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P F CHANGS CHINA BISTRO INC 10-K 2008 Documents found in this filing:Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Commission File Number: 0-25123
Registrant’s
telephone number, including area code:
(480) 888-3000
Securities registered pursuant to Section 12(b) of the
Act:
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 þ No o
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 o
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):
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
as of the last day of the second fiscal quarter, July 1,
2007, was $424,274,000.
On February 8, 2008 there were outstanding
24,173,545 shares of the registrant’s Common Stock.
Specified portions of the registrant’s Proxy Statement with
respect to the Annual Meeting of Stockholders to be held
April 18, 2008 are incorporated by reference into
Part III of this Report.
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PART I
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
incorporated our subsidiary, Taneko Japanese Tavern, Inc., in
February 2005 as a Delaware Corporation. We report our financial
and descriptive information according to two reportable
operating segments: Bistro and Pei Wei (see Notes to
Consolidated Financial Statements —
Note 16 — Segment Reporting).
As of December 30, 2007, we owned and operated 172 Bistro
restaurants that feature a blend of high quality, traditional
Chinese cuisine with 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 featuring a display kitchen, exhibition
wok cooking 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, one Bistro restaurant located in Honolulu, Hawaii
is operated under a joint venture agreement.
We also owned and operated 144 quick casual Pei Wei restaurants
as of December 30, 2007. Pei Wei was developed to maintain
the same spirit of hospitality and commitment to providing
fresh, high quality Asian food at a great value that has made
P.F. Chang’s successful. Pei Wei was also designed to keep
up with today’s lifestyles and provide a comfortable, quick
casual dine-in experience with the flexibility, speed, and
convenience of take-out service. Pei Wei opened its first unit
in the Phoenix, Arizona metro-area in July 2000.
Additionally, as of December 30, 2007, we owned and
operated one Taneko Japanese Tavern (“Taneko”)
restaurant. We plan to exit operation of this business and will
not continue to develop Taneko. As a result, we are negotiating
the sale of Taneko’s long-lived assets which we anticipate
will be finalized during the first quarter of fiscal 2008.
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 which allows regional managers,
certain general managers and certain executive chefs to become
partners in our business and 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.
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. Fan foods include rice,
noodles, grains and dumplings, while vegetables, meat, poultry
and seafood are t’sai foods. To further encourage
the Chinese philosophy of fan and t’sai, balance and
moderation, 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,
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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, Orange Peel 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.
Extensive research and development results in periodic changes
to our menu. In addition to the core menu, the Bistro menu also
now features lunch bowls as well as new and exciting Chinese
grill menu selections and new mini-desserts. Our new 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 Steak, Citrus Soy Wild Salmon and
Lemongrass Grilled Prawns with Garlic Noodles. These selections
have been developed by our executive chefs to provide our guests
with fresh new tastes. To complete the dining experience, we
created eight new 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
$6.95 — $21.00, and our appetizers range in price from
$3.50 — $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, constitute approximately 15% of revenues.
Lunch and dinner contribute approximately 33% and 67% of
revenues, respectively.
Pei Wei’s menu also offers a variety of intensely flavored
culinary creations; however, this menu is more concise than the
Bistro’s menu 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
Minced Chicken in Cooling Lettuce Wraps and Orange Peel Beef,
while sampling a variety of Asian dishes such as Vietnamese
Chicken Salad Rolls and Pei Wei Pad Thai. Some of our new
product offerings include the system-wide addition of freshly
baked chocolate chip cookies to round out the meal.
Entrées at Pei Wei range in price from $6.95 to $9.00, with
appetizers ranging from $2.00 to $6.95. We offer a limited
selection of beer and wine which comprises approximately 2% of
total sales. 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.
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 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 our hourly staff training programs that are
developed by the training and culinary departments.
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The hourly employee development program lasts between one and
two weeks and focuses on both technical and cultural knowledge.
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.
Pei Wei hourly employees also go through a week-long
comprehensive training program that focuses on the culinary
knowledge required for the specific position. After completion
of the program, each trainee is required to complete a position
certification prior to serving our guests.
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. Effective
January 2007 for new store openings, the Bistro began employing
a different 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 long-term improvements in the operating performance of
the restaurant. As a result of these changes, incentive payments
made to the individuals participating in the new plan are
classified as compensation 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 and Regional Vice Presidents,
with related compensation 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, during 2007 many existing legal partners
requested an early buyout of their partnership interest 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. See Critical
Accounting Policies within Item 7. Management’s
Discussion and Analysis for further information regarding
partnership accounting.
The Pei Wei partnership structure was not affected by the
changes at the Bistro and our traditional partnership structure
remains in effect for new Pei Wei restaurant openings.
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 have used limited radio, print and outdoor advertising
in the past, during 2007 we began testing the effects of more
significant marketing investments in key markets. We added
online, direct mail, and customer relationship initiatives to
the media mix to both drive new
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customer trials and foster better ongoing communication with our
guests. We expect to increase our marketing investment in
programs that build upon the insights gained in 2007.
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.
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 in duration from two to twelve
months. With the exception of a portion of our commodities, like
produce, we utilize Distribution Market Advantage as the primary
distributor of product to all of our restaurants. Distribution
Market Advantage is a cooperative of multiple food distributors
located throughout the United States. 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.
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 they increase their number of Asian-inspired menu
offerings.
At December 30, 2007, we employed approximately
28,800 persons, approximately 300 of whom were home office
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.
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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.
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
and amendments to those reports filed or furnished pursuant to
Section 13(a), 15(d) or 16 of the Exchange Act as soon as
reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange
Commission, or SEC.
We operated 172 full service Bistro restaurants, 144 quick
casual Pei Wei restaurants and one Taneko restaurant as of
December 30, 2007, 57 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. We cannot be
assured 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 lack of market awareness, inability
to hire sufficient staff and other factors. The failure of our
existing or new restaurants to perform as predicted could
negatively impact our revenues and results of operations.
Our country’s economic condition affects our
customers’ levels of discretionary spending. A decrease in
spending due to decreases in 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.
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:
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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.
Critical to our future success is our ability to successfully
expand our operations. We have expanded from seven restaurants
at the end of 1996 to 317 restaurants as of December 30,
2007. We expect to open 17 new Bistro restaurants and 25 new Pei
Wei restaurants during fiscal 2008. Our ability to expand
successfully will depend on a number of factors, including:
The opening of additional restaurants in the future will depend
in part upon our ability to generate sufficient funds from
operations or to obtain sufficient equity or debt financing on
favorable terms to support our expansion. We may not be able to
open our planned new operations on a timely basis, if at all,
and, if opened, these restaurants may not be operated
profitably. We have experienced, and expect to continue to
experience, delays in restaurant openings from time to time.
