-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K7u2p6GI0WoYXryzl/oT6xvm2/cEO7SV/DFcGY4isRHB6yQ4DrBDVfyYkHDUNXME wqdrOLq6iB51DO84rdvodQ== 0000950153-99-001369.txt : 19991111 0000950153-99-001369.hdr.sgml : 19991111 ACCESSION NUMBER: 0000950153-99-001369 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990926 FILED AS OF DATE: 19991110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: P F CHANGS CHINA BISTRO INC CENTRAL INDEX KEY: 0001039889 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 860815086 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25123 FILM NUMBER: 99745984 BUSINESS ADDRESS: STREET 1: 5090 N 40TH ST STE 160 CITY: PHOENIX STATE: AZ ZIP: 85018 MAIL ADDRESS: STREET 1: 5090 N. 40TH ST STREET 2: SUITE 160 CITY: PHOENIX STATE: AZ ZIP: 85018 10-Q 1 10-Q 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________. COMMISSION FILE NUMBER: 0-25123 P.F. CHANG'S CHINA BISTRO, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 86-0815086 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5090 NORTH 40TH STREET, SUITE #160 85018 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (602) 957-8986 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001 PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of September 26, 1999, there were outstanding 10,245,424 shares of the Registrant's Common Stock. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
ITEM PAGE - ---- ---- PART I FINANCIAL INFORMATION 1. Financial Statements (Unaudited)............................ 3 Condensed Consolidated Balance Sheets as of September 26, 1999 and December 27, 1998................................ 3 Condensed Consolidated Statements of Income for the Three Months Ended September 26, 1999 and September 27, 1998 and for the nine months ended September 26, 1999 and September 27, 1998.................................................. 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 26, 1999 and September 27, 1998.... 5 Notes to Condensed Consolidated Financial Statements........ 6 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 7 3. Quantitative and Qualitative Disclosures About Market Risk...................................................... 15 PART II OTHER INFORMATION 1. Legal Proceedings........................................... 16 2. Changes in Securities and Use of Proceeds................... 16 3. Defaults upon Senior Securities............................. 16 4. Submission of Matters to a Vote of Security Holders......... 16 5. Other Information........................................... 16 6. Exhibits and Reports on Form 8-K............................ 16
2 3 PART I FINANCIAL INFORMATION ITEM 1. UNAUDITED CONDENSED FINANCIAL STATEMENTS P.F. CHANG'S CHINA BISTRO, INC. CONSOLIDATED BALANCE SHEETS
NOTE 1 UNAUDITED DECEMBER 27, SEPTEMBER 26, 1998 1999 ------------ ------------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $18,857 $ 4,380 Receivables............................................... 2,792 1,311 Inventories............................................... 673 914 Current portion of notes receivable from related parties................................................ 225 245 Prepaids and other current assets......................... 631 987 ------- ------- Total current assets........................................ 23,178 7,837 Construction-in-progress.................................... 4,627 3,207 Property and equipment, net................................. 32,246 53,515 Goodwill, net............................................... 7,874 7,560 Notes receivable from related parties, less current portion................................................... 545 288 Other assets................................................ 717 1,348 ------- ------- Total assets................................................ $69,187 $73,755 ======= ======= LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 2,938 $ 2,277 Accrued payroll........................................... 1,943 1,776 Other accrued expenses.................................... 2,798 3,536 Income tax liability...................................... -- 1,122 Unearned revenue.......................................... 744 681 Current portion of long-term debt......................... 523 368 ------- ------- Total current liabilities................................... 8,946 9,760 Long-term debt.............................................. 1,829 1,596 Interests of minority members and partners in consolidated limited liability companies and partnerships.............. 183 91 Common stockholders' equity: Common stock, $0.001 par value, 20,000,000 shares authorized: 10,192,769 shares issued and outstanding at December 27, 1998 and 10,245,424 at September 26, 1999.......... 10 10 Additional paid-in capital................................ 63,409 63,866 Accumulated deficit....................................... (5,190) (1,568) ------- ------- Total common stockholders' equity........................... 58,229 62,308 ------- ------- Total liabilities and common stockholders' equity (deficit)................................................. $69,187 $73,755 ======= =======
See accompanying notes to unaudited condensed financial statements. 3 4 P.F. CHANG'S CHINA BISTRO, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------- ----------------------------- SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, 1998 1999 1998 1999 ------------- ------------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues.................................. $20,239 $40,961 $53,176 $104,390 Costs and expenses: Restaurant operating costs: Cost of sales........................ 5,653 11,405 14,752 28,888 Labor................................ 5,821 12,268 15,221 31,203 Operating............................ 3,457 7,030 8,897 17,811 Occupancy............................ 1,420 2,588 3,777 6,916 ------- ------- ------- -------- Total restaurant operating costs......................... 16,351 33,291 42,647 84,818 General and administrative.............. 1,574 2,452 4,327 6,600 Depreciation and amortization........... 583 1,327 1,596 3,412 Preopening.............................. 1,191 1,313 2,408 3,340 ------- ------- ------- -------- Income from operations.................... 