10-K 1 pfcb10k2011.htm PFCB 10K 2011
 
 
 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________
Form 10-K
x
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Fiscal Year Ended January 1, 2012
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from __________ to __________.
Commission File Number: 0-25123
P.F. Chang’s China Bistro, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
86-0815086
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
7676 East Pinnacle Peak Road
Scottsdale, AZ
 
85255
(Zip Code)
(Address of principal executive offices)
 
 
Registrant’s telephone number, including area code:
(480) 888-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $0.001 par Value
 
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No x
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 x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days.  Yes x     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer x
 
Non-accelerated filer o (Do not check if a smaller reporting company)     
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No x
The aggregate market value of the registrant’s common stock held by non-affiliates as of the last day of the registrant’s second fiscal quarter ended, July 3, 2011, was $430,374,485.
As of February 13, 2012 there were outstanding 21,151,707 shares of the registrant’s Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
(to the extent indicated herein)
Specified portions of the registrant’s Proxy Statement with respect to the Annual Meeting of Stockholders to be held April 18, 2012 are incorporated by reference into Part III of this Report.
 
 
 
 
 



TABLE OF CONTENTS
Item
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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PART I

Item 1.
Business
General
P.F. Chang’s China Bistro, Inc. (“P.F. Chang’s” or the “Company”) was incorporated in January 1996 as a Delaware corporation. We conducted our initial public offering in December 1998. We incorporated our subsidiary, Pei Wei Asian Diner, Inc., in December 1999 as a Delaware corporation. We report our financial and descriptive information according to two reportable operating segments: P.F. Chang’s China Bistro (“Bistro”) and Pei Wei Asian Diner (“Pei Wei”) (see Notes to Consolidated Financial Statements — Note 19 — Segment Reporting). Additionally, under Global Brand Development, we have extended our brands to international markets, domestic retail products and domestic airports with these businesses operating under development and licensing agreements.
As of January 1, 2012, we owned and operated 204 full service upscale Bistro restaurants that feature a blend of high quality, Chinese-inspired cuisine and attentive service in a high energy contemporary bistro setting. Our restaurants offer intensely flavored, highly memorable culinary creations, prepared from fresh ingredients, including premium herbs and spices imported directly from China. The menu features traditional Chinese offerings and innovative dishes that illustrate the emerging influence of Southeast Asia on modern Chinese cuisine. A full service bar offering an extensive selection of wines, specialty drinks, Asian beers, sake, cappuccino and espresso complements the menu at the Bistro. We offer superior customer service in a high energy atmosphere and a decor that includes wood and slate floors, life-size replicas of the terra cotta Xi’an warriors and narrative murals depicting scenes of life in ancient China.
As of January 1, 2012, we also owned and operated 170 quick-casual Pei Wei restaurants that offer a menu of freshly prepared, wok-seared, contemporary pan-Asian cuisine in a relaxed, warm environment with friendly attentive counter service as well as the flexibility, speed and convenience of take-away service. Pei Wei offers the same spirit of hospitality and commitment to providing fresh, high-quality Asian food at a great value that has made our Bistro restaurants successful.
As of January 1, 2012, fifteen international Bistro restaurants were open in Mexico, the Middle East and Puerto Rico and one international Pei Wei restaurant was open in Mexico, all operating under development and licensing agreements. Two Pei Wei airport locations were also open, operating under a licensing agreement. There were two Bistro locations in Hawaii which were operating under a joint venture arrangement in which we own a nominal noncontrolling interest. Additionally, a premium line of P.F. Chang's brand frozen Asian-style meals is available in numerous retail outlets throughout the U.S through a licensing agreement with Unilever.

Concept and Strategy

Our objectives are to be the best operator of Asian restaurants, continue to grow and develop our concepts, expand the presence of our brand in domestic and international markets, other venues and the retail sector and remain opportunistic regarding potential expansion opportunities in other concepts while providing superior returns to our shareholders. We offer high quality Asian cuisine in a memorable atmosphere while delivering exceptional customer service and an excellent dining value. By developing and operating restaurants that offer guests their preferred dining experience from quick take-out to upscale dining occasions, we strive to create a loyal customer base that generates a high level of repeat business in our restaurants and translates to interest and trial of our retail products. Although we are currently operating restaurants exclusively in the Asian niche, we would consider additional expansion opportunities in non-Asian concepts to the extent such ventures can meet or exceed our return thresholds.

We have established Bistro and Pei Wei restaurants in a wide variety of markets across the United States. Key to our strategy and success at the restaurant level is a philosophy that allows regional managers, general managers and executive chefs to participate in incentive programs that reward improvements in the operating performance of the restaurants for which they have responsibility. Additionally, through various development and licensing agreements, we have partnered with operators in international markets, domestic airports and the retail sector to extend our brand. Using expertise in their respective markets, our international and domestic partners are developing, constructing, and operating our restaurants worldwide. Our premium line of frozen Asian-style meals is available in numerous retail outlets throughout the United States to offer consumers additional opportunities to enjoy P.F. Chang's brand meals.
Menu

Bistro


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The menu for our Bistro restaurants offers a harmony of taste, texture, color and aroma by balancing the Chinese principles of fan and t’sai, which mean “balance” and “moderation”. Fan foods include rice, noodles, grains and dumplings, while t’sai foods include vegetables, meat, poultry and seafood. To further encourage the Chinese principles of fan and t’sai, our menu is served family-style, the traditional Chinese way of dining. Our chefs are trained to produce distinctive Chinese cuisine using traditional recipes from the major culinary regions of China, updated with a contemporary twist. The intense heat of Mandarin-style wok cooking sears in the clarity and distinct flavor of fresh ingredients. Slow-roasted Northern-style BBQ spare ribs are prepared in vertical ovens, while handmade shrimp, pork and vegetable dumplings, as well as flavorful fish and vegetables, are prepared in custom-made steamer cabinets. The menu is highlighted by dishes such as Chang’s Spicy Chicken, Mongolian Beef, Chang’s Chicken Lettuce Wraps, Oolong Marinated Chilean 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, including an extensive gluten-free menu. No MSG is added to any ingredients at our restaurants.
We offer a Triple Happiness Happy Hour from 3 to 6 PM weekdays at participating locations. The Triple Happiness Happy Hour menu features discounts on some appetizers from our main menu as well as appetizers that are only available during happy hour and are not part of the main Bistro menu. These items include dim sum and street fare offerings, as well as specials on beer, wine, sake and signature cocktails. Our Triple Happiness Happy Hour rewards guests by providing appealing, affordable cuisine and drinks at a great value.
We also offer P.F. Chang’s for Two, a prix-fixe menu offering a four-course meal for two people for $39.95. The menu includes two soups, one starter, two entrées and two mini desserts, all of which can be chosen from an extensive selection of signature dishes and guest favorites. The P.F. Chang's for Two menu also gives customers the flexibility to order certain items from the main menu for an additional charge while still providing a value-priced meal. P.F. Chang’s for Two allows our customers to enjoy a premium dining experience that offers both enticing culinary cuisine and great value.
Entrées at the Bistro range in price from $7.95 to $24.95, and our starters range in price from $3.00 to $8.95. Additionally, the Bistro offers a kids' menu ranging in price from $2.95 to $4.95. The average check per guest, including alcoholic beverages, is approximately $21.00 to $22.00. Sales of alcoholic beverages, featuring an extensive selection of wine, Asian beer, sake and signature cocktails, have constituted approximately 13% to 14% of total revenues for each of the past three years. Take-away sales comprise approximately 12% of Bistro’s total revenues. Lunch and dinner contribute approximately 32% and 68% of revenues, respectively.
Pei Wei
The menu at Pei Wei also offers a variety of intensely flavored culinary creations; however, this menu is more concise than that of the Bistro and includes not only Chinese cuisine but also other Asian fare such as Japanese, Korean, Thai and Vietnamese inspired dishes. 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 a variety of Asian dishes and traditional favorites such as Chicken Lettuce Wraps, Honey Seared Chicken, Spicy Korean Beef and Pad Thai.
During late 2011, we introduced Diner Selects, which has allowed our guests to pair a smaller portion of one of our five most popular dishes with a choice of a spring roll, cup of soup or Asian slaw, starting at $6.25. This has given our guests the opportunity to enjoy our fresh cuisine at an everyday, affordable price.
Our culinary team is continually researching and developing new dishes which we introduce to our guests through the use of limited time offers (“LTOs”). LTOs are typically offered over a twelve-week period and provide a new culinary experience to our guests. Some LTOs that have been offered over the past two years include Caramel Chicken, Korean BBQ and Thai River Noodles, some of which were eventually added to our standard menu due to their popularity. We currently plan to offer two to three LTOs each year.
Entrées at Pei Wei range in price from $6.25 to $9.50, with starters ranging from $2.00 to $7.25. Additionally, Pei Wei offers a kids' menu with entrées ranging from $3.75 to $4.25. The average check per guest at Pei Wei, including beer and wine sales, is approximately $9.00 to $10.00. Sales of alcoholic beverages, featuring a limited selection of beer and wine, have constituted approximately 1% to 2% of total revenues for each of the past three years. Take-away sales comprise approximately 41% of Pei Wei’s total revenues. Lunch and dinner contribute approximately 42% and 58% of revenues, respectively.
Operations
Bistro
The Bistro strives to create a sophisticated dining experience through the careful selection, training and supervision of personnel. The staff of a typical Bistro restaurant consists of an Operating Partner, three or four managers, a Culinary Partner, one or two

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sous chefs and approximately 125 hourly employees, many of whom work part-time. The Operating Partner of each restaurant is responsible for the day-to-day operations of that restaurant, including the hiring, training and development of personnel, as well as operating results. The Culinary Partner is responsible for product quality, purchasing, food costs and kitchen labor costs. We require our Operating Partners and Culinary Partners to have significant experience in the full service restaurant industry.
The Bistro has a comprehensive eight-week management development program. This program consists of four weeks of culinary training, including both culinary job functions and culinary management, with the remaining four weeks focused on service strategies, guest relations and administration. All salaried hospitality and culinary management personnel are required to successfully complete all sections of the program. Upon the completion of each four-week section, each trainee must successfully complete a comprehensive certification process.
Operating Partners are responsible for selecting hourly employees for their restaurants and administering hourly staff training programs that are developed by the training and culinary departments. The hourly employee development program lasts between one and two weeks and focuses on both technical and cultural knowledge.
Additionally, the Bistro offers online ordering, including large parties, and online reservations on its website at www.pfchangs.com. During late fiscal 2011, the Bistro outsourced phone-in take-away orders at its restaurants to a third-party call center, which has enabled the restaurants to better focus on dine-in guests while providing phone-in customers knowledgeable and attentive service.
Pei Wei
The staff at a typical Pei Wei restaurant consists of a general manager, a kitchen manager, one or two managers, and approximately 35 hourly employees, many of whom work part-time. 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 process.
Each Pei Wei hourly employee undergoes a week-long comprehensive training program that focuses on the culinary knowledge required for his or her specific position. After completion of the program, each employee is required to pass a test specific to his or her position prior to serving our guests.
Additionally, to help facilitate take-away sales, Pei Wei offers online ordering on its website at www.peiwei.com. Digital menu boards provide the flexibility to facilitate menu changes and product messaging.
Global Brand Development
International and Other Venues
We are selectively pursuing expansion of our brands into various international markets and other venues. Our license agreements typically provide for us to receive an initial territory fee, store opening fees and ongoing royalty revenues based on a percentage of restaurant sales ("restaurant licensing revenues").
Since fiscal 2009, we have signed development and licensing agreements with partners who will develop and operate up to 105 Bistro restaurants in international markets over the next five to ten years. As of January 1, 2012, fifteen international Bistro restaurants were open in Mexico, the Middle East and Puerto Rico. There are also two Bistro restaurants located in Hawaii which are operated under a joint venture arrangement in which we own a nominal noncontrolling interest.
During fiscal 2011, we signed a development and licensing agreement with a partner who will develop and operate three Pei Wei restaurants in Mexico over the next eighteen months. The agreement also provides an option for a long-term contract with a commitment to open fifty additional Pei Wei restaurants over ten years. During the fourth quarter of fiscal 2011, the first Pei Wei location opened in Mexico City.
Additionally, during the fourth quarter of fiscal 2011, the first two Pei Wei airport locations opened in John Wayne Orange County Airport and Minneapolis - St. Paul Airport, through a licensing agreement with a partner.

We continue to engage in discussions with additional potential partners regarding expansion of the Company's brands into various international markets and other venues.

