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

 

 

Form 10-K

 

 

Commission File Number: 0-25123

 

P.F. Chang’s China Bistro, Inc.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:

(480) 888-3000

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

 

 

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

NONE

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark 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 o     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):

 

(Do not check if a smaller reporting company)

 

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

 

The aggregate market value of the registrant’s common stock held by non-affiliates as of the last day of the registrant’s second fiscal quarter ended, July 4, 2010, was $526,279,797.

 

As of February 11, 2011 there were outstanding 22,832,874 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 19, 2011 are incorporated by reference into Part III of this Report.

 

 

TABLE OF CONTENTS

 

 

 

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, we have extended our brand to international markets and retail products, with both businesses operating under licensing agreements.

 

As of January 2, 2011, we owned and operated 201 full service 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 2, 2011, we also owned and operated 168 quick casual Pei Wei restaurants that offer a menu of fresh, high-quality Asian cuisine and provide a comfortable, quick and casual dine-in experience 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 2, 2011, seven international Bistro restaurants were open in Mexico and the Middle East, all operating under development and licensing agreements. Additionally, there were two Bistro locations in Hawaii which were operating under a joint venture arrangement in which we own a noncontrolling interest. During the first half of fiscal 2010, under an exclusive licensing agreement with Unilever, a premium line of frozen Asian-style entrées, under the P.F. Chang’s brand, became available in numerous retail outlets throughout the U.S.

 

Concept and Strategy

 

Our objectives are to be the best operator of Asian restaurants and to expand the presence of our brand in domestic and international markets, other venues and the retail sector 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 a variety of dining experiences 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 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 the profitability of the restaurants for which they have responsibility. Additionally, through various development and licensing agreements, we have partnered with operators in international markets and in the retail sector to extend our brand. Using expertise in their respective markets, our international partners are developing, constructing, and operating our restaurants worldwide. Our premium line of frozen Asian-style entrées is available in numerous retail outlets throughout the United States to offer consumers additional opportunities to enjoy P.F. Chang’s brand entrées.

Menu

 

Bistro

 

The menu for our Bistro restaurants offers a harmony of taste, texture, color and aroma by balancing the Chinese principles of fan and t’sai, which mean “balance” and “moderation”. Fan foods include rice, noodles, grains and dumplings, while t’sai foods include vegetables, meat, poultry and seafood. To further encourage the Chinese principles of fan and t’sai, our menu is served family-style, the traditional Chinese way of dining. Our chefs are trained to produce distinctive Chinese cuisine using traditional recipes from the major culinary regions of China, updated with a contemporary twist. The intense heat of Mandarin-style wok cooking sears in the clarity and distinct flavor of fresh ingredients. Slow-roasted 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 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.

 

In early 2010, we added a new daily Happy Hour from 3 to 6 PM at participating locations. The Happy Hour menu features appetizers that are only available during happy hour and are not part of the main Bistro menu, including dim sum and street fare offerings, as well as specials on a variety of beer, wine, sake and signature cocktails. Our Happy Hour rewards guests by providing appealing, affordable cuisine and drinks at a great value on a daily basis.

 

During 2009, we introduced 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. 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 $6.50 to $22.50, 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 $20.00 to $21.00. Sales of alcoholic beverages, featuring an extensive selection of wine, Asian beer, sake and signature cocktails, have constituted approximately 13% to 15% 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.

 

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 are an excellent way for us to provide a new culinary experience to our guests. Some LTOs that have been offered over the past two years were Thai Mango Chicken, Japanese Chile Beef Ramen, and Caramel Chicken. 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 priced at $3.75. 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 40% of Pei Wei’s total revenues. Lunch and dinner contribute approximately 43% and 57% of revenues, respectively.

Operations

 

Bistro

 

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

 

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

 

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 and online reservations on its website at www.pfchangs.com.

 

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. Our general managers are responsible for the day-to-day operations of the restaurant, including the hiring, training and development of personnel, as well as operating results. The kitchen manager collaborates with the general manager on product quality, purchasing, food cost and kitchen labor costs.

 

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

 

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

 

We are selectively pursuing expansion of our brands into various international markets and other venues. During fiscal 2010 and 2009, we signed four development and licensing agreements with partners who will develop and operate Bistro restaurants in international markets. 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 international restaurant sales.

 

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

Retail

 

During 2009, we entered into an exclusive licensing agreement with Unilever to develop and launch a premium line of frozen Asian-style entrées in the U.S. under the P.F. Chang’s brand. We receive ongoing royalty revenues based on a percentage of product sales, with such percentages escalating over the first three years of the agreement. During the second quarter of 2010, the new product line became available in numerous retail outlets, at which time we began recognizing retail royalty revenues.

 

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. In addition, at the Bistro, we implemented a Warrior Card loyalty program which provides our cardholders with the latest news, information, and special offers. We expect to continue these efforts in fiscal 2011.

 

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. 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 and location, and many existing restaurants compete with us at each of our locations. Key competitive factors in the industry include the quality and value of the food, quality of service, price, dining experience, restaurant location and the ambiance of the facilities. For the Bistro, our primary competitors are upscale 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.

 

Employees

 

At January 2, 2011, we employed approximately 25,000 persons, approximately 300 of whom were home office and field support personnel, approximately 1,800 of whom were unit management personnel and the remainder of whom were hourly restaurant personnel. Our employees are not covered by a collective bargaining agreement. We consider our employee relations to be good.