540 2,578 2,198 6,220 Interest income (expense)................. (305) 40 (760) 390 ------- ------- ------- -------- Income before elimination of minority members' and partners' interests and provision for income taxes.............. 235 2,618 1,438 6,610 Elimination of minority members' and partners' interests..................... (198) (671) (543) (1,487) ------- ------- ------- -------- Income before provision for income taxes................................... 37 1,947 895 5,123 Provision for income taxes................ -- (595) (11) (1,501) ------- ------- ------- -------- Net income................................ 37 $ 1,352 884 $ 3,622 ======= ======== Redeemable preferred stock accretion...... (238) (718) ------- ------- Net income available to common stockholders............................ $ (201) 166 ======= ======= Net income per share: Basic................................... $ (0.08) $ 0.13 $ 0.07 $ 0.35 ======= ======= ======= ======== Diluted................................. $ (0.08) $ 0.12 $ 0.05 $ 0.32 ======= ======= ======= ======== Weighted average shares used in computation: Basic................................... 2,500 10,223 2,500 10,207 ======= ======= ======= ======== Diluted................................. 2,500 11,149 3,206 11,152 ======= ======= ======= ========
See accompanying notes to unaudited condensed financial statements. 4 5 P.F. CHANG'S CHINA BISTRO, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED ------------------------------ SEPTEMBER 27, SEPTEMBER 26, 1998 1999 ------------- ------------- (IN THOUSANDS) OPERATING ACTIVITIES: Net income.................................................. $ 884 $ 3,622 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................. 1,269 3,086 Amortization of goodwill.................................. 327 326 Minority members' and partners' interests................. 543 1,487 Changes in operating assets and liabilities: Receivables............................................ 1,637 1,481 Inventories............................................ (68) (241) Prepaids and other current assets...................... 64 (356) Other assets........................................... (270) (643) Accounts payable....................................... (560) (661) Accrued payroll........................................ (149) (167) Other accrued expenses................................. 980 738 Income Tax Liability................................... -- 1,122 Unearned revenue....................................... (31) (63) -------- -------- Net cash provided by operating activities................... 4,626 9,731 INVESTING ACTIVITIES: Capital expenditures........................................ (15,538) (22,935) Increase (decrease) in notes receivable from related parties................................................... (9) 237 Payment for members' interests.............................. (227) -- -------- -------- Net cash used in investing activities....................... (15,774) (22,698) FINANCING ACTIVITIES: Proceeds from revolving line of credit, net of repayments... 12,500 -- Repayments of long-term debt................................ (397) (388) Proceeds from stock options exercised and employee stock purchases................................................. -- 457 Proceeds from minority partners' contributions.............. 289 311 Distributions to minority members and partners.............. (799) (1,890) -------- -------- Net cash provided by (used in) financing activities......... 11,593 (1,510) -------- -------- Net increase (decrease) in cash and cash equivalents........ 445 (14,477) Cash and cash equivalents at the beginning of the period.... 2,739 18,857 -------- -------- Cash and cash equivalents at the end of the period.......... $ 3,184 $ 4,380 ======== ========
See accompanying notes to unaudited condensed financial statements. 5 6 P.F. CHANG'S CHINA BISTRO, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION P.F. Chang's China Bistro, Inc. (the "Company") owns and operates 34 full service restaurants (as of September 26, 1999) in Arizona, California, Colorado, Utah, Texas, Illinois, New York, Michigan, Nevada, Florida, North Carolina, Louisiana, Alabama, Georgia, Massachusetts, Ohio and Virginia under the name of "P.F. Chang's China Bistro." The accompanying condensed financial statements have been prepared by the Company without audit and reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of financial position and the results of operations for the interim periods. The statements have been prepared in accordance with generally accepted accounting principles and with the regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such SEC rules and regulations. Operating results for the nine month period ended September 26, 1999 are not necessarily indicative of the results that may be expected for the year ending January 2, 2000. The balance sheet at December 27, 1998 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and notes thereto for the fiscal year ended December 27, 1998 included in the Company's Form 10-K. 2. NET INCOME (LOSS) PER SHARE Net income (loss) per share is computed in accordance with SFAS No. 128, "Earnings per Share." Basic net income per share is computed based on the weighted average of common shares outstanding during the period. Diluted net income per share is computed based on the weighted average number of common shares and common stock equivalents, which includes options under the Company's stock option plans and outstanding warrants. 3. CREDIT FACILITY The Company has obtained a commitment from a financial institution for a $15 million credit facility. The credit facility will be used to help fund the Company's development beyond 1999. 