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Retail

Since fiscal 2010, a premium line of eight P.F. Chang’s brand frozen Asian-style meals has been available in numerous retail outlets throughout the U.S. through an exclusive licensing agreement with Unilever. We receive ongoing royalty revenues based on a percentage of product sales ("retail licensing revenues"), with such percentages escalating over the first three years of the agreement. During the third quarter of fiscal 2011, four additional frozen Asian-style noodle meals were introduced.
Marketing
We focus our business strategy on providing high quality Asian cuisine prepared by an attentive staff in a distinctive environment at a great value. By focusing on the food, service and ambiance of the restaurant, we strive to create an environment that fosters repeat patronage and encourages word-of-mouth recommendations. We believe that word-of-mouth advertising is a key component in driving guests’ initial trial and subsequent visits, and that creating a great experience for guests will always be the ultimate marketing vehicle.
To attract and retain new customers, we have historically utilized a mix of marketing strategies including paid advertising, public relations and local community involvement. While we have used limited radio, print and outdoor advertising in the past, in recent years we began making more significant investments in these marketing channels in key markets. At the same time, we added online, direct mail, social media, and customer relationship initiatives to the media mix to both drive new customer trials and foster better ongoing communication with our guests. During fiscal 2010, we implemented a Bistro Warrior Card loyalty program which provides our cardholders with the latest news, information, and special offers. During early fiscal 2012, we transitioned to a surprise and delight program in which guests will earn varied rewards based on the frequency of their visits.
Management Information Systems
We utilize an integrated information system to manage the flow of information within each restaurant and between the restaurants and the home 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 as well as facilitating online ordering. 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 home office on a daily basis, enabling senior management to continually monitor operating results. We believe that our current point-of-sale system will be an adequate platform to support our continued expansion for the foreseeable future.
Supply Chain Management
Our supply chain management function provides our restaurants with high quality ingredients at competitive prices from reliable sources. Consistent menu specifications, as well as purchasing and receiving guidelines with continuous monitoring, ensure freshness and quality. Because we utilize fresh ingredients in our menu offerings, a modest level of inventory is maintained at each store. We negotiate short-term and long-term contracts depending on demand for the commodities used in the preparation of our products. Typically, our most important items are contracted for a term of one or more years to stabilize prices and ensure availability.
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. With the exception of a portion of our commodities, like produce, we utilize Distribution Market Advantage, a cooperative of multiple food distributors located throughout the United States, as the primary distributor of product to all of our restaurants. We have a non-exclusive contract with Distribution Market Advantage on terms and conditions that we believe are consistent with those made available to similarly situated restaurant companies. Our produce is distributed by a network of local specialty distributors who service our restaurants in adherence to our quality and safety standards.
Asian-specific ingredients, primarily spices and sauces, are usually sourced directly from Hong Kong, China, Taiwan and Thailand through a single importer and distributor. While this arrangement provides numerous benefits, including a rigorous quality assurance program and lower negotiated contract prices due to higher purchase volumes, the Company accepts a marginal amount of risk due to our reliance on a single source provider. However, we believe that competitively priced alternative distribution sources are available should they become necessary.
Competition
The restaurant business is intensely competitive with respect to food quality, price-value relationships, ambiance, service, dietary trends 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

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ambiance of the facilities. For the Bistro, our primary competitors are upscale and mid-range casual dining restaurants. For Pei Wei, our main competitors are other value-priced, quick casual concepts as well as locally owned and operated Asian restaurants.
There are a number of well-established competitors with 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 continuing popularity of Asian food may result in increased competition from non-Asian restaurants and other food outlets as they increase their number of Asian-inspired menu offerings. We also face growing competition as retail outlets improve the quality and convenience of their meal offerings potentially resulting in fewer occasions for consumers to dine out. In more recent years, there has been an increase in the level of promotions and discounts offered by other restaurant companies, which has created increased competition for consumers' disposable income.
Employees
At January 1, 2012, we employed approximately 26,000 persons, approximately 300 of whom were home office and field support personnel, approximately 1,900 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 favorable.
Unit Economics
We believe that unit economics are critical to the long-term success of any restaurant concept. Accordingly, we focus on unit-level returns over time as a key measurement of our success or failure. For analysis purposes, we group our restaurants by the year in which they opened. We then compare each “class” to its peers over time as well as to the performance of the entire system. These unit economics are available under the Investors/ROIC section of our website: www.pfcb.com.
Access to Information
Our Internet address is www.pfcb.com. We make available at this address, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports, and beneficial ownership reports filed by our directors and officers pursuant to Section 16 of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or SEC.
Item 1A.
Risk Factors
Various risks and uncertainties could affect our business. Any of the risks described below or elsewhere in this report or our other filings with the SEC could have a material impact on our business, financial condition or results of operations. It is not possible to predict or identify all risk factors. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations. Therefore, the following is not intended to be a complete discussion of all potential risks or uncertainties.

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

We owned and operated 204 full service Bistro restaurants and 170 quick casual Pei Wei restaurants as of January 1, 2012, 8 of which opened within the last 12 months. The results achieved by these restaurants may not be indicative of longer term performance or the potential market acceptance of restaurants in other locations. There can be no assurance that any new restaurant that we open will have similar operating results to those of prior restaurants. Our new restaurants commonly take several months to reach planned operating levels due to inefficiencies typically associated with new restaurants, including the training of new personnel, lack of market awareness, inability to hire sufficient staff and other factors. The failure of our existing or new restaurants to perform as expected could have a significant negative impact.

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

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

unfavorable general economic conditions in the markets in which we operate that adversely affect consumer spending;

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the impact of initiatives by competitors and increased competition generally;

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

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

changes in consumer preferences, declines in general consumer demand for Asian menu items or increased offerings of Asian-inspired dishes at non-Asian restaurants; and

unsuccessful marketing programs.

expense fluctuations that are either wholly or partially beyond our control, such as:

costs for commodities;

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

labor costs such as increased healthcare costs, general market wage levels and higher payroll taxes;

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

fair value fluctuations related to our cash-settled share-based compensation awards;

costs of opening, closing or relocating our restaurants;

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

increased employee training costs due to turnover.

Additionally, if market conditions deteriorate or if operating results decline, we may be required to record impairment charges of certain long-lived assets, which will negatively impact results of operations for the periods in which they are recorded.

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, adversely impacting our stock price.

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

The restaurant industry is intensely competitive with respect to food quality, price-value relationships, ambiance, service, dietary trends and location, and many restaurants compete with us at each of our locations. Our Bistro competitors are primarily upscale and mid-range casual dining restaurants, and our Pei Wei competitors are primarily other value-priced, quick casual concepts as well as locally owned and operated Asian restaurants. There are a number of well-established competitors with 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 similar concepts and the ongoing popularity of Asian food may result in increased competition from non-Asian restaurants which offer Asian-inspired dishes. We also face growing competition as retail outlets improve the quality and convenience of their meal offerings potentially resulting in fewer occasions for consumers to dine out. In more recent years, there has been an increase in the level of promotions and discounts offered by other restaurant companies, which has created increased competition for consumers' disposable income.

Any inability to successfully compete with other restaurants or retail outlets may prevent us from increasing or sustaining our revenues and/or profitability which could have a material adverse effect on our business, financial condition, results of operations and cash flows.


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Damage to our brands or reputation could negatively impact our business.

Our success depends substantially on the value and relevance of our brands and our reputation for offering a high quality, memorable experience to our guests. We believe that we must protect and grow the value of our brands to continue to be successful in the future. Any incident that erodes consumer trust in or affinity for our brands could significantly reduce their value. If consumers perceive or experience a reduction in food quality, service or ambiance, or in any way believe we failed to deliver a consistently positive experience, our brand value could suffer which could have an adverse effect on our business.

Additionally, multi-unit food service businesses such as ours can be materially and adversely affected by widespread negative publicity of any type, particularly regarding food quality, illness or public health issues (such as epidemics or the prospect of a pandemic), safety, injury or other health concerns. We have taken steps to mitigate each of these risks. To minimize the risk of food-borne illness, we have a Hazard Analysis and Critical Control Points ("HACCP") system for managing food safety and quality. Nevertheless, these risks cannot be completely eliminated and any outbreak of illness attributed to our restaurants or within the food service industry in general could cause a decline in our sales and have a material adverse effect on our results of operations.

Development is critical to our long-term success.

Our ability to successfully expand our operations continues to be critical to our long-term future success. We have expanded domestically from 7 restaurants at the end of 1996 to 374 restaurants as of January 1, 2012. We expect to open two to three new Bistro restaurants and twelve to sixteen new Pei Wei restaurants during fiscal 2012. 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. Our ability to expand successfully will depend on a number of factors, including:

identification and availability of suitable locations;

competition for restaurant sites in new and existing markets;

timely negotiation of favorable lease arrangements;

management of the costs of construction and development of new restaurants, including materials and skilled labor;

securing required governmental construction, zoning or other approvals and permits;

management of modifications in design to the size and scope of the projects or other unforeseen engineering problems;

recruitment of qualified operating personnel, including managers, chefs, kitchen staff and wait staff;

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

timely opening and continuing operations of other tenants at retail centers in which we are located;

weather conditions; and

general economic conditions, including those arising from the most recent economic downturn.
 
The opening of additional restaurants in the future will depend primarily on the availability of high-quality commercial real estate projects of the type we typically target for new locations. We may not be able to open our planned new restaurants on a timely basis, if at all. 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 and cash flows.

We are impacted by changes in general economic conditions and are dependent on sales concentrated in certain geographic areas.

Unfavorable economic conditions may continue throughout fiscal 2012, which may continue to negatively impact unemployment rates, the housing market, disposable income due to general price inflation, consumer confidence, interest rates and other events or factors. As a result, consumers may remain apprehensive about the economy and maintain or further reduce their already lowered level of discretionary spending. This could impact the frequency with which our customers choose to dine

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out or the amount they spend on meals while dining out, thereby decreasing our revenues and negatively affecting our operating results. Our business is also influenced by the level of corporate travel and entertainment spending by businesses as a significant portion of our sales is generated by guests conducting business at our Bistro restaurants. We believe there is a risk that prolonged negative economic conditions might cause both individual consumers and businesses to make long-lasting changes to their discretionary spending behavior, including dining out less frequently on a more permanent basis or reducing the amount they spend when dining out, which would have an adverse effect on our business.

Additionally, our financial performance is highly dependent on restaurants located in Texas, California, Florida and Arizona which contribute almost one-half of our total revenues. In recent years, these states have been somewhat more negatively impacted by the housing downturn, unemployment and the overall negative economic environment than other geographic areas. As a result, we have seen a more substantial decline in guest traffic at some of our restaurants in these locations, which has adversely affected the operations of our company as a whole. If we are unable to improve operating performance in these geographic areas, our financial results may continue to be adversely affected.

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

A substantial number of our restaurant personnel are hourly workers whose wage rates are affected by increases in the federal or state minimum wage rate. We are subject to the Fair Labor Standards Act, which governs such matters as minimum wages, overtime and other working conditions. As minimum wage rates increase, which will occur in eight states in 2012, we may need to increase not only the wages of our minimum wage employees but also the wages paid to employees at wage rates that are currently above minimum wage. Future legislation that increases minimum wage rates may increase our labor costs and have a material adverse effect on our business, financial condition, results of operations and cash flows.

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 U.S. Citizenship and Immigration Services, or USCIS. The United States Congress has recently been considering changes to Federal immigration laws and various states, including some 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. During fiscal 2011, we voluntarily began using e-verify for hiring at all of our domestic restaurants. Although we now use e-verify for all of our hiring and 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. We could also experience adverse publicity arising from immigration-related enforcement activity that negatively impacts our brand and may make it more difficult to hire and keep qualified employees. 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 restaurants in the future, could have a material adverse effect on our business, financial condition and operating results.

Additionally, we are subject to federal and state laws governing unionizing rights and activities. Although we do not currently have any union employees, the impact of labor legislation or rulemaking could have an adverse effect on our business and financial results by imposing requirements that could potentially increase costs, reduce flexibility and impact our ability to service our guests.

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

We continue to explore various initiatives to improve the operating performance of our concepts. There can be no assurance that we will be able to successfully implement operational initiatives or that such initiatives will achieve the desired improvements in operating results and the Company may experience an adverse impact on its business and its financial results.

We may also need to modify or refine elements of our restaurant system, including remodels or redesigns, to evolve our concepts in order to compete with popular new restaurant formats or concepts that may develop from time to time. We cannot ensure that we will be successful in implementing any such potential modifications or that these modifications will not reduce our profitability.

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

We are subject to regulation by federal agencies and to licensing and regulation by state and local health, sanitation, building, zoning, safety, fire and other departments relating to the development and operation of restaurants. These regulations include matters relating to building construction, zoning requirements, employment, the preparation and sale of food and alcoholic

10


beverages, integrity and security of data and the environment.

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.

