer and wine which have constituted approximately 2% of total revenues for each of the past three years. Take-away sales comprise approximately 38% of Pei Wei’s total revenues. The average check per guest eating in at Pei Wei, including beer and wine sales, is approximately $8.50 to $9.50. Lunch and dinner contribute approximately 43% and 57% of revenues, respectively.

Operations

Bistro

The Bistro strives to create a sophisticated dining experience through the careful selection, training and supervision of personnel. The staff of a typical Bistro restaurant consists of an Operating Partner, three or four managers, a Culinary Partner, one or two sous chefs and approximately 125 hourly employees, many of whom work part-time. The Operating Partner of each restaurant is responsible for the day-to-day operations of that restaurant, including the hiring, training and development of personnel, as well as operating results. The Culinary Partner is responsible for product quality, purchasing, food costs and kitchen labor costs. We require our Operating Partners and Culinary Partners to have significant experience in the full service restaurant industry.

The Bistro has a comprehensive eight-week management development program. This program consists of four weeks of culinary training, including both culinary job functions and culinary management, with the remaining four weeks focused on service strategies, guest relations and administration. All salaried hospitality and culinary management personnel are required to successfully complete all sections of the program. Upon the completion of each four-week section, each trainee must successfully complete a comprehensive certification.

The Operating Partners are responsible for selecting hourly employees for their restaurants and are responsible for administering hourly staff training programs that are developed by the training and culinary departments. The hourly employee development program lasts between one and two weeks and focuses on both technical and cultural knowledge.

Pei Wei

A typical staff at Pei Wei consists of a general manager, a kitchen manager, one or two managers, and approximately 45 hourly employees. Our general managers are responsible for the day-to-day operations of the restaurant, including the hiring, training and development of personnel, as well as operating results. The kitchen manager collaborates with the general manager on product quality, purchasing, food cost and kitchen labor costs.

Pei Wei uses a comprehensive nine-week management training program, which consists of six weeks of hands-on culinary functions and culinary management, with the remaining three weeks focusing on service strategies specific to dine-in and take-away service, guest and employee relations and administration. Upon completion of training, each new manager must complete a comprehensive culinary and overall operations certification.

Each Pei Wei hourly employee undergoes a week-long comprehensive training program that focuses on the culinary knowledge required for his or her specific position. After completion of the program, each employee is required to complete a position certification prior to serving our guests.

Global Brand Development

Based on our belief that our brands would work well in the international market, we have recently engaged in discussions with potential partners with whom we might collaborate to develop our international presence. We expect these relationships to take the form of license agreements under which we would receive an initial territory fee, store opening fees and ongoing royalty revenues based on a percentage of international restaurant sales.

Marketing

We focus our business strategy on providing high quality, Asian cuisine prepared by an attentive staff in a distinctive environment at a great value. By focusing on the food, service and ambiance of the restaurant, we strive to create an environment that fosters repeat patronage and encourages word-of-mouth recommendations. We believe that word-of-mouth advertising is a key component in driving guests’ initial trial and subsequent visits, and that creating a great experience for guests will always be the ultimate marketing vehicle.

To attract and retain new customers, we have historically utilized a mix of marketing strategies including paid advertising, public relations and local community involvement. While we had used limited radio, print and outdoor advertising in the past, during late fiscal 2007 and throughout fiscal 2008 we began making more significant investments in these marketing channels in key markets. At the same time, we added online, direct mail and customer relationship initiatives to the media mix to both drive new customer trials and foster better ongoing communication with our guests. We expect to continue these efforts in fiscal 2009.

Management Information Systems

We utilize an integrated information system to manage the flow of information within each restaurant and between the restaurants and the corporate office. This system includes a point-of-sale local area network that helps facilitate the operations of the restaurant by recording sales transactions and printing orders in the appropriate locations within the restaurant. Additionally, the point-of-sale system is utilized to authorize, batch and transmit credit card transactions, to record employee time clock information, to schedule labor and to produce a variety of management reports. Select information that is captured from this system is transmitted to the corporate office on a daily basis, enabling senior management to continually monitor operating results. We believe that our current point-of-sale system will be an adequate platform to support our continued expansion for the foreseeable future.

Supply Chain Management

Our supply chain management function provides our restaurants with high quality ingredients at competitive prices from reliable sources. Consistent menu specifications, as well as purchasing and receiving guidelines, ensure freshness and quality. Because we utilize only fresh ingredients in all of our menu offerings, inventory is maintained at a modest level. We negotiate short-term and long-term contracts depending on demand for the commodities used in the preparation of our products. These contracts generally average from two to twelve months in duration. With the exception of a portion of our commodities, like produce, we utilize Distribution Market Advantage, a

cooperative of multiple food distributors located throughout the United States, as the primary distributor of product to all of our restaurants. We have a non-exclusive contract with Distribution Market Advantage on terms and conditions that we believe are consistent with those made available to similarly situated restaurant companies. Our produce is distributed by a network of local specialty distributors who service our restaurants in adherence to our quality and safety standards. Our most important items are contracted annually to stabilize prices and ensure availability.

We believe that competitively priced alternative distribution sources are available should they become necessary. Asian-specific ingredients, primarily spices and sauces, are usually sourced directly from Hong Kong, China, Taiwan and Thailand. We have developed an extensive network of suppliers in order to maintain an adequate supply of items that conform to our brand and product specifications.

Competition

The restaurant business is intensely competitive with respect to food quality, price-value relationships, ambiance, service and location, and many existing restaurants compete with us at each of our locations. Key competitive factors in the industry include the quality and value of the food, quality of service, price, dining experience, restaurant location and the ambiance of the facilities. For the Bistro, our primary competitors include mid-priced, full service casual dining restaurants. For Pei Wei, our main competitors are other value-priced, quick service concepts as well as locally owned and operated Asian restaurants.

There are a number of well-established competitors with substantially greater financial, marketing, personnel and other resources than ours. In addition, many of our competitors are well established in the markets where our operations are, or in which they may be, located. While we believe that our restaurants are distinctive in design and operating concept, other companies may develop restaurants that operate with similar concepts. Additionally, the rising popularity of Asian food may result in increased competition from non-Asian restaurants as well as other food outlets, such as supermarkets, as they increase their number of Asian-inspired menu offerings.

Employees

At December 28, 2008, we employed approximately 26,800 persons, approximately 315 of whom were home office and field personnel, approximately 1,700 of whom were unit management personnel and the remainder of whom were hourly restaurant personnel. Our employees are not covered by a collective bargaining agreement. We consider our employee relations to be good.

Unit Economics

We believe that unit economics are critical to the long-term success of any restaurant concept. Accordingly, we focus on unit-level returns over time as a key measurement of our success or failure. For analysis purposes, we group our restaurants by the year in which they opened. We then compare each “class” to its peers over time as well as to the performance of the entire system. These unit economics are available on our website: www.pfcb.com.

Access to Information

Our Internet address is www.pfcb.com. We make available at this address, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports, and beneficial ownership reports filed by our directors and officers pursuant to Section 16 of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or SEC.


Item 1A.	*Risk Factors*

The failure of our existing or new restaurants to achieve expected results could have a negative impact on our revenues and financial results, including potential impairment of the long-lived assets of our restaurants, and could negatively impact our stock price.

We operated 189 full service Bistro restaurants and 159 quick casual Pei Wei restaurants as of December 28, 2008, 42 of which 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. There can be no assurance that any new restaurant that we open will have similar operating results to those of prior restaurants. Our new restaurants commonly take several months to reach planned operating levels due to inefficiencies typically associated with new restaurants, including the training of new personnel, lack of market awareness, inability to hire sufficient staff and other factors. The failure of our existing or new restaurants to perform as expected could have a significant negative impact.

We are subject to a number of significant risks that might cause our actual results to vary materially from our forecasts or projections including:


	•	lower customer traffic or average guest check, which negatively impacts comparable store sales, net revenues, operating income, operating margins and earnings per share, due to:


	•	the impact of initiatives by competitors and increased competition generally;

	•	lack of customer acceptance of new menu items or potential price increases necessary to cover higher input costs;

	•	unfavorable general economic conditions in the markets in which we operate, including, but not limited to, downturns in the housing market, higher interest rates, higher unemployment rates, lower disposable income due to higher energy or other consumer costs, lower consumer confidence, and other events or factors that adversely affect consumer spending, including the ongoing financial crises;

	•	customers trading down to lower priced items and/or shifting to competitors with lower priced products; or

	•	changes in consumer preferences or declines in general consumer demand for Asian menu items


	•	cost increases that are either wholly or partially beyond our control, such as:


	•	costs for commodities that we do not or cannot effectively hedge

	•	labor costs such as increased health care costs, general market wage levels and workers’ compensation insurance costs;

	•	operating expenses, such as utilities and other expenses that are impacted by energy price fluctuations

	•	litigation against the Company, particularly class action litigation;

	•	construction costs associated with new store openings;

	•	information technology costs and other logistical resources necessary to maintain and support the global growth of our business; and

	•	material interruptions in our supply chain, such as a material interruption of ingredient supply due to the failures of third-party suppliers, or interruptions in service by common carriers that ship goods within the Company’s distribution channels

Additionally, we have historically 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 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 may continue to have, a meaningful impact on preopening expenses as well as labor and operating costs. Due to the foregoing factors, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for a full fiscal year and these fluctuations may cause our operating results to be below expectations of public market analysts and investors, resulting in a lowering of our stock price.

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

Our country is currently in a recession and we believe that these weak general economic conditions will continue through 2009. The ongoing impacts of the housing crisis, rising unemployment and financial market weakness may further exacerbate current economic conditions. As the economy struggles, our customers may become more apprehensive about the economy and reduce their level of discretionary spending. A decrease in spending due to lower consumer discretionary income or consumer confidence in the economy 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 and negatively affecting our operating results. Additionally, we believe there is a risk that if the current negative economic conditions persist for a long period of time and become more pervasive, consumers might make long-lasting changes to their discretionary spending behavior, including dining out less frequently on a more permanent basis.

Additionally, many of the effects and consequences of the current economic crisis on our commercial partners are currently unknown and any one or more of them could potentially have a material adverse effect on our liquidity and capital resources, including our compliance with financial covenants under our credit facility, the ability of our banks to honor our credit facility, our ability to raise additional capital if needed, or other negative impacts on the Company’s business and financial results.

Our initiatives to improve the operating performance of our Pei Wei concept may not be successful and could adversely impact the financial results of the Company.

During 2008, we conducted a rigorous analysis of the entire Pei Wei store portfolio and as a result, we closed 10 underperforming Pei Wei restaurants. We also undertook, and continue to explore, various initiatives to improve the operating performance of our Pei Wei concept. There can be no assurance that we will be able to successfully implement operational initiatives or that such initiatives will achieve the desired improvements in operating results. Additionally, there can be no assurance that we will not close additional Pei Wei restaurants as a result of future assessments of Pei Wei’s operating performance or that we will not incur additional lease termination charges if we choose not to proceed with the development of unopened restaurants for which we currently have signed lease agreements. If we do not successfully implement our operating initiatives, if operating initiatives do not achieve the intended results or if we determine that additional opened or unopened Pei Wei store closures are necessary, the Company may experience a material adverse impact on its business and its financial results.

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 a portion of our commodities, such as produce, which are purchased locally by each restaurant, we rely on Distribution Market Advantage, a cooperative of multiple food distributors located throughout the nation, as the primary distributor of our ingredients. We have a non-exclusive contract with Distribution Market Advantage on terms and conditions that 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 Distribution Market Advantage could cause our food costs to fluctuate. Any disruption in the supply of specialty items from China due to quality or availability issues could also 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.

We are highly dependent on the financial performance of restaurants concentrated in certain geographic areas.

Our financial performance is highly dependent on restaurants located in California, Arizona, Nevada and Florida which comprise one-third of our total store population. In recent years, these states have been more negatively impacted by the housing downturn and the overall economic crisis than other geographic areas. As a result, we have seen a more substantial decline in guest traffic at our restaurants in these locations, which has adversely affected the operations of the company as a whole. If we are unable to improve operating performance in these geographic areas, our financial results will continue to be adversely affected.

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 food borne illnesses, injuries 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 ultimately determined to be 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 material adverse effect on our business. Additionally, the costs and expense of defending ourselves against lawsuits or claims, regardless of merit, could have an adverse impact on our profitability and could cause variability in our results compared to expectations.

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.

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. 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 maintain consistency in the quality and atmosphere of our restaurants. 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 of our product offerings and service and atmosphere of our restaurants is a critical factor in our success. Any failure to attract, retain and motivate key personnel may harm our reputation and result in a loss of business.

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

Our success will continue to depend on our ability to attract and retain a sufficient number of qualified employees, including kitchen staff and wait staff, to work our restaurants. 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.

Changes in government legislation may increase our labor costs and have a material adverse effect on our business and financial results.

A substantial number of our restaurant personnel are hourly workers whose wage rates are affected by increases in the federal or state minimum wage or changes to tip credits. FICA tip credits resulting from tip credit reporting are also a significant factor when calculating the Company’s effective tax rate. The FICA tip credit is based on the amount of tips in excess of the federal minimum wage requirements in effect on January 1, 2007. Mandated increases in minimum wage levels and changes to the tip credit have recently been and continue to be proposed at both federal and state government levels. Additionally, as minimum wage rates increase, we may need to increase not only the wages of our minimum wage employees but also the wages paid to employees at wage rates

that are above minimum wage. Future legislation that increases minimum wage rates or changes allowable tip credits may increase our labor costs or effective tax rate and have a material adverse effect on our business, financial condition, results of operations and cash flows.

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 at the Bistro concept include mid-price, full service, casual dining restaurants. For Pei Wei, our main competitors are other value-priced, quick-service concepts as well as locally owned and operated Asian restaurants. There are a number of 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 and the rising popularity of Asian food may result in increased competition from non-Asian restaurants as well as other food outlets, such as supermarkets, as they increase the number of Asian-inspired menu offerings.

Any inability to successfully compete with the other restaurants in our markets may prevent us from increasing or sustaining our revenues and profitability and could have 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 concepts in order to compete with popular new restaurant formats or concepts that develop from time to time. We cannot ensure that we will be successful in implementing these modifications or that these modifications will not reduce our profitability.

Our federal, state and local tax returns may, from time to time, be selected for audit by the taxing authorities, which may result in tax assessments or penalties that could have a material adverse impact on our results of operations and financial position.

We are subject to federal, state and local taxes in the U.S. Significant judgment is required in determining the provision for income taxes. Although we believe our tax estimates are reasonable, if the IRS or other taxing authority disagrees with the positions we have taken on our tax returns, we could have additional tax liability, including interest and penalties. If material, payment of such additional amounts upon final adjudication of any disputes could have a material impact on our results of operations and financial position.

Fluctuating insurance requirements and costs could negatively impact our profitability and projections.

The cost of workers’ compensation insurance, general liability insurance and directors and officers’ liability insurance fluctuates based on market conditions and availability as well as our historical trends. We self-insure a substantial portion of our workers’ compensation and general liability costs and unfavorable changes in trends could have a negative impact on our profitability.

Additionally, health insurance costs in general have risen significantly over the past few years and are expected to continue to increase in 2009. These increases, as well as potential state legislation requirements for employers to provide health insurance to employees, could have a negative impact on our profitability if we are not able to offset the effect of such increases with plan modifications and cost control measures, or by continuing to improve our operating efficiencies.

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

Each of our restaurants 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 and timeframes associated with the development and construction of our restaurants, including:


	•	landlord delays;

	•	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 restaurants within anticipated budgets or time periods, our business, financial condition, results of operations and cash flows may be adversely affected.

Development is critical to our long-term success.

Critical to our long-term future success is our ability to successfully expand our operations. We have expanded from seven restaurants at the end of 1996 to 348 restaurants as of December 28, 2008. We expect to open four to six new Bistro restaurants and two to four new Pei Wei restaurants during fiscal 2009. 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, including those arising from the current economic crisis described above.

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 as well as the availability of high-quality commercial real estate projects of the type we typically target for new locations. We may not be able to open our planned new restaurants 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 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:


	•	the environment;

	•	building construction;

	•	zoning requirements;

	•	the preparation and sale of food and alcoholic beverages; and

	•	employment.

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 Bureau of Citizenship and Immigration Services, or BCIS. The United States Congress has recently been considering changes to Federal immigration laws and various states, some of which where we have significant operations, are also in the process of considering or have already adopted new immigration laws. Some of these new laws may adversely affect our operations by increasing our obligations for compliance and oversight. Although we require all workers to provide us with the government-specified documentation evidencing their employment eligibility, some of our employees may, without our knowledge, be unauthorized workers. Unauthorized workers are subject to seizure and deportation and may subject us to fines, penalties or loss of our business license in certain jurisdictions. Any material disruption of our business, as a result of seizure of our workers, changes in immigration law, or significantly increased labor costs at our facilities in the future, could have a material adverse effect on our business, financial condition and operating results.

In fiscal 2008, approximately 15 percent of our revenues at the Bistro and 2 percent of revenues at Pei Wei were 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 and other regulations could negatively impact our business and our reputation.

Our financial results may also fluctuate significantly as a result of our accounting for certain aspects of our partnership program.

We incur non-cash charges for the excess of the imputed fair value of partner investments over the amount paid by our partners for their partnership interests. These amounts are recorded as the partnership interests are effective, which is typically when new stores open. The timing and volume of restaurant openings, the extent to which eligible persons elect to invest, the effective dates of their partnership interests and the determination of the related fair value

of the investment will create fluctuations in our operating results. Additionally, the timing and extent of any early repurchases of partnership interests may create fluctuations in our operating results.

For the reasons noted above, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for a full fiscal year, and, from time to time in the future, the accounting impact of our partnership program may cause our results of operations to be different than the expectations of public market analysts and investors. This discrepancy could cause the market price of our common stock to fluctuate. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The implementation of our new accounting software system could impact our ability to timely and/or accurately prepare financial reports or impact the effectiveness of our internal controls over financial reporting.

We are currently in the process of upgrading to a new accounting software system and expect to fully transition financial processes to this new system during early fiscal 2009. If we do not effectively implement this system or if the system does not operate as intended, it could impact our ability to report our financial results on a timely and accurate basis or adversely impact the effectiveness of our internal controls over financial reporting.

Special Note Regarding Forward-Looking Statements

Some of the statements in this Form 10-K and the documents we incorporate by reference constitute forward-looking statements. In some cases, forward-looking statements can be identified by terms such as may, will, should, expect, plan, intend, forecast, anticipate, believe, estimate, predict, potential, continue or the negative of these terms or other comparable terminology. The forward-looking statements contained in this document involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements may include the matters listed under Risk Factors and elsewhere in this Form 10-K, including, but not limited to, failure of our existing or new restaurants to achieve predicted results, the adequacy of anticipated sources of cash to fund our future capital requirements and development of new restaurants. Because we cannot guarantee future results, levels of activity, performance or achievements, undue reliance should not be placed on these forward-looking statements.


Item 1B.	*Unresolved Staff Comments*

None.


Item 2.	*Properties*

Our Bistro restaurants average 6,700 square feet and our Pei Wei restaurants average 3,100 square feet. The following table lists the number of existing Bistro and Pei Wei locations by state as of December 28, 2008:


State	Bistro		Pei Wei		Total

Alabama		2		—		2
Arizona		9		19		28
Arkansas		2		1		3
California		35		14		49
Colorado		7		5		12
Connecticut		2		—		2
Florida		14		17		31
Georgia		5		—		5
Idaho		1		—		1
Illinois		5		—		5
Indiana		2		—		2
Iowa		1		—		1
Kansas		1		3		4
Kentucky		2		—		2
Louisiana		2		—		2
Massachusetts		4		—		4
Maryland		6		2		8
Michigan		5		5		10
Minnesota		2		3		5
Mississippi		1		—		1
Missouri		3		2		5
Nebraska		1		—		1
Nevada		5		3		8
New Jersey		6		2		8
New Mexico		1		2		3
New York		4		—		4
North Carolina		6		4		10
Ohio		7		3		10
Oklahoma		2		6		8
Oregon		4		—		4
Pennsylvania		4		2		6
South Carolina		2		—		2
Tennessee		5		6		11
Texas		17		51		68
Utah		2		4		6
Virginia		5		5		10
Washington		5		—		5
Wisconsin		2		—		2

		189		159		348

Additionally, two Bistro restaurants are operated in Hawaii under a joint venture agreement.

Our home office is located in a 50,000 square foot office building in Scottsdale, Arizona. We purchased the land and building during 2004.

Expansion Strategy and Site Selection

We have historically developed Bistro and Pei Wei restaurants in both new and existing markets utilizing an expansion strategy targeted at metropolitan areas throughout the United States. Within each targeted metropolitan area, we identify specific areas with high traffic patterns and suitable demographic characteristics, including population density, consumer attitudes and affluence. Within an appropriate area, we evaluate specific sites that provide visibility, accessibility and exposure to traffic volume. Our site criteria are flexible, as is evidenced by the variety of environments and facilities in which we currently operate. These facilities include freestanding buildings, regional malls, urban properties and entertainment and strip centers.