Delays or failures in opening planned new restaurants could have
an adverse effect on our business, financial condition, results
of operations or cash flows.
Our success will continue to be highly dependent on our key
operating officers and employees. We must continue to attract,
retain and motivate a sufficient number of qualified management
and operating personnel, including regional managers, general
managers and executive chefs, to keep pace with an aggressive
expansion schedule. Individuals of this caliber are historically
in short supply and this shortage may limit our ability to
effectively penetrate new market areas. Additionally, the
ability of these key personnel to maintain consistency in the
quality and atmosphere of our restaurants is a critical factor
in our success. Any failure to do so may harm our reputation and
result in a loss of business.
Our success will continue to be dependent on our ability to
attract and retain a sufficient number of qualified employees,
including kitchen staff and wait staff, to keep pace with our
expansion schedule. Qualified individuals needed to fill these
positions are in short supply in certain areas. Our inability to
recruit and retain qualified individuals may delay the planned
openings of new restaurants while high employee turnover in
existing restaurants may negatively impact customer service and
customer relations, resulting in an adverse effect on our
revenues or results of operations.
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Many of our employees are subject to various minimum wage
requirements. The federal minimum wage increased to $5.85 in
July 2007 and is scheduled to further increase to $6.55 in July
2008. Additionally, many of our employees work in restaurants
located in states where the minimum wage is greater than the
federal minimum and receive compensation equal to the
state’s minimum wage. There may be similar increases
implemented in other jurisdictions in which we operate or seek
to operate. These minimum wage increases may have a material
adverse effect on our business, financial condition, results of
operations and cash flows.
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 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 growth strategy may strain our management, financial and
other resources. We must maintain a high level of quality and
service at our existing and future restaurants, continue to
enhance our operational, financial and management capabilities
and locate, hire, train and retain experienced and dedicated key
personnel. We may not be able to effectively manage these and
other factors necessary to permit us to achieve our expansion
objectives, and any failure to do so could negatively impact our
competitive position.
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 is purchased
locally by each restaurant, we rely on Distribution Market
Advantage as the primary distributor of our ingredients.
Distribution Market Advantage is a cooperative of multiple food
distributors located throughout the nation. We have a
non-exclusive contract with Distribution Market Advantage on
terms and conditions which we believe are consistent with those
made available to similarly situated restaurant companies.
Although we believe that alternative distribution sources are
available, any increase in distribution prices or failure to
perform by the 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.
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We are, from time to time, the subject of complaints or
litigation from guests alleging food borne illness, injury or
other food quality, health or operational concerns. We may be
adversely affected by publicity resulting from such allegations,
regardless of whether such allegations are valid or whether we
are liable. We are also subject to complaints or allegations
from former or prospective employees from time to time. A
lawsuit or claim could result in an adverse decision against us
that could have a 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.
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 taken by the company on its 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.
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 2008. 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.
Operating expenses, such as utilities and other expenses
impacted by energy price fluctuations, are not fixed and may
continue to increase in the future. If we are not able to offset
such increases with operating efficiencies or price increases,
they may negatively impact our operating results.
Our operating results may fluctuate significantly as a result of
a variety of factors, including:
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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 to date has been that
labor and operating costs associated with a newly opened
restaurant for the first several months of operation are
materially greater than what can be expected after that time,
both in aggregate dollars and as a percentage of revenues.
Accordingly, the volume and timing of new restaurant openings
has had, and is expected to continue to have, a meaningful
impact on preopening expenses 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.
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:
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.
Approximately 15 percent of our revenues at the Bistro and
two percent of revenues at Pei Wei are attributable to the sale
of alcoholic beverages. We are required to comply with the
alcohol licensing requirements of the federal government, states
and municipalities where our restaurants are located. Alcoholic
beverage control regulations require applications to state
authorities and, in certain locations, county and municipal
authorities for a license and permit to sell alcoholic
beverages. Typically, licenses must be renewed annually and may
be revoked or suspended for cause at any time. Alcoholic
beverage control regulations relate to numerous aspects of the
daily operations of the restaurants, including minimum age of
guests and employees, hours of operation, advertising, wholesale
purchasing, inventory control and handling, storage and
dispensing of alcoholic beverages. If we fail to comply with
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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.”
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.
None.
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Our Bistro restaurants average 6,900 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 30, 2007:
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Additionally, a Bistro restaurant located in Honolulu, Hawaii is
operated 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.
In fiscal 2008, we intend to open 17 new Bistro restaurants
primarily located in existing markets with plans to enter five
new markets. We also plan to open 25 new Pei Wei restaurants
primarily located in mature and under-penetrated markets. As of
the date of this
Form 10-K,
we had opened three of the new Bistro restaurants and nine of
the new Pei Wei restaurants planned for fiscal 2008.
We are actively developing Bistro and Pei Wei restaurants in
both new and existing markets and have planned an expansion
strategy targeted at metropolitan areas throughout the United
States. Within each targeted metropolitan area, we identify
specific trade areas with high traffic patterns and suitable
demographic characteristics, including population density,
consumer attitudes and affluence. Within an appropriate trade
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.
We intend to continue to develop Bistros that typically range in
size from 6,000 to 7,500 square feet, and that require, on
average, a 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 trade area. 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 restaurant during 2008.
We intend to develop our Pei Wei restaurants in both
underpenetrated and mature markets in which Pei Wei already has
a store base. The restaurants will typically range in size from
2,800 to 3,400 square feet and will require, on average, a
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 the cash investment to be approximately $800,000
to $900,000 per restaurant (net of estimated landlord
reimbursements). Preopening expenses are expected to average
approximately $150,000 per restaurant during 2008.
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 2008 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 two restaurant leases
that were scheduled to expire in 2008 and are currently
evaluating our lease renewal options for one restaurant lease
that is scheduled to expire in 2008. Generally, our leases
provide for a 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.
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.
None.
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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:
We have not historically paid any cash dividends. We intend to
continue to retain earnings for use in the operation and
expansion of our business, as well as repurchases of our common
stock from time to time, and therefore do not anticipate paying
any cash dividends in the foreseeable future.
On February 8, 2008, there were 112 holders of record of
P.F. Chang’s common stock.
Issuer
Purchases of Equity Securities
In July 2006, our Board of Directors authorized a program to
repurchase up to $50.0 million of our outstanding shares of
common stock from time to time in the open market or in private
transactions at prevailing market prices over a one-year period.
We repurchased 1.4 million shares of our common stock for
$46.4 million at an average price of $33.19 during fiscal
2006 and the remaining $3.6 million available under this
share repurchase authorization expired in July 2007.
During 2007, our Board of Directors authorized a subsequent
program to repurchase up to $100.0 million of our
outstanding shares of common stock from time to time in the open
market or in private transactions at prevailing market prices
over the next two years. We repurchased a total of
1.8 million shares of our common stock for
$50.0 million at an average price of $27.11 during fiscal
2007 using cash on hand and available credit lines. There can be
no assurance that we will purchase any additional shares.