Approximately 13 to 14% percent of total Bistro revenues and 1 to 2% percent of total Pei Wei revenues are attributable to the sale of alcoholic beverages. We are required to comply with the alcohol licensing requirements of the federal government, states and municipalities where our restaurants are located. Alcoholic beverage control regulations require applications to state authorities and, in certain locations, county and municipal authorities for a license and permit to sell alcoholic beverages. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the restaurants, including minimum age of guests and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages. If we fail to comply with federal, state or local regulations, our licenses may be revoked and we may be forced to terminate the sale of alcoholic beverages at one or more of our restaurants.

We have a significant number of hourly restaurant staff members who receive income from gratuities. We have elected to voluntarily participate in a Tip Reporting Alternative Commitment (“TRAC”) agreement with the Internal Revenue Service. By complying with the educational and other requirements of the TRAC agreement, we reduce the likelihood of potential employer-only FICA tax assessments for unreported or underreported tips. However, we rely on our staff members to accurately disclose the full amount of their tip income and base our reporting on the disclosures provided to us by such tipped employees.

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, which increases the costs of our operations.

We receive and maintain certain personal information about our guests and employees. The use of this information by us is regulated at the federal and state levels. If our security and information systems are compromised or our business associates fail to comply with these laws and regulations and this information is obtained by unauthorized persons or used inappropriately, it could adversely affect our reputation, as well as results of operations, and could result in litigation against us or the imposition of penalties. As privacy and information security laws and regulations change, we may incur additional costs to ensure we remain in compliance.

The U.S. and other foreign governments have increased focus on environmental matters such as climate change, greenhouse gases and water conservation. This increased focus may lead to new initiatives directed at regulating an as yet unspecified array of environmental matters. These efforts could result in increased taxation or in future restrictions on or increases in costs associated with food and other restaurant supplies, transportation costs and utility costs, any of which could decrease our operating profits and/or necessitate future investments in our restaurant facilities and equipment to achieve compliance.

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

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

Our profitability is dependent in part on our ability to anticipate and react to changes in food costs and availability. Factors beyond our control, including adverse weather conditions and governmental regulation, may affect our food costs. Any disruption in the supply of commodities or specialty items due to quality, availability or other issues could also cause our food costs to fluctuate. To mitigate some of the risks associated with availability, other than for a portion of our commodities, such as produce which is purchased locally by each restaurant, we rely on Distribution Market Advantage, a cooperative of multiple food distributors located throughout the nation, as the primary distributor of our ingredients. We have a non-exclusive contract with Distribution Market Advantage on terms and conditions that we believe are consistent with those made available to similarly situated restaurant companies. Although we believe that alternative distribution sources are available, any increase in distribution prices or failure to perform by Distribution Market Advantage could cause our food costs to fluctuate. We also have exposure to fluctuating costs and potential short-term availability issues associated with our Asian-specific ingredients, primarily spices and sauces, which we source directly from Hong Kong, China, Taiwan and Thailand through a single importer and distributor. 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.


11


Litigation could have a material adverse effect on our business.

We are, from time to time, the subject of complaints or litigation from guests alleging food borne illnesses, injuries or other food quality, health or operational concerns. We may be adversely affected by publicity resulting from such allegations, regardless of whether such allegations are valid or whether we are ultimately determined to be liable. We are also subject to complaints or litigation from former or prospective employees alleging wage and hour issues, discrimination, injuries or other concerns from time to time as well as from vendors, landlords, and other third-parties. A lawsuit or claim could result in an adverse decision against us that could have a material adverse effect on our business. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time.

We assess contingencies to determine the degree of probability and range of possible loss for potential accrual in our financial statements. An estimated loss contingency is accrued in our financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. We regularly review contingencies to determine the adequacy of our accruals and related disclosures.  The amount of ultimate loss may differ from these estimates. 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.

Adverse public or medical opinions about the health effects of consuming our products or new information or attitudes regarding diet and health could result in changes in regulations and consumer eating habits that could adversely affect our business.

Multi-unit restaurant operators and food service operations have received more scrutiny from regulators and health organizations in recent years relating to the health effects of consuming certain products. Regulations and consumer eating habits may change as a result of new information or attitudes regarding diet and health. Although our menu provides a range of healthy options, an unfavorable report on our menu ingredients, the size of our portions or the consumption of our menu items could influence the demand for our offerings. These changes may include regulations that impact the ingredients and nutritional content of our menu items. Also, as part of the health care reform law enacted by Congress in March of 2010, there are new federal requirements for menu labeling with the final rule expected during fiscal 2012, at which point we have approximately six months to comply. The success of our restaurant operations is dependent, in part, upon our ability to effectively respond to changes in consumer health and disclosure regulations and to adapt our menu offerings to trends in eating habits. If consumer health regulations or consumer eating habits change significantly, we may be required to modify or remove certain menu items. We may experience higher costs associated with the implementation and oversight of such changes. To the extent we are unable to respond with appropriate changes to our menu offerings, it could materially affect customer demand and have an adverse impact on our business.

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

Our success will continue to be highly dependent on our key operating officers, key executive 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. The ability of these key personnel to maintain consistency in the quality of our product offerings and service and atmosphere of our restaurants is a critical factor in our success. The key executive officers serve to maintain a corporate vision for our Company, execute our business strategy, and maintain consistency in the operating standards of our restaurants. Any failure to attract, retain and motivate key personnel may harm our reputation and result in a loss of business. Our future success is highly dependent upon our ability to attract and retain certain key operating, executive and other employees.  

Our global brand development efforts could negatively affect our brand and cause us to be exposed to additional risks and liabilities in foreign markets.

Our revenue is impacted by our business expansion into international markets and domestic retail product licensing. The growth of our international business depends upon our ability to find and attract quality partners. We believe that we have selected high-caliber, experienced partners for our business expansion into international markets and domestic retail product licensing. However,

12


as our existing and potential international partners reach agreements with other restaurant companies, we are competing for our partners' time and resources to dedicate to successfully expanding and executing our brand in their markets.

There is also a risk that international markets will become saturated with restaurant offerings, thus creating greater competition for guests. Increased competition at retail outlets in the frozen meal category, including product offerings by competitors at heavy discounts, may result in lower retail licensing revenues. Additionally, if customers have negative perceptions or experiences with operational execution or food quality at international restaurants or with our line of premium frozen Asian-style meals, our brand value could suffer which could have an adverse effect on our business.

We are impacted by changes or uncertainties in international economic, political, and social conditions as well as differing cultures and consumer preferences. Adverse developments in any of these areas could negatively impact our profitability. We also must comply with foreign laws and regulations in the countries in which we expand our restaurants and domestic laws affecting United States businesses that operate internationally, such as the Foreign Corrupt Practices Act. Failure to comply with such requirements could subject us to additional liabilities.

Federal, state and local tax rules can adversely impact our results of operations and financial position.

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

In addition, companies in the restaurant industry are typically impacted by changes to tax law regarding tip credits. Tip credits are the amounts an employer is permitted to assume an employee receives in tips when the employer calculates the employee's hourly wage for minimum wage compliance purposes. FICA tip credits resulting from tip credit reporting are also a significant factor when calculating the Company's effective tax rate. Changes to the tip credit have recently been and continue to be proposed and implemented at both federal and state government levels. Future legislation that changes allowable tip credits may increase our effective tax rate and have a material adverse effect on our business, financial condition, results of operations and cash flows.

Complying with new tax rules, laws or regulations could impact our financial condition and increases to federal or state statutory tax rates and other changes in tax laws, rules or regulations may increase our effective tax rate. Any increase in our effective tax rate could have a material impact on our financial results.

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

The cost of workers' compensation insurance, general liability insurance, health insurance, property 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, general liability, and health insurance 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 2012. We are reviewing the health care reform law enacted by Congress during 2010 to evaluate the potential impact of this new law on our business and to comply with various parts of the law as they take effect. The increases in costs, as well as legislative requirements for employers to provide specified levels of health insurance to all employees, could have a negative impact on our profitability.

The seasonality of our business could result in fluctuations in our financial performance.

Our business is subject to seasonal fluctuations. Our sales volumes are generally higher in the winter months and lower in the summer months, which can cause fluctuations in our operating results from quarter to quarter within a fiscal year. As a result, results of operations for any single quarter are not indicative of results that may be achieved for a full fiscal year.

Special Note Regarding Forward-Looking Statements

Any statements in this Form 10-K and the documents we incorporate by reference about our expectations, beliefs, plans, objectives, prospects, financial condition, assumptions or future events or performance are not historical facts and 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

13


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 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 expected results, intense competition in the restaurant industry, damage to our brands or reputation, our ability to successfully expand our operations and changes in general economic and political conditions that affect consumer spending. Because we cannot guarantee our future results, levels of activity, performance or achievements, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent beliefs and assumptions only as of the date of this annual report. Except as required by applicable law, we undertake no obligation to release publicly the results of any revisions or updates to these forward-looking statements to reflect events or circumstances arising after the date of our financial statements.

Item 1B.
Unresolved Staff Comments
None.

Item 2.
Properties
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 company-owned Bistro and Pei Wei locations by state as of January 1, 2012: 

14


State
Bistro
 
Pei Wei
 
Total
Alabama
2

 

 
2

Arizona
9

 
19

 
28

Arkansas
2

 
1

 
3

California
37

 
13

 
50

Colorado
7

 
6

 
13

Connecticut
2

 

 
2

Florida
15

 
21

 
36

Georgia
5

 

 
5

Idaho
1

 

 
1

Illinois
5

 
3

 
8

Indiana
2

 
1

 
3

Iowa
1

 

 
1

Kansas
1

 
3

 
4

Kentucky
2

 

 
2

Louisiana
2

 

 
2

Massachusetts
6

 

 
6

Maryland
7

 
2

 
9

Michigan
6

 
6

 
12

Minnesota
2

 
3

 
5

Mississippi
1

 

 
1

Missouri
3

 
2

 
5

Nebraska
1

 

 
1

Nevada
5

 
3

 
8

New Jersey
6

 
2

 
8

New Mexico
1

 
2

 
3

New York
5

 

 
5

North Carolina
6

 
4

 
10

Ohio
8

 
3

 
11

Oklahoma
2

 
6

 
8

Oregon
4

 

 
4

Pennsylvania
6

 
2

 
8

Rhode Island
1

 

 
1

South Carolina
3

 

 
3

Tennessee
5

 
6

 
11

Texas
18

 
53

 
71

Utah
2

 
4

 
6

Virginia
6

 
5

 
11

Washington
5

 

 
5

Wisconsin
2

 

 
2

 
204

 
170

 
374

Additionally, there are fifteen international Bistro restaurants in Mexico, the Middle East and Puerto Rico and one international Pei Wei restaurant in Mexico as of the end of fiscal 2011, operated by business partners under international development and licensing agreements. Two Bistro restaurants in Hawaii are also operated by a business partner under a joint venture arrangement in which we own a nominal noncontrolling interest. There are also two Pei Wei domestic airport locations as of the end of fiscal 2011, operated by business partners under licensing agreements.
Our home office is located in a 50,000 square foot office building in Scottsdale, Arizona. We purchased the land and building

15


during 2004.
Expansion Strategy and Site Selection
We have historically developed Bistro and Pei Wei restaurants utilizing an expansion strategy based on appropriate market penetration targeted at metropolitan areas throughout the United States. Within each targeted metropolitan area, we identify specific areas with high traffic patterns and suitable demographic characteristics, including population density, consumer attitudes and household income. Within an appropriate area, we evaluate specific sites that provide visibility, accessibility and exposure to traffic volume. Our site criteria are flexible, as is evidenced by the variety of environments and facilities in which we currently operate. These facilities include freestanding buildings, regional malls, urban properties and strip centers. During fiscal 2012, we plan to open two to three new Bistro restaurants and twelve to sixteen new Pei Wei restaurants.

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. Generally, our leases provide for minimum annual rent, and most leases require additional rent based on a percentage of sales volume in excess of minimum contractual levels at the particular location. Most of our leases require us to pay the costs of insurance, property taxes, and a portion of the lessor’s operating costs. We will evaluate restaurants toward the end of their initial lease term to assess whether we will renew the lease, move the existing restaurant to a new location or close the restaurant. We do not anticipate any difficulties renewing existing leases as they expire. Current restaurant leases have expiration dates ranging from 2012 to 2027, with the majority of the leases providing for at least one five-year renewal option. There are twenty leases scheduled to expire in fiscal 2012 of which ten have been renewed as of January 1, 2012.

Item 3.
Legal Proceedings
We are subject to various claims and legal actions arising out of the normal conduct of business, including commercial and employment matters. Some are expected to be covered, at least partly, by insurance. We intend to continue to defend ourselves vigorously in such matters. We assess contingencies to determine the degree of probability and range of possible loss for potential accruals in our financial statements. We accrue an estimated loss contingency in our financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. When evaluating loss contingencies, if we are unable to provide a meaningful estimate of the possible loss or range of possible loss it is because, among other reasons, (i) the proceedings are in various stages; (ii) damages have not been sought; (iii) damages are unsupported and/or exaggerated; (iv) there is uncertainty as to the outcome of pending appeals or motions; and/or (v) there are significant factual issues to be resolved.