Due to the recent economic slowdown, the number of high-quality commercial real estate projects of the type we typically target for our new locations has declined significantly. As a result, we have reduced the number of planned Bistro openings for fiscal 2009 and currently intend to open four to six new Bistro restaurants primarily located in existing markets. Additionally, we plan to open two to four new Pei Wei restaurants during fiscal 2009. None of the planned fiscal 2009 Bistro and Pei Wei restaurants have opened as of the date of this Form 10-K.

Bistros typically range in size from 6,000 to 7,500 square feet, and require an average total capitalized investment of approximately $4.0 million per restaurant (net of estimated tenant incentives). This total investment includes the capitalized lease value of the property, which can vary greatly depending on the specific location. We expect that our planned future restaurants will require, on average, a total cash investment per restaurant of approximately $2.8 million to $3.0 million (net of estimated landlord reimbursements). Preopening expenses are expected to average approximately $400,000 per Bistro restaurant during fiscal 2009.

Pei Wei restaurants typically range in size from 2,800 to 3,400 square feet and require an average total capitalized investment of approximately $1.5 million per restaurant (net of estimated tenant incentives). This total investment cost includes the capitalized lease value of the property, which can vary greatly depending on the specific trade area. We expect that our planned future restaurants will require, on average, a total cash investment per restaurant of approximately $800,000 to $900,000 per restaurant (net of estimated landlord reimbursements). Preopening expenses are expected to average approximately $150,000 per Pei Wei restaurant during fiscal 2009.

We currently lease the sites for all of our Bistro and Pei Wei restaurants and do not intend to purchase real estate for our sites in the future. Current restaurant leases have expiration dates ranging from 2009 to 2025, with the majority of the leases providing for at least one five-year renewal option. We have exercised our lease renewal options for one restaurant lease that is scheduled to expire in 2009 and are currently evaluating our lease renewal options for three additional restaurant leases that are scheduled to expire in 2009. Generally, our leases provide for minimum annual rent, and most leases require additional rent based on a percentage of sales volume in excess of minimum contractual levels at the particular location. Most of our leases require us to pay the costs of insurance, property taxes, and a portion of the lessor’s operating costs. We do not anticipate any difficulties renewing existing leases as they expire.


Item 3.	*Legal Proceedings*

We are engaged in legal actions arising in the ordinary course of our business and believe that the ultimate outcome of these actions will not have a material adverse effect on our results of operations, liquidity or financial position.


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

None.

PART II


Item 5.	*Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities*

Our common stock is traded on the NASDAQ Global Select Market under the symbol “PFCB”.

The following table sets forth the high and low price per share of our common stock for each quarterly period for our two most recent fiscal years:


Quarter Ended	High		Low

April 1, 2007	$	47.10	$	36.52
July 1, 2007	$	44.57	$	34.69
September 30, 2007	$	38.38	$	29.55
December 30, 2007	$	30.67	$	22.60
March 30, 2008	$	32.48	$	20.41
June 29, 2008	$	33.00	$	22.30
September 28, 2008	$	30.00	$	21.15
December 28, 2008	$	24.14	$	14.51

We have not historically paid any cash dividends.

On February 6, 2009, there were 111 holders of record of P.F. Chang’s common stock.

Issuer Purchases of Equity Securities

Our Board of Directors has authorized programs to repurchase up to a total of $150.0 million of our outstanding shares of common stock from time to time in the open market, pursuant to Rule 10b5-1 trading plans or in private transactions at prevailing market prices. During fiscal years 2006 and 2007, we repurchased a total of 3.2 million shares of our common stock for $96.4 million at an average price of $29.74 and $3.6 million of the initial $50.0 million purchase authorization expired in fiscal 2007.

During fiscal 2008, we repurchased a total of 0.4 million shares of our common stock for $10.0 million at an average price of $25.38 using cash on hand. At December 28, 2008, there remains $40.0 million available under the current share repurchase authorization, which expires in July 2009. We did not repurchase any shares during the fourth quarter of fiscal 2008.


Item 6.	*Selected Financial Data*

The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.


	Fiscal Year(1)
	2008			2007			2006			2005			2004
	(In thousands, except per share amounts)

Statement of Income Data:
Revenues	$	1,198,124		$	1,084,193		$	932,116		$	806,838		$	706,362
Costs and expenses:
Cost of sales		325,630			297,242			254,923			223,966			200,556
Labor		396,911			364,074			307,573			265,274			231,655
Operating		198,967			172,147			145,309			121,849			99,138
Occupancy		69,809			62,164			51,958			42,586			37,637
General and administrative		77,488			66,968			56,030			41,117			36,369
Depreciation and amortization		68,711			55,988			44,378			36,782			29,120
Preopening expense		8,457			14,310			11,922			9,102			7,793
Partner investment expense(2)		(354	)		(2,012	)		4,371			4,800			17,671

Total costs and expenses		1,145,619			1,030,881			876,464			745,476			659,939

Income from operations		52,505			53,312			55,652			61,362			46,423
Interest and other income (expense), net		(3,362	)		(100	)		1,315			1,841			612
Minority interest		(1,933	)		(4,169	)		(8,116	)		(8,227	)		(10,078	)

Income from continuing operations before provision for income taxes		47,210			49,043			48,851			54,976			36,957
Provision for income taxes		(12,193	)		(12,420	)		(14,078	)		(17,033	)		(10,751	)

Income from continuing operations		35,017			36,623			34,773			37,943			26,206
Loss from discontinued operations, net of tax(3)(4)		(7,591	)		(4,560	)		(1,520	)		(147	)		(152	)

Net Income	$	27,426		$	32,063		$	33,253		$	37,796		$	26,054

Income from continuing operations per share:
Basic	$	1.47		$	1.44		$	1.33		$	1.44		$	1.02

Diluted	$	1.45		$	1.41		$	1.30		$	1.41		$	0.99

Weighted average shares used in computation:
Basic		23,776			25,473			26,075			26,271			25,727

Diluted		24,080			25,899			26,737			27,000			26,575


	As of		As of		As of		As of		As of
	December 28,		December 30,		December 31,		January 1,		January 2,
	2008		2007		2006		2006		2005
	(In thousands)

Balance Sheet Data:
Cash and cash equivalents	$	40,951	$	24,055	$	31,589	$	31,948	$	66,409
Short-term investments (including restricted short-term investments)		—		—		—		42,410		5,000
Total assets		667,363		622,630		514,045		474,859		390,492
Long-term debt		82,496		90,828		13,723		5,360		545
Common stockholders’ equity		320,826		293,887		289,525		293,898		244,957


(1)		We operate on a 52/53-week year, with the fiscal year ending on the Sunday closest to December 31. Fiscal years 2008, 2007, 2006, and 2005 each were comprised of 52 weeks. Fiscal year 2004 was comprised of 53 weeks.

(2)		Partner investment expense increased during 2004 as a result of a $12.5 million modification of certain partnership agreements.

(3)		As a result of our decision to exit operations of Taneko, the results of Taneko (including a related asset impairment charge recognized during fiscal 2007) were classified as a discontinued operation for all periods presented as discussed further in Note 2 to our consolidated financial statements.

(4)		As a result of our decision to close 10 Pei Wei stores in fiscal 2008, the results of those 10 Pei Wei stores (including related asset impairment, lease termination and severance charges recognized during the third and fourth quarters of fiscal 2008) were classified as discontinued operations for all periods presented as discussed further in Note 2 to our consolidated financial statements.

No cash dividends were paid during any of the five previous years.


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

Overview

The following section presents an overview of our restaurant concepts, our related growth strategy and challenges we face. A summary of our 2008 financial results and our 2009 outlook are also presented.

Our restaurants

We own and operate two restaurant concepts in the Asian niche: P.F. Chang’s China Bistro (“Bistro”) and Pei Wei Asian Diner (“Pei Wei”). On August 1, 2008, we sold the long-lived assets of Taneko Japanese Tavern (“Taneko”), a third restaurant concept developed in 2006, which has been classified as a discontinued operation in the Company’s consolidated financial statements since the end of fiscal 2007.

Bistro

As of December 28, 2008, we owned and operated 189 full service Bistro restaurants that feature a blend of high quality, traditional Chinese cuisine and attentive service in a high energy contemporary bistro setting. P.F. Chang’s was formed in early 1996 with the acquisition of the four original Bistro restaurants and the hiring of an experienced management team. Utilizing a partnership management philosophy, we embarked on a strategic expansion of the concept targeted at major metropolitan areas throughout the United States. We own and operate all of our restaurants with the exception of two Bistro restaurants located in Hawaii which are operated under a joint venture arrangement in which we own a minority interest.

Pei Wei

counter service and take-out flexibility. We opened our first Pei Wei restaurant in July 2000 in the Phoenix, Arizona area and have expanded the concept significantly since that time.

As part of ongoing profitability initiatives, we closed 10 underperforming Pei Wei restaurants during the fourth quarter of 2008. This decision was a result of a rigorous evaluation of our entire store portfolio. We reviewed each location’s past and present operating performance combined with projected future results. The restaurants selected for closure had lower profitability and were not projected to provide acceptable returns in the foreseeable future. The results of these 10 Pei Wei restaurants are reported within discontinued operations in our consolidated financial statements for all periods presented. See Note 2 to our consolidated financial statements for further discussion.

Our strategy

Our objective is to be the best operator of Asian restaurants as viewed by our guests and our employees. We aim to develop and operate a nationwide system of Asian-inspired restaurants that offer guests a sophisticated dining experience, create a loyal customer base that generates a high level of repeat business and provide superior returns to our investors. To achieve our objectives, we strive to offer high quality Asian cuisine in a memorable atmosphere while delivering exceptional customer service and an excellent dining value.

We are currently operating restaurants exclusively in the Asian niche due in part to the continued popularity of Asian cuisine, combined with a relatively lower level of organized competition in this segment compared to other popular cuisines segments such as Mexican and Italian. We believe this creates a significant long-term opportunity for us to both grow our existing restaurant sales and open new locations in new and existing markets. We are selective when choosing our new restaurant locations and assess anticipated returns on invested capital at both an individual restaurant and market level when determining future development plans. We seek an average unit-level return on invested capital of 30 percent for both of our concepts and plan to continue opening new restaurants to the extent that we continue to achieve our target rate of return.

Our challenges

Our business is highly sensitive to changes in guest traffic. Increases in guest traffic drive higher sales, which creates improved leverage of our fixed operating costs and thus enables us to achieve higher operating margins. As guest traffic decreases, as it has during the current recession, lower sales result in decreased leverage that leads to declines in our operating margins. In addition to the impact of sales de-leverage, we currently face overall rising restaurant operating costs, including higher labor costs and increasing commodities costs. To offset the negative impacts of both higher operating costs and decreased leverage in a declining sales environment, our Bistro and Pei Wei operators have undertaken a series of initiatives designed to gain efficiencies at the restaurant level, with a focus on labor and cost of sales improvement opportunities, while taking special care to ensure that these initiatives do not negatively impact our guests’ dining experience.

The restaurant industry can be significantly affected by changes in discretionary spending patterns, economic conditions, consumer tastes, lifestyle trends and cost fluctuations. In recent years, consumers have been under increased economic pressures and as a result, many have changed their discretionary spending patterns. Many consumers dine out less frequently than in the past or have reduced the amount they spend on meals while dining out. Accordingly, we strive to continuously evolve and refine the critical elements of our restaurant concepts to help maintain and enhance the strength of our brands and remain fresh and relevant to our guests while maintaining a high value-to-price perception. We continuously update our menu offerings and have injected our restaurants with an updated contemporary look and feel. We also began implementing a number of new marketing initiatives designed to increase brand awareness and help drive guest traffic.

The restaurant business is intensely competitive with respect to food quality, price-value relationships, ambiance, service and location, and many existing restaurants compete with us at each of our locations. Additionally, the continued popularity of Asian cuisine may result in increased competition from new Asian-branded concepts as well as non-Asian restaurants and other food outlets, such as supermarkets, that may increase their Asian-inspired menu offerings.

Our 2008 Financial Results

During 2008, we experienced significant deteriorations in guest traffic at both of our restaurant concepts. We believe such traffic declines have occurred as recent events such as the housing and financial market crisis, rising unemployment and higher costs for consumer staples all contributed to a deepening U.S. economic recession, which has driven significant changes in consumer discretionary spending patterns. As a result, we saw a decline in overall sales per location and lower operating margins at both concepts during 2008.

Our 2008 financial results include:


	•	Consolidated revenue growth of 10.5 percent to $1.2 billion, driven primarily by new restaurant openings, partially offset by a decline in comparable store sales at both concepts;

	•	A decrease in income from continuing operations decrease of 4.4 percent to $35.0 million;

	•	An increase in diluted income per share from continuing operations increase of 2.8 percent to $1.45 partially due to the full year benefit of lower diluted shares outstanding principally resulting from prior share repurchases;

	•	A loss from discontinued operations (net of tax) of $7.6 million, including the impact of a $7.5 million pretax asset impairment charge and $2.7 million of lease termination and severance charges in connection with 10 Pei Wei store closures;

	•	17 new Bistro openings and 25 new Pei Wei openings.

Our results continued to be affected by concept growth during 2008 as we incurred $8.5 million ($6.3 million, net of tax), or approximately $0.26 per diluted share, in preopening expenses related to new Bistro and Pei Wei restaurant openings. As we continue to develop and expand our restaurant concepts at different rates, our financial results will be impacted by the mix of the number of restaurants in our concepts and the ratio of newer restaurants to more established restaurants within those concepts. This is due to the different operating characteristics of our brands as well as variations in the economics of our new restaurants compared to our more seasoned restaurants.

2009 Outlook

We anticipate a significant reduction in average weekly sales during fiscal 2009, with an estimated decrease of approximately 6% at both the Bistro and Pei Wei. Consolidated revenues for fiscal 2009 are expected to be flat compared to fiscal 2008 due to projected average weekly sales declines offset by the benefit of a full year of revenues for restaurants that opened during fiscal 2008 combined with revenues from anticipated new restaurant openings during fiscal 2009.

As a result of lower anticipated average weekly sales, we expect to experience deleverage of certain operating expenses, primarily related to fixed costs such as labor and depreciation. Overall restaurant operating margins for fiscal 2009 are projected to decline approximately 150 basis points compared to fiscal 2008.

We have reduced our planned 2009 new restaurant development and currently expect to open 4 to 6 new Bistro restaurants and 2 to 4 new Pei Wei restaurants during fiscal 2009. As a result, we anticipate a significant reduction in preopening expenses for fiscal 2009.

Overall, we expect consolidated income from continuing operations for fiscal 2009 to decline approximately 20% compared to fiscal 2008.

2009 Development

Bistro

We intend to open only four to six new Bistros in 2009, primarily located in existing markets. We have signed lease agreements for all of our development planned for fiscal 2009. Our Bistro restaurants typically range in size from 6,000 to 7,500 square feet, and require an average total cash investment of approximately $2.8 million to $3.0 million and total invested capital of approximately $4.0 million per restaurant (net of estimated landlord reimbursements). 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.” Preopening expenses are expected to average approximately $400,000 per restaurant during fiscal 2009.

Pei Wei

We intend to slow our Pei Wei growth substantially in fiscal 2009 and limit the number of openings to two to four new restaurants for which we already have signed leases. Our Pei Wei restaurants are generally 2,800 to 3,400 square feet in size and require an average total cash investment of approximately $800,000 to $900,000 and total invested capital of approximately $1.5 million per restaurant (net of estimated landlord reimbursements). Preopening expenses are expected to average approximately $150,000 per restaurant during fiscal 2009.

Global Brand Development

Operating Statistics

There are several key financial metrics that can be useful in evaluating and understanding our business. These metrics, which are widely used throughout the restaurant industry, include short-term revenue measures such as average weekly sales and total revenues and long-term profitability measures such as return on invested capital, each of which are described in further detail below. We believe it is helpful to review these measures both in total and by class year (i.e., year of restaurant opening).


	•	Average weekly sales represents an average sales amount per restaurant and helps gauge the changes in traffic, pricing and brand development. New restaurants are included in our average weekly sales comparison at the start of their thirteenth month of operation. It is not uncommon in the casual dining industry for new restaurant locations to open with an initial honeymoon period of higher than normal sales volumes and then experience a drop-off in sales after initial customer trials.

	•	Total revenues by class year helps assess the sales performance of our new and existing restaurants as well as the growth of each concept as we continue our expansion strategy.

	•	Return on invested capital is a key profitability measure that provides an indication of the long-term health of our concepts. This metric is based on a comparison of operating profit to the average capital invested in our restaurants. We believe return on invested capital is a critical indicator in evaluating our ability to create long-term value for our shareholders.

The following table shows total revenues and average weekly sales for our company-owned Bistro and Pei Wei restaurants based on the year of opening (revenues in thousands):


			Revenues						Average Weekly Sales
Year of Unit Opening	Units		2008		2007		2006		2008		2007		2006

Bistro
Pre-2001		51	$	294,147	$	306,150	$	310,896	$	111,377	$	115,441	$	117,497
2001		13		71,430		72,863		74,457		105,666		107,786		110,143
2002		14		68,872		69,390		71,201		94,603		95,316		97,803
2003		18		95,740		98,101		98,844		102,287		104,809		105,602
2004		18		78,853		81,263		81,705		84,245		86,817		87,292
2005		18		79,875		83,259		86,164		85,337		88,953		92,056
2006		20		90,702		96,792		33,272		87,214		93,069		101,132
2007		20		98,756		41,687		—		94,958		108,279		—
2008		17		41,369		—		—		94,019		—		—
Total Bistro		189	$	919,744	$	849,505	$	756,539	$	98,127	$	102,486	$	105,265
Pei Wei(1)
2000		1	$	2,760	$	2,902	$	3,089	$	53,084	$	55,803	$	59,406
2001		4		7,769		8,307		8,701		37,350		39,938		41,830
2002		11		21,475		23,168		24,081		37,543		40,503		42,099
2003		17		33,982		36,021		36,049		38,440		40,748		40,780
2004		19		39,357		40,525		40,002		39,836		41,017		40,488
2005		23		42,598		43,458		42,080		35,618		36,337		35,184
2006		27		49,197		50,383		21,480		35,041		35,885		38,495
2007		32		52,792		29,673		—		31,726		34,909		—
2008		25		28,231		—		—		34,053		—		—
Total Pei Wei		159	$	278,161	$	234,437	$	175,482	$	35,675	$	38,095	$	39,363


(1)		Reflects revenues and average weekly sales for Pei Wei continuing operations only.

Return on invested capital metrics are available on our website at www.pfcb.com.

Critical Accounting Policies

Our significant accounting policies are disclosed in Note 1 to our consolidated financial statements. The following discussion addresses our most critical accounting policies, which are those that require significant judgment.

Partnership Structure

We utilize a partnership philosophy to facilitate the development, leadership and operation of our restaurants. Historically, this philosophy was embodied in a traditional legal partnership structure, which included capital contributions from our partners in exchange for an ownership stake in the profits and losses of our restaurants. Under this legal partnership program, each partner who wishes to participate in our legal partnership structure, to the extent applicable, is required to make a cash capital contribution in exchange for a specified interest in the partnership. The ownership interest purchased by each partner generally ranges between two and ten percent of the restaurant or region the partner oversees. Generally, no more than ten percent of an individual restaurant is owned in total by minority partners. We perform an assessment of what the imputed fair value of these interests might be for a passive equity investor (i.e. not someone actually working in the restaurant), utilizing a discounted cash flow model and updated assumptions based on the results of an annual valuation analysis performed by a third-party consultant. This methodology involves the use of various estimates relating to future cash flow projections and discount rates for which significant judgments are required. We recognize any excess of the imputed fair value of these interests,

determined by using the discounted cash flow model, over the cash contribution paid by our partners as partner investment expense upon purchase by the partner of the respective interest.

At the end of a specific term (generally five years), we have the right, but not the obligation, to purchase the minority partner’s interest in the partner’s respective restaurant or region at fair value. The estimated fair value for such purchases and sales is determined by reference to current industry purchase metrics as well as the historical cash flows or net income of the subject restaurant or region. We have the option to pay the agreed upon purchase price in cash over a period of time not to exceed five years. Given that there is no public market for these interests, the fair value determinations are subjective and require the use of various estimates for which significant judgments are required. Any excess of the purchase price over the imputed fair value is recorded as an intangible asset and amortized over approximately 15 years for our Bistro restaurants and approximately 10 years for our Pei Wei restaurants.

Effective January 2007 for new store openings, the Bistro began employing a different partnership structure to achieve the same goal. At the restaurant level, our Operating and Culinary Partners at stores opened on or after January 1, 2007 (still “partners” in the philosophical, but not legal sense) no longer have a direct ownership stake in the profits and losses of a restaurant, but are instead eligible to receive monthly incentive payments based upon the profitability of the restaurant, as well as participate in an incentive program that rewards improvements in the operating performance of the restaurant. As a result of these changes, awards made to the individuals participating in the new plan are classified as compensation expense rather than as minority interest expense. Accordingly, compensation expense for these Operating and Culinary Partners is reflected in the consolidated income statement as labor expense. Additionally, a similar structure exists for our Market Partners, Market Chefs and Regional Vice Presidents, with related compensation expense reflected as general and administrative expense in the consolidated income statement. Partner investment expense is no longer recognized for new Bistro restaurant openings beginning in 2007 as a result of this change. Additionally, many existing legal partners requested an early buyout of their partnership interests during 2007 and 2008 as a result of their desire to participate in the new plan, the financial impact of which is discussed under “Partner Investment Expense” in Results of Operations.