The following table sets forth our share repurchases of common
stock during each period in the fourth quarter of 2007:
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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.
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No cash dividends were paid during any of the five previous
years.
The following section presents an overview of our restaurant
concepts, our related growth strategy and challenges we face. A
summary of our 2007 financial results and our 2008 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”).
As of December 30, 2007, we owned and operated 172 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 one Bistro
restaurant located in Honolulu, Hawaii which opened in September
2006 under a joint venture arrangement in which we own a
minority interest.
As of December 30, 2007, we also owned and operated 144
quick casual Pei Wei restaurants that offer a modest menu of
freshly prepared, high quality Asian cuisine served in a
relaxed, warm environment with friendly 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.
Additionally, as of December 30, 2007, we owned and
operated one Taneko Japanese Tavern restaurant. We plan to exit
operation of this business and will not continue to develop
Taneko. As a result, we are negotiating the sale of
Taneko’s long-lived assets which we anticipate will be
finalized during the first quarter of fiscal 2008 as discussed
in greater detail below.
17
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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 rising popularity of Asian cuisine,
combined with a relatively lower level of organized competition
in this segment compared to other popular cuisines such as
Mexican and Italian. We believe this creates a significant
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
currently 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
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 and value, dining experience, restaurant location and the
ambiance of the facilities. Additionally, the rising popularity
of Asian cuisine may result in increased competition from new
Asian-branded concepts as well as non-Asian restaurants that may
increase their Asian-inspired menu offerings.
In addition to being highly competitive, the restaurant industry
is often affected by changes in consumer tastes, discretionary
spending patterns, economic conditions, 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 and
maintain a high value-to-price perception. During 2007, we began
implementation of a new Chinese grill menu, mini-desserts and
additional lunch-size menu offerings at the Bistro. In addition,
we rolled-out new plateware and uniforms at the Bistro. At Pei
Wei, some of our new culinary offerings include the system-wide
addition of freshly baked chocolate chip cookies to round out
the meal. As a result of these and other initiatives, we have
updated the menu offerings available to our guests 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 drive
sustainable guest traffic increases.
Additionally, we are challenged to manage rising restaurant
operating costs including increased labor costs resulting from
recent and upcoming minimum wage legislation and higher
commodities costs impacting our cost of sales.
Our
2007 Financial Results
In 2007, we continued to experience the impact of a very
difficult operating environment as consumers felt greater
economic strain from overall macroeconomic conditions. We saw
reduced restaurant traffic as fewer guests visited our
restaurants in 2007 than in the previous year and we encountered
more intense cost pressures, particularly in the labor category.
The combined impact of reduced traffic and higher costs resulted
in the deterioration of operating margins in 2007.
Our 2007 financial results include:
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Our results continued to be affected by concept growth during
2007, particularly as the number of Pei Wei restaurants
increased by 35 percent during the year. In total, during
2007 we incurred $15.0 million or approximately $0.44 per
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.
2008
Development
Bistro
We intend to open 17 new Bistros in 2008. We will continue our
development in existing markets and plan to enter five new
markets in 2008. We have signed lease agreements for the
majority of our development planned for fiscal 2008. We intend
to continue to develop Bistro restaurants that typically range
in size from 6,000 to 7,500 square feet, and that require,
on average, a 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 2008.
Pei
Wei
A key factor in Pei Wei’s performance is our success in new
markets. There are inherent risks in opening new restaurants,
especially in new markets, for various reasons, including the
lack of experience, logistical support and brand awareness in a
new market. These factors may result in lower than anticipated
sales and higher than average expenses during the initial period
of operation for new restaurants in new markets.
Throughout fiscal 2006 and 2007, we opened 67 new Pei Wei
restaurants of which 24 were located in new markets. Partially
as a result of the impact of these new openings, we have
experienced lower average weekly sales and reduced operating
margins. In 2008, we intend to slow our growth substantially and
limit the number of openings in new markets through the
development of 25 new restaurants, primarily located in mature
or under-penetrated markets. New Pei Wei restaurants in mature
markets typically open at higher sales levels and greater
profitability than those located in new or under-penetrated
markets. Under-penetrated markets represent areas in which we do
not have a significant number of stores and, as a result, we
typically cannot maximize unit sales management and marketing
which results in lower profitability levels. We have
historically experienced higher sales volumes for all
restaurants in certain formerly under-penetrated markets once we
achieved greater store density and increased brand awareness.
We believe this development focus, together with our
implementation of revised new restaurant opening procedures,
will help to mitigate the overall risks associated with opening
restaurants in new markets. 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 2008. We have
signed lease agreements for the majority of our development
planned for fiscal 2008.
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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).
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):
Return on invested capital metrics are available on our website
at www.pfcb.com.
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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. This methodology
involves the use of various estimates relating to future cash
flow projections and discount rates for which significant
judgments are required. 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 is
recognized 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 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 have
requested an early buyout of their partnership interest during
2007 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
Obligation
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
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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 lease term used for straight-line rent expense is calculated
from the date we obtain possession of the leased premises
through the lease termination date. Prior to January 2,
2006, we capitalized rent expense from possession date through
construction completion and reported the related asset in
property and equipment. Capitalized rent was amortized through
depreciation and amortization expense over the estimated useful
life of the related assets limited to the lease term.
Straight-line rent recorded during the preopening period
(construction completion through restaurant open date) was
recorded as preopening expense. Beginning January 2, 2006,
we expense rent from possession date through restaurant open
date as preopening expense, in accordance with FASB Staff
Position
No. 13-1,
Accounting for Rental Costs Incurred During a Construction
Period. Once a restaurant opens for business, we record
straight-line rent over the lease term plus contingent rent to
the extent it exceeded the minimum rent obligation per the lease
agreement.
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 lesser 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. 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. 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”). We contract
with a third-party consultant who utilizes our historical data
to validate our assumptions for option grants. 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 (which includes leasehold
improvements) and intangible assets with finite lives (those
assets resulting from the acquisition of minority 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 annually. 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 restaurant or
partnership 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
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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 historical industry data as well as our
actual historical trends. 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.
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.
Tax contingency reserves result from our estimates of potential
liabilities resulting from differences between actual and
audited results. Changes in the tax contingency reserve result
from resolution of audits of prior year filings, the expiration
of statutes of limitations, changes in tax laws and current year
estimates for asserted and unasserted items. 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. Significant
changes in our estimates could adversely affect our reported
results. See Note 14 to the consolidated financial
statements for further discussion of our tax contingency
reserves.
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 2007, 2006
and 2005 were each comprised of 52 weeks.