Because litigation is inherently unpredictable and unfavorable resolutions can occur, assessing contingencies is highly subjective and requires judgments about future events. As a result, the amount of ultimate loss may differ from our estimates. In addition, although it is possible that our results of operations, liquidity or financial position could be materially affected in any particular future reporting period by the unfavorable resolution of one or more of these contingencies, we currently believe that the ultimate outcome of these matters will not have a material adverse effect on our results of operations, liquidity or financial position.

PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the NASDAQ Global Select Market under the symbol PFCB.
The following table sets forth the range of prices and cash dividends declared per share of our common stock for each quarterly period for our two most recent fiscal years:

16


Quarter Ended
High
 
Low
 
Cash Dividends Declared
April 4, 2010
$
45.30

 
$
35.50

 
$
0.170

July 4, 2010
$
48.43

 
$
38.51

 
$
0.250

October 3, 2010
$
48.37

 
$
37.36

 
$
0.210

January 2, 2011
$
53.39

 
$
44.55

 
$
0.290

April 3, 2011
$
51.74

 
$
43.76

 
$
0.210

July 3, 2011
$
47.98

 
$
37.38

 
$
0.250

October 2, 2011
$
42.36

 
$
26.96

 
$
0.250

January 1, 2012
$
32.58

 
$
26.10

 
$
0.275

The Company has paid quarterly cash dividends since the first quarter of fiscal 2010. Prior to the second quarter of fiscal 2011, cash dividends were variable and calculated based on 45% of the Company's quarterly net income. Beginning with the second quarter of fiscal 2011, the Board of Directors approved a quarterly cash dividend, which is currently set at $0.275 per share. Cash dividends are paid quarterly in arrears.
On February 13, 2012, there were 121 holders of record of P.F. Chang’s common stock. This does not include persons whose stock is in nominee or "street name" accounts through brokers. On February 13, 2012, the closing sale price of our common stock was $34.81 per share.
Issuer Purchases of Equity Securities
Our Board of Directors has authorized programs to repurchase our outstanding shares of common stock from time to time in the open market, pursuant to Rule 10b5-1 trading plans or in private transactions at prevailing market prices. Under previous share repurchase programs authorized by our Board of Directors, we have repurchased a total of 7.7 million shares of our common stock for $246.4 million at an average price of $32.07 since July 2006. Included in this total are 1.7 million shares of our common stock repurchased during fiscal 2011 for $59.3 million at an average price of $34.66.
On October 17, 2011, our Board of Directors authorized a new share repurchase program under which we may repurchase up to $100.0 million of our outstanding shares of common stock. On February 8, 2012, our Board of Directors increased the authorized amount of our share repurchase program from $100.0 million to $150.0 million. There were no shares repurchased during the fourth quarter of fiscal 2011.

Performance Graph

The following graph compares the cumulative five-year total return on the Company's common stock with the cumulative total returns of the NASDAQ Composite Index and the Russell 2000 Index, in each case assuming an initial investment of $100 and the reinvestment of dividends in the Company's stock and each of the indexes on December 31, 2006. Historical performance should not be considered indicative of future stockholder returns.


17



Item 6.
Selected Financial Data
The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-K.

18


 
Fiscal Year(1)
 
2011
 
2010
 
2009
 
2008
 
2007
 
(In thousands, except per share amounts)
Consolidated Statements of Income Data:
 

 
 

 
 

 
 

 
 

Total revenues
$
1,238,755

 
$
1,242,799

 
$
1,228,179

 
$
1,198,124

 
$
1,084,193

Costs and expenses:
 
 
 

 
 

 
 

 
 

Cost of sales
325,771

 
324,731

 
326,421

 
325,630

 
297,242

Labor
419,302

 
410,000

 
401,583

 
396,911

 
364,074

Operating
214,050

 
208,294

 
203,859

 
198,967

 
172,147

Occupancy
75,864

 
73,707

 
70,635

 
69,809

 
62,164

General and administrative(2)
70,088

 
81,883

 
82,749

 
77,488

 
66,968

Depreciation and amortization
80,355

 
77,486

 
74,429

 
68,711

 
55,988

Asset impairment charges(3)
10,486

 

 

 

 

Preopening expense
2,048

 
1,976

 
3,919

 
8,457

 
14,310

Partner investment expense
(236
)
 
(318
)
 
(629
)
 
(354
)
 
(2,012
)
Total costs and expenses
1,197,728

 
1,177,759

 
1,162,966

 
1,145,619

 
1,030,881

Income from operations
41,027

 
65,040

 
65,213

 
52,505

 
53,312

Interest and other income (expense), net
(288
)
 
(572
)
 
(1,637
)
 
(3,362
)
 
(100
)
Income from continuing operations before taxes
40,739

 
64,468

 
63,576

 
49,143

 
53,212

Provision for income taxes
(10,253
)
 
(17,122
)
 
(18,492
)
 
(12,193
)
 
(12,420
)
Income from continuing operations, net of tax
30,486

 
47,346

 
45,084

 
36,950

 
40,792

Income (loss) from discontinued operations, net of tax(4)(5)
(63
)
 
46

 
(479
)
 
(7,591
)
 
(4,560
)
Net income
30,423

 
47,392

 
44,605

 
29,359

 
36,232

Less net income attributable to noncontrolling interests
346

 
784

 
1,408

 
1,933

 
4,169

Net income attributable to PFCB
$
30,077

 
$
46,608

 
$
43,197

 
$
27,426

 
$
32,063

 
 
 
 
 
 
 
 
 
 
Income from continuing operations attributable to PFCB common stockholders per share:


 
 
 
 
 
 
 
 
Basic
$
1.38

 
$
2.05

 
$
1.90

 
$
1.47

 
$
1.44

Diluted
$
1.36

 
$
2.01

 
$
1.87

 
$
1.45

 
$
1.41

Weighted average shares used in computation:
 

 
 

 
 

 
 

 
 

Basic
21,831

 
22,689

 
22,986

 
23,776

 
25,473

Diluted
22,104

 
23,115

 
23,413

 
24,080

 
25,899

 
 
 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.99

 
$
0.92

 
$

 
$

 
$

Amounts attributable to PFCB:
 

 
 

 
 

 
 

 
 

Income from continuing operations, net of tax
$
30,140

 
$
46,562

 
$
43,676

 
$
35,017

 
$
36,623

Income (loss) from discontinued operations, net of tax
(63
)
 
46

 
(479
)
 
(7,591
)
 
(4,560
)
Net income attributable to PFCB
$
30,077

 
$
46,608

 
$
43,197

 
$
27,426

 
$
32,063


19


 
As of
January 1, 2012
 
As of
January 2, 2011
 
As of
January 3, 2010
 
As of
December 28, 2008
 
As of
December 30, 2007
 
(In thousands)
Consolidated Balance Sheet Data:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
50,011

 
$
71,452

 
$
63,499

 
$
40,951

 
$
24,055

Total assets
576,075

 
634,689

 
652,150

 
667,363

 
622,630

Long-term debt
1,177

 
1,195

 
1,212

 
82,496

 
90,828

Total PFCB common stockholders’ equity
311,530

 
359,494

 
335,349

 
320,826

 
293,887

____________________
(1)
We operate on a 52/53-week year, with the fiscal year ending on the Sunday closest to December 31. Fiscal years 2011, 2010, 2008 and 2007 each were comprised of 52 weeks. Fiscal year 2009 was comprised of 53 weeks.
(2)
General and administrative decreased during fiscal 2011 as a result of a $13.0 million decrease in share-based compensation expense.
(3)
Asset impairment charges during fiscal 2011 related to three Bistro restaurants that continue to operate and three Pei Wei restaurants that closed during the fourth quarter of fiscal 2011.
(4)
As a result of our decision to exit operations of Taneko, the results of Taneko (including a related asset impairment charge recognized during fiscal 2007) were classified as a discontinued operation for all periods presented.
(5)
As a result of our decision to close ten Pei Wei stores in fiscal 2008, the results of those ten Pei Wei stores (including related asset impairment, lease termination and severance charges recognized during fiscal 2011, 2010, 2009 and 2008) were classified as discontinued operations for all periods presented as discussed further in Note 3 to our consolidated financial statements.
We began paying cash dividends during fiscal 2010. No cash dividends were paid during fiscal 2009, 2008 and 2007.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview
The following section presents an overview of our restaurants, Global Brand Development and other ventures, as well as our growth strategy and challenges we face. A summary of our fiscal 2011 financial results and our fiscal 2012 outlook are also presented.
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”).
Bistro
As of January 1, 2012, we owned and operated 204 full service upscale Bistro restaurants that feature a blend of high quality, Chinese-inspired 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. Over the last few years, our new restaurant development has been more modest as we focus our efforts on improving existing restaurant performance as well as restaurant remodels and refurbishments. We own and operate all of our restaurants in the continental U.S. 
Pei Wei
As of January 1, 2012, we owned and operated 170 quick-casual Pei Wei restaurants that offer a menu of freshly prepared, wok-seared, contemporary pan-Asian cuisine in a relaxed, warm environment with friendly attentive counter service as well as the flexibility, speed and convenience of takeaway service. Pei Wei offers the same spirit of hospitality and commitment to providing fresh, high-quality Asian food at a great value that has made our Bistro restaurants successful. We opened our first Pei Wei restaurant in July 2000 in the Phoenix, Arizona area and have expanded the concept significantly since that time. Over the last few years,

20


our new restaurant development has been more modest as we focus our efforts on improving existing restaurant performance as well as restaurant remodels.
During fiscal 2011, we closed three underperforming Pei Wei restaurants that had negative cash flows and were not projected to provide acceptable returns in the foreseeable future. See Note 2 to our consolidated financial statements for further discussion.

Global Brand Development
International and Other Venues
We are selectively pursuing expansion of our brands into various international markets and other venues. Our license agreements typically provide for us to receive an initial territory fee, store opening fees and ongoing royalty revenues based on a percentage of restaurant sales ("restaurant licensing revenues").
Since fiscal 2009, we have signed development and licensing agreements with partners who will develop and operate up to 105 Bistro restaurants in international markets over the next five to ten years. As of January 1, 2012, fifteen Bistro restaurants were open in Mexico, the Middle East and Puerto Rico. There are also two Bistro restaurants located in Hawaii which are operated under a joint venture arrangement in which we own a nominal noncontrolling interest. During fiscal 2012, our partners collectively expect to open ten to fourteen new Bistro restaurants, one of which was opened as of February 16, 2012.
During fiscal 2011, we signed a development and licensing agreement with a partner who will develop and operate three Pei Wei restaurants in Mexico over the next eighteen months. The agreement also provides an option for a long-term contract with a commitment to open fifty additional Pei Wei restaurants over ten years. The first location opened in Mexico City in December of fiscal 2011.
During February 2012, the Company signed a development and licensing agreement with M.H. Alshaya, who is developing and operating Bistro restaurants in the Middle East, to develop three Pei Wei restaurants throughout the Middle East over the near term. The agreement provides an option for a 10 year contract with a commitment to open up to 55 additional Pei Wei restaurants. The first location is anticipated to open in Kuwait City during the second quarter of fiscal 2012. During fiscal 2012, our partners expect to open two to four new Pei Wei restaurants.

Additionally, during the fourth quarter of fiscal 2011, the first two Pei Wei airport locations opened in John Wayne Orange County Airport and Minneapolis - St. Paul Airport, through a licensing agreement with a partner. During fiscal 2012, our partners expect to open three to five new domestic Pei Wei airport restaurants.
We continue to engage in discussions with additional potential partners regarding expansion of our brands.

Retail

Since fiscal 2010, a premium line of eight P.F. Chang's brand frozen Asian-style meals has been available in numerous retail outlets throughout the U.S. through an exclusive licensing agreement with Unilever. We receive ongoing royalty revenues based on a percentage of product sales ("retail licensing revenues"), with such percentages escalating over the first three years of the agreement. During the third quarter of fiscal 2011, four additional frozen Asian-style noodle meals were introduced.

Other Ventures

During 2009, we entered into an agreement with FRC Balance LLC ("FRC"), d/b/a True Food Kitchen, to provide debt capital for the early-stage development of True Food Kitchen restaurants. The agreement provides a $10.0 million loan facility to develop True Food Kitchen restaurants that we can, under certain conditions, convert into a majority equity position in FRC. As of January 1, 2012, we had advanced $6.4 million under the loan facility to fund construction of three new restaurants which opened during fiscal 2011 and 2010. As of January 1, 2012, FRC opened four True Food Kitchen restaurants. FRC anticipates opening the fifth and sixth True Food restaurants during fiscal 2012. In February 2012, after receiving authorization from our Board of Directors, we and True Food's partners mutually agreed to an early exercise of our conversion option, which is expected to be completed during the first half of fiscal 2012.