The Pei Wei partnership structure is not affected by the changes at the Bistro and the traditional partnership structure remains in effect for new Pei Wei restaurant openings.

Lease Obligations

We lease all of our restaurant properties. At the inception of the lease, each property is evaluated to determine whether the lease will be accounted for as an operating or capital lease. The term used for this evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured and failure to exercise such option would result in an economic penalty.

There is potential for variability in the rent holiday period, which begins on the possession date and ends on the store open date, during which no cash rent payments are typically due under the terms of the lease. Factors that may affect the length of the rent holiday period generally relate to construction related delays. Extension of the rent holiday period due to delays in store opening will result in greater preopening rent expense recognized during the rent holiday period and lower occupancy expense during the rest of the lease term (post-opening).

For leases that contain rent escalations, we record the total rent payable during the lease term, as determined above, on a straight-line basis over the term of the lease (including the rent holiday period beginning upon our possession of the premises), and record the difference between the minimum rent paid and the straight-line rent as a lease obligation. Many of our leases contain provisions that require additional rental payments based upon restaurant sales volume (“contingent rent”). Contingent rent is accrued each period as the liability is incurred, in addition to the straight-line rent expense noted above. This results in variability in occupancy expense as a percentage of revenues over the term of the lease in restaurants where we pay contingent rent.

Management makes judgments regarding the probable term for each restaurant property lease, which can impact the classification and accounting for a lease as capital or operating, the rent holiday and/or escalations in payments that are taken into consideration when calculating straight-line rent and the term over which leasehold

improvements for each restaurant are amortized. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different assumed lease terms were used.

Share-Based Compensation

We account for share-based compensation in accordance with the fair value recognition provisions of Financial Accounting Standards Board Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payment. We use the Black-Scholes option pricing model, which requires the input of subjective assumptions. These assumptions include estimating 1) the length of time employees will retain their vested stock options before exercising them (“expected term”), 2) the volatility of our common stock price over the expected term and 3) the number of options that will ultimately not vest (“forfeitures”). Additionally, we use assumptions to estimate the expected forfeiture rate related to restricted stock in determining the share-based compensation for these awards. Changes in these assumptions can materially affect our estimates of share-based compensation and consequently, the related amount recognized in the consolidated statements of income.

Impairment of Long-Lived Assets

We review property and equipment and intangible assets with finite lives (those assets resulting from the acquisition of minority partners’ interests in the operating rights of certain of our restaurants) for impairment when events or circumstances indicate these assets might be impaired, but at least quarterly. We test impairment using historical cash flows and other relevant facts and circumstances as the primary basis for our estimates of future cash flows. The analysis is performed at the individual restaurant or operating segment level for indicators of permanent impairment. Judgments and estimates made related to long-lived assets are affected by factors such as economic conditions, changes in historical resale values and changes in operating performance. This process requires the use of estimates and assumptions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets.

Self Insurance

We are self-insured for a significant portion of our current and prior years’ exposures related to our workers’ compensation, general liability, medical and dental programs. We have paid to our insurance carrier amounts that approximate the cost of claims known to date and we have accrued additional liabilities for our estimate of ultimate costs related to those claims. We develop these estimates with our insurance providers and use historical experience factors to estimate the ultimate claim exposure. Our self-insurance liabilities are actuarially determined and consider estimates of expected losses, based on statistical analyses of our actual historical trends as well as historical industry data. If actual claims experience differs from our assumptions and estimates, changes in our insurance reserves would impact the expense recorded in our consolidated income statements.

Income Taxes

We provide for income taxes based on our estimate of federal and state income tax liabilities. These estimates include, among other items, effective rates for state and local income taxes, allowable tax credits for items such as taxes paid on reported tip income, estimates related to depreciation and amortization expense allowable for tax purposes, and the tax deductibility of certain other items.

Our estimates are based on the information available to us at the time that we prepare the income tax provision. We generally file our annual income tax returns several months after our fiscal year-end. Income tax returns are subject to audit by federal, state, and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws.

Accruals for uncertain tax positions are accounted for under FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). On a quarterly basis, we review and update our inventory of tax positions as necessary to add any new uncertain positions taken, or to remove previously identified uncertain positions that have been adequately resolved. Additionally, uncertain positions may be re-measured as warranted by changes in facts or law. Accounting for uncertain tax positions requires significant

judgments, including estimating the amount, timing and likelihood of ultimate settlement. Although the Company believes that its estimates are reasonable, actual results could differ from these estimates.

Results of Operations

We operate on a 52/53-week year, with the fiscal year ending on the Sunday closest to December 31. Fiscal years 2008, 2007 and 2006 were each comprised of 52 weeks.

Fiscal 2008 compared to Fiscal 2007

Our consolidated operating results for the fiscal years ended December 28, 2008 (fiscal 2008) and December 30, 2007 (fiscal 2007) were as follows (dollars in thousands):


	Fiscal Year
	2008			% of Revenues			2007			% of Revenues			Change			% Change

Revenues	$	1,198,124			100.0	%	$	1,084,193			100.0	%	$	113,931			10.5	%
Costs and expenses:
Cost of sales		325,630			27.2	%		297,242			27.4	%		28,388			9.6	%
Labor		396,911			33.1	%		364,074			33.6	%		32,837			9.0	%
Operating		198,967			16.6	%		172,147			15.9	%		26,820			15.6	%
Occupancy		69,809			5.8	%		62,164			5.7	%		7,645			12.3	%
General and administrative		77,488			6.5	%		66,968			6.2	%		10,520			15.7	%
Depreciation and amortization		68,711			5.7	%		55,988			5.2	%		12,723			22.7	%
Preopening expense		8,457			0.7	%		14,310			1.3	%		(5,853	)		(40.9	)%
Partner investment expense		(354	)		0.0	%		(2,012	)		(0.2	)%		1,658			(82.4	)%

Total costs and expenses		1,145,619			95.6	%		1,030,881			95.1	%		114,738			11.1	%

Income from operations		52,505			4.4	%		53,312			4.9	%		(807	)		(1.5	)%
Interest and other income (expense), net		(3,362	)		(0.3	)%		(100	)		0.0	%		(3,262	)		—
Minority interest		(1,933	)		(0.2	)%		(4,169	)		(0.4	)%		2,236			(53.6	)%

Income from continuing operations before provision for income taxes		47,210			3.9	%		49,043			4.5	%		(1,833	)		(3.7	)%
Provision for income taxes		(12,193	)		(1.0	)%		(12,420	)		(1.1	)%		227			(1.8	)%

Income from continuing operations		35,017			2.9	%		36,623			3.4	%		(1,606	)		(4.4	)%
Loss from discontinued operations, net of tax		(7,591	)		(0.6	)%		(4,560	)		(0.4	)%		(3,031	)		66.5	%

Net Income	$	27,426			2.3	%	$	32,063			3.0	%	$	(4,637	)		(14.5	)%

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

Selected operating statistics for the Bistro for fiscal 2008 and 2007 were as follows (dollars in thousands):


	Fiscal Year
				% of						% of
	2008			Revenues			2007			Revenues			Change			% Change

Revenues	$	919,963			100.0	%	$	849,743			100.0	%	$	70,220			8.3	%
Costs and expenses:
Cost of sales		249,911			27.2	%		232,578			27.4	%		17,333			7.5	%
Labor		301,967			32.8	%		282,919			33.3	%		19,048			6.7	%
Operating		149,083			16.2	%		131,863			15.5	%		17,220			13.1	%
Occupancy		50,670			5.5	%		47,059			5.5	%		3,611			7.7	%
Minority interest		1,361			0.1	%		3,351			0.4	%		(1,990	)		(59.4	)%
Depreciation and amortization		51,091			5.6	%		42,294			5.0	%		8,797			20.8	%
Preopening expense		5,677			0.6	%		9,012			1.1	%		(3,335	)		(37.0	)%
Partner investment expense		(1,066	)		(0.1	)%		(3,358	)		(0.4	)%		2,292			(68.3	)%

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

Selected operating statistics for Pei Wei for the fiscal 2008 and 2007 were as follows (dollars in thousands):


	Fiscal Year
			% of					% of
	2008		Revenues			2007		Revenues			Change			% Change

Revenues	$	278,161		100.0	%	$	234,450		100.0	%	$	43,711			18.6	%
Costs and expenses:
Cost of sales		75,719		27.2	%		64,664		27.6	%		11,055			17.1	%
Labor		94,944		34.1	%		81,155		34.6	%		13,789			17.0	%
Operating		49,884		17.9	%		40,284		17.2	%		9,600			23.8	%
Occupancy		19,139		6.9	%		15,105		6.4	%		4,034			26.7	%
Minority interest		572		0.2	%		818		0.3	%		(246	)		(30.1	)%
Depreciation and amortization		16,158		5.8	%		12,278		5.2	%		3,880			31.6	%
Preopening expense		2,780		1.0	%		5,298		2.3	%		(2,518	)		(47.5	)%
Partner investment expense		712		0.3	%		1,346		0.6	%		(634	)		(47.1	)%

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

Revenues

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

Bistro: The increase in revenues was attributable to revenues of $98.4 million generated by 17 new Bistro restaurants that opened during 2008 combined with a full year of revenues for the 20 new stores that opened during 2007. Revenues for stores that opened prior to 2007 declined by $28.2 million as a significant reduction in overall guest traffic more than offset the benefit of a three to four percent average check increase, reflecting the net benefit of price and menu mix changes.

Pei Wei: The increase in revenues was attributable to revenues of $51.3 million generated by 25 new Pei Wei restaurants that opened during 2008 combined with a full year of revenues for the 32 new stores that opened during 2007. Revenues for stores that opened prior to 2007 decreased by $7.6 million primarily due to a significant reduction in overall guest traffic partially offset by the benefit of a slightly higher average check, reflecting the net benefit of price and menu mix changes.

Costs and Expenses

Cost of Sales

Cost of sales is comprised of the cost of food and beverages. Cost of sales as a percentage of revenues decreased at both Bistro and Pei Wei due to the net impact of favorable product mix shifts. We negotiate annual pricing agreements for many of our key commodities and such contracts provided for favorable seafood and produce costs, unfavorable poultry and wok oil costs, and consistent beef costs during fiscal 2008 compared to fiscal 2007.

Labor

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

Bistro: Labor expenses as a percentage of revenues decreased primarily due to improved efficiency primarily in culinary as well as hospitality positions. The decrease was partially offset by the benefit of reduced workers’ compensation insurance liabilities recorded in 2007 resulting from lower than anticipated claim development from prior claim years, higher management incentive costs principally resulting from the full year impact of the 2007 change in the Bistro partnership structure and the impact of decreased leverage on lower average weekly sales on the portion of labor expenses that is fixed in nature.

Pei Wei: Labor expenses as a percentage of revenues decreased primarily due to improved labor efficiency in culinary and hospitality positions as well as lower manager salaries resulting from reduced management headcount. The benefit of opening fewer new stores on a larger base of existing stores during fiscal 2008 also contributed to the decrease. The decrease was partially offset by costs associated with the utilization of additional key hourly employees, the benefit of reduced workers’ compensation insurance liabilities recorded in 2007 resulting from lower than anticipated claim development from prior claim years and the impact of decreased leverage on lower average weekly sales on the portion of labor expenses that is fixed in nature.

Operating

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

Bistro: Operating expenses as a percentage of revenues increased primarily due to increased marketing spend, the impact of decreased leverage on lower average weekly sales on the portion of operating costs that is fixed in nature and higher utility costs.

Pei Wei: Operating expenses as a percentage of revenues increased primarily due to the impact of decreased leverage resulting from lower average weekly sales on the portion of operating costs that is fixed in nature as well as increased marketing spend, higher utility costs, and higher menu printing costs related to new menu rollouts.

Occupancy

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

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

Pei Wei: Occupancy costs as a percentage of revenues increased primarily due to the impact of decreased leverage on lower average weekly sales.

General and Administrative

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

Consolidated general and administrative costs increased primarily due to higher management incentive accruals resulting from the accrual of a corporate bonus for fiscal 2008 compared to the absence of such an accrual in fiscal 2007 as well as higher compensation and benefits expense primarily related to the addition of corporate management personnel and increased health insurance costs. These increases were partially offset by lower share-based compensation expense. Fiscal 2008 also includes $2.0 million of cash and non-cash charges related to the Pei Wei President’s separation agreement which included a severance payment, accelerated vesting of unvested options and the extension of the expiration date of all outstanding stock options.

Depreciation and Amortization

Depreciation and amortization expenses include the depreciation and amortization of fixed assets, gains and losses on disposal of assets and the amortization of intangible assets and non-transferable liquor license fees. Each segment contributed as follows:

Bistro: Depreciation and amortization increased primarily due to depreciation on restaurants that opened during fiscal 2008 as well as a full year of depreciation on restaurants that opened during fiscal 2007. As a percentage of revenues, depreciation and amortization increased primarily due to the impact of decreased leverage resulting from lower average weekly sales.

Pei Wei: Depreciation and amortization increased primarily due to depreciation on restaurants that opened during fiscal 2008 as well as a full year of depreciation on restaurants that opened during fiscal 2007. As a percentage of revenues, depreciation and amortization increased primarily due to the impact of decreased leverage resulting from lower average weekly sales.

Preopening Expense

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

Bistro: Preopening expense decreased primarily due to the impact of opening 17 new restaurants during fiscal 2008 compared to opening 20 new restaurants during fiscal 2007 in addition to a lower number of scheduled new restaurant openings in early fiscal 2009 compared to early fiscal 2008.

Pei Wei: Preopening expense decreased primarily due to the timing of expenses related to restaurants that opened during the first quarter of 2008, which resulted in a greater portion of preopening expenses related to fiscal 2008 openings being recognized during fiscal 2007. Also contributing to the decrease was the impact of opening 25 new restaurants during fiscal 2008 compared to opening 32 new restaurants during fiscal 2007 as well as a lower number of scheduled new restaurant openings in early fiscal 2009 compared to early fiscal 2008.

Partner Investment Expense

Partner investment expense represents the difference between the imputed fair value of our partners’ ownership interests at the time the partners invest in their restaurants and our partners’ cash contributions for those ownership interests. Additionally, for those partners who are bought out prior to the restaurant reaching

maturity (typically after five years of operation), partner investment expense includes a reversal of previously recognized expense for the difference between the fair value of the partner’s interest at inception date and the fair value at the date of repurchase, to the extent that the former is greater. Each segment contributed as follows:

Bistro: The change in partner investment expense resulted primarily from changes in the partnership structure beginning in 2007 which led to a significant increase in early buyouts of minority partner interests beginning in fiscal 2007. Early buyouts resulted in a $1.1 million reversal of previously recognized partner investment expense during fiscal 2008 as compared to a $3.4 million reversal during fiscal 2007, in each case due to the fair value of the partners’ interests at inception date exceeding the fair value of the partners’ interests at repurchase date.

Pei Wei: Partner investment expense decreased primarily due to the impact of opening fewer new restaurants during fiscal 2008 compared to fiscal 2007.

Interest and Other Income (Expense), Net

Interest expense recognized during fiscal 2008 and fiscal 2007 primarily consists of interest costs in excess of amounts capitalized related to our outstanding credit line and other borrowings. Interest income earned during fiscal 2007 primarily related to interest-bearing overnight deposits as lower borrowing levels resulted in full capitalization of interest expense. Accretion expense related to our conditional asset retirement obligations is also recognized in interest expense.

Consolidated interest and other income (expense), net increased primarily due to higher interest expense in 2008 resulting from interest incurred on a higher average level of outstanding credit line borrowings throughout 2008, a portion of which exceeded our limit for capitalization during 2008. We expect to continue to recognize net interest expense until such time as we lower our outstanding debt levels or increase our development.

Minority Interest

Minority interest represents the portion of our net earnings which is attributable to the collective ownership interests of our minority partners. As previously discussed, in many of our restaurants we employ a partnership management structure whereby we have entered into a series of partnership agreements with our regional managers, certain of our general managers, and certain of our executive chefs. Each segment contributed as follows:

Bistro: Minority interest as a percentage of revenues at the Bistro decreased due to the impact of partner buyouts occurring during fiscal 2008 and the full year impact of partner buyouts that occurred during fiscal 2007. During fiscal 2008 and fiscal 2007, 92 interests and 203 interests were purchased, respectively, which reduced the number of minority interests to 40 interests at the end of fiscal 2008.

Pei Wei: Minority interest as a percentage of revenues decreased slightly primarily due to the impact of partnership interest buyouts occurring during fiscal 2007 and 2008.

Provision for Income Taxes

Our effective tax rate from continuing operations was 25.8% for fiscal 2008 compared to 25.3% for fiscal 2007. The increase from the prior year was primarily attributable to state taxes, and, to a lesser extent, the impact of a change in estimate related to amended tax returns. Besides the effect of state taxes and the change in estimate related to the amended returns, the income tax rate for both fiscal 2008 and fiscal 2007 differed from the expected provision for income taxes, which is derived by applying the statutory income tax rate, primarily as a result of FICA tip credits.

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

Loss on Discontinued Operations, Net of Tax

As part of ongoing profitability initiatives, we closed 10 underperforming Pei Wei restaurants during the fourth quarter of 2008. This decision, which was reached during the third quarter of 2008, was the result of a rigorous

evaluation of our entire store portfolio. We reviewed each location’s past and present operating performance combined with projected future results. The locations selected for closure represent restaurants with lower profitability that were not projected to provide acceptable returns in the foreseeable future.

During the second half of 2008, we recognized non-cash asset impairment charges of $7.5 million ($4.6 million net of tax) related to the write-off of the carrying value of long-lived assets associated with the 10 Pei Wei store closures. We also recognized additional pretax charges of $2.6 million related to estimated and actual lease termination costs and $0.1 million related to severance payments made in connection with the store closures. These charges as well as all historical operations related to the closed stores are reflected within discontinued operations in the consolidated financial statements for all years presented as further discussed in Note 2 to the consolidated financial statements.

Additionally, as a result of the expected sale of Taneko’s long-lived assets, Taneko was classified as a discontinued operation as of December 30, 2007. We recognized a $3.1 million ($2.1 million net of tax) asset impairment charge which was included within discontinued operations during 2007. All revenues, costs and expenses and income taxes attributable to Taneko are reflected within discontinued operations in the consolidated financial statements for all periods presented.

Fiscal 2007 compared to Fiscal 2006

Our consolidated operating results for the fiscal years ended December 30, 2007 (fiscal 2007) and December 31, 2006 (fiscal 2006) were as follows (dollars in thousands):


	Fiscal Year
				% of						% of
	2007			Revenues			2006			Revenues			$ Change			% Change

Revenues	$	1,084,193			100.0	%	$	932,116			100.0	%	$	152,077			16.3	%
Costs and expenses:
Cost of sales		297,242			27.4	%		254,923			27.3	%		42,319			16.6	%
Labor		364,074			33.6	%		307,573			33.0	%		56,501			18.4	%
Operating		172,147			15.9	%		145,309			15.6	%		26,838			18.5	%
Occupancy		62,164			5.7	%		51,958			5.6	%		10,206			19.6	%
General and administrative		66,968			6.2	%		56,030			6.0	%		10,938			19.5	%
Depreciation and amortization		55,988			5.2	%		44,378			4.8	%		11,610			26.2	%
Preopening expense		14,310			1.3	%		11,922			1.3	%		2,388			20.0	%
Partner investment expense		(2,012	)		(0.2	)%		4,371			0.5	%		(6,383	)		—

Total costs and expenses		1,030,881			95.1	%		876,464			94.0	%		154,417			17.6	%

Income from operations		53,312			4.9	%		55,652			6.0	%		(2,340	)		(4.2	)%
Interest and other income (expense), net		(100	)		0.0	%		1,315			0.1	%		(1,415	)		—
Minority interest		(4,169	)		(0.4	)%		(8,116	)		(0.9	)%		3,947			(48.6	)%

Income from continuing operations before provision for income taxes		49,043			4.5	%		48,851			5.2	%		192			0.4	%
Provision for income taxes		(12,420	)		(1.1	)%		(14,078	)		(1.5	)%		1,658			(11.8	)%

Income from continuing operations		36,623			3.4	%		34,773			3.7	%		1,850			5.3	%
Loss from discontinued operations, net of tax		(4,560	)		(0.4	)%		(1,520	)		(0.2	)%		(3,040	)		—

Net Income	$	32,063			3.0	%	$	33,253			3.6	%	$	(1,190	)		(3.6	)%

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

Selected operating statistics for the Bistro for fiscal 2007 and 2006 were as follows (dollars in thousands):


	Fiscal Year
				% of					% of
	2007			Revenues			2006		Revenues			Change			% Change

Revenues	$	849,743			100.0	%	$	756,634		100.0	%	$	93,109			12.3	%
Costs and expenses:
Cost of sales		232,578			27.4	%		206,567		27.3	%		26,011			12.6	%
Labor		282,919			33.3	%		247,097		32.7	%		35,822			14.5	%
Operating		131,863			15.5	%		115,465		15.3	%		16,398			14.2	%
Occupancy		47,059			5.5	%		40,683		5.4	%		6,376			15.7	%
Minority interest		3,351			0.4	%		6,993		0.9	%		(3,642	)		(52.1	)%
Depreciation and amortization		42,294			5.0	%		34,451		4.6	%		7,843			22.8	%
Preopening expense		9,012			1.1	%		8,004		1.1	%		1,008			12.6	%
Partner investment expense		(3,358	)		(0.4	)%		3,475		0.5	%		(6,833	)		—

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

Selected operating statistics for Pei Wei for fiscal 2007 and 2006 were as follows (dollars in thousands):


	Fiscal Year
			% of					% of
	2007		Revenues			2006		Revenues			Change			% Change

Revenues	$	234,450		100.0	%	$	175,482		100.0	%	$	58,968			33.6	%
Costs and expenses:
Cost of sales		64,664		27.6	%		48,356		27.6	%		16,308			33.7	%
Labor		81,155		34.6	%		60,476		34.5	%		20,679			34.2	%
Operating		40,284		17.2	%		29,844		17.0	%		10,440			35.0	%
Occupancy		15,105		6.4	%		11,275		6.4	%		3,830			34.0	%
Minority interest		818		0.3	%		1,123		0.6	%		(305	)		(27.2	)%
Depreciation and amortization		12,278		5.2	%		8,790		5.0	%		3,488			39.7	%
Preopening expense		5,298		2.3	%		3,919		2.2	%		1,379			35.2	%
Partner investment expense		1,346		0.6	%		896		0.5	%		450			50.2	%

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

Revenues

Each segment contributed as follows:

Bistro: The increase in revenues was attributable to revenues of $105.2 million generated by 20 new Bistro restaurants that opened during 2007 combined with a full year of revenues for the 20 new stores that opened during 2006. Stores that opened prior to 2006 experienced a $12.1 million decline in revenues due to a reduction in overall guest traffic which resulted in lower sales volumes, despite the benefit of a 3% average check increase.