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Fiscal
2007 compared to Fiscal 2006
Our consolidated operating results for the fiscal years ended
December 30, 2007 (fiscal year 2007) and
December 31, 2006 (fiscal year 2006) were as follows
(dollars in thousands):
Certain percentage amounts do not sum to total due to rounding.
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Operating results for the Bistro for fiscal years 2007 and 2006
were as follows (dollars in thousands):
Certain percentage amounts do not sum to total due to rounding.
Operating results for Pei Wei for the fiscal years 2007 and 2006
were as follows (dollars in thousands):
Certain percentage amounts do not sum to total due to rounding.
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Revenues
Our revenues are derived primarily from food and beverage sales.
Each segment contributed to current year revenue growth 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 $62.4 million generated by the
37 new Pei Wei restaurants that opened in 2007 combined with a
full year of revenues for the 30 new stores that opened during
2006. Stores that opened prior to 2006 experienced a
$0.3 million increase in revenues due to higher guest
traffic partially offset by a slight decrease in average check.
Costs
and Expenses
Cost of sales is comprised of the cost of food and beverages.
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 expenses consist of restaurant management salaries, hourly
staff payroll costs, other payroll-related items, workers’
compensation costs and imputed partner bonus expense. Imputed
partner bonus expense represents the portion of restaurant-level
operating results that are allocable to minority partners, but
which is presented as bonus expense for accounting purposes.
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 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 to date has been
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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 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 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 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 increased 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 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 management
and staff salaries, employee benefits, travel, legal and
professional fees, technology and market research. Each segment
contributed as follows:
Bistro: General and administrative costs at
the Bistro increased primarily due to higher management
incentive accruals resulting from the impact of the 2007 change
in the Bistro partnership structure, an increase in health
insurance costs and greater travel-related expenses. As a
percentage of revenues, Bistro’s general and administrative
costs were consistent with the prior year.
Pei Wei: General and administrative costs at
Pei Wei increased primarily due to an increase in compensation
expense related to the addition of development and operating
partners as well as our new Pei Wei Chief Operating Officer,
increased health insurance costs, higher management incentive
accruals, greater travel-related expenses and increased
share-based compensation expense. As a percentage of revenues,
Pei Wei’s general and administrative costs decreased
compared to the prior year due to improved leverage resulting
from the impact of an expanded store base.
Shared Services and Other: General and
administrative costs for Shared Services and Other increased
$4.8 million or 18 percent principally due to higher
compensation and benefits expense, primarily related to the
addition of corporate management personnel, and increased
share-based compensation expense. This increase was partially
offset by lower incentive compensation expense and reduced legal
expenses.
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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 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 expenses, which are expensed as incurred, consist of
expenses incurred prior to opening a new restaurant and are
comprised principally of manager salaries, relocation costs,
employee payroll and related training costs. Preopening expenses
also include straight-line rent expense for the period between
the possession date of the leased premises and the restaurant
opening date. 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 37 new Pei Wei
restaurants during fiscal 2007 compared to 30 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 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
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. 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 37 new
restaurants during fiscal 2007 compared to opening 30 new
restaurants during 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.
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Interest
and Other Income (Expense), Net
Interest expense recognized during fiscal 2007 primarily
consists of interest costs in excess of amounts capitalized
related to our outstanding credit line and other borrowings as
well as accretion expense related to our conditional asset
retirement obligations. Interest income earned during fiscal
2006 primarily relates to interest-bearing overnight deposits.
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 during 2008 until such time as
we lower our outstanding debt levels.
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 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 24.7% for
fiscal 2007 compared to 28.6% 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
As a result of the planned sale of Taneko’s long-lived
assets, Taneko was classified as a discontinued operation as of
December 30, 2007. All revenues, costs and expenses and
income taxes attributable to Taneko have been aggregated within
“loss from discontinued operations, net of tax” for
all periods presented.
Additionally, based on an asset impairment analysis performed as
of December 30, 2007, the carrying value of Taneko’s
long-lived assets exceeded their estimated fair value. As a
result, we recognized a $3.1 million pretax asset
impairment charge which is also included within discontinued
operations for 2007. We expect to finalize the asset sale during
the first quarter of 2008. See Note 2 to the consolidated
financial statements for additional discussion.
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Fiscal
2006 compared to Fiscal 2005
Our consolidated operating results for the fiscal years ended
December 31, 2006 (fiscal year 2006) and
January 1, 2006 (fiscal year 2005) were as follows
(dollars in thousands):
Certain percentage amounts do not sum to total due to rounding.
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Operating results for the Bistro for fiscal years 2006 and 2005
were as follows (dollars in thousands):
Certain percentage amounts do not sum to total due to rounding.
Operating results for Pei Wei for the fiscal years 2006 and 2005
were as follows (dollars in thousands):
Certain percentage amounts do not sum to total due to rounding.
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Revenues
Each segment contributed to current year revenue growth as
follows:
Bistro: The increase in revenues was
attributable to revenues of $33.4 million generated by the
20 new Bistro restaurants opened in 2006 and a
$48.5 million increase in revenues generated by the 18
Bistro restaurants that opened during 2005, partially offset by
a $0.5 million net decrease in revenues for restaurants
that opened prior to 2005. The increase in revenues is the
result of new store openings and a full year of revenue for
those stores opened during 2005 as well as an approximate 2.4%
effective price increase impacting all restaurants. Such
increases were partially offset by a slight decline in overall
guest traffic during fiscal 2006. Bistro revenues also include
licensing fees of $0.1 million related to our portion of
revenues from a Bistro in Hawaii which opened in September 2006
and is operated under a joint venture arrangement.
Pei Wei: The increase in revenues was
attributable to revenues of $23.4 million generated by 30
new restaurants opened in 2006 and a $25.6 million increase
in revenues generated by the 24 restaurants that opened during
2005, partially offset by a $2.7 million net decrease in
revenues for restaurants that opened prior to 2005. The increase
in revenues is the result of new store openings and a full year
of revenue for those stores opened during 2005 as well as an
approximate 2.2% effective price increase impacting all
restaurants. Such increases were partially offset by a slight
decline in overall guest traffic during fiscal 2006.
Costs
and Expenses
Each segment contributed as follows:
Bistro: Cost of sales as a percentage of
revenues at the Bistro decreased primarily due to lower poultry
costs partially offset by higher meat and dry food costs.
Pei Wei: Cost of sales as a percentage of
revenues at Pei Wei decreased primarily due to lower poultry
costs partially offset by higher dry and other food expense.
Each segment contributed as follows:
Bistro: Labor expenses as a percentage of
revenues at the Bistro were unchanged as increases in efficiency
(as measured by sales per labor hour) and the benefit of reduced
health insurance and workers’ compensation liabilities,
resulting from lower than anticipated claims activity were
offset by higher management incentives and wage rate pressure in
our culinary positions.