Our Strategy

Our objectives are to be the best operator of Asian restaurants, continue to grow and develop our concepts, expand the presence of our brand in domestic and international markets, other venues and the retail sector and remain opportunistic regarding potential expansion opportunities in other concepts while providing superior returns to our shareholders. We offer high quality Asian cuisine

21


in a memorable atmosphere while delivering exceptional customer service and an excellent dining value. By developing and operating restaurants that offer guests their preferred dining experience from quick take-out to upscale dining occasions, we strive to create a loyal customer base that generates a high level of repeat business in our restaurants and translates to interest and trial of our retail products.
We are selective when choosing our new restaurant locations and assess anticipated returns on invested capital at both an individual restaurant and market level when determining future development plans. We seek an average unit-level return on invested capital of 30 percent. We plan to continue opening new restaurants for both our concepts to the extent we achieve our target rate of return. Although we are currently operating restaurants exclusively in the Asian niche, we would consider additional expansion opportunities in non-Asian concepts to the extent such ventures can meet or exceed our return thresholds.
Our Challenges
Our business is highly sensitive to changes in guest traffic. Increases in guest traffic typically drive higher sales, which improve the leverage of our fixed operating costs and thus enable us to achieve higher operating margins. As guest traffic decreases, lower sales result in decreased leverage that lead to deteriorations in our operating margins. In order to position our brands for success during economic downturns and recoveries, our operators concentrate on consistent execution of superior customer service while also focusing on additional opportunities for operating efficiencies.
The restaurant industry is significantly affected by changes in discretionary spending patterns, economic conditions, consumer tastes, lifestyle trends and cost fluctuations. In recent years, consumers have been under increased economic pressures and as a result, many have changed their discretionary spending patterns. Many consumers dine out less frequently than in the past or have reduced the amount they spend on meals while dining out. Accordingly, we strive to 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. We continuously update our menu offerings and employ marketing initiatives designed to improve our value-to-price proposition, increase brand awareness and help drive guest traffic. In more recent years, there has been an increase in the level of promotions and discounts offered by other restaurant companies, which has created increased competition for consumers' disposable income.
The restaurant business is intensely competitive with respect to food quality, price-value relationships, ambiance, service and location, and many existing restaurants compete with us at each of our locations. Additionally, the ongoing popularity of Asian cuisine may result in increased competition from new Asian-branded concepts as well as non-Asian restaurants and other food outlets that may expand their Asian-inspired menu offerings. We also face growing competition as retail outlets improve the quality and convenience of their meal offerings potentially resulting in fewer occasions for consumers to dine out.
Our 2011 Financial Results
During fiscal 2011, we experienced declines in guest traffic at both Bistro and Pei Wei restaurants, which were partially offset by the benefit of a two to three percent menu price increase. We also experienced higher costs at both Bistro and Pei Wei restaurants in labor, operating and costs of sales. Additionally, fiscal 2011 results included the following items:

Asset impairment charges of $10.5 million related to three Bistro restaurants that continue to operate and three Pei Wei restaurants that closed during the fourth quarter of fiscal 2011 ($0.35 per share);

The benefit of share-based compensation expense adjustments of $7.5 million resulting primarily from lower fair value of performance units and other cash-settled awards ($0.25 per share);

Lease termination costs of $1.3 million related to the three Pei Wei restaurants that closed during the fourth quarter of fiscal 2011 ($0.04 per share); and

Charges related to the departure of the Bistro's Chief Operating Officer and the streamlining of certain support functions ($0.03 per share).

Diluted income per share from continuing operations attributable to PFCB decreased 32.3% to $1.36 due to a decrease in income from continuing operations, net of tax, partially offset by the benefit of lower diluted shares outstanding, principally resulting from share repurchases.

During fiscal 2011, we opened three Bistro restaurants and five Pei Wei restaurants. Additionally, we closed three Pei Wei restaurants during the fourth quarter of fiscal 2011. Our international partners opened ten Bistro restaurants and one Pei Wei restaurant, all operated under development and licensing agreements, and two Pei Wei airport locations also opened, operated under licensing agreements. Also, four additional P.F. Chang's brand frozen Asian-style noodle meals were introduced in numerous

22


retail outlets, through an exclusive licensing agreement.

2012 New Store Development
Bistro
We intend to open two to three new Bistro restaurants during fiscal 2012. Our Bistro restaurants typically range in size from 6,000 to 7,500 square feet and require an average total invested capital of approximately $3.2 million to $3.7 million per restaurant (net of estimated tenant incentives). 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 Risk.” We expect that our planned future restaurants will require, on average, a total cash investment per restaurant of approximately $2.0 million to $2.5 million (net of estimated tenant incentives). Preopening expenses are expected to average approximately $350,000 to $400,000 per restaurant during fiscal 2012.
Pei Wei
We intend to open 12 to 16 new Pei Wei restaurants during fiscal 2012. Our Pei Wei restaurants typically range in size from 2,800 to 3,400 square feet and require an average total invested capital of approximately $1.5 million per restaurant (net of estimated tenant incentives). 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 Risk.” We expect that our planned future restaurants will require, on average, a total cash investment per restaurant of approximately $750,000 to $850,000 (net of estimated tenant incentives). Preopening expenses are expected to average approximately $140,000 to $160,000 per restaurant during fiscal 2012.
During fiscal 2012, we plan to introduce Pei Wei Asian Market, which is a new, alternate format of our Pei Wei concept. The quick casual Pei Wei Asian Market restaurants will offer fresh, high-quality Asian food in slightly smaller portion sizes with lower price points and will focus on take-away and speed of service. Pei Wei Asian Market restaurants will also have a flexible design plan with smaller square footage, which will provide greater real estate development opportunities.
Global Brand Development
During fiscal 2012, our partners collectively intend to open ten to fourteen new Bistro restaurants, two to four new Pei Wei restaurants in international markets, and three to five Pei Wei restaurants in domestic airport locations. These new restaurant openings will require no capital investment from us.
During February 2012, we signed a development and licensing agreement with M.H. Alshaya, who is developing and operating Bistro restaurants in the Middle East, to develop three Pei Wei restaurants throughout the Middle East over the near term. The agreement provides an option for a 10 year contract with a commitment to open up to 55 additional Pei Wei restaurants. The first location is anticipated to open in Kuwait City during the second quarter of fiscal 2012.

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, total revenues and comparable store sales and long-term profitability measures such as return on invested capital, each of which is described in further detail below. We believe it is helpful to review these measures both in total and by class year (i.e. year of restaurant opening).
Average weekly sales represent an average sales amount per restaurant and helps gauge the changes in traffic, pricing and brand development. It is not uncommon in the casual dining industry for new restaurant locations to open with an initial honeymoon period of higher than normal sales volumes and then experience a drop-off in sales after initial customer trials.
Total revenues by class year helps assess the sales performance of our new and existing restaurants as well as the growth of each concept as we continue our expansion strategy.
Year-over-year change comparable store sales include the change in year-over-year sales for restaurants that have been open eighteen months or more in order to remove the impact of new restaurant openings in comparing the operations of existing restaurants. Comparable same store sales change comes from guest traffic, the mix of menu items sold or menu price changes.
Return on invested capital is a key profitability measure that provides an indication of the long-term health of our concepts. This metric is based on a comparison of operating profit to the average capital invested in our restaurants. We believe

23


return on invested capital is a critical indicator in evaluating our ability to create long-term value for our shareholders.
The following table shows total revenues, average weekly sales and comparable store sales for our company-owned Bistro and company-owned Pei Wei restaurants based on the year of opening (revenues in thousands):
 
 
2011
 
2010
 
2009
Bistro
 
 
 
 

 
 

Revenues (1)
 
$
921,240

 
$
929,227

 
$
925,282

Average weekly sales
 
$
87,972

 
$
89,989

 
$
91,161

Year-over-year change comparable store sales
 
-2.1
 %
 
-0.1
 %
 
-6.7
 %
 
 
 
 
 
 
 
Pei Wei (2)
 
 
 
 
 
 
Revenues (1)
 
$
311,697

 
$
310,072

 
$
302,679

Average weekly sales
 
$
34,854

 
$
35,632

 
$
35,171

Year-over-year change comparable store sales
 
-2.1
 %
 
1.8
 %
 
0.1
 %
____________________
(1)
Fiscal 2011 and 2010 were each comprised of 52 weeks, and fiscal 2009 was comprised of 53 weeks.
(2)
The totals include revenues and average weekly sales for the three Pei Wei restaurants that closed during the fourth quarter of fiscal 2011.
Return on invested capital metrics are available under the Investors/ROIC section on our website at www.pfcb.com.
Critical Accounting Policies
Our significant accounting policies are disclosed in Note 1 to our consolidated financial statements. The following discussion addresses our most critical accounting policies, which are those that require significant judgment.
Impairment of Long-Lived Assets
We review property and equipment and intangible assets with finite lives (those assets which resulted from the acquisition of noncontrolling interests in the operating rights of certain of our restaurants prior to fiscal 2009) for impairment when events or circumstances indicate these assets might be impaired, but at least quarterly. An analysis is performed at the individual restaurant level and primarily includes an assessment of historical cash flows and other relevant facts and circumstances. Generally, for restaurants open greater than two years, negative restaurant-level cash flows over the previous twelve-month period are considered a potential impairment indicator. In these situations, we evaluate future restaurant cash flow projections in conjunction with qualitative factors and future operating plans. Based on this assessment, we either (a) continue to monitor these restaurants over the near-term for evidence of improved performance or (b) immediately recognize an impairment charge based on the amount by which the asset carrying value exceeds fair value, which is based on discounted estimated future cash flows.
In the past, the majority of the restaurants under monitoring have typically achieved cash flow improvements in a timely fashion such that no impairment charge was deemed necessary and the restaurant was removed from active monitoring. However, impairment charges were recognized during fiscal 2011 related to three Bistro restaurants, which continue to operate, and three Pei Wei restaurants, which closed during the fourth quarter of fiscal 2011. All of these locations were previously being monitored for impairment. We did not recognize any impairment charges during fiscal 2010 and fiscal 2009.
Our impairment assessment process requires the use of estimates and assumptions regarding future cash flows and operating outcomes, which are subject to a significant degree of judgment based on our experience and knowledge. These estimates can be significantly impacted by changes in the economic environment, real estate market conditions and overall operating performance. At any given time, we are typically actively monitoring a small number of restaurants and impairment charges could be triggered in the future if individual restaurant performance does not improve or if management decides to close that location. Also, if current economic conditions worsen, additional restaurants could be placed on active monitoring and potentially trigger impairment charges in future periods.
Share-Based Compensation
We account for share-based compensation based on fair value measurement guidance. We use the Black-Scholes option pricing model, which requires the input of subjective assumptions, for our options and cash-settled liability awards, with the exception

24


of performance units. These assumptions include estimating: 1) expected term, 2) common stock price volatility over the expected term and 3) the number of awards that will ultimately not vest (“forfeitures”). For performance units, fair value was calculated each reporting period prior to vesting using a Monte Carlo simulation model which incorporated the historical performance, volatility and correlation of our stock price and the Russell 2000 Index.
In February 2009, each of our Co-Chief Executive Officers was granted an award of 600,000 performance units, which vested on January 1, 2012. The cash value of the performance units was equal to the amount by which our final average stock price, as defined in the agreements, exceeded the strike price. The strike price was adjusted based on the percentage change in the Russell 2000 Index during the performance period, as defined in the agreements, which approximated three years. The performance units were granted in February 2009, and since the grant date, the Russell 2000 Index increased 57% while our stock appreciated 58%. Therefore, the final value was $0.29 per unit or $0.3 million.

Additionally, we use assumptions to estimate the expected forfeiture rate related to restricted stock and cash-settled liability awards in determining the share-based compensation expense for these awards. Changes in these assumptions can materially affect fair value and our estimates of share-based compensation expense. Consequently, the related amount recognized in the consolidated statements of income could vary significantly in future periods.

Income Taxes
We provide for income taxes based on our estimate of federal and state income tax liabilities in the U.S. and international 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 at which time we reconcile our original estimate to the final amounts included in the tax returns. Differences, if any, between our estimate and the final amounts can result in adjustments to income tax expense. Additionally, our income tax returns are subject to audit by federal, state, local and international governments, generally years after the returns are filed. The returns under audit could be subject to material adjustments based on differing interpretations of the tax laws.

We account for uncertain tax positions, which prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon settlement. 