Pei Wei: The increase in revenues was attributable to revenues of $58.6 million generated by the 32 new Pei Wei restaurants that opened in 2007 combined with a full year of revenues for the 27 new stores that opened during 2006. Stores that opened prior to 2006 experienced a $0.4 million increase in revenues due to higher guest traffic partially offset by a slight decrease in average check.

Costs and Expenses

Cost of Sales

Each segment contributed as follows:

Bistro: Cost of sales as a percentage of revenues at the Bistro increased slightly primarily due to higher produce and dry food expense as well as the impact of our new grill menu items. The increases were partially offset by lower seafood and pork expense resulting from favorable pricing, improved yields and increased purchasing through national distribution contracts.

Pei Wei: Cost of sales as a percentage of revenues at Pei Wei was consistent with the prior year primarily due to lower produce expense resulting from the increase in product availability, favorable yields and the number of products covered by contract pricing as well as lower pork expense resulting from favorable pricing and yields. This impact was fully offset by increased dry food expense and the benefit of an adjustment recorded during the second quarter of 2006 resulting from a modification of our accounting policy related to rebate accruals.

Labor

Each segment contributed as follows:

Bistro: Labor expenses as a percentage of revenues at the Bistro increased primarily due to higher management incentive costs principally resulting from the 2007 change in the Bistro partnership structure, wage rate pressure impacting all hourly labor categories and the impact of decreased leverage resulting from lower average weekly sales on the portion of labor costs that is fixed in nature. The impact of these factors was partially offset by the benefit of reduced workers’ compensation insurance liabilities resulting from lower than anticipated claims development.

Pei Wei: Labor expenses as a percentage of revenues at Pei Wei increased slightly primarily due to continued wage rate pressure in culinary positions, increased management incentive costs and the impact of decreased leverage resulting from lower average weekly sales on the portion of labor costs that is fixed in nature. The impact of these factors was partially offset by the benefit of reduced workers’ compensation insurance liabilities resulting from lower than anticipated claims development.

Operating

Each segment contributed as follows:

Bistro: Operating expenses as a percentage of revenues at our Bistro restaurants increased slightly when considering an adjustment resulting from a modification of our accounting policy related to utility accruals during the second quarter of 2006. Excluding the impact of this adjustment, operating expenses as a percentage of revenues increased primarily due to costs related to the system-wide rollout of a new safety program initiative as well as higher utilities costs and the impact of decreased leverage resulting from lower average weekly sales on the portion of operating costs that is fixed in nature.

Pei Wei: Operating expenses as a percentage of revenues at our Pei Wei restaurants increased including an adjustment resulting from a modification of our accounting policy related to utility accruals during the second quarter of 2006. Excluding the impact of this adjustment, operating expenses as a percentage of revenues increased primarily due to an increase in marketing spend, the impact of decreased leverage resulting from lower average weekly sales on the portion of operating costs that is fixed in nature and higher utilities costs, partially offset by reduced take-out supplies and menu printing costs.

Occupancy

Each segment contributed as follows:

Bistro: Occupancy costs as a percentage of revenues at the Bistro increased slightly primarily due to higher general liability insurance costs combined with the impact of decreased leverage resulting from lower average weekly sales.

Pei Wei: Occupancy costs as a percentage of revenues at Pei Wei was consistent primarily due to the impact of decreased leverage resulting from lower average weekly sales combined with higher general liability insurance costs, partially offset by reduced property tax accruals.

General and Administrative

Consolidated general and administrative costs increased primarily due to higher compensation and benefits expense primarily related to the addition of corporate management personnel, the addition of Pei Wei development and operating partners as well as our new Pei Wei Chief Operating Officer and increased health insurance costs. To a lesser extent, the increase was also due to higher share-based compensation expense and higher management incentive accruals resulting primarily from the impact of the 2007 change in the Bistro partnership structure partially offset by the absence of a corporate bonus accrual during fiscal 2007.

Depreciation and Amortization

Each segment contributed as follows:

Bistro: Depreciation and amortization increased primarily due to additional depreciation and amortization on restaurants that opened during fiscal 2007 and, to a lesser extent, costs related to our new plateware and grill menu initiatives. As a percentage of revenues, depreciation and amortization increased due to higher average capital expenditures for new restaurants and remodels as well as the impact of decreased leverage resulting from lower average weekly sales.

Pei Wei: Depreciation and amortization increased primarily due to additional depreciation and amortization on restaurants that opened during fiscal 2007. As a percentage of revenues, depreciation and amortization increased due to the impact of decreased leverage resulting from lower average weekly sales and higher average capital expenditures for new restaurants.

Preopening Expense

Each segment contributed as follows:

Bistro: Preopening expense increased primarily due to the impact in 2007 of the timing and number of restaurants scheduled to open during early fiscal 2008 compared to the impact in 2006 of early fiscal 2007 openings. Additionally, total preopening costs per restaurant increased slightly during fiscal 2007 compared to the prior year.

Pei Wei: Preopening expense increased primarily due to the impact of opening 32 new Pei Wei restaurants during fiscal 2007 compared to 27 new Pei Wei restaurants during fiscal 2006, as well as the impact in 2007 of the timing and number of restaurants scheduled to open during early fiscal 2008 compared to the impact in 2006 of early fiscal 2007 openings. Additionally, total preopening costs per restaurant increased slightly during fiscal 2007 compared to the prior year.

Partner Investment Expense

Each segment contributed as follows:

Bistro: Partner investment expense at the Bistro decreased due to the change in partnership structure discussed previously, which led to a significant increase in early buyouts of minority partner interests during fiscal 2007. These early buyouts resulted in a $3.4 million reversal of previously recognized partner investment expense due to the fair value of the partner’s interest at inception date exceeding the fair value of the partner’s

interest at repurchase date. Additionally, as a result of the change in partnership structure, partner investment expense is no longer recognized at the time a new Bistro restaurant opens.

Pei Wei: Partner investment expense at Pei Wei increased primarily due to the impact of opening fewer new restaurants during fiscal 2007 compared to fiscal 2006. These increases were partially offset by higher expense reductions related to minority partner buyouts and the impact of a lower imputed fair value of partnership interests in new Pei Wei restaurants in fiscal 2007.

Interest and Other Income (Expense), Net

Consolidated interest and other income (expense), net decreased primarily due to lower interest income resulting from the sale of interest-bearing securities in late 2006 to fund our share repurchase program, combined with increased interest expense in 2007 resulting from greater interest incurred related to additional credit line borrowings, a portion of which exceeded our limit for capitalization during 2007. We expect to continue to recognize net interest expense until such time as we lower our outstanding debt levels.

Minority Interest

Each segment contributed as follows:

Bistro: Minority interest as a percentage of revenues at the Bistro decreased due to the impact of partner buyouts occurring during fiscal 2007. These buyouts reduced the number of minority interests from 338 interests as of December 31, 2006 to 133 interests as of December 30, 2007.

Pei Wei: Minority interest as a percentage of revenues at Pei Wei decreased due to the impact of lower restaurant net income and the impact of partner buyouts occurring during fiscal 2007.

Provision for Income Taxes

Our effective tax rate from continuing operations was 25.3% for fiscal 2007 compared to 28.8% for fiscal 2006. The income tax rates for both fiscal 2007 and fiscal 2006 differed from the expected provision for income taxes, which is derived by applying the statutory income tax rate, primarily as a result of FICA tip credits. The decrease in the effective rate for fiscal 2007 compared to fiscal 2006 is primarily due to an income tax benefit arising from state tax credits and state and federal net operating losses. Management has evaluated all positive and negative evidence concerning the realizability of deferred tax assets and has determined that, with the exception of a small amount of state net operating losses, the Company will recognize sufficient future taxable income to realize the benefit of its deferred tax assets. See Note 14 to the consolidated financial statements for a discussion of our adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.

Loss on Discontinued Operations, Net of Tax

Taneko and 10 underperforming Pei Wei restaurants were classified as discontinued operations for all periods presented. See Fiscal 2008 compared to Fiscal 2007 Loss on Discontinued Operations, Net of Tax section for further discussion.

Quarterly Results

The following table sets forth certain unaudited quarterly information for the eight fiscal quarters in the two-year period ended December 28, 2008, expressed as a percentage of revenues, except for revenues which are expressed in thousands. This quarterly information has been prepared on a basis consistent with the audited financial statements and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented. Our quarterly operating results may fluctuate significantly as a result of a variety of factors, and operating results for any quarter are not necessarily indicative of results for a full fiscal year.


	Fiscal 2008												Fiscal 2007
	First			Second			Third			Fourth			First			Second			Third			Fourth
	Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter

Revenues, in thousands	$	305,917		$	301,533		$	295,877		$	294,797		$	262,014		$	264,660		$	268,120		$	289,399
Costs and expenses:
Cost of sales		27.3	%		27.2	%		27.2	%		27.0	%		27.5	%		27.3	%		27.3	%		27.5	%
Labor		33.8			33.2			33.1			32.4			33.6			33.7			33.9			33.1
Operating		15.7			16.4			17.6			16.7			15.5			15.8			16.2			16.0
Occupancy		5.8			5.8			5.8			5.9			5.6			5.8			5.9			5.7
General and administrative		6.1			6.3			6.1			7.4			6.3			5.9			6.4			6.1
Depreciation and amortization		5.4			5.7			5.8			6.1			4.7			5.0			5.4			5.4
Preopening expense		0.9			0.6			0.5			0.8			0.9			1.2			1.8			1.4
Partner investment expense		0.1			(0.2	)		0.0			(0.1	)		(0.5	)		(0.2	)		(0.0	)		(0.0	)

Total costs and expenses		95.0			95.0			96.3			96.1			93.7			94.5			96.8			95.3

Income from operations		5.0			5.0			3.7			3.9			6.3			5.5			3.2			4.7
Interest and other income (expense), net		(0.3	)		(0.3	)		(0.3	)		(0.2	)		0.1			0.1			(0.0	)		(0.2	)
Minority interest		(0.2	)		(0.2	)		(0.1	)		(0.1	)		(0.6	)		(0.4	)		(0.3	)		(0.2	)

Income from continuing operations before provision for income taxes		4.4			4.5			3.3			3.5			5.8			5.1			2.9			4.3
Provision for income taxes		(1.2	)		(1.2	)		(0.7	)		(1.0	)		(1.6	)		(1.4	)		(0.7	)		(1.0	)

Income from continuing operations		3.3	%		3.3	%		2.6	%		2.5	%		4.2	%		3.8	%		2.2	%		3.3	%
Loss from discontinued operations, net of tax		(0.1	)		(0.2	)		(1.6	)		(0.7	)		(0.2	)		(0.3	)		(0.3	)		(0.9	)

Net Income		3.2	%		3.1	%		1.0	%		1.8	%		4.0	%		3.5	%		2.0	%		2.4	%

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

Liquidity and Capital Resources

Our primary sources of liquidity are cash provided by operations and borrowings under our credit facility. Historically, our need for capital resources has been driven by our construction of new restaurants. More recently, our need for capital resources has also been driven by the purchase of minority interests in both fiscal 2008 and 2007 as well as repurchases of our common stock in fiscal 2008, 2007 and 2006.

The following table presents a summary of our cash flows for fiscal years 2008, 2007, and 2006 (in thousands):


	2008			2007			2006

Net cash provided by operating activities	$	139,753		$	137,920		$	123,404
Net cash used in investing activities		(97,649	)		(166,376	)		(75,065	)
Net cash provided by (used in) financing activities		(25,208	)		20,922			(48,698	)

Net increase (decrease) in cash and cash equivalents	$	16,896		$	(7,534	)	$	(359	)

Operating Activities

We have funded our capital requirements since inception through sales of equity securities, debt financing and cash flows from operations. Net cash provided by operating activities exceeded net income for the periods shown due principally to the effect of depreciation and amortization, a net increase in operating liabilities, share-based compensation and the effect of minority interest as well as non-cash asset impairment and lease termination charges recognized in fiscal 2008 and 2007.

Investing Activities

We have historically used cash primarily to fund the development and construction of new restaurants. Investment activities primarily related to capital expenditures of $87.2 million, $151.6 million, and $114.3 million in fiscal years 2008, 2007 and 2006, respectively. Capital expenditures were relatively higher during fiscal 2007 and relatively lower during fiscal 2008 due to both the number of new restaurant openings in each year (42 new restaurants during fiscal 2008 compared to 52 new restaurants during fiscal 2007) and the timing of openings, which resulted in a greater portion of capital expenditures related to early fiscal 2008 openings being recognized during fiscal 2007. Also included are purchases of minority interests of $9.8 million, $13.0 million and $2.1 million in 2008, 2007, and 2006, respectively, and capitalized interest of $0.7 million, $1.8 million, and $1.0 million in 2008, 2007, and 2006, respectively. Additionally, we had net sales of short-term investments totaling $42.4 million during 2006.

We intend to open four to six new Bistro restaurants and two to four new Pei Wei restaurants in fiscal year 2009. We expect that our planned future Bistro restaurants will require, on average, a total cash investment per restaurant of approximately $2.8 million to $3.0 million. We expect to spend approximately $400,000 per restaurant for preopening costs. Total cash investment per each Pei Wei restaurant is expected to average $800,000 to $900,000 and we expect to spend $150,000 per restaurant for preopening costs. The anticipated total cash investment per restaurant is based on recent historical averages which have increased over prior years due to increases in construction related costs of steel, aluminum and lumber. We expect total gross capital expenditures for fiscal 2009 to approximate $35.0 million to $45.0 million ($30.0 million to $40.0 million, net of landlord reimbursements).

Financing Activities

Financing activities during fiscal 2008, 2007, and 2006 included debt repayments, purchases of treasury stock, proceeds from stock options exercised and employee stock purchases, distributions to minority partners, and the tax benefit from disqualifying stock option dispositions, as well as $96.0 million and $12.0 million of credit line borrowings during fiscal 2007 and 2006, respectively. Fiscal year 2006 also included $7.3 million related to the purchase of Pei Wei minority interests.

Future Capital Requirements

Our capital requirements, including development costs related to the opening of additional restaurants, have historically been significant. Our future capital requirements and the adequacy of our available funds will depend on many factors, including the operating performance of our restaurants, the pace of expansion, real estate markets, site locations, the nature of the arrangements negotiated with landlords and any potential repurchases of our common stock.

For fiscal 2009, we believe that our cash flow from operations will significantly exceed our projected capital requirements. As a result and given the uncertainty of the macroeconomic environment, we plan to evaluate other uses of capital, including, but not limited to, debt repayment and repurchases of our common stock.

In the longer term, in the unlikely event that additional capital is required, we may seek to raise such capital through public or private equity or debt financing. Future capital funding transactions may result in dilution to current shareholders. We cannot ensure that such capital will be available on favorable terms, if at all.

Credit Facility

On August 31, 2007, we entered into a senior credit facility (“Credit Facility”) with several commercial financial institutions, which allows for borrowings of up to $150.0 million. The Credit Facility is guaranteed by our material existing and future domestic subsidiaries. The Credit Facility expires on August 30, 2013 and contains

customary representations, warranties, and negative and affirmative covenants, including a requirement to maintain a maximum leverage ratio, as defined, of 2.5:1 and a minimum fixed charge coverage ratio, as defined, of 1.25:1, as well as customary events of default and certain default provisions that could result in acceleration of the Credit Facility. We were in compliance with these restrictions and conditions as of December 28, 2008 as our leverage ratio was 1.79:1 and the fixed charge coverage ratio was 2.08:1.

As of December 28, 2008, we had borrowings outstanding under the Credit Facility totaling $80.0 million as well as $11.3 million committed for the issuance of letters of credit, which is required by insurance companies for our workers’ compensation and general liability insurance programs. Available borrowings under the Credit Facility were $58.7 million at December 28, 2008. See Item 7A below for a discussion of interest rates and our interest rate swap.

Share Repurchase Program

Our Board of Directors has authorized programs to repurchase up to a total of $150.0 million of our outstanding shares of common stock from time to time in the open market, pursuant to Rule 10b5-1 trading plans or in private transactions at prevailing market prices. We repurchased a total of 3.2 million shares of our common stock for $96.4 million at an average price of $29.74 during fiscal years 2006 and 2007 and $3.6 million of the initial $50.0 million purchase authorization expired in fiscal 2007.

Partnership Activities

As of December 28, 2008, there were 58 partners within our partnership system representing 225 partnership interests. During fiscal 2008, we had the opportunity to purchase 27 partnership interests which had reached the five-year threshold period during the year, as well as 131 additional partnership interests which (i) had reached the end of their initial five-year term in prior years (ii) related to partners who left the Company prior to the initial five-year term or (iii) related to partners who requested an early buyout of their interest. We purchased 149 of these partnership interests in their entirety for a total of $12.5 million. Of the total purchase price, $9.8 million was paid in cash, while the remaining balance has been recorded as debt on the consolidated balance sheet at December 28, 2008.

During fiscal 2009, we will have the opportunity to purchase 18 additional partnership interests which will reach their five-year anniversary. If all of these interests are purchased, the total purchase price will approximate $1.2 million to $1.6 million based upon the estimated fair value of the respective interests at December 28, 2008.

Purchase Commitments

The following table shows our purchase commitments by category as of December 28, 2008 (in thousands):


	Payments Due by period
			Less						Greater
			Than		1-3		3-5		Than
	Total		1 Year		Years		Years		5 Years

Long-term debt	$	88,805	$	5,753	$	1,396	$	80,126	$	1,530
Operating leases		376,551		48,053		95,481		88,558		144,459
Capital leases		3,759		416		832		832		1,679
Purchase obligations		146,856		116,233		30,623		—		—

Total	$	615,971	$	170,455	$	128,332	$	169,516	$	147,668

The table above does not include obligations related to lease renewal option periods even if it is reasonably assured that we will exercise the related option. Additionally, purchase obligations have been included only to the extent that our failure to perform would result in formal recourse against us. Accordingly, certain procurement arrangements that require us to purchase future items are included, but only to the extent they include a recourse provision for our failure to purchase.

New Accounting Standards

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


Item 7A.	*Quantitative and Qualitative Disclosures about Market Risk*

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

Interest Rates

We have exposure to interest rate risk related to our variable rate borrowings. Our revolving credit facility allows for borrowings of up to $150.0 million with outstanding amounts bearing interest at variable rates equal to LIBOR plus an applicable margin which is subject to change based on our leverage ratio. At December 28, 2008, we had borrowings of $80.0 million outstanding under our credit facility as well as unsecured promissory notes totaling $6.7 million.

During the second quarter of fiscal 2008, we entered into an interest rate swap with a notional amount of $40.0 million to hedge a portion of the cash flows of our variable rate borrowings. We have designated the interest rate swap as a cash flow hedge of our exposure to variability in future cash flows attributable to interest payments on a $40.0 million tranche of floating rate debt borrowed under our revolving credit facility. Under the terms of the swap, we pay a fixed rate of 3.32% on the $40.0 million notional amount and receive payments from the counterparty based on the 1-month LIBOR rate for a term ending on May 20, 2010, effectively resulting in a fixed rate on the LIBOR component of the $40.0 million notional amount. The effective interest rate on the total borrowings outstanding under our revolving credit facility, including the impact of the interest rate swap agreement, was 3.9% as of December 28, 2008.