6 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following section contains forward-looking statements which involve risks and uncertainties. Such forward-looking statements may be deemed to include anticipated restaurant openings, anticipated costs and sizes of future restaurants and the adequacy of anticipated sources of cash to fund the Company's future capital requirements. Words such as "believes," "anticipates," "expects," "intends," "plans" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. The Company's actual results may differ materially from those discussed in the forward-looking statements. Factors that might cause actual events or results to differ materially from those indicated by such forward-looking statements may include matters noted elsewhere in this Form 10-Q, such as development and construction risks, potential labor shortages, fluctuations in operating results, and changes in food costs. OVERVIEW P.F. Chang's owns and operates 34 full service restaurants (as of September 26, 1999) that feature a distinctive blend of high quality, traditional Chinese cuisine and American hospitality in a sophisticated, contemporary bistro setting. The Company was formed in early 1996 with the acquisition of the four original P.F. Chang's restaurants and the hiring of an experienced management team, led by Richard Federico and Robert Vivian, the Company's Chief Executive Officer and Chief Financial Officer, respectively, to support the Company's founder, Paul Fleming. Utilizing a partnership management philosophy, the Company embarked on a strategic expansion of the concept targeted at major metropolitan areas throughout the United States and opened three additional restaurants in 1996, six in 1997, and 10 in 1998. The Company intends to open three new restaurants for the remainder of 1999 (eleven new restaurants were opened during the first nine months of 1999) and another thirteen to fifteen new restaurants in 2000. The units that the Company intends to develop in the remainder of 1999 and 2000 will be situated in approximately 9 new markets across the United States. The Company has signed lease agreements for all of the remaining units planned for 1999. Additionally, the Company has signed lease agreements or letters of intent for all units expected to open in 2000. The Company intends to continue to develop restaurants that typically range in size from 6,000 square feet to 7,000 square feet, and that require on average, a total cash investment of between $1.5 million and $2.0 million and a total capitalized investment of between $2.5 million and $3.0 million per restaurant. This total investment includes the capitalized lease value of the property, which can vary greatly depending on the specific trade area. See "Risk Factors -- Development and Construction Risks." RESULTS OF OPERATIONS The following tables set forth certain unaudited quarterly information for the three months ended September 27, 1998 and September 26, 1999, and the nine months ended September 27, 1998 and September 26, 1999, expressed as a percentage of revenues, except for revenues which are expressed in thousands. This quarterly information has been prepared on a consistent basis with the audited financial statements and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented. The Company's quarterly operating results may fluctuate significantly as a result of a variety of factors, and operating results for any quarter are not necessarily indicative of results for a full fiscal year. Historically, the Company has experienced variability in the amount and percentage of revenues attributable to preopening expenses. The Company typically incurs the most significant portion of preopening expenses associated with a given restaurant within the two months immediately preceding and the month of the opening of the restaurant. In addition, the Company's experience to date has been that labor and operating costs associated with a newly opened restaurant (for approximately its first four to six months of operation) are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Accordingly, the volume and timing of new restaurant openings has had and is expected to have a meaningful impact on preopening expenses, labor and operating costs until such time as a larger base of restaurants in operation mitigates such impact. 7 8
THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------ ------------------------------ SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, 1998 1999 1998 1999 ------------- ------------- ------------- ------------- STATEMENTS OF OPERATIONS DATA: Revenues (in thousands)................ $20,239 $40,961 $53,176 $104,390 Costs and expenses: Restaurant operating costs: Cost of sales..................... 27.9% 27.8% 27.8% 27.7% Labor............................. 28.8 30.0 28.6 29.9 Operating......................... 17.1 17.2 16.7 17.1 Occupancy......................... 7.0 6.3 7.1 6.6 ------- ------- ------- -------- Total restaurant operating costs...................... 80.8 81.3 80.2 81.3 General and administrative........... 7.7 6.0 8.1 6.3 Depreciation and amortization........ 2.9 3.2 3.0 3.3 Preopening expense................... 5.9 3.2 4.5 3.2 ------- ------- ------- -------- Income from operations................. 2.7 6.3 4.2 5.9 Interest income (expense), net......... (1.5) 0.1 (1.4) 0.4 Elimination of minority interests...... (1.0) (1.6) (1.0) (1.4) ------- ------- ------- -------- Income before provision for income taxes................................ 0.2 4.8 1.8 4.9 Provision for income taxes............. (0.0) (1.5) (0.0) (1.4) ------- ------- ------- -------- Net income............................. 0.2% 3.3% 1.8% 3.5% ======= ======= ======= ========
Revenues The Company's revenues are derived entirely from food and beverage sales. Revenues increased by $20.8 million, or 102.4%, to $41.0 million in the three months ended September 26, 1999 from $20.2 million in the three months ended September 27, 1998. Revenues increased by $51.3 million, or 96.3%, to $104.4 million in the nine months ended September 26, 1999 from $53.1 million in the nine months ended September 27, 1998. The increase in third quarter 1999 revenues compared to third quarter 1998 revenues was primarily attributable to revenues of 16.7 million generated by new restaurants opened subsequent to September 27, 1998 and a 4.1 million increase in revenues in the three months ended September 26, 1999 for existing restaurants. The increase in year-to-date revenues for the nine months ended September 26, 1999 compared to the nine months ended September 27, 1998 was primarily attributable to revenues of 33.3 million generated by new restaurants opened subsequent to September 27, 1998 and a 18.0 million increase in revenues in the nine months ended September 26, 1999 for existing restaurants. Increased customer visits produced comparable restaurant sales gains of 12.2% in the three months ended September 26, 1999 and 11.9% in the nine months ended