On a quarterly basis, we review and update our inventory of tax positions as necessary to add any new uncertain positions taken, or to remove previously identified uncertain positions that have been adequately resolved. Additionally, uncertain positions may be re-measured as warranted by changes in facts or law. Accounting for uncertain tax positions requires significant judgments, including estimating the amount, timing and likelihood of ultimate settlement. Although we believe that these estimates are reasonable, actual results could differ from these estimates.

Deferred Rent

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 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.
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. Construction-related factors may affect the length of the rent holiday period. Extension of the rent holiday period due to delays in restaurant opening will result in greater preopening rent expense recognized during the rent holiday period and can result in lower occupancy expense during the rest of the lease term (post-opening).
For leases that contain rent escalations, we recognize rent expense on a straight-line basis over the lease term beginning upon our possession of the premises. Many of our leases contain provisions that require additional rental payments based upon restaurant sales volume (“contingent rent”). Contingent rent is recognized as rent expense in the period incurred. This results in variability in occupancy expense over the term of the lease in restaurants where we pay contingent rent.

25


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 escalations in payments that are taken into consideration when calculating straight-line rent and the term over which tenant incentives received from landlords in connection with certain operating leases for each restaurant are amortized. From time to time, based on current facts, circumstances and expectations of future results, we may make changes in our assumptions of the likelihood of renewal at the end of the lease term. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different assumed lease terms were used.
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 or claims administrator 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, including known claims and an actuarially determined estimate of incurred but not yet reported claims. We develop these estimates using historical experience factors to estimate the ultimate claim exposure. Our self-insurance liabilities are actuarially determined and consider estimates of expected losses, based on statistical analyses of our actual historical trends as well as historical industry data. If actual claims experience differs from our assumptions and estimates, changes in our insurance reserves would impact the expense recorded in our consolidated income statements.

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 2011 and 2010 were each comprised of 52 weeks and fiscal year 2009 was comprised of 53 weeks.
The discussion of changes in operating results includes quantification, where meaningful, of the factors that contribute to the change based on a percentage of revenues and/or absolute dollars. The sum of the changes quantified in the explanations may not total the changes displayed in the tables below as there are less significant changes in the income statement line items that are not the main contributors to the change.
Fiscal 2011 compared to Fiscal 2010
Our consolidated operating results for the fiscal years ended January 1, 2012 (fiscal 2011) and January 2, 2011 (fiscal 2010) were as follows (dollars in thousands):

26


 
Fiscal Year
 
2011
 
% of Revenues
 
2010
 
% of Revenues
 
Change
 
% Change
Revenues
 
 
 
 
 
 
 
 
 
 
 
Restaurant sales
$
1,233,076

 
 
 
$
1,239,503

 
 
 
$
(6,427
)
 
(0.5
)%
Restaurant licensing
3,065

 
 
 
2,105

 
 
 
960

 
45.6
 %
Retail licensing
2,614

 
 
 
1,191

 
 
 
1,423

 

Total revenues
1,238,755

 
100.0
 %
 
1,242,799

 
100.0
 %
 
(4,044
)
 
(0.3
)%
Costs and expenses:
 

 
 

 
 

 
 

 
 

 
 

Cost of sales
325,771

 
26.3
 %
 
324,731

 
26.1
 %
 
1,040

 
0.3
 %
Labor
419,302

 
33.8
 %
 
410,000

 
33.0
 %
 
9,302

 
2.3
 %
Operating
214,050

 
17.3
 %
 
208,294

 
16.8
 %
 
5,756

 
2.8
 %
Occupancy
75,864

 
6.1
 %
 
73,707

 
5.9
 %
 
2,157

 
2.9
 %
General and administrative
70,088

 
5.7
 %
 
81,883

 
6.6
 %
 
(11,795
)
 
(14.4
)%
Depreciation and amortization
80,355

 
6.5
 %
 
77,486

 
6.2
 %
 
2,869

 
3.7
 %
Asset impairment charges
10,486

 
0.8
 %
 

 
0.0
 %
 
10,486

 

Preopening expense
2,048

 
0.2
 %
 
1,976

 
0.2
 %
 
72

 
3.6
 %
Partner investment expense
(236
)
 
0.0
 %
 
(318
)
 
0.0
 %
 
82

 
(25.8
)%
Total costs and expenses
1,197,728

 
96.7
 %
 
1,177,759

 
94.8
 %
 
19,969

 
1.7
 %
Income from operations
41,027

 
3.3
 %
 
65,040

 
5.2
 %
 
(24,013
)
 
(36.9
)%
Interest and other income (expense), net
(288
)
 
0.0
 %
 
(572
)
 
0.0
 %
 
284

 
(49.7
)%
Income from continuing operations before taxes
40,739

 
3.3
 %
 
64,468

 
5.2
 %
 
(23,729
)
 
(36.8
)%
Provision for income taxes
(10,253
)
 
(0.8
)%
 
(17,122
)
 
(1.4
)%
 
6,869

 
(40.1
)%
Income from continuing operations, net of tax
30,486

 
2.5
 %
 
47,346

 
3.8
 %
 
(16,860
)
 
(35.6
)%
Income (loss) from discontinued operations, net of tax
(63
)
 
0.0
 %
 
46

 
0.0
 %
 
(109
)
 

Net income
30,423

 
2.5
 %
 
47,392

 
3.8
 %
 
(16,969
)
 
(35.8
)%
Less net income attributable to noncontrolling interests
346

 
0.0
 %
 
784

 
0.1
 %
 
(438
)
 
(55.9
)%
Net income attributable to PFCB
$
30,077

 
2.4
 %
 
$
46,608

 
3.8
 %
 
$
(16,531
)
 
(35.5
)%
Certain percentage amounts may not sum due to rounding. Percentages over 100% are not displayed.
Selected operating statistics for the Bistro were as follows (dollars in thousands):

27


 
Fiscal Year
 
2011
 
% of Revenues
 
2010
 
% of Revenues
 
Change
 
% Change
Total revenues
$
921,379

 
100.0
%
 
$
929,372

 
100.0
%
 
$
(7,993
)
 
(0.9
)%
Costs and expenses:
 
 
 

 
 
 
 

 
 

 
 

Cost of sales
241,429

 
26.2
%
 
241,768

 
26.0
%
 
(339
)
 
(0.1
)%
Labor
313,627

 
34.0
%
 
308,161

 
33.2
%
 
5,466

 
1.8
 %
Operating
156,194

 
17.0
%
 
153,087

 
16.5
%
 
3,107

 
2.0
 %
Occupancy
52,756

 
5.7
%
 
52,504

 
5.6
%
 
252

 
0.5
 %
Depreciation and amortization
58,378

 
6.3
%
 
56,434

 
6.1
%
 
1,944

 
3.4
 %
Asset impairment charges
8,559

 
0.9
%
 

 

 
8,559

 

Preopening expense
1,351

 
0.1
%
 
1,467

 
0.2
%
 
(116
)
 
(7.9
)%
Partner investment expense

 

 

 

 

 

Net income attributable to noncontrolling interests
186

 

 
296

 

 
(110
)
 
(37.2
)%
Selected operating statistics for Pei Wei were as follows (dollars in thousands):
 
Fiscal Year
 
2011
 
% of Revenues
 
2010
 
% of Revenues
 
Change
 
% Change
Total revenues
$
311,697

 
100.0
 %
 
$
310,131

 
100.0
 %
 
$
1,566

 
0.5
 %
Costs and expenses:
 
 
 

 
 
 
 

 
 

 
 

Cost of sales
84,342

 
27.1
 %
 
82,963

 
26.8
 %
 
1,379

 
1.7
 %
Labor
105,675

 
33.9
 %
 
101,839

 
32.8
 %
 
3,836

 
3.8
 %
Operating
57,856

 
18.6
 %
 
55,207

 
17.8
 %
 
2,649

 
4.8
 %
Occupancy
23,108

 
7.4
 %
 
21,203

 
6.8
 %
 
1,905

 
9.0
 %
Depreciation and amortization
19,378

 
6.2
 %
 
18,942

 
6.1
 %
 
436

 
2.3
 %
Asset impairment charges
1,927

 
0.6
 %
 

 

 
1,927

 

Preopening expense
697

 
0.2
 %
 
509

 
0.2
 %
 
188

 
36.9
 %
Partner investment expense
(236
)
 
(0.1
)%
 
(318
)
 
(0.1
)%
 
82

 
(25.8
)%
Net income attributable to noncontrolling interests
160

 
0.1
 %
 
488

 
0.2
 %
 
(328
)
 
(67.2
)%
Revenues
Restaurant Sales
Our restaurant sales are derived primarily from food and beverage sales. Each segment contributed as follows:
Bistro:  The decrease in revenues was primarily attributable to a $16.8 million decline in revenues for stores that opened prior to fiscal 2010 including traffic declines partially offset by the benefit of a two to three percent menu price increase. The decline was partially offset by incremental new store revenues of $8.8 million, comprised of a full year of revenues from the four new stores that opened during fiscal 2010 and revenues generated by the three new stores that opened during fiscal 2011.
Pei Wei:  The increase in revenues was primarily attributable to incremental new store revenues of $8.0 million, comprised of revenues generated by the five new stores that opened during fiscal 2011 and a full year of revenues from the two new stores that opened during fiscal 2010. The increase was partially offset by a $6.4 million decline in revenues for stores that opened prior to fiscal 2010 primarily due to traffic declines partially offset by the benefit of a two to three percent menu price increase. The decrease also included approximately $1.1 million in lost sales resulting from temporary Arizona store closures during the first quarter of fiscal 2011.
Restaurant Licensing
Our restaurant licensing revenues are derived primarily from initial territory fees, store opening fees, and ongoing royalty fees

28


based on a percentage of restaurant sales from restaurants operated under development and licensing agreements and joint venture agreements.

The increase in restaurant licensing revenues was primarily attributable to a $1.5 million increase in royalty fees in fiscal 2011 partially offset by $0.7 million of initial territory fees recognized during fiscal 2010.

Retail Licensing
Our retail licensing revenues are derived from ongoing royalty fees based on a percentage of licensed retail product sales, with such percentage escalating over the first three years of the agreement.

The increase in retail licensing revenues was primarily attributable to an escalation in the royalty percentage in the second quarter of fiscal 2011 as well as a full year of retail product sales in fiscal 2011.

Costs and Expenses

Cost of Sales

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 increased primarily due to the net impact of unfavorable commodity pricing (+0.4%) primarily related to seafood, beef and Asian imports partially offset by lower poultry costs. The increase was partially offset by net favorable product mix shifts and operational efficiencies (-0.2%).

Pei Wei: Cost of sales as a percentage of revenues increased primarily due to the net unfavorable impact of product mix shifts and yield fluctuations (+0.2%) as well as unfavorable commodity pricing (+0.2%) primarily related to Asian imports, beef and seafood partially offset by lower poultry costs.

Labor
Labor expenses consist of restaurant management salaries, hourly staff payroll costs, health insurance and other payroll-related items and workers' compensation costs. Each segment contributed as follows:
Bistro: Labor expenses increased primarily due to $4.4 million of labor expenses at new restaurants that opened during fiscal 2011 and fiscal 2010, $3.2 million increase in culinary and hospitality labor costs primarily resulting from increased focus on guest service and average wage rate pressure, $1.8 million of higher health and workers' compensation insurance expense and $1.0 million of higher management salaries. These increases were partially offset by a $5.5 million decrease in incentive accruals.

As a percentage of revenues, labor expenses increased primarily due to higher culinary and hospitality labor costs primarily resulting from increased focus on guest service and average wage rate pressure (+0.8%), higher management salaries and decreased leverage on lower average weekly sales on the portion of labor expenses that is fixed in nature (+0.3%) and higher health and workers' compensation insurance expense (+0.2%). These increases were partially offset by lower incentive accruals (-0.5%).

Pei Wei: Labor expenses increased primarily due to $3.2 million of labor expenses at new restaurants that opened during fiscal 2011 and fiscal 2010, a $0.7 million increase in culinary and hospitality labor costs, $0.3 million of higher management salaries and $0.3 million of higher workers' compensation insurance expense. These increases were partially offset by a $0.9 million decrease in management incentive accruals.

As a percentage of revenues, labor expenses increased primarily due to operational inefficiencies in culinary and hospitality positions and at new restaurants (+0.9%) as well as higher management salaries and the impact of decreased leverage on lower average weekly sales on the portion of labor expenses that is fixed in nature (+0.3%) partially offset by lower management incentive accruals (-0.2%).
Operating
Operating expenses consist primarily of various restaurant-level costs such as repairs and maintenance, utilities and marketing, certain of which are variable and may fluctuate with revenues. Also, expenditures associated with marketing programs are discretionary in nature and the timing and amount of marketing spend will vary. Each segment contributed as follows:
Bistro: Operating expenses increased primarily due to $2.4 million of operating expenses at new restaurants that opened during

29


fiscal 2011 and fiscal 2010 and $2.2 million of higher repairs and maintenance costs partially offset by a $1.6 million decline in marketing spend.