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

As of December 28, 2008, based on current interest rates and total borrowings outstanding, including the impact of our interest rate swap, a hypothetical 100 basis point increase in interest rates would have less than a $0.5 million pre-tax impact on our results of operations.

Commodities Prices

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

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

P.F. Chang’s China Bistro, Inc.:

We have audited the accompanying consolidated balance sheets of P.F. Chang’s China Bistro, Inc. and subsidiaries (the Company) as of December 28, 2008 and December 30, 2007, and the related consolidated statements of income, common stockholders’ equity, and cash flows for the year ended December 28, 2008, the year ended December 30, 2007, and the year ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of P.F. Chang’s China Bistro, Inc. and subsidiaries as of December 28, 2008 and December 30, 2007, and the results of their operations and their cash flows for the year ended December 28, 2008, the year ended December 30, 2007, and the year ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, effective January 2, 2006, the Company has changed its method of accounting for share-based compensation due to the adoption of the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment. As discussed in Note 1 to the consolidated financial statements, effective January 1, 2007, the Company has changed its method of accounting for uncertainty in income taxes due to the adoption of the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109. As discussed in Note 1 to the consolidated financial statements, effective December 31, 2007, the Company adopted the provisions of SFAS No. 157, Fair Value Measurements.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 28, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 10, 2009 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

(signed) KPMG LLP

Phoenix, Arizona

February 10, 2009

P.F. CHANG’S CHINA BISTRO, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)


	December 28,			December 30,
	2008			2007

ASSETS
Current assets:
Cash and cash equivalents	$	40,951		$	24,055
Inventories		4,930			4,649
Other current assets		51,643			32,552

Total current assets		97,524			61,256
Property and equipment, net		524,004			520,145
Goodwill		6,819			6,819
Intangible assets, net		24,270			22,004
Other assets		14,746			12,406

Total assets	$	667,363		$	622,630


LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	15,203		$	17,745
Construction payable		4,358			11,319
Accrued expenses		71,162			59,259
Unearned revenue		31,115			25,346
Current portion of long-term debt, including $3,502 and $3,507 due to related parties at December 28, 2008 and December 30, 2007, respectively		5,753			6,932

Total current liabilities		127,591			120,601
Long-term debt, including $1,073 and $3,002 due to related parties at December 28, 2008 and December 30, 2007, respectively		82,496			90,828
Lease obligations		113,178			93,435
Other liabilities		14,691			6,710
Minority interests		8,581			17,169
Commitments and contingencies (Note 15)		—			—
Common stockholders’ equity:
Common stock, $0.001 par value, 40,000,000 shares authorized: 24,114,107 shares and 24,151,888 shares issued and outstanding at December 28, 2008 and December 30, 2007, respectively		27			27
Additional paid-in capital		206,667			196,385
Treasury stock, at cost, 3,634,979 shares and 3,240,943 shares at December 28, 2008 and December 30, 2007, respectively		(106,372	)		(96,358	)
Accumulated other comprehensive loss		(755	)		—
Retained earnings		221,259			193,833

Total common stockholders’ equity		320,826			293,887

Total liabilities and common stockholders’ equity	$	667,363		$	622,630

See accompanying notes to consolidated financial statements.

P.F. CHANG’S CHINA BISTRO, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)


	Year Ended
	December 28,			December 30,			December 31,
	2008			2007			2006

Revenues	$	1,198,124		$	1,084,193		$	932,116
Costs and expenses:
Cost of sales		325,630			297,242			254,923
Labor		396,911			364,074			307,573
Operating		198,967			172,147			145,309
Occupancy		69,809			62,164			51,958
General and administrative		77,488			66,968			56,030
Depreciation and amortization		68,711			55,988			44,378
Preopening expense		8,457			14,310			11,922
Partner investment expense		(354	)		(2,012	)		4,371

Total costs and expenses		1,145,619			1,030,881			876,464

Income from operations		52,505			53,312			55,652
Interest and other income (expense), net		(3,362	)		(100	)		1,315
Minority interest		(1,933	)		(4,169	)		(8,116	)

Income from continuing operations before provision for income taxes		47,210			49,043			48,851
Provision for income taxes		(12,193	)		(12,420	)		(14,078	)

Income from continuing operations		35,017			36,623			34,773
Loss from discontinued operations, net of tax		(7,591	)		(4,560	)		(1,520	)

Net Income	$	27,426		$	32,063		$	33,253

Basic income per share:
Income from continuing operations	$	1.47		$	1.44		$	1.33
Loss from discontinued operations, net of tax		(0.32	)		(0.18	)		(0.05	)

Net Income	$	1.15		$	1.26		$	1.28

Diluted income per share:
Income from continuing operations	$	1.45		$	1.41		$	1.30
Loss from discontinued operations, net of tax		(0.31	)		(0.17	)		(0.06	)

Net Income	$	1.14		$	1.24		$	1.24

Weighted average shares used in computation:
Basic		23,776			25,473			26,075

Diluted		24,080			25,899			26,737

See accompanying notes to consolidated financial statements.

P.F. CHANG’S CHINA BISTRO, INC.

CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS’ EQUITY

(In thousands)


												Accumulated
						Additional						Other
	Common Stock					Paid-In			Treasury			Comprehensive			Retained
	Shares			Amount		Capital			Stock			Loss			Earnings		Total

Balances, January 1, 2006		26,397		$	26	$	165,355		$	—		$	—		$	128,517	$	293,898
Issuance of common stock under stock option plans		210			1		3,071			—			—			—		3,072
Issuance of common stock under employee stock purchase plan		67			—		2,142			—			—			—		2,142
Issuance of restricted shares under incentive plans, net of forfeitures		96			—		—			—			—			—		—
Purchase of treasury stock		(1,397	)		—		—			(46,373	)		—			—		(46,373	)
Purchase of subsidiary stock		—			—		(7,345	)		—			—			—		(7,345	)
Share-based compensation expense		—			—		8,941			—			—			—		8,941
Tax benefit from share-based compensation		—			—		1,937			—			—			—		1,937
Net income		—			—		—			—			—			33,253		33,253

Balances, December 31, 2006		25,373			27		174,101			(46,373	)		—			161,770		289,525
Issuance of common stock under stock option plans		439			—		5,617			—			—			—		5,617
Issuance of common stock under employee stock purchase plan		83			—		2,174			—			—			—		2,174
Issuance of restricted shares under incentive plans, net of forfeitures		101			—		—			—			—			—		—
Purchase of treasury stock		(1,844	)		—		—			(49,985	)		—			—		(49,985	)
Share-based compensation expense		—			—		10,512			—			—			—		10,512
Tax benefit from share-based compensation		—			—		3,981			—			—			—		3,981
Net income		—			—		—			—			—			32,063		32,063

Balances, December 30, 2007		24,152			27		196,385			(96,358	)		—			193,833		293,887
Issuance of common stock under stock option plans		31			—		284			—			—			—		284
Issuance of common stock under employee stock purchase plan		31			—		774			—			—			—		774
Issuance of restricted shares under incentive plans, net of forfeitures		294			—		—			—			—			—		—
Purchase of treasury stock		(394	)		—		—			(10,014	)		—			—		(10,014	)
Share-based compensation expense		—			—		9,715			—			—			—		9,715
Income tax shortfall from share-based compensation		—			—		(491	)		—			—			—		(491	)
Unrealized loss on derivatives		—			—		—			—			(755	)		—		(755	)
Net income		—			—		—			—			—			27,426		27,426

Balances, December 28, 2008		24,114		$	27	$	206,667		$	(106,372	)	$	(755	)	$	221,259	$	320,826

See accompanying notes to consolidated financial statements.

P.F. CHANG’S CHINA BISTRO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	Year Ended
	December 28,			December 30,			December 31,
	2008			2007			2006

Operating Activities:
Net income	$	27,426		$	32,063		$	33,253
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		69,661			57,251			44,863
Share-based compensation		9,715			10,512			8,941
Non-cash asset impairment and lease termination charges in discontinued operations		9,889			3,125			—
Deferred income taxes		5,381			4,767			(6,175	)
Minority interest		1,933			4,169			8,116
Partner bonus expense, imputed		913			1,374			1,999
Other		143			167			294
Partner investment expense		(354	)		(2,012	)		4,371
Excess tax (benefit) shortfall from share-based compensation		491			(3,981	)		(1,937	)
Changes in operating assets and liabilities:
Inventories		(281	)		(417	)		(771	)
Other current assets		(18,406	)		(786	)		(2,257	)
Other assets		(434	)		(3,937	)		(2,464	)
Accounts payable		(2,542	)		2,490			1,405
Accrued expenses		9,524			3,411			14,984
Lease obligations		19,914			21,911			15,837
Unearned revenue		5,769			7,120			2,945
Other liabilities		1,011			693			—

Net cash provided by operating activities		139,753			137,920			123,404

Investing Activities:
Capital expenditures		(87,178	)		(151,553	)		(114,330	)
Purchase of minority interests		(9,763	)		(13,032	)		(2,142	)
Capitalized interest		(708	)		(1,791	)		(1,003	)
Purchase of short-term investments		—			—			(12,660	)
Sale of short-term investments		—			—			55,070

Net cash used in investing activities		(97,649	)		(166,376	)		(75,065	)

Financing Activities:
Repayments of long-term debt		(12,512	)		(30,475	)		(5,110	)
Purchases of treasury stock		(10,014	)		(49,985	)		(46,373	)
Distributions to minority members and partners		(3,323	)		(6,365	)		(10,080	)
Payments of capital lease obligation		(171	)		(158	)		(146	)
Borrowings on credit facility		—			96,000			12,000
Debt issuance costs		—			(254	)		—
Purchase of subsidiary common stock		—			—			(7,345	)
Proceeds from minority investors’ contributions		245			387			1,205
Excess tax benefit (shortfall) from share-based compensation		(491	)		3,981			1,937
Proceeds from stock options exercised and employee stock purchases		1,058			7,791			5,214

Net cash provided by (used in) financing activities		(25,208	)		20,922			(48,698	)

Net increase (decrease) in cash and cash equivalents		16,896			(7,534	)		(359	)
Cash and cash equivalents at the beginning of the period		24,055			31,589			31,948

Cash and cash equivalents at the end of the period	$	40,951		$	24,055		$	31,589

Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	5,442		$	1,907		$	915
Cash paid for income taxes, net of refunds	$	9,842		$	4,615		$	12,616

Supplemental Disclosure of Non-Cash Items:
Purchase of minority interests through issuance of long-term-debt	$	2,693		$	11,732		$	1,851
Change in construction payable	$	(6,961	)	$	2,244		$	2,612

See accompanying notes to consolidated financial statements.

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 28, 2008


1.	Summary of Significant Accounting Policies

Organization and Nature of Operations

P.F. Chang’s China Bistro, Inc. (the “Company”) operates two restaurant concepts consisting of restaurants throughout the United States under the names P.F. Chang’s China Bistro (“Bistro”) and Pei Wei Asian Diner (“Pei Wei”). The Company was formed in 1996 and became publicly traded in 1998.

Fiscal Year

The Company’s fiscal year ends on the Sunday closest to the end of December. Fiscal years 2008, 2007, and 2006 were each comprised of 52 weeks.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Principles of Consolidation and Presentation

The Company’s consolidated financial statements include the accounts and operations of the Company and its subsidiaries and partnerships in which it owns more than a 50 percent interest. All material balances and transactions between the consolidated entities have been eliminated. Minority interest is recorded as a reduction of the reported income or expense unless the amount would result in a reduction of expense for which the minority partner would not be responsible.

Reclassification

Certain amounts shown in the prior periods’ consolidated financial statements have been reclassified to conform to the current year consolidated financial statement presentation.

Cash and Cash Equivalents

The Company’s cash and cash equivalent balances are not pledged or restricted. The Company’s policy is to invest cash in excess of operating requirements in income-producing investments. Income-producing investments with maturities of three months or less at the time of investment are reflected as cash equivalents. Amounts receivable from credit card processors are also considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction. Cash equivalents as of December 28, 2008 and December 30, 2007 consisted primarily of overnight money market fund investments and amounts receivable from credit card processors.

Receivables

Receivables, which the Company classifies within other current assets, consist primarily of amounts due from landlords or other parties for tenant incentives and amounts due from third-party gift card sales. Management believes these amounts to be collectible.

Inventories

Inventories consist of food and beverages and are stated at the lower of cost or market using the first-in, first-out method.

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Property and Equipment

Property and equipment is stated at cost, which includes capitalized interest during the construction and development period. Furniture, fixtures and equipment are depreciated on a straight-line basis over the estimated useful service lives of the related assets, which approximate seven years. The Company’s home office building is depreciated on a straight-line basis over 30 years, and building improvements are depreciated on a straight-line basis over 20 years. Leasehold improvements and buildings under capital lease are amortized over the shorter of the useful life of the asset or the length of the related lease term. The term of the lease includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured and failure to exercise such option would result in an economic penalty. China and smallwares are generally depreciated over two years up to 50 percent of their original cost and replacements are recorded as operating expenses as they are purchased.

Depreciation and amortization expense includes the depreciation and amortization of fixed assets, gains and losses on disposal of assets and the amortization of intangible assets, non-transferable liquor license fees and capitalized software costs. Depreciation and amortization expense included in continuing operations associated with property and equipment, including property under capital leases, totaled $65.5 million, $53.3 million, and $42.4 million for the years ended December 28, 2008, December 30, 2007, and December 31, 2006, respectively.

During the years ended December 28, 2008, December 30, 2007, and December 31, 2006, the Company incurred gross interest expense of $4.8 million, $2.5 million, and $1.0 million, respectively. $0.7 million, $1.8 million, and $1.0 million, respectively, of these interest costs were capitalized during the years ended December 28, 2008, December 30, 2007, and December 31, 2006.

The Company reviews property and equipment for impairment when events or circumstances indicate these assets might be impaired, but at least quarterly. The Company tests impairment using historical cash flows and other relevant facts and circumstances as the primary basis for an estimate of future cash flows. The analysis is performed at the individual restaurant or operating segment level for indicators of permanent impairment.

During the year-ended December 28, 2008, the Company recognized non-cash asset impairment charges of $7.5 million ($4.6 million net of tax) related to the write-off of the carrying value of the long-lived assets associated with the closure of 10 Pei Wei stores. During the year-ended December 30, 2007, the Company recognized an asset impairment charge of $3.1 million ($2.1 million net of tax) related to the write-off of the carrying value of the long-lived assets of Taneko associated with the fiscal 2008 asset sale. See Note 2 for further discussion. No other impairment of long-lived assets was recognized by the Company during the years ended December 28, 2008 and December 30, 2007. There can be no assurance that future impairment tests will not result in additional charges to earnings.

Goodwill and Intangible Assets

Goodwill is not amortized but is subject to annual impairment tests. Intangible assets deemed to have definite lives are amortized over their estimated useful lives.

Goodwill

Goodwill represents the residual purchase price after allocation of the purchase price of assets acquired and relates to the Company’s purchase of interests in various restaurants at the formation of the Company. Impairment tests are performed with respect to goodwill at the segment level of reporting. On an annual basis, the Company reviews the recoverability of goodwill based primarily on a multiple of earnings analysis comparing the fair value of the reporting segment to the carrying value. As a secondary review, the Company also compares the market value of its common stock to the total Company carrying value. Generally, the Company performs its annual assessment for impairment during the fourth quarter of its fiscal year and performs the analysis more frequently if there are any impairment indicators identified during the year. As of December 28, 2008, management determined there was no

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

impairment of goodwill. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings.

Intangible Assets

Intangible assets consist of the excess of the purchase price at the time the Company repurchases a partner’s minority interest over the imputed fair value of that interest at the time of the original investment. These assets are amortized over their useful lives, which is generally 15 years for Bistro restaurants and 10 years for Pei Wei restaurants.

The Company reviews intangible assets with definite lives (those assets resulting from the acquisition of minority partner’s interests in the operating rights of certain of our restaurants) for impairment when events or circumstances indicate these assets might be impaired, but at least quarterly. The Company tests impairment using historical cash flows and other relevant facts and circumstances as the primary basis for an estimate of future cash flows. The analysis is performed at the restaurant level for indicators of impairment. As of December 28, 2008, management has determined that there was no impairment of intangible assets. There can be no assurance that future intangible assets impairment tests will not result in a charge to earnings.

Other Assets

Other assets consist primarily of transferable and nontransferable liquor licenses, capitalized software costs, vendor deposits, deferred compensation plan assets and deferred financing costs. During 2008, the Company recorded additional assets related to capitalized software, liquor licenses for new restaurants and its deferred compensation plan (see Note 11 for additional information).

Accrued Insurance

The Company is self-insured for certain exposures, principally medical and dental, general liability and workers’ compensation, for the first $100,000, $250,000 or $500,000 of individual claims, depending on the type of claim. The Company has paid amounts to its insurance carrier that approximate the cost of claims known to date and has accrued additional liabilities for its estimate of ultimate costs related to those claims. In developing these estimates, the Company and its insurance providers use historical experience factors to estimate the ultimate claim exposure. The Company’s self insurance liabilities are actuarially determined and consider estimates of expected losses, based on statistical analyses of the Company’s actual historical trends as well as historical industry data. It is reasonably possible that future adjustments to these estimates will be required. Management believes the Company has provided adequate reserves for its self-insured exposure.

Lease Obligations

The Company leases all of its restaurant properties. At the inception of the lease, each property is evaluated to determine whether the lease will be accounted for as an operating or capital lease. The term of the lease used for this evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured and failure to exercise such option would result in an economic penalty.

The Company accounts for tenant incentives received from its landlords in connection with certain of its operating leases as a deferred rent liability within lease obligations and amortizes such amounts over the relevant lease term. For leases that contain rent escalations, the Company records the total rent payable during the lease term, as determined above, on a straight-line basis over the term of the lease (including the “rent holiday” period beginning upon possession of the premises), and records the difference between the minimum rents paid and the straight-line rent as a lease obligation.

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Certain leases contain provisions that require additional rental payments based upon restaurant sales volume (“contingent rent”). Contingent rent is accrued each period as the liability is incurred, in addition to the straight-line rent expense noted above.

Other Liabilities

Other liabilities include the Company’s conditional asset retirement obligations (“ARO”) recognized under Financial Accounting Standards Board (“FASB”) Interpretation No. 47 (“FIN 47”), Accounting for Conditional Asset Retirement Obligations. The Company’s ARO liabilities are primarily associated with certain of the Company’s restaurant leases under which the landlord has the option to require, at a future date, the Company to remove its leasehold improvements at the end of the lease term and return the property to the landlord in its original condition. The Company estimates the fair value of these liabilities based on estimated store closing costs, accretes that current cost forward to the date of estimated ARO removal and discounts the future cost back as if it were performed at the inception of the lease. At the inception of such a lease, the Company records the ARO liability and also records a related capital asset in an amount equal to the estimated fair value of the liability. The ARO liability is accreted to its future value, with accretion expense recognized as interest and other income, net, and the capitalized asset is depreciated on a straight-line basis over the useful life of the asset, which is generally the life of the leasehold improvement. The estimate of the conditional asset retirement liability is based on a number of assumptions requiring management’s judgment, including store closing costs, inflation rates and discount rates. As a result, in future periods the Company may make adjustments to the ARO liability as a result of the availability of new information, changes in estimated costs and other factors.

Other liabilities also include the Company’s net long-term deferred tax liabilities, liabilities related to the Company’s deferred compensation plans (discussed further in Note 11) and a derivative liability (discussed further in this footnote and Note 7).

Unearned Revenue

The Company sells gift cards to customers in its restaurants, through its websites and via other retail outlets. Unearned revenue represents gift cards sold for which revenue recognition criteria, generally redemption, has not been met. These amounts are presented net of any discounts issued by the Company in connection with the terms of its third-party gift card distribution agreements.

Revenue Recognition

Revenues from food, beverage and alcohol sales are recognized as products are sold.

The Company recognizes income from gift cards when: (i) the gift card is redeemed by the customer; or (ii) the likelihood of the gift card being redeemed by the customer is remote (gift card breakage) and the Company determines there is no legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions. The Company determines the gift card breakage rate based upon historical redemption patterns. Gift card breakage income was not significant in any fiscal year and is reported within Revenues in the consolidated statements of income.

Advertising

The Company expenses advertising production costs at the time the advertising first takes place. All other advertising costs are expensed as incurred. Advertising expense for the years ended December 28, 2008, December 30, 2007, and December 31, 2006 was $9.2 million, $5.5 million, and $3.5 million, respectively.

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Partner Bonus Expense, Imputed

Partner bonus expense, imputed, which is classified within labor expense on the consolidated statements of income, represents the portion of restaurant level operating results that is allocable to minority partners, but which is presented as bonus expense for accounting purposes. Specifically, given that employees who choose to invest as partners are not eligible to participate in restaurant-level bonus programs, a portion of their partnership earnings that would otherwise be presented as minority interest expense is deemed to be a bonus expense for financial reporting purposes. The amounts imputed are based on existing bonus programs used by the Company for non-investing employees based on individual restaurant level-operating results. Partner bonus expense, imputed for the years ended December 28, 2008, December 30, 2007, and December 31, 2006 was $0.9 million, $1.4 million, and $2.0 million, respectively.