September 26, 1999. The Company did not implement any meaningful price increases in either period. Costs and expenses Cost of sales. Cost of sales is composed of the cost of food and beverages. Cost of sales decreased nominally as a percentage of revenues to 27.8% in the three months ended September 26, 1999 from 27.9% in the three months ended September 27, 1998. Cost of sales decreased nominally to 27.7% for the nine months ended September 26, 1999 from 27.8% in the nine months ended September 27, 1998. Labor. Labor expenses consist of restaurant management salaries, hourly staff payroll costs and other payroll-related items. Labor expenses as a percentage of revenues increased to 30.0% in the three months ended September 26, 1999 from 28.8% in the three months ended September 27, 1998. Labor expenses increased to 29.9% in the nine months ended September 26, 1999 from 28.6% in the nine months ended September 27, 1998. The increase in labor expenses for both periods was primarily due to the fact that the Company opened eleven new restaurants in the first nine months of 1999 compared to only four new restaurants in the first nine months of 1998. The Company's experience to date has been that labor costs 8 9 associated with a newly opened restaurant (for approximately its first four to six months of operation) are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Additionally, as a result of tightening labor markets around the country, the Company has experienced an increase in its labor costs across the system. The Company expects that tighter labor markets will continue to exert upward pressure on its labor costs on a year-over-year basis for the remainder of 1999. Operating. Operating expenses consist primarily of various restaurant-level costs, which are generally variable and are expected to fluctuate with revenues. In addition, the Company's experience to date has been that operating costs associated with a newly opened restaurant (for approximately its first four to six months of operation) are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Operating expenses increased as a percentage of revenues to 17.2% in the three months ended September 27, 1999 from 17.1% in the three months ended September 27, 1998. Operating expenses increased to 17.1% in the nine months ended September 26, 1999 from 16.7% in the nine months ended September 27, 1998. The increase for both periods was primarily due to the fact that the Company opened eleven new restaurants during the first nine months of 1999 compared to only four new restaurants in the first nine months of 1998. Occupancy. Occupancy costs include both fixed and variable portions of rent, common area maintenance charges, property insurance and property taxes. Occupancy costs decreased as a percentage of revenues to 6.3% in the three months ended September 26, 1999 from 7.0% in the three months ended September 27, 1998. Occupancy expenses decreased to 6.6% for the nine months ended September 26, 1999 from 7.1% in the nine months ended September 27, 1998. The decrease in occupancy for both periods was primarily the result of the increased revenue base and, to a lesser extent, more favorable lease terms associated with new restaurants. General and administrative. General and administrative expenses are composed of expenses associated with corporate and administrative functions that support development and restaurant operations and provide an infrastructure to support future growth, including management and staff salaries, employee benefits, travel, legal and professional fees, technology and market research. General and administrative expenses increased to $2.5 million (6.0% of revenues) in the three months ended September 26, 1999 from $1.6 million (7.7% of revenues) in the three months ended September 27, 1998. General and administrative expenses increased to $6.6 million (6.3% of revenues) in the nine months ended September 26, 1999 from $4.3 million (8.1% of revenues) in the nine months ended September 27, 1998. The increase was due primarily to the addition of corporate management personnel which resulted in approximately $460,000 and $1.1 million of additional compensation and benefits expense for the three months ended September 26, 1999 and the nine months ended September 26, 1999 respectively, as well as additional costs to support a larger restaurant base, including travel and consulting fees. Also, the Company incurred additional costs during the first nine months of 1999, such as printing, accounting, and legal costs, as a result of becoming a public company in December of 1998. The decrease as a percentage of revenues was due primarily to the Company's expanding revenue base and its ability to leverage the duties and responsibilities of its Market Partners (See "Elimination of minority interests" below). Depreciation and amortization. Depreciation and amortization expenses include the depreciation of fixed assets and the amortization of goodwill costs associated with the acquisition of the ownership interests in the original restaurants. Depreciation and amortization increased to $1.3 million in the three months ended September 26, 1999 from $583,000 in the three months ended September 27, 1998. Depreciation and amortization increased to $3.4 million for the nine months ended September 26, 1999 from $1.6 million for the nine months ended September 27, 1998. The increase for both periods was primarily due to depreciation on fixed assets purchased for new restaurants. Preopening. Preopening costs, which are expensed as incurred, consist of expenses incurred prior to opening a new restaurant and are comprised principally of manager salaries and relocation, employee payroll and related training costs. Preopening expenses in the three months ended September 26, 1999 increased to $1.3 million from $1.2 million in the three months ended September 27, 1998 and increased to $3.3 million for the nine months ended September 26, 1999 from $2.4 million for the nine months ended September 27, 1998 9 10 due to the greater number of restaurants opened or under development during the 1999 period than the 1998 period. Interest income (expense), net. Interest income increased to $40,000 in the three months ended September 26, 1999 from an expense of $305,000 in the three months ended September 