As a percentage of revenues, operating expenses increased primarily due to higher repairs and maintenance costs (+0.3%), the impact of decreased leverage on lower average weekly sales (+0.1%) and higher restaurant supply costs (+0.1%) partially offset by lower marketing spend (-0.2%).
Pei Wei: Operating expenses increased primarily due to $1.3 million of operating expenses at new restaurants that opened during fiscal 2011 and fiscal 2010, $0.8 million of higher marketing spend and $0.6 million of higher repairs and maintenance costs.
As a percentage of revenues, operating expenses increased primarily due to higher marketing spend (+0.3%), higher repairs and maintenance costs (+0.2%) and the impact of decreased leverage on lower average weekly sales (+0.2%).

Occupancy

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

Bistro: Occupancy costs increased primarily due to $0.9 million of occupancy costs at new restaurants that opened during fiscal 2011 and fiscal 2010, a $0.4 million increase in general liability insurance costs and a $0.3 million increase in common area maintenance expense. These increases were partially offset by a $0.7 million decrease in contingent rent expense and a $0.7 million decrease in property tax expense.
As a percentage of revenues, occupancy costs increased primarily due to the impact of decreased leverage on lower average weekly sales (+0.1%).
Pei Wei: Occupancy costs increased primarily due to $1.3 million of estimated lease termination costs in connection with three restaurants that closed during the fourth quarter of fiscal 2011 as well as $0.7 million of occupancy costs at new restaurants that opened during fiscal 2011 and fiscal 2010.
As a percentage of revenues, occupancy costs increased primarily due to estimated lease termination costs in connection with three restaurants that closed during the fourth quarter of fiscal 2011 (+0.4%) and the impact of decreased leverage on lower average weekly sales (+0.2%).

General and Administrative
General and administrative expenses are comprised of costs associated with corporate and administrative functions that support restaurant development and operations and provide infrastructure to support future growth including, but not limited to, management and staff compensation, employee benefits, travel, legal and professional fees and technology. The Restoration Plan participants' realized and unrealized holding gains and losses related to liabilities associated with the Restoration Plan, a nonqualified deferred compensation plan, are included within general and administrative expense, with a corresponding offset for the Restoration Plan investments in interest and other income (expense), net.
Consolidated general and administrative costs decreased primarily due to a $13.0 million decline in share-based compensation expense principally resulting from a decrease in fair value of performance units and other cash-settled awards and a $4.9 million decrease in incentive accruals. These decreases were partially offset by a $2.5 million increase in management salaries, which includes $1.2 million of charges related to the departure of the Bistro's Chief Operating Officer and the streamlining of certain support functions during the second half of fiscal 2011, and a $2.1 million increase in health insurance costs.

Depreciation and Amortization

Depreciation and amortization expenses include the depreciation of fixed assets, gains and losses on disposal of assets and the amortization of intangible assets, software and non-transferable liquor license fees. Each segment contributed as follows:
Bistro: Depreciation and amortization expenses increased primarily due to $1.6 million related to adjustments to leasehold improvement asset lives during the fourth quarter of fiscal 2010 and $0.9 million of depreciation expense for new restaurants that opened during fiscal 2011 and fiscal 2010. These increases were partially offset by a $0.9 million decrease in depreciation due to furniture, fixtures, and equipment that became fully depreciated during fiscal 2011 and fiscal 2010.

As a percentage of revenues, depreciation and amortization expenses increased primarily due to adjustments to leasehold

30


improvement asset lives during the fourth quarter of fiscal 2010 (+0.2%) and the impact of decreased leverage on lower average weekly sales (+0.1%).

Pei Wei: Depreciation and amortization expenses increased primarily due to $0.6 million of depreciation expense for new restaurants that opened during fiscal 2011 and fiscal 2010.

As a percentage of revenues, depreciation and amortization expenses increased primarily due to the impact of decreased leverage on lower average weekly sales (+0.1%).

Asset Impairment Charges

Asset impairment charges include the amount by which the asset carrying value exceeds fair value, which is based on discounted cash flows, for restaurants that trigger impairment testing. See Critical Accounting Policies for further discussion. Each segment contributed as follows:

Bistro: Asset impairment charges of $8.6 million are related to the full write-off of the carrying value of long-lived assets at three restaurants that continue to operate.

Pei Wei: Asset impairment charges of $1.9 million are related to the full write-off of the carrying value of long-lived assets at three restaurants that closed during the fourth quarter of fiscal 2011.

Preopening Expense
Preopening expense, consisting primarily of manager salaries, 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 during the period between the date of possession and the restaurant opening date for our leased restaurant locations. Each segment contributed as follows:
Bistro:  Preopening expense decreased primarily due to the impact of opening three new restaurants during fiscal 2011 compared to four new restaurants during fiscal 2010 partially offset by the impact of costs related to re-opening one restaurant that was significantly remodeled during fiscal 2011.
Pei Wei:  Preopening expense increased primarily due to the impact of opening five new restaurants during fiscal 2011 compared to two new restaurants during fiscal 2010.
Partner Investment Expense
Partner investment expense consists primarily of a reversal of previously recognized expense for the difference between the fair value of the noncontrolling interest at inception date and the fair value at the date of repurchase, to the extent that the former is greater, for those partner interests that are bought out prior to the restaurant reaching maturity (typically after five years of operation). Partner investment expense also includes the difference between the imputed fair value of noncontrolling interests at the time our partners invested in our restaurants and our partners’ cash contributions for those ownership interests.
The change in consolidated partner investment expense is primarily due to the impact of fewer early buyouts during fiscal 2011 compared to fiscal 2010.
Interest and Other Income (Expense), Net
Interest expense primarily consists of interest costs in excess of amounts capitalized related to our outstanding credit line (to the extent balances are outstanding) and other borrowings, as well as accretion expense related to our conditional asset retirement obligations. Interest income earned primarily relates to advances under the loan facility to True Food Kitchen and interest-bearing overnight deposits. Realized and unrealized holding gains and losses related to investments in the Restoration Plan are included within other income (expense), with a corresponding offset for the Restoration Plan liabilities in general and administrative expense.
The change in consolidated interest and other income (expense), net was primarily due to $0.9 million of lower interest expense on lower average outstanding credit line borrowings during fiscal 2011 compared to fiscal 2010 as well as a $0.4 million increase in interest income partially offset by a $0.6 million net increase in unrealized holding losses associated with investments in the Restoration Plan.

Provision for Income Taxes


31


Our effective tax rate from continuing operations, including discrete items and deduction for noncontrolling interests, was 25.4% for fiscal 2011 compared to 26.9% for fiscal 2010. Our effective tax rate is impacted by recurring items, such as the FICA tip credit, as well as discrete items that may arise in any given year but are not consistent from year to year. The decrease in the effective tax rate in fiscal 2011 is primarily attributable to increased leverage from federal employment-related tax credits on lower income from continuing operations before taxes partially offset by the impact of the non-deductible portion of officers’ compensation. 

The income tax rate for both fiscal 2011 and fiscal 2010 differed from the expected provision for income taxes, which is derived by applying the statutory income tax rate, primarily as a result of FICA tip credits.

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

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests represents the portion of our net income which is attributable to the collective ownership interests of our noncontrolling partners. In certain of our restaurants, we historically employed a partnership management structure whereby we 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:  The change in net income attributable to noncontrolling interests was primarily due to lower restaurant net income and the full year impact of noncontrolling interest buyouts that occurred during fiscal 2010.

Pei Wei: The change in net income attributable to noncontrolling interests was primarily due to the impact of 96 noncontrolling interest buyouts occurring since the beginning of fiscal 2010.


Fiscal 2010 compared to Fiscal 2009
Our consolidated operating results for the fiscal years ended January 2, 2011 (fiscal 2010), comprised of 52 weeks, and January 3, 2010 (fiscal 2009), comprised of 53 weeks, were as follows (dollars in thousands):

32


 
Fiscal Year
 
2010
 
% of Revenues
 
2009
 
% of Revenues
 
Change
 
% Change
Revenues:
 
 


 
 
 


 


 


Restaurant sales
$
1,239,503

 
 
 
$
1,228,045

 
 
 
$
11,458

 
0.9
 %
Restaurant licensing
2,105

 
 
 
134

 
 
 
1,971

 

Retail licensing
1,191

 
 
 

 
 
 
1,191

 

Total revenues
1,242,799

 
100.0
 %
 
1,228,179

 
100.0
 %
 
14,620

 
1.2
 %
Costs and expenses:
 

 
 

 
 

 
 

 
 

 
 

Cost of sales
324,731

 
26.1
 %
 
326,421

 
26.6
 %
 
(1,690
)
 
(0.5
)%
Labor
410,000

 
33.0
 %
 
401,583

 
32.7
 %
 
8,417

 
2.1
 %
Operating
208,294

 
16.8
 %
 
203,859

 
16.6
 %
 
4,435

 
2.2
 %
Occupancy
73,707

 
5.9
 %
 
70,635

 
5.8
 %
 
3,072

 
4.3
 %
General and administrative
81,883

 
6.6
 %
 
82,749

 
6.7
 %
 
(866
)
 
(1.0
)%
Depreciation and amortization
77,486

 
6.2
 %
 
74,429

 
6.1
 %
 
3,057

 
4.1
 %
Preopening expense
1,976

 
0.2
 %
 
3,919

 
0.3
 %
 
(1,943
)
 
(49.6
)%
Partner investment expense
(318
)
 
0.0
 %
 
(629
)
 
(0.1
)%
 
311

 
(49.4
)%
Total costs and expenses
1,177,759

 
94.8
 %
 
1,162,966

 
94.7
 %
 
14,793

 
1.3
 %
Income from operations
65,040

 
5.2
 %
 
65,213

 
5.3
 %
 
(173
)
 
(0.3
)%
Interest and other income (expense), net
(572
)
 
0.0
 %
 
(1,637
)
 
(0.1
)%
 
1,065

 
(65.1
)%
Income from continuing operations before taxes
64,468

 
5.2
 %
 
63,576

 
5.2
 %
 
892

 
1.4
 %
Provision for income taxes
(17,122
)
 
(1.4
)%
 
(18,492
)
 
(1.5
)%
 
1,370

 
(7.4
)%
Income from continuing operations, net of tax
47,346

 
3.8
 %
 
45,084

 
3.7
 %
 
2,262

 
5.0
 %
Income (loss) from discontinued operations, net of tax
46

 
0.0
 %
 
(479
)
 
0.0
 %
 
525

 

Net income
47,392

 
3.8
 %
 
44,605

 
3.6
 %
 
2,787

 
6.2
 %
Less net income attributable to noncontrolling interests
784

 
0.1
 %
 
1,408

 
0.1
 %
 
(624
)
 
(44.3
)%
Net income attributable to PFCB
$
46,608

 
3.8
 %
 
$
43,197

 
3.5
 %
 
$
3,411

 
7.9
 %
Certain percentage amounts do not sum to total due to rounding. Percentages over 100% are not displayed.
Selected operating statistics for the Bistro were as follows (dollars in thousands):
 
Fiscal Year
 
2010
 
% of Revenues
 
2009
 
% of Revenues
 
Change
 
% Change
Total revenues
$
929,372

 
100.0
%
 
$
925,321

 
100.0
 %
 
$
4,051

 
0.4
 %
Costs and expenses:
 

 
 

 
 

 
 

 
 

 
 

Cost of sales
241,768

 
26.0
%
 
244,816

 
26.5
 %
 
(3,048
)
 
(1.2
)%
Labor
308,161

 
33.2
%
 
300,775

 
32.5
 %
 
7,386

 
2.5
 %
Operating
153,087

 
16.5
%
 
150,883

 
16.3
 %
 
2,204

 
1.5
 %
Occupancy
52,504

 
5.6
%
 
50,186

 
5.4
 %
 
2,318

 
4.6
 %
Depreciation and amortization
56,434

 
6.1
%
 
54,521

 
5.9
 %
 
1,913

 
3.5
 %
Preopening expense
1,467

 
0.2
%
 
2,835

 
0.3
 %
 
(1,368
)
 
(48.3
)%
Partner investment expense

 

 
(236
)
 
0.0
 %
 
236

 
(100.0
)%
Net income attributable to noncontrolling interests
296

 
0.0
%
 
538

 
0.1
 %
 
(242
)
 
(45.0
)%
Selected operating statistics for Pei Wei were as follows (dollars in thousands):