Preopening Expense

Preopening expense, consisting primarily of manager salaries and relocation expense, employee payroll and related training costs incurred prior to the opening of a restaurant, is expensed as incurred. Preopening expense also includes the accrual for straight-line rent recorded for the period between date of possession and the restaurant opening date for the Company’s leased restaurant locations.

Partner Investment Expense

Partner investment expense generally represents the difference between the imputed fair value of partners’ ownership interests at the time the partners invest in their restaurants and the partners’ cash capital contribution for these ownership interests. Additionally, for those partners who are bought out prior to the end of a specific term (generally five years), partner investment expense includes a reversal of previously recognized expense for the difference between the fair value of the partner’s interest at inception date and the fair value at the date of repurchase, to the extent that the former is greater.

Consolidated partner investment expense for the years ended December 28, 2008 and December 30, 2007 was a net benefit of $0.4 million and $2.0 million, respectively. Partner investment expense at the Bistro for the years ended December 28, 2008 and December 30, 2007 was a $1.1 million and $3.4 million benefit, respectively, due to the change in the Bistro partnership structure discussed in Note 13, which led to a significant increase in buyouts of minority partner interests during fiscal 2008 and fiscal 2007. These buyouts resulted in the reversal of a portion of previously recognized partner investment expense, due to the fair value of the partner’s interest at inception date exceeding the fair value of the partner’s interest at repurchase date. Additionally, as a result of the change in partnership structure at the Bistro beginning in fiscal 2007, partner investment expense is no longer recognized at the time a new Bistro restaurant opens.

Taxes

The Company utilizes the liability method of accounting for income taxes as set forth in Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes. Under the liability method, deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Recognition of deferred tax assets is limited to amounts considered by management to be more likely than not of realization in future periods.

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation, the Company recognized no material adjustment to the liability for unrecognized income tax benefits that existed as of December 31, 2006. It is the Company’s policy to recognize interest and penalties related to uncertain tax positions as a component of income tax expense. See Note 14 for additional information regarding the change in unrecognized tax benefits.

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Minority interest relating to the income or loss of consolidated partnerships includes no provision for income taxes as any tax liability related thereto is the responsibility of the individual minority investors.

Additionally, the Company presents sales tax on a net basis in its consolidated financial statements.

Share-Based Compensation

The Company accounts for share-based compensation under SFAS No. 123 (revised 2004) (“SFAS 123R”) Share Based Payment under the fair-value method. The Company may grant stock options for a fixed number of shares to certain employees and directors with an exercise price equal to or greater than the fair value of the shares at the date of grant. The Company also may grant restricted stock and restricted stock units with fair value determined based on the Company’s closing stock price on the date of grant.

The fair value for stock options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions used for stock option grants issued under the option plans:


	Year Ended
	December 28,			December 30,			December 31,
	2008			2007			2006

Weighted average risk-free interest rate		3.1	%		4.7	%		4.9	%
Expected life of options (years)		5.5			5.5			5.6
Expected stock volatility		35.0	%		35.0	%		35.0	%
Expected dividend yield		0.0	%		0.0	%		0.0	%

The estimated fair value of share-based compensation plans and other options is amortized to expense primarily over the vesting period. See Note 10 for further discussion of the Company’s share-based compensation.

Income from Continuing Operations per Share

Income from continuing operations per share is computed in accordance with SFAS No. 128, Earnings per Share. Basic income from continuing operations per share is computed based on the weighted average of common shares outstanding during the period. Diluted income from continuing operations per share is computed based on the weighted average number of common shares and potentially dilutive securities, which includes options and restricted stock outstanding under the Company’s stock option plans. For the years ended December 28, 2008, December 30, 2007, and December 31, 2006, 2.3 million, 1.6 million, and 1.6 million, respectively, of the Company’s options were excluded from the calculation due to anti-dilutive effects.

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table sets forth the computation of basic and diluted income from continuing operations per share:


	Year Ended
	December 28,		December 30,		December 31,
	2008		2007		2006

Numerator:
Income from continuing operations	$	35,017	$	36,623	$	34,773

Denominator:
Basic: Weighted-average shares outstanding during the year		23,776		25,473		26,075
Add: Dilutive effect of employee and director equity awards		304		426		662

Diluted		24,080		25,899		26,737

Income from continuing operations per share:
Basic	$	1.47	$	1.44	$	1.33

Diluted	$	1.45	$	1.41	$	1.30

Fair Value of Financial Instruments

The carrying amount of cash and cash equivalents, investments, receivables, accounts payable, and accrued expenses is deemed to approximate fair value due to the immediate or short-term maturity of these financial instruments. The fair value of long-term debt approximates the carrying value due to the Company’s right to repay outstanding balances at any time.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash investments and receivables. The Company maintains cash and cash equivalents, funds on deposit and certain other financial instruments with financial institutions that are considered in the Company’s investment strategy. Concentrations of credit risk with respect to receivables are limited as the Company’s receivables are primarily with its landlords, related to tenant incentives.

Derivatives

All derivatives are recognized on the balance sheet at fair value as either assets or liabilities. The fair value of the Company’s derivative financial instruments is determined using either market quotes or valuation models that are based upon the net present value of estimated future cash flows and incorporate current market data inputs. The Company reports its derivative assets or liabilities in other assets or other liabilities, as applicable. The accounting for the change in the fair value of a derivative financial instrument depends on its intended use and the resulting hedge designation, if any, as discussed below.

A cash flow hedge is a derivative designed to hedge the exposure of variable future cash flows that is attributable to a particular risk associated with an existing recognized asset or liability, or a forecasted transaction. The Company utilizes the hypothetical derivative method, as defined in SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities to measure hedge effectiveness. For derivative financial instruments that qualify as cash flow hedges, the effective portions of the gain or loss on the derivatives are recorded in accumulated other comprehensive (loss) income and reclassified into earnings when the hedged cash flows are recognized into earnings. The amount that is reclassified into earnings, as well as any ineffective portion of the gain or loss, as

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

determined by the accounting requirements, are reported as a component of interest and other income (expense). If a hedge is de-designated or terminated prior to maturity, the amount previously recorded in accumulated other comprehensive (loss) income is recognized into earnings over the period that the hedged item impacts earnings. If a hedge relationship is discontinued because it is probable that a forecasted transaction will not occur according to the original strategy, any related amounts previously recorded in accumulated other comprehensive (loss) income are recognized into earnings immediately. There was no hedge ineffectiveness recognized during the period ended December 28, 2008.

During the second quarter of 2008, the Company hedged a portion of its existing long-term variable-rate debt through the use of an interest rate swap. This derivative instrument effectively fixes the interest expense on a portion of the Company’s long-term debt for the duration of the swap. See Note 7 for further discussion of the Company’s interest rate swap.

Recent Accounting Pronouncements

In October 2008, the FASB issued Staff Position (“FSP”) No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which clarifies the application of Statement No. 157 in an inactive market and illustrates how an entity would determine fair value when the market for a financial asset is not active. The Staff Position is effective immediately and applies to prior periods for which financial statements have not been issued, including interim or annual periods ending on or before December 30, 2008. The implementation of FAS 157-3 did not have a material impact on the Company’s consolidated financial statements.

In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). This change is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R and other GAAP. The requirement for determining useful lives must be applied prospectively to intangible assets acquired after the effective date and the disclosure requirements must be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, which will require the Company to adopt these provisions in the first quarter of fiscal 2009 and will apply prospectively FSP 142-3 on its consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, (“SFAS 161”). SFAS 161 requires companies to provide enhanced disclosures about derivative instruments and hedging activities to enable investors to better understand the effects of such instruments and activities on a company’s financial position, financial performance and cash flows. Under SFAS 161, companies are required to disclose the fair values of derivative instruments and their gains and losses in a tabular format. SFAS 161 is effective for fiscal years beginning after November 15, 2008, and the Company will adopt these provisions in the first quarter of fiscal 2009. The Company does not anticipate that the adoption of SFAS 161 will have a material impact on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date. SFAS 141R significantly changes the accounting for business combinations in a number of areas including the treatment of contingent consideration, preacquisition contingencies, transaction costs, in-process research and development and restructuring costs. In addition, under SFAS 141R, changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. SFAS 141R provides guidance regarding what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

SFAS 141R is effective for fiscal years beginning after December 15, 2008 with early application prohibited. The Company will adopt SFAS 141R beginning in the first quarter of fiscal 2009 and will change its accounting treatment for business combinations on a prospective basis.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions with minority interest holders. SFAS 160 is effective for fiscal years beginning after December 15, 2008 with early application prohibited. As a result of adopting SFAS 160, beginning in fiscal 2009 the Company will no longer record an intangible asset when the purchase price of a partnership interest exceeds the book value at the time of buyout. Instead, any excess will be recorded as a reduction to equity. Additionally, after the adoption of SFAS 160, operating losses will be allocated to noncontrolling interests even when such allocation results in a deficit balance (i.e., book value can go negative). The Company will present noncontrolling interests (currently shown as minority interest) as a component of equity on the consolidated balance sheets and minority interest expense will no longer be separately reported as a reduction to net income on the consolidated income statements. The Company does not anticipate the adoption of SFAS 160 to have any other material impact on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets and liabilities. The standard establishes a common definition for fair value to be applied to U.S. GAAP requiring the use of fair value establishes a framework for measuring fair value and expands required disclosures about such fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007; however, FASB Staff Position FAS 157-2 Effective Date of FASB Statement No. 157 delayed the effective date of SFAS 157 for most nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. The implementation of SFAS 157 for financial assets and financial liabilities, effective December 31, 2007, did not have a material impact on the Company’s consolidated financial statements. The Company will adopt SFAS 157 for nonfinancial assets and nonfinancial liabilities beginning in the first quarter of fiscal 2009 and does not expect adoption to have a material impact on its consolidated financial statements.

SFAS 157 established a three-level hierarchy of valuation techniques used to measure fair value, defined as follows:


	•	Unadjusted Quoted Prices — The fair value of an asset or liability is based on unadjusted quoted prices, in active markets for identical assets or liabilities. An example would be a marketable equity security that is actively traded on the New York Stock Exchange. (Level 1)

	•	Pricing Models with Significant Observable Inputs — The fair value of an asset or liability is based on information derived from either an active market quoted price, which may require further adjustment based on the attributes of the financial asset or liability being measured, or an inactive market transaction. Examples of such instruments would include (i) a quoted price for an actively traded equity investment that is adjusted for a contractual trading restriction, or (ii) the fair value derived from a trade of an identical or similar security in an inactive market. (Level 2)

	•	Pricing Models with Significant Unobservable Inputs — The fair value of an asset or liability is primarily based on internally derived assumptions surrounding the timing and amount of expected cash flows for the financial instrument. Therefore, these assumptions are unobservable in either an active or inactive market. An example would be the retained interest in a securitization trust. (Level 3)

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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


	Fair Value Measurements as of December 28, 2008
				Quoted Prices in		Significant
				Active Markets for		Other			Significant
				Identical		Observable			Unobservable
	December 28,			Assets/Liabilities		Inputs			Inputs
	2008			(Level 1)		(Level 2)			(Level 3)		Valuation Technique

Money Markets	$	41,125		$	—	$	41,125		$	—		market approach
401(k) Restoration Plan investments		1,274			—		1,274			—		market approach
Interest rate swap liability		(1,227	)		—		(1,227	)		—		income approach

Total	$	41,172		$	—	$	41,172		$	—

The Company invests excess cash in money market funds and reflects these amounts within cash and cash equivalents on the consolidated balance sheet at a net value of 1:1 for each dollar invested. Total money market balances exceeded the cash and cash equivalents balance per the consolidated balance sheet at December 28, 2008 due to the offset of certain money market fund investments with book overdrafts in operating cash accounts at the same financial institution under legal right of offset agreements. As of December 28, 2008, $22.8 million of the Company’s money market investments were guaranteed by the federal government under the Treasury Temporary Guarantee Program for Money Market Funds. This program expires on April 30, 2009. Other money market investments held by the Company were invested primarily in government backed securities at December 28, 2008.

The Company’s 401(k) Restoration Plan (the “Restoration Plan”) investments are considered trading securities and are reported at fair value based on third party broker statements. The realized and unrealized holding gains and losses related to these investments, as well as the offsetting compensation expense, is recorded in operating income. See Note 11 for further discussion of the Company’s Restoration Plan.

The fair value of the Company’s interest rate swap is estimated using net present value of a series of cash flows on both the fixed and floating legs of the swap. These cash flows are based on yield curves which take into account the contractual terms of the derivative, including the period to maturity and market-based parameters such as interest rates and volatility. The yield curves used in the valuation model are based on published data for counterparties with an AA rating. Market practice in pricing derivatives initially assumes all counterparties have the same credit quality. The Company mitigates derivative credit risk by transacting with highly rated counterparties. Management has evaluated the credit and nonperformance risks associated with its derivative counterparty and believes them to be insignificant and not warranting a credit adjustment at December 28, 2008. See Note 7 for a discussion of the Company’s interest rate swap.


2.	Discontinued Operations

Pei Wei

As part of ongoing profitability initiatives, the Company closed 10 underperforming Pei Wei restaurants during the fourth quarter of 2008. This decision, which was reached during the third quarter of 2008, was the result of a rigorous evaluation of the Company’s entire store portfolio. The Company reviewed each location’s past and present operating performance combined with projected future results. The restaurants selected for closure had lower profitability and were not projected to provide acceptable returns in the foreseeable future.

During the second half of 2008, the Company recognized non-cash asset impairment charges of $7.5 million ($4.6 million net of tax) related to the write-off of the carrying value of long-lived assets associated with the 10 Pei Wei store closures, which was included in discontinued operations. During the fourth quarter of 2008, the Company recognized additional pretax charges of $2.6 million related to estimated and actual lease termination costs and

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$0.1 million related to severance payments made in connection with the store closures, which was included in discontinued operations. The Company is actively pursuing lease termination agreements with each of the closed Pei Wei restaurants’ landlords. A lease termination agreement for one of the ten locations had been executed as of December 28, 2008. Lease termination agreements for two additional locations have been executed as of the date of this Form 10-K.

Goodwill allocated to the Pei Wei concept totaled $0.3 million. The Company did not record any impairment to Pei Wei goodwill related to the fiscal 2008 store closures.

In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long Lived Assets, the Company determined that each individual Pei Wei restaurant represents a component of an entity since each store has separately identifiable operations and cash flows. Each restaurant is therefore considered a reporting unit in accordance with SFAS 142, Goodwill and Other Intangible Assets. The ten closed restaurants were not in close proximity to other Pei Wei restaurants and the Company does not anticipate having significant ongoing cash inflows or outflows related to these operations subsequent to closure and lease termination. As a result, the Company determined that the Pei Wei restaurant closures met the criteria for classification as discontinued operations in the accompanying consolidated financial statements. As a result, all historical operating results as well as asset impairment, lease termination and severance charges related to the closed stores are reflected within discontinued operations in the consolidated financial statements for all periods presented.

Taneko

The Company opened its Taneko Japanese Tavern (“Taneko”) restaurant on October 1, 2006 in Scottsdale, Arizona. As a result of the operating losses realized by Taneko and management’s increased focus on the Company’s core Bistro and Pei Wei restaurant concepts, at the end of fiscal 2007 the Company decided to exit operation of the Taneko business. As of December 30, 2007, the Company classified Taneko as held for sale and determined that Taneko met the criteria for classification as a discontinued operation in the accompanying consolidated financial statements. During the fourth quarter of 2007, the Company recognized a non-cash asset impairment charge of $3.1 million ($2.1 million net of tax) related to the write-off of the carrying value of Taneko’s long-lived assets, which was included in discontinued operations. On August 1, 2008, the Company completed the sale of Taneko’s long-lived assets.

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


	Year Ended			Year Ended			Year Ended
	December 28,			December 30,			December 31,
	2008			2007			2006

Revenues	$	9,597		$	11,089		$	5,490
Lease termination charges		2,576			—			—
Severance charges		93			—			—
Loss from discontinued operations before income tax benefit		(4,932	)		(3,951	)		(2,465	)
Income tax benefit		1,923			1,444			945

Loss from discontinued operations, net of tax, before asset impairment charges		(3,009	)		(2,507	)		(1,520	)
Asset impairment charges, net of tax		(4,582	)		(2,053	)		—

Loss from discontinued operations, net of tax	$	(7,591	)	$	(4,560	)	$	(1,520	)

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


3.	Other Current Assets

Other current assets consist of the following (in thousands):


	December 28,		December 30,
	2008		2007

Receivables	$	24,867	$	15,763
Current portion of deferred tax asset		8,344		7,659
Prepaid rent		5,180		4,396
Income taxes receivable		9,960		2,704
Other		3,292		2,030

Total other current assets	$	51,643	$	32,552

Receivables as of December 28, 2008 and December 30, 2007 include amounts due from landlords or other parties for tenant incentives as a result of new restaurant openings and amounts due from third-party gift card sales.


4.	Property and Equipment

Property and equipment consist of the following (in thousands):


	December 28,			December 30,
	2008			2007

Land	$	3,681		$	3,681
Building and improvements		15,337			15,263
Leasehold improvements		576,861			509,431
Furniture, fixtures and equipment		167,153			146,344
China and smallwares		17,169			15,287

		780,201			690,006
Less: accumulated depreciation and amortization		(262,775	)		(206,219	)

		517,426			483,787
Add: Construction in progress		6,578			36,358

Property and equipment, net	$	524,004		$	520,145


5.	Intangible Assets

Intangible assets consists of the following (in thousands):


	December 28,			December 30,
	2008			2007

Intangible assets, gross	$	29,863		$	25,408
Accumulated amortization		(5,593	)		(3,404	)

Intangible assets, net	$	24,270		$	22,004

Intangible assets are comprised of intangible assets recognized upon the Company’s buyout of minority partner interests when the Company’s purchase price exceeded the imputed fair value at the time of the original investment. Amortization expense related to intangible assets for the years ended December 28, 2008, December 30, 2007, and December 31, 2006 was $2.2 million, $1.7 million, and $1.0 million, respectively.

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The estimated aggregate annual amortization expense for intangible assets at December 28, 2008, is summarized as follows (in thousands):


2009	$	2,309
2010		2,309
2011		2,309
2012		2,295
2013		2,285
Thereafter		12,763

Total	$	24,270


6.	Accrued Expenses

Accrued expenses consist of the following (in thousands):


	December 28,		December 30,
	2008		2007

Accrued payroll	$	25,409	$	20,100
Sales and use tax payable		5,026		6,215
Property tax payable		4,151		3,635
Accrued insurance		16,130		13,831
Accrued rent		4,315		4,136
Other accrued expenses		16,131		11,342

Total accrued expenses	$	71,162	$	59,259


7.	Credit Facility

On August 31, 2007, the Company entered into a senior credit facility (“Credit Facility”) with several commercial financial institutions, which allows for borrowings of up to $150.0 million. The Credit Facility expires on August 30, 2013 and contains customary representations, warranties, negative and affirmative covenants, including a requirement to maintain a maximum leverage ratio, as defined, of 2.5:1 and a minimum fixed charge coverage ratio, as defined, of 1.25:1, as well as customary events of default and certain default provisions that could result in acceleration of the Credit Facility. The Company was in compliance with these restrictions and conditions as of December 28, 2008 as the Company’s leverage ratio was 1.79:1 and the fixed charge coverage ratio was 2.08:1.

The Credit Facility is guaranteed by the Company’s material existing and future domestic subsidiaries. As of December 28, 2008, the Company had borrowings outstanding under the Credit Facility totaling $80.0 million as well as $11.3 million committed for the issuance of letters of credit, which is required by insurance companies for the Company’s workers’ compensation and general liability insurance programs. Available borrowings under the Credit Facility were $58.7 million at December 28, 2008.

Interest Rate Swap

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

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

At December 28, 2008, the recorded fair value of the interest rate swap was a liability balance of $1.2 million ($0.8 million net of tax). The liability is reported within other liabilities in the consolidated balance sheet and is offset by a corresponding amount in stockholders’ equity, representing the net unrealized losses included in accumulated other comprehensive loss. At December 28, 2008, accumulated other comprehensive loss, as reflected in common stockholders’ equity, consisted of unrealized losses on derivatives totaling $0.8 million, net of tax.


8.	Long-Term Debt

Long-term debt consists of the following (in thousands):


	December 28,		December 30,
	2008		2007

Credit line borrowings (see Note 7)		$80,000		$85,000
Unsecured promissory notes — related parties, maturing January 2008 through November 2010		4,575		6,509
Unsecured promissory notes — non-related parties, maturing January 2008 through May 2010		2,126		4,947
Other		1,548		1,304

Total debt		88,249		97,760
Less: current portion		5,753		6,932

Total long-term debt		$82,496		$90,828

Unsecured promissory notes relate to the Company’s purchase of minority partner interests and have interest rates of 50 to 200 basis points over LIBOR. Such notes are classified as related party for those partners who remain associated with the Company after the purchase of their interests. Other debt is presented net of debt discounts and is primarily comprised of non-interest-bearing promissory notes related to the purchase of certain of the Company’s liquor licenses.