27, 1998. Interest income increased to $390,000 in the nine months ended September 26, 1999 from an expense of $760,000 in the nine months ended September 27, 1998. The increase in both periods was principally due to the repayment of the Company's revolving line of credit in December of 1998, and the subsequent investment of cash from its initial public offering. Elimination of minority interests Elimination of minority interests represents the portion of the Company's net earnings which are attributable to the collective ownership interests of its partners. The Company has provided for a partnership management structure in which it has entered into a series of partnership agreements with its regional managers ("Market Partners"), certain of its general managers ("Operating Partners") and certain of its executive chefs ("Culinary Partners"). Elimination of minority interests increased to $671,000 for the three months ended September 26, 1999 from $198,000 for the three months ended September 27, 1998 and it increased to $1.5 million in the nine months ended September 26, 1999 from $543,000 in the nine months ended September 27, 1998 due primarily to the addition of new restaurants and an increase in the operating profit of those restaurants. Provision for income taxes The provision for income taxes for the three months ended September 26, 1999 was $595,000. There was no provision for income taxes for the three months ended September 27, 1998. Tax expense increased to $1.5 million for the nine months ended September 26, 1999 from $11,000 for the nine months ended September 27, 1998 due primarily to the fact that the Company's taxable income increased substantially from the prior period. The income tax provision for 1999 differs from the expected provision for income taxes, derived by applying the statutory income tax rate, as a result of the Company's expected utilization in 1999 of its net operating loss carryforward and the resulting decrease in the related deferred income tax valuation allowance. LIQUIDITY AND CAPITAL RESOURCES The Company has funded its capital requirements since its inception through sales of equity securities, debt financing, sale-leaseback arrangements and cash flows from operations. Net cash provided by operating activities was $9.7 million and $4.6 million for the nine months ended September 26, 1999 and September 27, 1998, respectively. Net cash provided by operating activities exceeded the net income for the periods due principally to the effect of depreciation and amortization and reductions in receivables. The Company uses cash primarily to fund the development and construction of new restaurants. Net cash used in investing activities in the nine months ended September 26, 1999 and September 27, 1998 was $22.7 million and $15.8 million, respectively. Capital expenditures made up the majority of its investing activities in both periods. The Company intends to open three new restaurants for the remainder of 1999 (eleven new restaurants were opened during the first nine months of 1999) and another thirteen to fifteen new restaurants in 2000. The Company expects that its planned future restaurants will require, on average, a total cash investment per restaurant, exclusive of landlord contributions, of approximately $1.5 million to $2.0 million. Preopening expenses are expected to average approximately $300,000 per restaurant, however, any unexpected delays in construction, labor shortages, or other factors could result in higher than anticipated preopening costs. Net cash used in financing activities in the nine months ended September 26, 1999 was $1.5 million compared to net cash provided by financing activities in the nine months ended September 27, 1998 of $11.6 million. Financing activities in the first nine months of 1999 consisted primarily of distributions to the Company's partners and repayments of long-term debt. Financing activities in the first nine months of 1998 consisted principally of borrowings under the Company's credit facility, which was paid in full at the time of the Company's initial public offering and expired in December 1998. 10 11 The Company's capital requirements, including development costs related to the opening of additional restaurants, have been and will continue to be significant. The Company's future capital requirements and the adequacy of its available funds will depend on many factors, including the pace of expansion, real estate markets, site locations and the nature of the arrangements negotiated with landlords. Although no assurance can be given, the Company believes that cash flow from operations together with its current cash reserves will be sufficient to fund its capital requirements through 1999. The Company has obtained a commitment for a $15 million credit facility to help fund its development beyond 1999. In the event that additional capital is required, the Company may seek to raise such capital through public or private equity or debt financings. Future capital funding transactions may result in dilution to current shareholders. There can be no assurance that such capital will be available on favorable terms, if at all. RISK FACTORS Restaurant Industry and Competition The restaurant industry is intensely competitive with respect to food quality, price-value relationships, ambiance, service and location, and many restaurants compete with the Company at each of its locations. The Company's competitors include mid-price, full-service casual dining restaurants and locally owned and operated Chinese restaurants. There are many well-established competitors with substantially greater financial, marketing, personnel and other resources than the Company, and many of the Company's competitors are well established in the markets where the Company's operations are, or in which they may be, located. Additionally, other companies may develop restaurants that operate with similar concepts. The restaurant business is often affected by changes in consumer tastes, national, regional or local economic conditions, demographic trends, consumer confidence in the economy, discretionary spending priorities, weather conditions, tourist travel, traffic patterns and the type, number and location of competing restaurants. Changes in these factors could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows. In