33


 
Fiscal Year
 
2010
 
% of Revenues
 
2009
 
% of Revenues
 
Change
 
% Change
Total revenues
$
310,131

 
100.0
 %
 
$
302,724

 
100.0
 %
 
$
7,407

 
2.4
 %
Costs and expenses:
 

 
 

 
 

 
 

 
 

 
 
Cost of sales
82,963

 
26.8
 %
 
81,605

 
27.0
 %
 
1,358

 
1.7
 %
Labor
101,839

 
32.8
 %
 
100,808

 
33.3
 %
 
1,031

 
1.0
 %
Operating
55,207

 
17.8
 %
 
52,976

 
17.5
 %
 
2,231

 
4.2
 %
Occupancy
21,203

 
6.8
 %
 
20,449

 
6.8
 %
 
754

 
3.7
 %
Depreciation and amortization
18,942

 
6.1
 %
 
18,103

 
6.0
 %
 
839

 
4.6
 %
Preopening expense
509

 
0.2
 %
 
1,084

 
0.4
 %
 
(575
)
 
(53.0
)%
Partner investment expense
(318
)
 
(0.1
)%
 
(393
)
 
(0.1
)%
 
75

 
(19.1
)%
Net income attributable to noncontrolling interests
488

 
0.2
 %
 
870

 
0.3
 %
 
(382
)
 
(43.9
)%
Revenues
Each segment contributed as follows:
Bistro:  The increase in revenues was primarily attributable to incremental new store revenues of $29.0 million, comprised of a full year of revenues from the eight new stores that opened during fiscal 2009 and revenues generated by the four new restaurants which opened during fiscal 2010. The increase was partially offset by a $25.1 million decrease in revenues for stores that opened prior to fiscal 2009 including the impact of one fewer operating week during fiscal 2010 compared to fiscal 2009. The decrease was also due to a decline in the average ticket of 1.4%, which includes the benefit of a menu price increase, partially offset by an increase in overall guest traffic of 1.3%.
Pei Wei:  The increase in revenues was primarily attributable to incremental new restaurant revenues of $8.2 million, comprised of a full year of revenues from the seven new restaurants that opened during fiscal 2009 and revenues generated by the two new restaurants which opened during fiscal 2010. The increase was partially offset by the decrease in revenues generated by restaurants open prior to fiscal 2009.  Due to the impact of one fewer operating week during fiscal 2010 compared to fiscal 2009, revenue at these locations decreased $0.8 million partially offset by an increase in the average ticket of 1.8%, which includes the benefit of a menu price increase, combined with a slight increase in overall guest traffic of 0.1%.
Costs and Expenses
Cost of Sales
Each segment contributed as follows:
Bistro: Cost of sales as a percentage of revenues decreased primarily due to the benefit of favorable commodity pricing, primarily resulting from beef and wok oil (-0.4%).

Pei Wei: Cost of sales as a percentage of revenues decreased primarily due to the benefit of favorable commodity pricing, primarily resulting from beef and wok oil (-0.6%) partially offset by the net impact of product mix shifts and yield fluctuations (+0.4%).

Labor

Each segment contributed as follows:
Bistro: Labor expenses increased primarily due to $9.5 million of additional labor costs at our restaurants that opened during fiscal 2010 and fiscal 2009 and a $2.7 million increase in incentive accruals. These increases were partially offset by a $3.4 million decrease in culinary labor costs resulting from scheduling efficiencies partially offset by higher average hourly wage rates, a $0.6 million decrease in management salaries, and a $0.4 million decrease in workers' compensation expense resulting from lower than anticipated claim development.
As a percentage of revenues, labor expenses increased primarily due to an increase in incentive accruals (+0.3%), higher average hourly wage rates (+0.2%), and higher payroll taxes (+0.1%).

34


Pei Wei: Labor expenses increased primarily due to $2.6 million of additional labor expenses at our restaurants that opened during fiscal 2010 and fiscal 2009 partially offset by a $1.2 million decrease in manager salaries and a $0.2 million decrease in management incentive accruals.
As a percentage of revenues, labor expenses decreased primarily due to lower manager salaries (-0.3%), the benefit of improved leverage from higher average weekly sales (-0.1%), and lower management incentive accruals (-0.1%).
Operating
Each segment contributed as follows:

Bistro: Operating expenses increased primarily due to $5.1 million of additional operating expenses at our restaurants that opened during fiscal 2010 and fiscal 2009 and $0.6 million in higher marketing spend partially offset by a $1.5 million reduction in restaurant supply and printing costs, a $1.3 million decrease in repairs, maintenance and equipment costs and $0.8 million lower utilities costs.
Operating expenses as a percentage of revenues increased primarily due to the impact of decreased leverage resulting from one fewer operating week during fiscal 2010 (+0.1%) as well as higher marketing spend (+0.1%) partially offset by favorable restaurant supply costs (-0.1%).
Pei Wei: Operating expenses increased primarily due to $1.5 million of additional operating expenses at our restaurants that opened during fiscal 2010 and fiscal 2009 and $1.0 million higher marketing spend partially offset by a $0.3 million reduction in restaurant supply costs.
Operating expenses as a percentage of revenues increased primarily due to higher marketing spend (+0.3%) and the impact of decreased leverage resulting from one fewer operating week during fiscal 2010 (+0.1%) partially offset by lower restaurant supply costs (-0.1%) and the benefit of improved leverage from higher average weekly sales (-0.1%).
Occupancy
Each segment contributed as follows:
Bistro: Occupancy costs increased primarily due to $1.8 million of additional occupancy costs at our restaurants that opened during fiscal 2010 and fiscal 2009 and a $0.7 million increase in property tax expense.

Occupancy costs as a percentage of revenues increased due to the impact of decreased leverage resulting from one fewer operating week during fiscal 2010 (+0.1%), higher property tax expense in the current fiscal year (+0.1%), and the impact of decreased leverage on lower average weekly sales (+0.1%).
Pei Wei:  Occupancy costs increased primarily due to $0.7 million of additional occupancy costs at our restaurants that opened during fiscal 2010 and fiscal 2009 and a $0.1 million increase in property tax expense.
Occupancy costs as a percentage of revenues were consistent compared to the prior fiscal year primarily due to the impact of decreased leverage resulting from one fewer operating week during fiscal 2010 (+0.1%) and higher property tax expense (+0.1%), offset primarily by the benefit of improved leverage from higher average weekly sales (-0.1%).
General and Administrative

Consolidated general and administrative costs decreased primarily due to lower management salaries of $1.2 million due to decreased headcount and lower legal costs of $0.6 million, partially offset by higher share-based compensation expense of $0.6 million principally resulting from an increase in fair value of the performance units and other cash-settled awards.

Depreciation and Amortization

Each segment contributed as follows:
Bistro: Depreciation and amortization increased primarily due to an increase of $1.9 million related to new restaurants that opened during fiscal 2010 and fiscal 2009, an increase of $0.6 million due to leasehold improvement additions, and an increase of $0.5 million due to leasehold improvement asset life adjustments during the fourth quarter of fiscal 2010. These increases were partially offset by a $0.9 million reduction due to plateware assets rolled out system-wide that were fully depreciated during fiscal 2010 and fiscal 2009.

35


Depreciation and amortization as a percentage of revenues increased primarily due to the impact of decreased leverage resulting from one fewer operating week during fiscal 2010 (+0.1%) and the impact of decreased leverage on lower average weekly sales (+0.1%). These increases were partially offset by plateware assets rolled out system-wide that were fully depreciated during fiscal 2010 and fiscal 2009 (-0.1%).
Pei Wei: Depreciation and amortization increased primarily due to an increase of $0.6 million related to new restaurants that opened during fiscal 2010 and fiscal 2009 and an increase of $0.5 million due to the addition of digital menu boards. These increases were partially offset by a $0.5 million reduction in depreciation due to furniture, fixtures, and equipment and smallwares assets that were fully depreciated during fiscal 2010 and fiscal 2009.

As a percentage of revenues, depreciation and amortization increased primarily due to the addition of digital menu boards (+0.2%) and the impact of decreased leverage resulting from one fewer operating week during fiscal 2010 (+0.1%). These increases were partially offset by a reduction in depreciation due to furniture, fixtures, and equipment and smallwares assets that were fully depreciated during fiscal 2010 and fiscal 2009 (-0.2%) and the benefit of improved leverage from higher average weekly sales (-0.1%).

Preopening Expense
Each segment contributed as follows:
Bistro:  Preopening expense decreased primarily due to the impact of opening four new restaurants during fiscal 2010 compared to eight new restaurants during fiscal 2009.
Pei Wei:  Preopening expense decreased primarily due to the impact of opening two new restaurants in fiscal 2010 compared to seven new restaurants in fiscal 2009.
Partner Investment Expense
Each segment contributed as follows:
Bistro:  The increase in partner investment expense resulted from fewer early buyouts of noncontrolling interests during fiscal 2010 compared to fiscal 2009.

Pei Wei:  Partner investment expense increased primarily due to the impact of fewer early buyouts during fiscal 2010 compared to fiscal 2009. The increase is partially offset by the change in the partnership program beginning the second quarter of fiscal 2010. As a result, partner investment expense is no longer recognized at the time a new restaurant opens.
Interest and Other Income (Expense), Net
The change in consolidated interest and other income (expense), net was primarily due to $1.2 million lower interest expense resulting from the repayment of the entire $40.0 million in outstanding credit line borrowings during the second quarter of 2010, partially offset by a $0.2 million decrease in unrealized holding gains associated with investments in the Restoration Plan.
Provision for Income Taxes
Our effective tax rate from continuing operations, including discrete items and deduction for noncontrolling interests, was 26.9% for fiscal 2010 compared to 29.7% for fiscal 2009. Our effective tax rate is impacted by recurring items, such as the FICA tip credit, as well as discrete items that may arise in any given year but are not consistent from year to year. The decrease in the effective tax rate in fiscal 2010 is primarily due to the following net discrete tax benefits: (1) decrease in state tax expense related to the reconciliation of prior year tax provision to final tax returns; (2) favorable settlements of state income tax audits and (3) interest income related to federal amended returns filed in fiscal 2008.

The income tax rate for both fiscal 2010 and fiscal 2009 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. In fiscal 2010, income from continuing operations increased at a greater rate than FICA tip credits generated as compared to fiscal 2009. Pei Wei and Global Brand Development employees are not tipped. As we do not earn FICA tip credits from the Pei Wei and Global Brand Development employees and as the proportion of net income contributed by Pei Wei and Global Brand Development grows, we expect our effective tax rate to increase. 

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

36


income to realize the benefit of our deferred tax assets.

Income (Loss) from Discontinued Operations, Net of Tax
The results of the ten Pei Wei restaurants that closed during the fourth quarter of fiscal 2008 are classified as discontinued operations for all periods presented. The change in income (loss) from discontinued operations, net of tax is primarily due to charges of $1.4 million recognized during fiscal 2009 related to estimated and actual lease termination costs.

Net Income Attributable to Noncontrolling Interests
Each segment contributed as follows:
Bistro:  The change in net income attributable to noncontrolling interests was primarily due to the full year impact of noncontrolling interest buyouts that occurred during fiscal 2009 and, to a lesser extent, the impact of fiscal 2010 noncontrolling interest buyouts. These buyouts reduced the number of noncontrolling interests from 40 at the beginning of fiscal 2009 to 14 as of January 2, 2011.
Pei Wei: The change in net income attributable to noncontrolling interests was primarily due to the impact of 130 noncontrolling interest buyouts occurring since the beginning of fiscal 2009 partially offset by the impact of higher restaurant net income.
Quarterly Results

The following table sets forth certain unaudited quarterly information for the eight fiscal quarters in the two-year period ended January 1, 2012, 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.

37


 
Fiscal 2011
 
Fiscal 2010
 
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
 
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
Revenues, in thousands
$
317,369

 
$
311,014

 
$
300,617

 
$
309,755

 
$
310,371

 
$
312,838

 
$
308,410

 
$
311,180

Costs and expenses:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Cost of sales
26.3
%
 
26.4
%
 
25.9
%
 
26.6
%
 
27.1
%
 
26.1
%
 
25.4
%
 
25.9
%
Labor
33.5

 
33.9

 
34.0

 
34.0

 
33.7

 
32.7

 
32.9

 
32.7

Operating
17.0

 
16.9

 
18.1

 
17.2

 
17.0

 
16.5

 
16.9

 
16.7

Occupancy
5.8

 
6.0

 
6.1

 
6.6

 
5.7

 
5.9

 
6.0

 
6.0

General and administrative
6.4

 
6.2

 
4.2

 
5.8

 
6.1

 
6.3

 
7.5

 
6.4

Depreciation and amortization
6.2

 
6.5

 
6.7

 
6.6

 
6.1

 
6.2

 
6.3

 
6.4

Asset impairment charges
0.0

 
0.2

 
1.6