The aggregate annual payments of long-term debt outstanding at December 28, 2008, are summarized as follows (in thousands):


2009	$5,753
2010	1,333
2011	63
2012	63
2013	80,063
Thereafter	1,530

Total	88,805
Less: debt discount	(556	)

Total debt	$88,249

Note: Aggregate amount due in 2013 includes outstanding credit line borrowings totaling $80.0 million as of December 28, 2008. The Credit Facility expires on August 30, 2013.

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


9.	Leases

The Company leases certain buildings and land which are considered capital leases and are included in property and equipment on the consolidated balance sheets. Amortization of assets under capital leases is included in depreciation and amortization expense.

Capital lease assets consist of the following (in thousands):


	December 28,			December 30,
	2008			2007

Capital lease assets, gross	$	4,494		$	4,494
Accumulated amortization		(2,278	)		(2,048	)

Capital lease assets, net	$	2,216		$	2,446

The related capital lease obligations are reported within lease obligations and consist of the following (in thousands):


	December 28,		December 30,
	2008		2007

Building	$	2,246	$	2,416
Land		1,050		1,050

Capital lease obligations	$	3,296	$	3,466

The Company leases restaurant facilities and certain real property as well as equipment under operating leases having terms expiring between 2009 and 2025. The restaurant facility and real property leases primarily have renewal clauses of five to 20 years exercisable at the option of the Company with rent escalation clauses stipulating specific rent increases, some of which are based on the consumer price index. Certain of these leases require the payment of contingent rentals based on a percentage of gross revenues, as defined in the leases.

Rent expense included in continuing operations in the consolidated statements of income for operating leases is summarized as follows (in thousands):


	Year Ended
	December 28,		December 30,		December 31,
	2008		2007		2006

Minimum rent	$	35,052	$	30,511	$	25,346
Contingent rent		10,127		9,626		8,886

Total rent expense	$	45,179	$	40,137	$	34,232

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

At December 28, 2008, the Company had signed lease agreements for unopened restaurants with total minimum lease payment obligations of $21.4 million. The following table does not include lease obligations related to renewal option periods even if it is reasonably assured that the Company will exercise the related option. Future minimum lease payments under capital and operating leases are as follows (in thousands):


			Operating
	Capital Leases		Leases		Total

2009	$	416	$	48,053	$	48,469
2010		416		48,411		48,827
2011		416		47,070		47,486
2012		416		45,852		46,268
2013		416		42,706		43,122
Thereafter		1,679		144,459		146,138

Total minimum lease payments		3,759	$	376,551	$	380,310

Less: Amount representing interest		1,590

Present value of minimum lease payments	$	2,169

The Company leases a building and certain furniture and equipment from a partnership in which the Company owns an approximate seven percent interest. Annual rent payments are contingent based on a percentage of gross revenues. The respective period rent expense is included in the amounts disclosed above.


10.	Preferred Stock and Common Stockholders’ Equity

Preferred Stock

The board of directors is authorized to issue up to 10,000,000 shares of preferred stock and to determine the powers, preferences, privileges, rights, including voting rights, qualifications, limitations and restrictions of those shares without any further vote or act by the common stockholders. There was no outstanding preferred stock as of December 28, 2008 and December 30, 2007.

Stock Option Plans

1996 and 1997 Plans

In August 1996, the Company adopted the 1996 Stock Option Plan (“1996 Plan”), and in July 1997, the Company adopted the 1997 Restaurant Management Stock Option Plan (“1997 Plan”). Options under the 1996 Plan may be granted to employees, consultants and directors to purchase the Company’s common stock at an exercise price that equals or exceeds the fair value of such shares on the date such option is granted. Options under the 1997 Plan may be granted to key employees of the Company who are actively engaged in the management and operation of the Company’s restaurants to purchase the Company’s common stock at an exercise price that equals or exceeds the fair value of such shares on the date such option is granted. Vesting periods are determined at the discretion of the board of directors, and all options outstanding at December 28, 2008 vest over five years. Options may be exercised immediately upon grant, subject to a right by the Company to repurchase any unvested shares at the exercise price. Any options granted shall not be exercisable after ten years. Upon certain changes in control of the Company, the 1996 and 1997 Plans provide for two additional years of immediate vesting. The Company has reserved a total of 2,173,000 shares of common stock for issuance under the 1996 and 1997 Plans, all of which have been granted as of December 28, 2008.

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1998 Plan

During 1998, the Company’s Board of Directors approved the 1998 Stock Option Plan (“1998 Plan”) which provides for discretionary grants of incentive stock options and nonqualified stock options to the Company’s employees, including officers, directors, consultants, advisors, and other independent contractors. A total of 3,213,770 additional shares of common stock have been reserved for issuance under the 1998 Plan of which approximately 340,000 were available to be granted as of December 28, 2008. The option exercise price per share for an incentive stock option and nonstatutory stock option may not be less than 100 percent of the fair market value of a share of common stock on the grant date. The Company’s Compensation Committee has the authority to, among other things, determine the vesting schedule for each option granted. Options currently outstanding generally vest over five years and all options expire within 10 years of their date of grant.

1999 Plan

During 1999, the Company’s Board of Directors approved the 1999 Nonstatutory Stock Option Plan (“1999 Plan”), which provides for discretionary grants of nonqualified stock options to the Company’s employees. The 1999 Plan prohibits grants to officers or directors. A total of 800,000 shares of common stock have been reserved for issuance under the 1999 Plan of which approximately 71,000 were available to be granted as of December 28, 2008. The option exercise price per share may not be less than 100 percent of the fair market value of a share of common stock on the grant date. The Company’s Compensation Committee has the authority to, among other things, determine the vesting schedule for each option granted. Options currently outstanding generally vest over five years and all options expire within 10 years of their date of grant.

2006 Plan

In May 2006, the Company’s Board of Directors approved the 2006 Equity Incentive Plan (“2006 Plan”) which provides for grants of incentive and nonstatutory stock options as well as stock appreciation rights, restricted stock, restricted stock units, performance units, deferred compensation awards and other stock-based awards. Awards other than incentive stock options generally may be granted only to employees, directors and consultants of the Company, or certain related entities or designated affiliates. A total of 1,750,000 shares of common stock have been reserved for issuance under the 2006 Plan of which approximately 238,000 were available to be granted as of December 28, 2008. Shares subject to stock options and stock appreciation rights are charged against the 2006 Plan share reserve on the basis of one share for each one share granted while shares subject to other types of equity awards are charged against the 2006 Plan share reserve on the basis of two shares for each one share granted. The 2006 Plan also contains other limits with respect to the terms of different types of incentive awards and with respect to the number of shares subject to awards that can be granted to an employee during any fiscal year. Options currently outstanding generally vest monthly over five years, restricted stock grants cliff-vest three years from the date of issuance and restricted stock units cliff-vest one year from the date of issuance. All options granted under the 2006 Plan expire within 10 years of their date of grant.

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Option valuation

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of subjective assumptions, including estimating 1) the length of time employees will retain their vested stock options before exercising them (“expected term”), 2) the volatility of the Company’s common stock price over the expected term, 3) the number of options that will ultimately not vest (“forfeitures”) and (4) the weighted average risk-free rate of return. The following table presents information regarding options granted and exercised (in thousands except weighted average fair value):


	Year Ended
	December 28,			December 30,		December 31,
	2008			2007		2006

Weighted average fair value of stock options granted	$	11.89		$	14.24	$	13.77
Intrinsic value of stock options exercised	$	590		$	13,208	$	6,322
Tax (shortfall) benefit from share-based compensation	$	(491	)	$	3,981	$	1,937

Option activity

Information regarding activity for stock options outstanding under the Plans is as follows:


	Outstanding Options
						Weighted-
						Average
						Remaining		Aggregate
				Weighted-		Contractual		Intrinsic
				Average Exercise		Term		Value(1)
	Shares			Price (per share)		(In years)		(In thousands)

Options outstanding at January 1, 2006		2,968,117		$	37.84
Granted		509,010			33.11
Converted Pei Wei options		306,782			5.06
Exercised		(211,318	)		14.54
Forfeited (canceled)		(238,811	)		46.70

Options outstanding at December 31, 2006		3,333,780		$	35.01
Granted		308,251			34.94
Exercised		(439,924	)		12.78
Forfeited (canceled)		(185,299	)		43.55

Options outstanding at December 30, 2007		3,016,808		$	37.72
Granted		10,842			31.42
Exercised		(30,732	)		9.27
Forfeited (canceled)		(209,595	)		46.45

Options outstanding at December 28, 2008		2,787,323		$	37.36		5.2	$	3,213

Options exercisable at December 28, 2008		2,237,962		$	36.64		4.6	$	3,213


(1)		The aggregate intrinsic value of stock options represents the closing market price on the last trading day of the quarter less the exercise price of each option multiplied by the number of in-the-money stock options.

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information regarding options outstanding and exercisable at December 28, 2008 is as follows:


	Options Outstanding						Options Exercisable
			Weighted- Average		Weighted-				Weighted-
	Number		Remaining		Average		Number		Average
Range of Exercise Prices	Outstanding		Contractual Life		Exercise Price		Exercisable		Exercise Price

$ 1.20 - $10.00		123,862		1.9 years	$	5.85		123,862	$	5.85
$10.01 - $15.00		131,273		0.9 years		13.08		131,273		13.08
$15.01 - $20.00		239,904		2.4 years		18.71		239,904		18.71
$20.01 - $25.00		2,068		3.0 years		24.39		2,068		24.39
$25.01 - $30.00		10,512		3.7 years		29.05		10,512		29.05
$30.01 - $35.00		860,783		6.0 years		31.51		548,334		31.43
$35.01 - $40.00		139,725		6.0 years		38.48		133,724		38.56
$40.01 - $45.00		356,374		6.0 years		43.69		291,390		43.72
$45.01 - $50.00		269,027		5.0 years		46.38		242,879		46.34
$50.01 - $59.11		653,795		6.1 years		55.51		514,016		55.12

Restricted stock activity

During the years ended December 28, 2008, December 30, 2007 and December 31, 2006, the Company issued restricted stock and RSUs as permitted under the 2006 Plan. Restricted stock and restricted stock units (“RSUs”) are charged against the 2006 Plan share reserve on the basis of two shares for each one share granted. The fair value of restricted stock and RSUs is determined based on the Company’s closing stock price on the date of grant. These restricted stock awards vest and become unrestricted three years after the date of grant. RSUs (which currently have only been issued to the Board of Directors) vest and become unrestricted one year after date of grant in accordance with each Directors’ elected service term. Share-based compensation expense is recognized ratably over the three-year service period for restricted stock and over a one-year service period for RSUs.

Information regarding activity for restricted stock and RSUs outstanding under the 2006 Plan is as follows:


	Restricted Share Awards
	and RSUs
				Weighted-
				Average
				Grant-Date
				Fair Value
	Shares			(per share)

Restricted share awards outstanding at January 1, 2006		—		$	—
Granted		102,700			30.43
Vested		—			—
Forfeited (canceled)		(6,300	)		30.05

Restricted share awards outstanding at December 31, 2006		96,400		$	30.46
Granted		128,922			33.84
Vested		—			—
Forfeited (canceled)		(27,420	)		30.97

Restricted share awards outstanding at December 30, 2007		197,902		$	32.59
Granted		355,231			18.26
Vested		—			—
Forfeited (canceled)		(42,439	)		31.47

Restricted share awards and RSUs outstanding at December 28, 2008		510,694		$	22.72

No outstanding awards were vested as of December 28, 2008.

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Share-based compensation expense

As share-based compensation expense recognized is based on awards ultimately expected to vest, it must be reduced for estimated or actual forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Reported share-based compensation was classified as follows (in thousands):


	Year Ended			Year Ended			Year Ended
	December 28,			December 30,			December 31,
	2008			2007			2006

Labor	$	529		$	906		$	960
General and administrative		9,143			9,473			7,869

Total share-based compensation		9,672			10,379			8,829
Less: tax benefit		(2,495	)		(2,626	)		(2,543	)

Total share-based compensation, net of tax	$	7,177		$	7,753		$	6,286

For the year ended December 28, 2008, share-based compensation expense includes a non-cash charge of $1.2 million related to the acceleration of the vesting of unvested options and the extension of the term of all outstanding stock options pursuant to a separation agreement with the former President of Pei Wei Asian Diner, Inc. entered into in December 2008.

Share-based compensation presented above excludes $43,000, $133,000 and $112,000 ($26,000, $87,000 and $74,000 net of tax), for fiscal years ended December 28, 2008, December 30, 2007 and December 31, 2006, respectively, related to discontinued operations.

At December 28, 2008, unrecognized share-based compensation, net of forfeitures (in thousands) as follows:


			Restricted Stock
	Options		and RSUs		Total

2009	$	4,474	$	2,966	$	7,440
2010		2,752		2,055		4,807
2011		1,148		1,283		2,431
2012		332		—		332
2013		8		—		8

Total	$	8,714	$	6,304	$	15,018

The unrecognized share-based compensation expense shown above will be recognized over the remaining weighted average vesting period which is approximately 1.8 years for stock options and 2.1 years for restricted stock and RSUs.

Employee Stock Purchase Plan

During 1998, the Company’s Board of Directors approved the 1998 Employee Stock Purchase Plan (“Purchase Plan”) and reserved 800,000 shares for issuance thereunder. The Purchase Plan permits eligible employees to purchase common stock at a discount, but only through payroll deductions, during concurrent 24 month offering periods. Each offering period is divided into four consecutive six-month purchase periods. The price at which stock is purchased under the Purchase Plan was initially equal to 85 percent of the lower of the fair market value of the common stock on the first day of the offering period and the fair market value of the common stock on the last day of the offering period. In accordance with the adoption of SFAS 123R on January 2, 2006, the Company began recognizing share-based compensation expense for its Purchase Plan, which totaled $0.2 million and $0.5 million, respectively, for the years ended December 30, 2007 and December 31, 2006.

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In August 2007, the Company modified the terms of its Purchase Plan such that the price at which stock is purchased is equal to 95 percent of the fair market value of the common stock on the last day of the offering period. As a result of this change, the Company’s Purchase Plan is no longer considered to be compensatory and therefore, the Company ceased recognizing share-based compensation expense associated with the Purchase Plan in August 2007.

Share Repurchase Program

Since inception, the Company’s Board of Directors authorized programs to repurchase up to a total of $150.0 million of the Company’s outstanding shares of common stock from time to time in the open market or in private transactions at prevailing market prices. The Company repurchased a total of 3.2 million shares of its common stock for $96.4 million at an average price of $29.74 for the years ended December 30, 2007 and December 31, 2006 and $3.6 million of the initial $50.0 million purchase authorization expired in fiscal 2007.

For the year ended December 28, 2008, the Company repurchased a total of 0.4 million shares of its common stock for $10.0 million at an average price of $25.38 using cash on hand. At December 28, 2008, there remains $40.0 million available under the current share repurchase authorization, which expires in July 2009.


11.	Benefit Plans

401(k) Plan

Effective July 1, 1997, the Company adopted a 401(k) Defined Contribution Benefit Plan (“the Plan”), which covers substantially all employees of the Company that have completed one year of service and have attained the age of 21 years old. The Plan permits participants to contribute to the Plan, subject to Internal Revenue Code restrictions, and also permits the Company to make discretionary matching contributions. For the year ended December 31, 2006, the Company did not make any contributions to the Plan. Beginning July 1, 2007, the Company began bi-weekly matching contributions in amounts equal to 25% of the first 6% of employee compensation contributed, resulting in a maximum contribution of 1.5% of participating employee compensation per year (subject to annual dollar maximum limits). Company contributions to the Plan vest at the rate of 20% each year beginning after the employee’s first year of service. For the years ended December 28, 2008 and December 30, 2007, the Company’s matching contribution expense under the Plan was $0.6 million and $0.3 million, respectively.

401(k) Restoration Plan

Effective July 1, 2007, the Company adopted a 401(k) Restoration Plan, a nonqualified deferred compensation plan which allows officers and highly compensated employees to defer receipt of a portion of their compensation and contribute such amounts to one or more investment funds. The maximum aggregate amount deferrable under the Restoration Plan is 75% of base salary and 100% of cash incentive compensation. The Company makes bi-weekly matching contributions in an amount equal to 25% of the first 6% of employee compensation contributed, with a maximum annual Company contribution of 1.5% of employee compensation per year (subject to annual dollar maximum limits). Company contributions to the Restoration Plan vest at the rate of 20% each year beginning after the employee’s first year of service. For the years ended December 28, 2008 and December 30, 2007, the Company’s matching contribution expense under the Restoration Plan was $0.2 million and $0.1 million, respectively.

Additionally, the Company entered into a rabbi trust agreement to protect the assets of the Restoration Plan. Each participant’s account is comprised of their contribution, the Company’s matching contribution and their share of earnings or losses in the Restoration Plan. In accordance with EITF No. 97-14, Accounting for Deferred Compensation Arrangements Where Amounts Are Held in a Rabbi Trust and Invested, the accounts of the rabbi trust are reported in the Company’s consolidated financial statements. The Company reports these investments within other assets and the related obligation within other liabilities on the consolidated balance sheet. Such amounts totaled $1.2 million and $0.6 million at December 28, 2008 and December 30, 2007, respectively. The investments

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

are considered trading securities and are reported at fair value with the realized and unrealized holding gains and losses related to these investments, as well as the offsetting compensation expense, recorded in operating income.


12.	Employment Agreements

The Company has executed employment agreements with the following executive officers: Chief Executive Officer, President (Co-Chief Executive Officer, effective January 5, 2009), Executive Vice-President, Global Brand Development and Chief Financial Officer. The term for the current agreements is three years and the agreements prohibit these officers 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. The agreements provide for immediate vesting of unvested stock options, and the extension of the expiration date to three years, after the occurrence of certain events. These events include a change in control of the Company, termination of the executive’s employment by the Company without cause or separation of employment by the executive for “good reason” (as defined in the agreements). Should any of these events occur, the Company may be required to record an expense based upon the difference between the original grant price of the options and the fair value at the modification date for the number of shares ultimately affected by the modification. As of December 28, 2008, approximately 1.1 million shares were affected by these agreements of which approximately 0.3 million shares were unvested.

In December 2008, the President of Pei Wei Asian Diner, Inc. resigned his position with the Company and the Company entered into a separation agreement. According to the terms of the agreement, the Company paid severance compensation and accelerated the vesting of approximately 71,000 unvested stock options and extended the exercise period of all outstanding stock options. These terms resulted in the recognition of additional non-cash share-based compensation expense of $1.2 million and a cash severance payment of $0.8 million for the year ended December 28, 2008.


13.	Partnership Structure

The Company utilizes a partnership philosophy to facilitate the development, leadership and operation of its restaurants. Historically, this philosophy has been embodied in a traditional legal partnership structure, which includes capital contributions from partners in exchange for an ownership stake in the profits and losses of the Company’s restaurants. Each partner is required to make a capital contribution in exchange for their percentage interest in the restaurant or region the partner is employed to manage. The ownership interest purchased by each partner generally ranges between two and ten percent of the restaurant or region the partner oversees. At the end of a specific term (generally five years), the Company 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. An estimated fair value is determined by reference to current industry purchase metrics as well as the historical cash flows or net income of the subject restaurant or region, as appropriate. The Company has the option to pay the agreed upon purchase price in cash over a period of time not to exceed five years.

Effective January 2007 for new store openings, the Bistro employs a different structure to achieve the same goal. At the restaurant level, the Bistro’s Operating and Culinary Partners (“partners” in the philosophical not legal sense) share in the profitability of the restaurant as well as participate in a long-term incentive program that rewards enhancement of economic value. Due to this change in partnership structure, individuals participating in the new plan receive amounts classified as compensation expense rather than a share of partnership earnings. Accordingly, compensation expense for the Bistro’s Operating and Culinary Partners is reflected in the consolidated income statement as labor expense. Additionally, a similar structure exists for the Bistro’s Market Partners, Market Chefs and Regional Vice Presidents, with related compensation expense reflected as general and administrative expense in the consolidated income statement. Partner investment expense is no longer recognized for new Bistro restaurant openings beginning in 2007 as a result of this change; however, for those partners who are bought out prior to the restaurant reaching maturity (typically after five years of operation), partner investment expense includes a reversal

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of previously recognized expense for the difference between the fair value of the partner’s interest at inception date and the fair value at the date of repurchase, to the extent that the former is greater.

The Pei Wei partnership structure was not affected by the changes at the Bistro and the traditional partnership structure remains in effect for new Pei Wei restaurant openings.