the future, changes in consumer tastes may require the Company to modify or refine elements of its restaurant system to evolve its concept in order to compete with popular new restaurant formats or concepts that develop from time to time, and there can be no assurance that the Company will be successful in implementing such modifications. Uncertainties Associated with Expanding Operations The Company operates 34 restaurants (as of September 26, 1999), 17 of which have been opened within the last twelve months. The results achieved to date by the Company's relatively small number of restaurants may not be indicative of those restaurants' long-term performance or the potential market acceptance of restaurants in other locations. Further, there can be no assurance that any new restaurant which the Company opens will obtain similar operating results to those of prior restaurants. The Company anticipates that its new restaurants will commonly take several months to reach planned operating levels due to certain inefficiencies typically associated with new restaurants, including lack of market awareness, inability to hire sufficient staff and other factors. A critical factor in the Company's future success is its ability to successfully expand its operations. The Company's ability to expand successfully will depend on a number of factors, including the identification and availability of suitable locations, competition for restaurant sites, the negotiation of favorable lease arrangements, timely development in certain cases of commercial, residential, street or highway construction near the Company's restaurants, management of the costs of construction and development of new restaurants, securing required governmental approvals and permits, recruitment of qualified operating personnel (particularly managers and chefs), the competition in new markets, general economic conditions and other factors, some of which are beyond the control of the Company. The opening of additional restaurants in the future will depend in part upon the Company's ability to generate sufficient funds from operations or to obtain sufficient equity or debt financing on favorable terms to support such expansion. There can be no assurance that the Company will be successful in addressing these risks, that the Company will be able to open its planned new operations on a timely basis, if at all, or, if opened, that those operations will be operated profitably. The Company has experienced, and expects to continue to experience, delays in restaurant openings 11 12 from time to time. Delays or failures in opening planned new restaurants could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows. The Company's growth strategy may strain the Company's management, financial and other resources. To manage its growth effectively, the Company must maintain a high level of quality and service at its existing and future restaurants, continue to enhance its operational, financial and management capabilities and locate, hire, train and retain experienced and dedicated operating personnel, particularly managers and chefs. Purchasing The Company's purchasing programs provide its restaurants with high quality ingredients at competitive prices from reliable sources. Consistent menu specifications as well as purchasing and receiving guidelines ensure freshness and quality. Because the Company utilizes only fresh ingredients in all of its menu offerings, inventory is maintained at a modest level. The Company negotiates short-term and long-term contracts depending on demand for its products. These contracts range in duration from two to twelve months. With the exception of produce, which is purchased locally, the Company utilizes Distributors Marketing Alliance as the primary distributor of product to all of its restaurants. Distributors Marketing Alliance is a cooperative of multiple food distributors located throughout the nation. The Company has a non-exclusive short-term contract with Distributors Marketing Alliance on terms and conditions which the Company believes are consistent with those made available to similarly situated restaurant companies. The Company believes that competitively priced alternative distribution sources are available should such channels be necessary. Chinese-specific ingredients are usually sourced directly from Hong Kong, China and Taiwan. The Company has developed an extensive network of importers in order to maintain an adequate supply of items that conform to the Company's brand and product specifications. Inflation The primary inflationary factors affecting the Company's operations are food and labor costs. A large number of the Company's restaurant personnel are paid at rates based on the applicable minimum wage, and increases in the minimum wage directly affect the Company's labor costs. To date, inflation has not had a material impact on the Company's results of operations. Development and Construction Risks Because each P.F. Chang's restaurant is distinctively designed to accommodate particular characteristics of each location and to blend local or regional design themes with the Company's principal trade dress and other common design elements, each location presents its own development and construction risks. Many factors may affect the costs associated with the development and construction of the Company's restaurants, including labor disputes, shortages of materials and skilled labor, weather interference, unforeseen engineering problems, environmental problems, construction or zoning problems, local government regulations, modifications in design to the size and scope of the projects and other unanticipated increases in costs, any of which could give rise to delays or cost overruns. There can be no assurance that the Company will be able to develop additional P.F. Chang's restaurants within anticipated budgets or time periods, and any such failure could materially adversely affect the Company's business, financial condition, results of operations or cash flows. Dependence on Key Personnel The success of the Company's business will continue to be highly dependent on its key operating officers and employees, including Richard Federico, the Company's Chief Executive Officer and President, Robert Vivian, the Company's Chief Financial