Pei Wei: Labor expenses as a percentage of
revenues at Pei Wei increased primarily due to wage rate
pressure in our culinary positions, increased management
salaries due to higher staffing and decreased leverage due to
lower average weekly sales.
Each segment contributed as follows:
Bistro: Operating expenses as a percentage of
revenues at our Bistro restaurants increased primarily due to
higher utility costs related to an increase in rates and usage,
an adjustment resulting from a second quarter 2006 modification
of our accounting policy related to utility accruals and higher
repairs and maintenance costs, partially offset by a reduction
in radio advertising usage. Additionally, decreased leverage due
to lower average weekly sales contributed to the increase.
Pei Wei: Operating expenses as a percentage of
revenues at our Pei Wei restaurants increased primarily due to
higher utility costs related to an increase in rates and an
adjustment resulting from a second quarter 2006 modification of
our accounting policy related to utility accruals. Additionally,
decreased leverage due to lower
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average weekly sales contributed to the increase while lower
take-out supplies costs partially offset the increase.
Each segment contributed as follows:
Bistro: Occupancy costs as a percentage of
revenues at the Bistro increased primarily due to the benefit of
a cumulative adjustment for capital lease assets recorded in
fiscal 2005, decreased leverage resulting from lower average
weekly sales and higher property tax expense in the current year.
Pei Wei: Occupancy costs as a percentage of
revenues at Pei Wei increased primarily due to decreased
leverage resulting from lower average weekly sales and higher
property tax expense in the current year.
Each segment contributed as follows:
Bistro: General and administrative costs as a
percentage of revenues at the Bistro increased primarily due to
the recognition of share-based compensation expense during
fiscal 2006 as well as higher management incentive accruals and,
to a lesser extent, an increase in compensation and benefits
expense. These items were partially offset by the benefit of
reduced health insurance liabilities resulting from lower than
anticipated claims activity.
Pei Wei: General and administrative costs at
Pei Wei increased primarily due to an increase in compensation
and benefits expense related to the addition of corporate
management personnel as well as the recognition of share-based
compensation expense during fiscal 2006 and, to a lesser extent,
higher travel related expenses and greater health insurance
expenses resulting from higher enrollment, offset by lower than
anticipated claims activity. As a percentage of revenues, Pei
Wei’s general and administrative costs were unchanged from
the prior year.
Shared Services and Other: General and
administrative costs for Shared Services and Other increased
primarily due to the recognition of share-based compensation
expense during fiscal 2006. Other factors that contributed to
the increase were higher compensation and benefits expense
primarily related to the addition of corporate management
personnel, an increase in accounting, consulting and legal fees
and, to a lesser extent, higher management incentive accruals.
These items were slightly offset by a reduction in rent expense
due to the purchase of our new headquarters building in fiscal
2005.
Each segment contributed as follows:
Bistro: Depreciation and amortization
increased primarily due to a full year’s depreciation and
amortization on restaurants opened in fiscal 2005, additional
depreciation and amortization on restaurants that opened during
fiscal 2006 and, to a lesser extent, an increase in amortization
of intangible and other assets. The increase was also due to
higher average capital expenditures for new restaurants and a
change in the amortization of non-transferable liquor license
fees during fiscal 2006. These items were partially offset by a
decrease relating to a cumulative adjustment for capital lease
assets recorded in fiscal 2005.
Pei Wei: Depreciation and amortization
increased primarily due to a full year’s depreciation and
amortization on restaurants opened in fiscal 2005 and additional
depreciation and amortization on restaurants that opened during
fiscal 2006. The increase was also due to decreased leverage
resulting from lower average weekly sales, higher average
capital expenditures for new restaurants and a change in the
amortization of non-transferable liquor license fees during
fiscal 2006.
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Each segment contributed as follows:
Bistro: Preopening expense increased primarily
due to the recognition of preopening rent during construction
recognized in 2006, the impact of opening 20 new Bistro
restaurants in 2006 compared to 18 new Bistro restaurants in
2005 and a slight increase in the average per location
preopening costs incurred during fiscal 2006, due to a delay in
the opening date of certain new restaurants.
Pei Wei: Preopening expense increased
primarily due to the recognition of preopening rent during
construction recognized in 2006 and the impact of opening 30 new
Pei Wei restaurants in 2006 compared to 24 new Pei Wei
restaurants in 2005, partially offset by a slight decrease in
the average per location preopening costs incurred during fiscal
2006. This decrease in average costs was primarily due to lower
manager salary and travel costs associated with the higher ratio
of restaurant openings in mature markets versus new markets
during 2006.
Each segment contributed as follows:
Bistro: Partner investment expense at the
Bistro decreased slightly primarily due to increased expense
reductions related to minority partner buyouts in the current
year and the impact of a lower imputed fair value of partnership
interests in new Bistro restaurants in 2006, partially offset by
expense associated with two additional restaurants that opened
in fiscal 2006 as compared to fiscal 2005.
Pei Wei: Partner investment expense at Pei Wei
decreased primarily due to increased expense reductions related
to minority partner buyouts in the current year and the impact
of a lower imputed fair value of partnership interests in new
Pei Wei restaurants in 2006.
Interest
and Other Income (Expense), Net
Consolidated interest and other income (expense), net decreased
primarily due to the recognition of accretion expense related to
our conditional asset retirement obligations (see Note 1 to
our consolidated financial statements for further discussion)
and lower interest income resulting from the sale of
interest-bearing securities to finance our share repurchase
program, which commenced during third quarter (see “Share
Repurchase Program” in the Liquidity and Capital Resources
section for further detail), partially offset by a higher
year-over-year rate of return on our investments.
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 2006 as well as the impact of
lower restaurant net income.
Pei Wei: Minority interest as a percentage of
revenues at Pei Wei decreased slightly due to the impact of
lower restaurant net income.
Provision
for Income Taxes
Our effective tax rate from continuing operations was 28.6% for
fiscal 2006 and 31.0% for fiscal 2005. Disregarding the benefit
of $0.2 million in reserve adjustments due to closure of
audits during 2006 offset by $0.1 million in newly
identified tax exposure items, our effective tax rate was 29.0%.
In accordance with Accounting Principles Board No. 28,
Interim Financial Reporting, we estimate our effective
tax rate for the entire year and apply it to our interim
operating results. When significant unusual charges occur, the
income tax effect for such charges is computed separately and is
not included in the estimated annual effective tax rate. The
income tax rates for fiscal 2006 and fiscal 2005 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.
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Quarterly
Results
The following table sets forth certain unaudited quarterly
information for the eight fiscal quarters in the two-year period
ended December 30, 2007, 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.
Certain percentage amounts may not sum to total due to rounding.