The following is a summary of partnership activity:


	December 28,		December 30,
	2008		2007

Total number of partners		58		112
Partnership interests purchased during the year		149		256
Purchase price of partnership interests purchased (in thousands):
Cash	$	9,763	$	13,032
Debt		2,693		11,732

Total	$	12,456	$	24,764


14.	Income Taxes

Income tax expense from continuing operations consisted of the following (in thousands):


	Year Ended
	December 28,		December 30,			December 31,
	2008		2007			2006

Federal:
Current	$	4,258	$	5,475		$	16,479
Deferred		5,762		5,668			(5,259	)

Total Federal	$	10,020	$	11,143		$	11,220

State:
Current	$	1,592	$	1,588		$	3,649
Deferred		581		(311	)		(791	)

Total State	$	2,173	$	1,277		$	2,858

Total income tax expense	$	12,193	$	12,420		$	14,078

The Company’s effective tax rate differs from the federal statutory rate for the following reasons:


	Year Ended
	December 28,			December 30,			December 31,
	2008			2007			2006

Income tax expense at federal statutory rate		35.0	%		35.0	%		35.0	%
State taxes, net of federal expense		4.9	%		2.6	%		3.8	%
Share-based compensation expense		(0.1	)%		0.0	%		0.4	%
FICA tip credit		(13.5	)%		(11.6	)%		(9.7	)%
Other, net		(0.5	)%		(0.7	)%		(0.7	)%

Total effective rate		25.8	%		25.3	%		28.8	%

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The income tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows (in thousands):


	December 28,			December 30,
	2008			2007

Deferred tax assets:
Preopening expenses	$	2,832		$	2,750
FICA and AMT credit carryforwards		1,781			335
Goodwill and intangibles		8,855			8,391
Unearned compensation		2,671			3,921
Insurance		2,397			5,289
Share-based compensation expense		9,456			6,387
Other		2,597			3,081
Straight line rent		1,670			1,360
Deferred revenue		2,908			—

Total deferred tax assets	$	35,167		$	31,514

Deferred tax liabilities:
Depreciation on property and equipment	$	36,976		$	28,067

Net deferred tax assets (liabilities) before valuation allowance	$	(1,809	)	$	3,447
Less: valuation allowance		(247	)		(101	)

Net deferred tax assets (liabilities)	$	(2,056	)	$	3,346

The Company currently files tax returns on a consolidated basis in some states and on a stand-alone basis in others. At December 28, 2008 and December 30, 2007, the Company had deferred tax assets totaling $0.6 million and $0.3 million, respectively, related to state net operating loss carryforwards in certain states where stand-alone tax returns are filed. These losses expire over the next five to 20 years. The Company has recorded a valuation allowance to offset the deferred tax assets for those losses that the Company does not anticipate being able to utilize prior to their expiration.

At December 28, 2008, the Company 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 years ended December 28, 2008, December 30, 2007, and December 31, 2006, the Company recorded a $0.2 million $4.3 million, and $1.9 million, respectively, increase to equity with a corresponding reduction to income tax liability. Additionally, at December 28, 2008 and December 30, 2007, the Company reversed $0.8 million and $0.4 million, respectively, of deferred tax assets related to fully vested cancelled options for which the Company will not receive a tax benefit. 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.

The reserve for uncertain tax positions was $1.3 million and $1.2 million, respectively, at December 28, 2008 and December 30, 2007. This balance is the Company’s best estimate of the potential liability for uncertain tax positions. The increase in the uncertain tax position reserve was primarily due to the current year requirements for uncertain asserted and unasserted items, as well as preliminary audit assessments that will settle during 2009. This increase was partially offset by decreases to the reserve relating to the expiration of the statute of limitations for certain jurisdictions. Inherent uncertainties exist in estimates of tax contingencies due to changes in tax law, both legislated and concluded through the various jurisdictions’ tax court systems.

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Changes in the Company’s reserve for uncertain tax positions are as follows (in thousands):


Beginning balance on December 30, 2007	$	1,175
Decreases attributable to tax positions taken during prior periods		66
Increases attributable to tax positions taken during the current period		187
Decreases related to settlements with taxing authorities		(106	)
Decreases resulting from a lapse of applicable statutes of limitations		(63	)

Ending balance on December 28, 2008	$	1,259

As of December 28, 2008 and December 30, 2007, the Company had accrued $0.3 million and $0.3 million, respectively, of interest related to uncertain tax positions. For the year ended December 28, 2008, provision for income tax includes a $0.02 million expense related to an increase in interest expense on uncertain tax positions. As of December 28, 2008 and December 30, 2007, the Company had accrued $0.1 million and $0.1 million, respectively of penalties related to uncertain tax positions.

Currently, the Company has statutes of limitations open in various states ranging from the 1999 through 2007 tax years. The federal statute of limitations is currently open for the 2004 through 2007 tax years.


15.	Commitments and Contingencies

Purchase Obligations

The Company enters into various purchase obligations in the ordinary course of its business. Those that are binding relate primarily to commodities contracts and construction for restaurants planned to open in the near future. At December 28, 2008, such purchase obligations approximated $116.2 million and were due within the following 12-month period.

Litigation and other

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


16.	Segment Reporting

The Company operates exclusively in the United States food-service industry and has determined that its reportable segments are those that are based on the Company’s methods of internal reporting and management structure. The Company’s reportable segments are Bistro and Pei Wei. Assets held for sale related to the discontinued operations of Taneko are included in total assets for Shared Services as of December 30, 2007. There were no material amounts of revenues or transfers among reportable segments.

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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


	Total		Shared Services			Bistro		Pei Wei

Fiscal Year 2008
Revenues	$	1,198,124	$	—		$	919,963	$	278,161
Segment profit		136,163		(1,462	)		115,880		21,745
Capital expenditures		87,178		2,450			65,546		19,182
Depreciation and amortization		68,711		1,462			51,091		16,158
Total assets		667,363		20,478			534,224		112,661
Goodwill		6,819		—			6,566		253
Fiscal Year 2007
Revenues	$	1,084,193	$	—		$	849,743	$	234,450
Segment profit		128,409		(1,416	)		109,679		20,146
Capital expenditures		151,553		157			111,248		40,148
Depreciation and amortization		55,988		1,416			42,294		12,278
Total assets		622,630		16,451			488,021		118,158
Goodwill		6,819		—			6,566		253
Fiscal Year 2006
Revenues	$	932,116	$	—		$	756,634	$	175,482
Segment profit		119,859		(1,137	)		105,378		15,618
Capital expenditures		114,330		3,848			76,853		33,629
Depreciation and amortization		44,378		1,137			34,451		8,790

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

Reconciliation of Non-GAAP Financial Information to GAAP measures (in thousands):


	Fiscal Year
	2008			2007			2006

Segment profit	$	136,163		$	128,409		$	119,859
Less: General and administrative		(77,488	)		(66,968	)		(56,030	)
Less: Preopening expense		(8,457	)		(14,310	)		(11,922	)
Less: Partner investment expense		354			2,012			(4,371	)
Less: Interest & other income (expense), net		(3,362	)		(100	)		1,315

Income from continuing operations before provision for income taxes	$	47,210		$	49,043		$	48,851

P.F. CHANG’S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


17.	Interim Financial Results (Unaudited)

The following tables set forth certain unaudited consolidated financial information for each of the four quarters in fiscal 2008 and 2007 (in thousands, except per share data). In management’s opinion, this unaudited quarterly information has been prepared on the same basis as the audited consolidated financial statements and includes all necessary adjustments, consisting only of normal recurring adjustments, that management considers necessary for a fair presentation of the unaudited quarterly results when read in conjunction with the Consolidated Financial Statements and Notes. The Company believes that quarter-to-quarter comparisons of its financial results are not necessarily indicative of future performance.


	Fiscal 2008												Fiscal 2007
	First			Second			Third			Fourth			First			Second			Third			Fourth
	Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter

Revenues	$	305,917		$	301,533		$	295,877		$	294,797		$	262,014		$	264,660		$	268,120		$	289,399
Income from continuing operations before provision for income taxes		13,559			13,531			9,712			10,408			15,201			13,557			7,870			12,415
Income from continuing operations		9,978			9,895			7,655			7,489			11,033			9,951			6,003			9,636
Loss from discontinued operations, net of tax		(329	)		(525	)		(4,693	)		(2,044	)		(568	)		(674	)		(728	)		(2,590	)
Net income		9,649			9,370			2,962			5,445			10,465			9,277			5,275			7,046
Basic income from continuing operations per share		0.42			0.41			0.32			0.32			0.43			0.39			0.23			0.39
Basic net income per share		0.40			0.39			0.13			0.23			0.41			0.36			0.20			0.28
Diluted income from continuing operations per share		0.41			0.41			0.32			0.31			0.42			0.38			0.23			0.38
Diluted net income per share		0.40			0.39			0.12			0.23			0.40			0.36			0.20			0.28
Basic weighted average shares outstanding		23,972			23,898			23,613			23,623			25,488			25,708			25,773			24,923
Diluted weighted average shares outstanding		24,295			24,247			23,927			23,851			26,046			26,129			26,105			25,257


Item 9.	*Changes in and Disagreements with Accountants on Accounting and Financial Disclosure*

None.


Item 9A.	*Controls and Procedures*

Disclosure Controls and Procedures — We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Co-Chief Executive Officers (“Co-CEOs”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as the Company’s controls are designed to do, and management necessarily was required to apply its judgment in evaluating the risk related to controls and procedures.

In connection with the preparation of this Annual Report on Form 10-K, as of December 28, 2008, an evaluation was performed under the supervision and with the participation of our management, including the Co-CEOs and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Co-CEOs and CFO concluded that our disclosure controls and procedures were effective as of December 28, 2008. These conclusions were communicated to the Audit Committee.

Management’s Annual Report on Internal Control over Financial Reporting — Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control system is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Our management has assessed the effectiveness of our internal control over financial reporting as of December 28, 2008. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in Internal Control — Integrated Framework. Based on this assessment, our Co-CEOs and CFO concluded that our internal control over financial reporting was effective as of December 28, 2008 based on the criteria set forth by COSO in Internal Control — Integrated Framework.

Our independent registered public accounting firm, KPMG LLP, has issued an attestation report on the effectiveness of our internal control over financial reporting. This report appears below.

Change in Internal Control Over Financial Reporting — There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


Item 9B.	*Other Information*

None.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
P.F. Chang’s China Bistro, Inc.:

We have audited P.F. Chang’s China Bistro, Inc. and subsidiaries’ (the Company’s) internal control over financial reporting as of December 28, 2008 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Annual Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 28, 2008 based on criteria established in Internal Control — Integrated Framework, issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of P.F. Chang’s China Bistro, Inc. and subsidiaries as of December 28, 2008 and December 30, 2007, and the related consolidated statements of income, common stockholders’ equity, and cash flows for the year ended December 28, 2008, the year ended December 30, 2007, and the year ended December 31, 2006, and our report dated February 10, 2009 expressed an unqualified opinion on those consolidated financial statements.

(signed) KPMG LLP

Phoenix, Arizona

February 10, 2009

PART III


Item 10.	*Directors, Executive Officers and Corporate Governance*

The information required by Item 10 with respect to Directors and Executive Officers is incorporated by reference from the information under the captions “Directors and Executive Officers,” “Board Meetings and Committees,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Code of Ethics,” contained in the Company’s definitive proxy statement in connection with the solicitation of proxies for the Company’s 2009 Annual Meeting of Stockholders to be held on April 28, 2009 (the “Proxy Statement”).


Item 11.	*Executive Compensation*

The information required by Item 11 is incorporated by reference from the information under the caption “Executive Compensation and Other Matters” contained in the Proxy Statement.


Item 12.	*Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*

The information required by Item 12 is incorporated by reference from information under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” contained in the Proxy Statement.


Item 13.	*Certain Relationships and Related Transactions, and Director Independence*

The information required by Item 13 is incorporated by reference from the information under the caption “Certain Relationships and Related Transactions, and Director Independence” contained in the Proxy Statement.


Item 14.	*Principal Accounting Fees and Services*

The information required by Item 14 is incorporated by reference from the information under the caption “Independent Auditors Fees and Other Matters,” contained in the Proxy Statement.

PART IV


Item 15.	*Exhibits, Financial Statement Schedules*

Documents filed as part of this report:

1. The following Financial Statements of the Company are included in Part II, Item 8 of this Annual Report on Form 10-K:

Report of Independent Registered Public Accounting Firm;

Consolidated Balance Sheets at December 28, 2008 and December 30, 2007;

Consolidated Statements of Income for the Years Ended December 28, 2008, December 30, 2007 and December 31, 2006;

Consolidated Statements of Common Stockholders’ Equity for the Years Ended December 28, 2008, December 30, 2007 and December 31, 2006;

Consolidated Statements of Cash Flows for the Years Ended December 28, 2008, December 30, 2007 and December 31, 2006;

Notes to Consolidated Financial Statements.

2. Schedules to Financial Statements:

All financial statement schedules have been omitted because they are either inapplicable or the information required is provided in the Company’s Consolidated Financial Statements and Notes thereto, included in Part II, Item 8 of this Annual Report on Form 10-K.

3. Index to Exhibits


Exhibit
Number			Description Document

	3(i)(1)		Amended and Restated Certificate of Incorporation.
	3(ii)		Amended and Restated By-laws.
	4	.1(2)	Specimen Common Stock Certificate.
	4	.2(2)	Amended and Restated Registration Rights Agreement dated May 1, 1997.
	†10	.1(2)	Form of Indemnification Agreement for directors and executive officers.
	†10	.2(2)	1998 Stock Option Plan and forms of agreement thereunder.
	†10	.3(2)	1997 Restaurant Manager Stock Option Plan and forms of Agreement thereunder.
	†10	.4(2)	1996 Stock Option Plan and forms of Agreement thereunder.
	†10	.5(2)	1998 Employee Stock Purchase Plan.
	†10	.13(3)	1999 Nonstatutory Stock Option Plan.
	10	.16(4)	Common Stock Purchase Agreement dated January 11, 2001.
	†10	.17(5)	Pei Wei Asian Diner, Inc. 2001 Stock Option Plan.
	†10	.23(6)	Key Employee Stock Purchase Plan and forms of Agreement thereunder.
	†10	.25(7)	2006 Equity Incentive Plan.
	†10	.26(7)	Amended and Restated 1998 Stock Option Plan.
	10	.27(8)	2007 Credit Agreement dated August 31, 2007.
	†10	.28(9)	Employment Agreement between the Company and Richard L. Federico, as amended, dated May 21, 2008.
	†10	.29(9)	Employment Agreement between the Company and Robert T. Vivian, as amended, dated May 21, 2008.
	†10	.30(9)	Employment Agreement between the Company and Russell Owens, as amended, dated May 21, 2008.
	†10	.31(9)	Employment Agreement between the Company and R. Michael Welborn, as amended, dated May 21, 2008.
	†10	.32(9)	Employment Agreement between the Company and Mark Mumford, as amended, dated May 21, 2008.
	†10	.33(9)	Non-Employee Director Compensation Plan, effective April 17, 2008.
	†10	.34	Separation Agreement between the Company and Russell Owens, dated December 18, 2008.
	21	.1	List of Subsidiaries.
	23	.1	Consent of KPMG LLP, Independent Registered Public Accounting Firm
	31	.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Richard L. Federico.
	31	.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Robert T. Vivian.
	31	.3	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Mark D. Mumford.
	32	.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Richard L. Federico.
	32	.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Mark D. Mumford.
	32	.3	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Robert T. Vivian.


†		Management Contract or Compensatory Plan.

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

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

(3)		Incorporated by reference to the Registrant’s Annual Report on Form 10-K dated March 6, 2001.

(4)		Incorporated by reference to the Registrant’s Form 10-Q, dated April 1, 2001.

(5)		Incorporated by reference to the Registrant’s Annual Report on Form 10-K dated February 19, 2002.

(6)		Incorporated by reference to the Registrant’s Form S-8 dated January 31, 2005.

(7)		Incorporated by reference to the Registrant’s Form 8-K dated May 4, 2006.

(8)		Incorporated by reference to the Registrant’s Form 10-Q, dated October 26, 2007.

(9)		Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on July 23, 2008.

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 February 11, 2009.

P.F. CHANG’S CHINA BISTRO, INC.


	By:	/s/ RICHARD L. FEDERICO

Richard L. Federico

Chairman and Co-Chief Executive Officer


	By:	/s/ ROBERT T. VIVIAN

Robert T. Vivian

Co-Chief Executive Officer

POWER OF ATTORNEY

Know all persons by these presents, that each person whose signature appears below constitutes and appoints Richard L. Federico, Robert T. Vivian and Mark D. Mumford, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place, and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their substitute or substituted, may lawfully do or cause to be done by virtue thereof.

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


By:	/s/ F. LANE CARDWELL, JR. F. Lane Cardwell, Jr.	Director	February 11, 2009

By:	/s/ RICHARD L. FEDERICO Richard L. Federico	Chairman, Co-Chief Executive Officer and Director (Principal Executive Officer)	February 11, 2009

By:	/s/ LESLEY H. HOWE Lesley H. Howe	Director	February 11, 2009

By:	/s/ KENNETH A. MAY Kenneth A. May	Director	February 11, 2009

By:	/s/ MARK D. MUMFORD Mark D. Mumford	Chief Financial Officer (Principal Financial and Accounting Officer)	February 11, 2009

By:	/s/ M. ANN RHOADES M. Ann Rhoades	Director	February 11, 2009

EXHIBIT INDEX


Exhibit
Number			Description Document

	3(i)(1)		Amended and Restated Certificate of Incorporation.
	3(ii)		Amended and Restated By-laws.
	4	.1(2)	Specimen Common Stock Certificate.
	4	.2(2)	Amended and Restated Registration Rights Agreement dated May 1, 1997.
	†10	.1(2)	Form of Indemnification Agreement for directors and executive officers.
	†10	.2(2)	1998 Stock Option Plan and forms of agreement thereunder.
	†10	.3(2)	1997 Restaurant Manager Stock Option Plan and forms of Agreement thereunder.
	†10	.4(2)	1996 Stock Option Plan and forms of Agreement thereunder.
	†10	.5(2)	1998 Employee Stock Purchase Plan.
	†10	.13(3)	1999 Nonstatutory Stock Option Plan.
	10	.16(4)	Common Stock Purchase Agreement dated January 11, 2001.
	†10	.17(5)	Pei Wei Asian Diner, Inc. 2001 Stock Option Plan.
	†10	.23(6)	Key Employee Stock Purchase Plan and forms of Agreement thereunder.
	†10	.25(7)	2006 Equity Incentive Plan.
	†10	.26(7)	Amended and Restated 1998 Stock Option Plan.
	10	.27(8)	2007 Credit Agreement dated August 31, 2007.
	†10	.28(9)	Employment Agreement between the Company and Richard L. Federico, as amended, dated May 21, 2008.
	†10	.29(9)	Employment Agreement between the Company and Robert T. Vivian, as amended, dated May 21, 2008.
	†10	.30(9)	Employment Agreement between the Company and Russell Owens, as amended, dated May 21, 2008.
	†10	.31(9)	Employment Agreement between the Company and R. Michael Welborn, as amended, dated May 21, 2008.
	†10	.32(9)	Employment Agreement between the Company and Mark Mumford, as amended, dated May 21, 2008.
	†10	.33(9)	Non-Employee Director Compensation Plan, effective April 17, 2008.
	†10	.34	Separation Agreement between the Company and Russell Owens, dated December 18,2008.
	21	.1	List of Subsidiaries.
	23	.1	Consent of KPMG LLP, Independent Registered Public Accounting Firm.
	31	.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Richard L. Federico.
	31	.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Robert T. Vivian.
	31	.3	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Mark D Mumford.
	32	.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Richard L. Federico.
	32	.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Robert T. Vivian.
	32	.3	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Mark D Mumford.


†		Management Contract or Compensatory Plan.

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

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

(3)		Incorporated by reference to the Registrant’s Annual Report on Form 10-K dated March 6, 2001.

(4)		Incorporated by reference to the Registrant’s Form 10-Q, dated April 1, 2001.

(5)		Incorporated by reference to the Registrant’s Annual Report on Form 10-K dated February 19, 2002.

(6)		Incorporated by reference to the Registrant’s Form S-8 dated January 31, 2005.

(7)		Incorporated by reference to the Registrant’s Form 8-K dated May 4, 2006.

(8)		Incorporated by reference to the Registrant’s Form 10-Q, dated October 26, 2007.

(9)		Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on July 23, 2008.


Item		Page

PART I
1.	Business		3
1A.	Risk Factors		7
1B.	Unresolved Staff Comments		13
2.	Properties		14
3.	Legal Proceedings		15
4.	Submission of Matters to a Vote of Security Holders		15

PART II
5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		16
6.	Selected Financial Data		17
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
7A.	Quantitative and Qualitative Disclosures About Market Risk		38
8.	Financial Statements and Supplementary Data		39
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		72
9A.	Controls and Procedures		72
9B.	Other Information		72

PART III
10.	Directors, Executive Officers and Corporate Governance		74
11.	Executive Compensation		74
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		74
13.	Certain Relationships and Related Transactions, and Director Independence		74
14.	Principal Accounting Fees and Services		74

PART IV
15.	Exhibits, Financial Statement Schedules		74
EX-3.(ii)
EX-10.34
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-31.3
EX-32.1
EX-32.2
EX-32.3


Item 8.	*Financial Statements and Supplementary Data*


	Page

Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm		40
Consolidated Balance Sheets at December 28, 2008 and December 30, 2007		41
Consolidated Statements of Income for the Years Ended December 28, 2008, December 30, 2007 and December 31, 2006		42
Consolidated Statements of Common Stockholders’ Equity for the Years Ended December 28, 2008, December 30, 2007 and December 31, 2006		43
Consolidated Statements of Cash Flows for the Years Ended December 28, 2008, December 30, 2007 and December 31, 2006		44
Notes to Consolidated Financial Statements		45