Officer, Greg Carey, the Company's Chief Operating Officer, and Frank Ziska, the Company's Chief Development Officer. The Company's success in the future will be dependent on its ability to attract, retain and motivate a sufficient number of qualified management and operating personnel, including Market Partners, Operating Partners and Culinary Partners, to keep pace with an aggressive expansion schedule. Such qualified individuals are historically in short supply and any inability of the Company to attract and retain such key employees may limit its ability to effectively penetrate new 12 13 market areas. Additionally, the ability of these key personnel to maintain consistency in the quality and atmosphere of the Company's restaurants in various markets is a critical factor in the Company's success. Any failure to do so may harm the Company's reputation and could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows. Governmental Regulation The Company's restaurants are subject to regulation by federal agencies and to licensing and regulation by state and local health, sanitation, building, zoning safety, fire and other departments relating to the development and operation of restaurants. These regulations include matters relating to environmental, building construction, zoning requirements and the preparation and sale of food and alcoholic beverages. The Company's facilities are licensed and subject to regulation under state and local fire, health and safety codes. The development and construction of additional restaurants will be subject to compliance with applicable zoning, land use and environmental regulations. There can be no assurance that the Company will be able to obtain necessary licenses or other approvals on a cost-effective and timely basis in order to construct and develop restaurants in the future. Various federal and state labor laws govern the Company's operations and its relationship with its employees, including minimum wage, overtime, working conditions, fringe benefit and citizenship requirements. In particular, the Company is subject to the regulations of the INS. Given the location of many of the Company's restaurants, even if the Company's operation of those restaurants is in strict compliance with INS requirements, the Company's employees may not all meet federal citizenship or residency requirements, which could lead to disruptions in its work force. Approximately 20% of the Company's revenues are attributable to the sale of alcoholic beverages. The Company is required to comply with the alcohol licensing requirements of the federal government, states and municipalities where its restaurants are located. Alcoholic beverage control regulations require applications to state authorities and, in certain locations, county and municipal authorities for a license and permit to sell alcoholic beverages. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the restaurants, including minimum age of guests and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages. Failure to comply with federal, state or local regulations could cause the Company's licenses to be revoked or force it to terminate the sale of alcoholic beverages at one or more of its restaurants. The Company is subject to state "dram shop" laws and regulations, which generally provide that a person injured by an intoxicated person may seek to recover damages from an establishment that wrongfully served alcoholic beverages to such person. While the Company carries liquor liability coverage as part of its existing comprehensive general liability insurance, there can be no assurance that it will not be subject to a judgment in excess of such insurance coverage or that it will be able to obtain or continue to maintain such insurance coverage at reasonable costs, or at all. The federal Americans With Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment. The Company is required to comply with the Americans With Disabilities Act and regulations relating to accommodating the needs of the disabled in connection with the construction of new facilities and with significant renovations of existing facilities. Minimum Wage A number of the Company's employees are subject to various minimum wage requirements. Many of the Company's employees work in restaurants located in California and receive salaries equal to the California minimum wage. The minimum wage in California rose from $5.00 per hour effective March 1, 1997 to $5.75 per hour effective March 1, 1998. There can be no assurance that similar increases will not be implemented in other jurisdictions in which the Company operates or seeks to operate. In addition, the federal minimum wage increased to $5.15 per hour effective September 1, 1997. There can be no assurance that the Company will be able to pass additional increases in labor costs through to its guests in the form of menu price adjustments and accordingly, such minimum wage increases could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows. 13 14 Potential Labor Shortages The success of the Company will continue to be dependent on its ability to attract and retain a sufficient number of qualified employees, including kitchen staff and waitstaff, to keep pace with its expansion schedule. Qualified individuals needed to fill these positions are in short supply in certain areas, and the inability to recruit and retain such individuals may delay the planned openings of new restaurants or result in high employee turnover in existing restaurants which could have a material adverse effect on the Company's business, financial condition, cash flows or results of operations. Fluctuations in Operating Results The Company's operating results may fluctuate significantly as a result of a variety of factors, including general economic conditions, consumer confidence in the economy, changes in consumer preferences, competitive factors, weather conditions, the timing of new restaurant openings and related expenses, revenues contributed by new restaurants and increases or decreases in comparable restaurant revenues. Historically, the Company has experienced variability in the amount and percentage of revenues attributable to preopening expenses. The Company typically incurs the most significant portion of preopening expenses associated with a given restaurant within