Our primary source of liquidity is cash provided by operations,
though we also borrow under our credit facility from time to
time. Historically, our need for capital resources has primarily
resulted from our construction of new restaurants. In fiscal
2007 and 2006, our need for capital resources was also driven by
additional repurchases of our common stock and, in 2007,
repurchases of minority interests.
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The following table presents a summary of our cash flows for
fiscal years 2007, 2006 and 2005 (in thousands):
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
the net income due principally to the effect of depreciation and
amortization, an increase in operating liabilities and the
effect of minority interest, share-based compensation (in fiscal
2007 and 2006 only) and partnership-related non-cash expenses.
Additionally, the impact of a non-cash asset impairment charge
related to the anticipated sale of Taneko’s assets is
included in fiscal 2007.
Investing
Activities
We use cash primarily to fund the development and construction
of new restaurants. Investment activities primarily related to
capital expenditures of $151.6 million, $114.3 million
and $93.8 million in fiscal years 2007, 2006 and 2005,
respectively. Also included are purchases of minority interests
of $13.0 million, $2.1 million and $6.1 million
in 2007, 2006 and 2005, respectively, and capitalized interest
of $1.8 million, $1.0 million and $3.4 million in
2007, 2006 and 2005, respectively. Additionally, we had net
sales (purchases) of short-term investments totaling
$42.4 million and ($37.4 million) during 2006 and
2005, respectively.
We intend to open 17 new Bistro restaurants and 25 new Pei Wei
restaurants in fiscal year 2008. 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 capital expenditures
for fiscal 2008 to approximate $105.0 million to
$115.0 million.
Financing
Activities
Financing activities for fiscal year 2007 and 2006 primarily
consist of cash inflows of $65.5 million and
$6.9 million, respectively, from net debt borrowings as
well as cash outflows resulting from treasury stock purchases of
$50.0 million and $46.4 million, respectively.
Additionally, financing activities include the tax benefit from
disqualifying stock option dispositions and distributions to
minority partners, offset by the impact of proceeds from stock
options exercised and employee stock purchases. 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 been and will
continue to be significant. Our future capital requirements and
the adequacy of our available funds will depend on many factors,
including 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. We
believe that our cash flow from operations, together with our
current cash reserves and available credit lines, will be
sufficient to fund our projected capital requirements through
2008 and for the foreseeable future. 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.
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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. Borrowings under the Credit Facility bear
interest, at our option, at a rate equal to either
(i) LIBOR plus an applicable margin as defined in the
Credit Facility ranging from 0.4% to 0.875%, depending on our
current leverage ratio or (ii) the higher of (a) the
Federal Funds Effective Rate plus one-half of 1.0% or
(b) the Prime Rate as announced by JPMorgan Chase Bank. The
Credit Facility bears a commitment fee on the unused portion of
the revolver at an annual rate ranging from 0.08% to 0.175%,
depending on our current leverage ratio. At December 30,
2007, our interest margin was 0.625% and commitment fee was
0.125%.
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 of 2.5:1 and a minimum fixed charge coverage
ratio 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 30, 2007 as our
leverage ratio was 1.91:1 and the fixed charge coverage ratio
was 2.02:1.
The Credit Facility is guaranteed by our material existing and
future domestic subsidiaries.
As of December 30, 2007, we had borrowings outstanding
under the Credit Facility totaling $85.0 million at an
average interest rate of 5.7% as well as $9.7 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 $55.3 million at
December 30, 2007.
Share
Repurchase Program
In July 2006, our Board of Directors authorized a program to
repurchase up to $50.0 million of our outstanding shares of
common stock from time to time in the open market or in private
transactions at prevailing market prices over a one-year period.
We repurchased 1.4 million shares of our common stock for
$46.4 million during fiscal 2006 and the remaining
$3.6 million available under this share repurchase
authorization expired in July 2007.
During 2007, our Board of Directors authorized a subsequent
program to repurchase up to $100.0 million of our
outstanding shares of common stock from time to time in the open
market or in private transactions at prevailing market prices
over the next two years. We repurchased a total of
1.8 million shares of our common stock for
$50.0 million at an average price of $27.11 during fiscal
2007 using cash on hand and available credit lines. There can be
no assurance that we will purchase any additional shares.
Partnership
Activities
As of December 30, 2007, there were 112 partners within our
partnership system representing 326 partnership interests.
During 2007, we had the opportunity to purchase 37 partnership
interests which had reached the five-year threshold period
during the year, as well as 244 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 256 of these partnership interests
in their entirety for a total of approximately
$24.8 million. Of the total purchase price, approximately
$13.0 million was paid in cash, while the remaining balance
has been recorded as debt on the consolidated balance sheet at
December 30, 2007.
In 2008, we will have the opportunity to purchase 44 additional
partnership interests which will reach their five-year
anniversary. If all of these interests are purchased, the total
purchase price will approximate $4.5 million to
$5.5 million based upon the estimated fair value of the
respective interests at December 30, 2007. If we purchase
all of these interests in 2008, the estimated liquidity impact
will be a reduction of cash of approximately $1.5 million
to $1.8 million during the year.
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Minority
Interest Purchase
On January 9, 2006, we purchased the 13 percent
minority interest held by key employees in our Pei Wei Asian
Diner subsidiary for a value of approximately
$22.8 million, thereby making Pei Wei Asian Diner a
wholly-owned subsidiary. The purchase price consideration
consisted of $7.3 million in cash and the conversion of
outstanding options to purchase 98,100 shares of Pei Wei
Asian Diner, Inc. common stock into options to purchase
306,782 shares of P.F. Chang’s common stock. There was
no additional intrinsic value associated with the converted
options to purchase P.F. Chang’s common stock for the key
employees. The transaction did not involve any changes in
management or key positions in Pei Wei.
Purchase
Commitments
The following table shows our purchase commitments by category
as of December 30, 2007 (in thousands):
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. Tenant improvement allowances
contained within our operating leases are included in the
preceding table in the year in which the location is expected to
open. 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 Recent Accounting Pronouncement section of Note 1 to
our consolidated financial statements for a summary of new
accounting standards.
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.
Our revolving credit facility allows for borrowings up to
$150.0 million bearing interest at variables rates of LIBOR
plus an applicable margin. We held no short-term investments at
December 30, 2007. We had borrowings of $85.0 million
outstanding under our credit facility and unsecured promissory
notes totaling $11.5 million at December 30, 2007.
Based on these debt levels, a hypothetical 100 basis point
change in interest rates would have a $1.0 million pre-tax
impact on our results of operations.
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. We do not use financial
instruments to hedge commodity prices because these purchase
arrangements help control the ultimate cost paid and any
commodity price aberrations are generally short-term in nature.
Table of Contents
P.F.
CHANG’S CHINA BISTRO, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
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 as of
December 30, 2007 and December 31, 2006, and the
related consolidated statements of income, common
stockholders’ equity, and cash flows for 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 30, 2007 and December 31,
2006, and the results of their operations and their cash flows
for the year ended December 30, 2007 and the year ended
December 31, 2006.
As discussed in Note 1 to the consolidated financial
statements, effective January 2, 2006, the Company adopted
the provisions of Statement of Financial Accounting Standards
No. 123R, Share-Based Payment.
As discussed in Note 1 to the consolidated financial
statements, effective January 1, 2007, the Company adopted
the provisions of Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes — an interpretation of
FASB Statement No. 109.
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 30, 2007, 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 14, 2008
expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
(signed) KPMG LLP
Phoenix, Arizona
February 14, 2008
Table of Contents
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
P.F. Chang’s China Bistro, Inc.
We have audited the accompanying consolidated statements of
income, common stockholders’ equity, and cash flows of P.F.
Chang’s China Bistro, Inc. for the year ended
January 1, 2006. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements 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 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
results of operations and cash flows of P.F. Chang’s China
Bistro, Inc. for the year ended January 1, 2006, in
conformity with U.S. generally accepted accounting
principles.
/s/ Ernst &
Young LLP
Phoenix, Arizona
February 13, 2006
Table of Contents
P.F.
CHANG’S CHINA BISTRO, INC.
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
Table of Contents
P.F.
CHANG’S CHINA BISTRO, INC.
CONSOLIDATED STATEMENTS OF INCOME
See accompanying notes to consolidated financial statements.
Table of Contents
P.F.
CHANG’S CHINA BISTRO, INC.
See accompanying notes to consolidated financial statements.
Table of Contents
P.F.
CHANG’S CHINA BISTRO, INC.
See accompanying notes to consolidated financial statements.
Table of Contents
P.F.
CHANG’S CHINA BISTRO, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December 30,
2007
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.
Additionally, as of December 30, 2007, the Company owned
and operated one Taneko Japanese Tavern (“Taneko”)
restaurant. The Company plans to exit operation of this business
and will not continue to develop Taneko. As a result, the
Company is negotiating the sale of Taneko’s long-lived
assets which is anticipated to be finalized during the first
quarter of fiscal 2008.
Fiscal
Year
The Company’s fiscal year ends on the Sunday closest to the
end of December. Fiscal years 2007, 2006 and 2005 were each
comprised of 52 weeks.
The preparation of the consolidated financial statements in
conformity with U.S. generally accepted accounting
principles 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.
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.
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 30, 2007 and
December 31, 2006 consisted primarily of money market funds.
Receivables, which the Company classifies within prepaid and
other current assets, consist primarily of amounts due from
landlords or other parties for tenant incentives. Management
believes these amounts to be collectible.
Inventories consist of food and beverages and are stated at the
lower of cost or market using the
first-in,
first-out method.
Table of Contents
P.F.
CHANG’S CHINA BISTRO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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
subsequent additions 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 and
non-transferable liquor license fees. Depreciation and
amortization expense associated with property and equipment,
including property under capital leases, totaled
$54.5 million, $42.9 million and $36.3 million
for the years ended December 30, 2007, December 31,
2006 and January 1, 2006, respectively.
During the years ended December 30, 2007, December 31,
2006 and January 1, 2006, the Company incurred gross
interest expense of approximately $2.5 million,
$1.0 million and $3.4 million, respectively.
Approximately $1.8 million, $1.0 million and
$3.4 million, respectively, of interest costs were
capitalized during the years ended December 30, 2007,
December 31, 2006 and January 1, 2006.
The Company reviews property and equipment (which includes
leasehold improvements) for impairment when events or
circumstances indicate these assets might be impaired, but at
least annually. 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 permanent
impairment.
As of December 30, 2007, the Company recognized a
$3.1 million asset impairment charge related to the
long-lived assets of Taneko resulting from an impairment
analysis performed due in part to the expected first quarter
2008 asset sale as is more fully described in Note 2. No
other impairment of long-lived assets was recognized by the
Company during the year ended December 30, 2007. There can
be no assurance that future impairment tests will not result in
a charge to earnings.
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. 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 30, 2007, management determined there was no
impairment of goodwill. There can be no assurance that future
goodwill impairment tests will not result in a charge to
earnings.
Table of Contents
P.F.
CHANG’S CHINA BISTRO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 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 30, 2007,
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 consist primarily of transferable and
nontransferable liquor licenses, vendor deposits, capitalized
software costs, deferred compensation plan assets and deferred
financing costs. During 2007, the Company recorded additional
assets related to liquor licenses for new restaurants,
capitalized software and a new deferred compensation plan (see
Note 11 for additional information).
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 provided additional accrued
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
historical industry data as well as the Company’s actual
historical trends. 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.
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.
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. Additionally, 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 this amount over the
lease term.
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.
Table of Contents
P.F.
CHANG’S CHINA BISTRO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Prior to January 2, 2006, the Company capitalized rent
expense from possession date through construction completion and
reported the related asset in property and equipment.
Capitalized rent was amortized through depreciation and
amortization expense over the estimated useful life of the
related assets limited to the lease term. Straight-line rent
recorded during the preopening period (construction completion
through restaurant open date) was recorded as preopening
expense. Beginning January 2, 2006, the Company expenses
rent from possession date through restaurant open date as
preopening expense, in accordance with FASB Staff Position
No. 13-1,
Accounting for Rental Costs Incurred During a Construction
Period. Once a restaurant opens for business, the Company
records the straight-line rent over the lease term plus
contingent rent to the extent it exceeded minimum rent
obligation per the lease agreement.
Other liabilities include the Company’s conditional asset
retirement obligations (“ARO”) recognized under 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 as well as liabilities related to the
Company’s deferred compensation plans which is discussed
further in Note 11.
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.
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.
Based on historical information, the likelihood of a gift card
remaining unredeemed can be determined 24 months after gift
card issuance. At that time, the Company recognizes breakage
income for those cards for which the likelihood of redemption is
deemed to be remote. Gift card breakage income is included
within Revenues in the consolidated statements of income.
Table of Contents
P.F.
CHANG’S CHINA BISTRO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 30, 2007, December 31, 2006 and
January 1, 2006 was approximately $5.8 million,
$3.5 million and $4.1 million, respectively.
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 30, 2007,
December 31, 2006 and January 1, 2006 was
$1.4 million, $2.0 million and $1.8 million,
respectively.
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. In accordance with
FASB Staff Position
No. 13-1,
Accounting for Rental Costs Incurred During a Construction
Period, as of January 2, 2006, the Company ceased
capitalization of rent during the construction period which
resulted in the recognition of $1.8 million in additional
preopening rent expense during fiscal 2006. Prior to
January 2, 2006, only straight-line rent for the period
between construction completion and restaurant opening date was
included in preopening expense. Rent for the period between date
of possession and construction completion was capitalized as
property and equipment.