the two months immediately preceding and the month of the opening of the restaurant. In addition, the Company's experience to date has been that labor and operating costs associated with a newly opened restaurant for the first several months of operation are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Accordingly, the volume and timing of new restaurant openings has had and is expected to have a meaningful impact on preopening expenses and labor and operating costs until such time as a larger base of restaurants in operation mitigates such impact. Due to the foregoing factors, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for a full fiscal year, and, from time to time in the future, the Company's results of operations may be below the expectations of public market analysts and investors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Changes in Food Costs The Company's profitability is dependent in part on its ability to anticipate and react to changes in food costs. Other than for produce, which is purchased locally by each restaurant, the Company relies on Distributors Marketing Alliance as the primary distributor of its food. Distributors Marketing Alliance is a cooperative of multiple food distributors located throughout the nation. The Company has a non-exclusive short-term contract with Distributors Marketing Alliance on terms and conditions which the Company believes are consistent with those made available to similarly situated restaurant companies. Although the Company believes that alternative distribution sources are available, any increase in distribution prices or failure to perform by the Distributors Marketing Alliance could cause the Company's food costs to fluctuate. Further, various factors beyond the Company's control, including adverse weather conditions and governmental regulation, may affect the Company's food costs. There can be no assurance that the Company will be able to anticipate and react to changing food costs through its purchasing practices and menu price adjustments in the future, and failure to do so could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows. Year 2000 Compliance The Company is aware of the issues associated with the programming code in existing computer systems as the year 2000 approaches. The "year 2000 problem" is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to "00". The issue is whether computer systems will properly recognize date-sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company has reviewed both its information technology and its non-information technology systems to determine whether they are year 2000 compliant, and the Company has not identified any material systems which are not year 2000 compliant. The Company has initiated formal communications with all significant suppliers and service providers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate the year 2000 problem. The Company has received written assurances of year 14 15 2000 compliance from a majority of the third parties with whom it has relationships, including its POS, payroll and credit card service providers. Unless public suppliers of water, electricity and natural gas are disrupted for a substantial period of time (in which case the Company's business may be materially adversely affected), the Company believes its operations will not be significantly disrupted even if third parties with whom the Company has relationships are not year 2000 compliant. Further, the Company believes that it will not be required to make any material expenditures to address the year 2000 problem. However, uncertainty exists concerning the potential costs and effects associated with any year 2000 compliance, and the Company intends to continue to make efforts to ensure that third parties with whom it has relationships are year 2000 compliant. Litigation The Company is from time to time the subject of complaints or litigation from guests alleging illness, injury or other food quality, health or operational concerns. Adverse publicity resulting from such allegations may materially adversely affect the Company and its restaurants, regardless of whether such allegations are valid or whether the Company is liable. The Company also is the subject of complaints or allegations from former or prospective employees from time to time. A lawsuit or claim could result in an adverse decision against the Company that could materially adversely affect the Company or its business. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Management believes that the market risk associated with the Company's market risk sensitive instruments as of September 26, 1999 is not material, and therefore, disclosure is not required. 15 16 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company was not involved in any material legal proceedings as of September 26, 1999. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:
EXHIBIT NUMBER DESCRIPTION DOCUMENT ------- -------------------- 27.1 Financial Data Schedule.
(b) Report on Form 8-K: No reports on Form 8-K have been filed by the Company during the nine months ended September 26, 1999. 16 17 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 November 9, 1999. P.F. CHANG'S CHINA BISTRO, INC. By: /s/ RICHARD FEDERICO ------------------------------------ Richard Federico Chief Executive Officer Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RICHARD L. FEDERICO Chief Executive Officer, November 9, 1999 - --------------------------------------------------- President and Director Richard L. Federico (Principal Executive Officer) /s/ ROBERT T. VIVIAN Chief Financial Officer and November 9, 1999 - --------------------------------------------------- Secretary (Principal Robert T. Vivian Financial and Accounting Officer)
17 18 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION DOCUMENT - ------- -------------------- 27.1 Financial Data Schedule.
EX-27.1 2 EX-27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR QUARTERLY PERIOD ENDED SEPTEMBER 26, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH. 1,000 U.S. DOLLARS 3-MOS JAN-02-2000 JUN-28-1999 SEP-26-1999 1 4,380 0 1,311 0 914 7,837 53,515 0 73,755 9,760 0 0 0 10 62,298 73,755 104,390 104,390 28,888 84,818 0 0 (390) 6,610 1,501 0 0 0 0 3,622 0.35 0.32
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