Partner investment expense generally represents the difference
between the imputed fair value of partners’ ownership
interests and the partners’ cash capital contribution for
these 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 year ended
December 30, 2007 was a net benefit of $2.0 million.
Partner investment expense at the Bistro for the year ended
December 30, 2007 was a $3.4 million benefit 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 2007. These buyouts
resulted in the reversal during fiscal 2007 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. Partner investment expense for the
years ended December 31, 2006 and January 1, 2006 was
$4.4 million and $4.8 million, respectively.
Table of Contents
P.F.
CHANG’S CHINA BISTRO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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.
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.
The Company grants 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 grants restricted stock with a fair
value determined based on the Company’s closing stock price
on the date of grant. The Company previously accounted for stock
option grants in accordance with Accounting Principles Board
Opinion No. 25 (“APB 25”), Accounting for
Stock Issued to Employees, and related interpretations for
fiscal 2005 and prior, and, accordingly, recognized no
compensation expense for the stock option grants for those
periods.
On January 2, 2006, the Company adopted the provisions of
Financial Accounting Standards Board (“FASB”)
Statement of Financial Accounting Standard (“SFAS”)
No. 123 (revised 2004) (“SFAS 123R”),
Share-Based Payment, and SEC Staff Accounting
Bulletin No. 107 (“SAB 107”),
Share-Based Payment, requiring the measurement and
recognition of all share-based compensation under the fair value
method. The Company implemented SFAS 123R using the
modified prospective transition method, which does not result in
the restatement of previously issued financial statements.
Table of Contents
P.F.
CHANG’S CHINA BISTRO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table represents the effect on net income and
earnings per share if the Company had applied the fair value
method and recognition provisions of SFAS 123,
Accounting for Stock-Based Compensation, to share-based
compensation:
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 grants under the
option plans:
For purposes of pro-forma disclosures, 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.
In November 2005, the FASB issued FASB Staff Position
No. 123(R)-3, Transition Election Related to Accounting
for the Tax Effects of Share-Based Payment Awards
(“FSP 123R-3”). The Company has elected to
adopt the alternative transition method for calculating the tax
effects of share-based compensation pursuant to FSP 123R-3.
The alternative transition method includes a simplified method
to establish the beginning balance of the additional paid-in
capital pool related to the effects of employee share-based
compensation, which is available to absorb tax deficiencies
recognized subsequent to the adoption of SFAS 123R.
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 30, 2007,
Table of Contents
P.F.
CHANG’S CHINA BISTRO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
December 31, 2006 and January 1, 2006,
1.6 million, 1.6 million and 0.3 million,
respectively, of the Company’s shares were excluded from
the calculation due to anti-dilutive effects.
The following table sets forth the computation of basic and
diluted income from continuing operations per share:
The carrying amount of cash and cash equivalents, investments,
receivables, accounts payable, and accrued expenses approximate
fair value due to the immediate or short-term maturity of these
financial instruments. The fair value of long-term debt is
determined using current applicable rates for similar
instruments and collateral as of the balance sheet date and
approximates the carrying value of such debt.
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.
Recent
Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48
(“FIN 48”), Accounting for Uncertainty in
Income Taxes — an interpretation of FASB Statement
No. 109, which clarifies the accounting for uncertainty
in tax positions. FIN 48 requires that the Company
recognize the impact of a tax position in the Company’s
financial statements if that position is more likely than not to
be sustained on audit, based on the technical merits of the
position. The provisions of FIN 48 are effective for fiscal
years beginning after December 15, 2006, with the
cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. The adoption of
FIN 48 did not have a material impact on the Company’s
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 fair value. SFAS 141R significantly changes the
accounting for
Table of Contents
P.F.
CHANG’S CHINA BISTRO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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. 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.
The Company will adopt SFAS 160 beginning in the first
quarter of fiscal 2009 and is currently evaluating the impact of
adopting SFAS 160 on its consolidated financial statements.
In May 2007, the FASB issued FASB Staff Position
No. FIN 48-1,
Definition of Settlement in FASB Interpretation No. 48
(“the FSP”). The FSP provides guidance about how
an enterprise should determine whether a tax position is
effectively settled for the purpose of recognizing previously
unrecognized tax benefits. Under the FSP, a tax position could
be effectively settled on completion of examination by a taxing
authority if the entity does not intend to appeal or litigate
the result and it is remote that the taxing authority would
examine or re-examine the tax position. The Company applied the
provisions of the FSP upon adoption of FIN 48.
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 expands required
disclosures about the extent to which companies measure assets
and liabilities at fair value, the information used to measure
fair value, and the effect of fair value measurements on
earnings. SFAS 157 applies under other accounting
pronouncements that require or permit fair value measurements,
the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement
attribute. Accordingly, SFAS 157 does not require any new
fair value measurement. SFAS 157, as originally issued, was
effective for fiscal years beginning after November 15,
2007. However, on December 14, 2007, the FASB issued FASB
Staff Position
FAS 157-b,
which deferred the effective date of SFAS 157 for one year,
as it relates to nonfinancial assets and liabilities. The
Company will adopt SFAS No. 157 as it relates to
financial assets and liabilities beginning in the first quarter
of fiscal 2008 and does not expect adoption to have a material
impact on its consolidated financial statements.
The Company opened its 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 two core Bistro and Pei Wei restaurant concepts,
the Company has decided to exit operation of the Taneko
business. The Company has a memorandum of understanding for the
sale of Taneko’s long-lived assets and expects to finalize
the sale during the first quarter of 2008. The Company expects
to retain a non-voting minority interest in Taneko after the
asset sale is completed.
Based on these events, the Company classified Taneko as held for
sale and performed an asset impairment analysis as of
December 30, 2007. Based on this analysis, the Company
determined that the carrying value of Taneko’s long-lived
assets exceeded their estimated fair value and as a result, the
Company recognized a $3.1 million pretax asset impairment
charge related to the long-lived assets of Taneko during 2007.
Additionally, the Company determined that Taneko met the
criteria for classification as a discontinued operation as of
December 30, 2007. The aforementioned asset impairment
charge, along with the revenues, costs
Table of Contents
P.F.
CHANG’S CHINA BISTRO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
and expenses and income taxes attributable to Taneko have been
aggregated within “loss from discontinued operations, net
of tax” on the consolidated statements of income for all
periods presented. Losses from discontinued operations, net of
tax are comprised of the following (in thousands):
Prepaids and other current assets consist of the following:
Receivables as of December 30, 2007 and December 31,
2006 include amounts due from landlords or other parties for
tenant incentives as a result of new restaurant openings during
fiscal 2007 and fiscal 2006, respectively.
Property and equipment consists of the following:
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