 

Unit Economics

 

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

 

 

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 201 full service Bistro restaurants and 168 quick casual Pei Wei restaurants as of January 2, 2011, six of which opened within the last twelve months. The results achieved by these restaurants may not be indicative of longer term performance or the potential market acceptance of restaurants in other locations. There can be no assurance that any new restaurant that we open will have similar operating results to those of prior restaurants. Our new restaurants commonly take several months to reach planned operating levels due to inefficiencies typically associated with new restaurants, including the training of new personnel, lack of market

awareness, inability to hire sufficient staff and other factors. The failure of our existing or new restaurants to perform as expected could have a significant negative impact.

 

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

 

 

 

 

 

If market conditions deteriorate or if operating results decline unexpectedly, we may be required to record impairment charges, 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.

 

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 implemented 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.

 

We believe that we have selected high-caliber, experienced partners for our business expansion into international markets and retail product licensing. However, 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 entrées, our brand value could suffer which could have an adverse effect on our business.

 

Development is critical to our long-term success.

 

Critical to our long-term future success is our ability to successfully expand our operations. We have expanded from 7 restaurants at the end of 1996 to 369 restaurants as of January 2, 2011. We expect to open three to five new Bistro restaurants and six to eight new Pei Wei restaurants during fiscal 2011. 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:

 

 

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, and, if opened, these restaurants may not be operated profitably. We have experienced, and expect to continue to experience, delays in restaurant openings from time to time. Delays or failures in opening planned new restaurants could have an adverse effect on our business, financial condition, results of operations and cash flows.

 

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

 

Generally weak economic conditions may continue throughout fiscal 2011. As a result, our customers may continue to 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 out or the amount

they spend on meals while dining out, thereby decreasing our revenues and potentially 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, 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 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.

 

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

 

The restaurant industry is intensely competitive with respect to food quality, price-value relationships, ambiance, service and location, and many restaurants compete with us at each of our locations. Our Bistro competitors are primarily upscale 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.

 

Our revenue is also impacted by our business expansion into international markets. The growth of our international business depends upon our ability to find and attract quality partners. In addition, 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.

 

Any inability to successfully compete with other restaurants in domestic or international markets may prevent us from increasing or sustaining our revenues and/or profitability and could have a material adverse effect on our business, financial condition, results of operations or cash flows. We may also need to modify or refine elements of our restaurant system to evolve our concepts in order to compete with popular new restaurant formats or concepts that 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.

 

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

 

A substantial number of our restaurant personnel are hourly workers whose wage rates are affected by increases in the federal or state minimum wage 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, we may need to increase not only the wages of our minimum wage employees but also the wages paid to employees at wage rates that are above minimum wage. Future legislation that increases minimum wage rates may increase our labor costs and have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Additionally, potential changes in labor legislation, including all or parts of the Employee Free Choice Act (“EFCA”), could result in portions of our workforce being subjected to greater organized labor influence. The EFCA, also referred to as the “card check” bill, could impact the nature of labor relations in the United States,

specifically, how union elections and contract negotiations are conducted. The EFCA aims to make it easier for unions to form, and employers of unionized employees may face mandatory, binding arbitration of labor scheduling, costs and standards, which could increase the costs of doing business. As EFCA will most likely not be passed in its current form, another more immediate risk arises from the change in composition of the National Labor Relations Board (“NLRB”), which has the power to enact policy changes. Although we do not currently have any union employees, NLRB rulemaking and reversal of existing NLRB precedent, EFCA or similar labor legislation 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.

 

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, 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. 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 delete 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 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 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.

 

Various federal and state labor laws govern our operations and our relationship with our employees, including minimum wage, overtime, working conditions, fringe benefit and citizenship requirements. In particular, we are subject to the regulations of the Bureau of Citizenship and Immigration Services, or BCIS. The United States Congress has recently been considering changes to Federal immigration laws and various states, 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. Although we require all workers to provide us with the government-specified documentation evidencing their employment eligibility, some of our employees may, without our knowledge, be unauthorized workers. Unauthorized workers are subject to seizure and deportation and may subject us to fines, penalties or loss of our business license in certain jurisdictions. Any material disruption of our business, as a result of seizure of our workers, changes in immigration law, or significantly increased labor costs at our restaurants in the future, could have a material adverse effect on our business, financial condition and operating results.

 

Approximately 13 to 15% 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.

 

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.

 

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.

 

Robert Vivian, one of our co-chief executive officers, will retire at the end of fiscal 2011. While we are constantly focused on succession plans at all levels, when his employment terminates, the transition process may result in disruptions to our operations, which could have an adverse effect on our results of operations and business.

 

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, 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 2011. We are reviewing the health care reform law enacted by Congress in March of 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 legislation requirements for employers to provide specified levels of health insurance to all employees, could have a negative impact on our profitability if we are not able to offset the effect of such increases with plan modifications and cost control measures, or by continuing to improve our operating efficiencies.

 

The 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. Additionally, quarterly fluctuations in our results can impact the amount of quarterly cash dividend payments, which are based on a fixed percentage of net income.

 

We could be adversely impacted if our information technology and computer systems do not perform properly.

 

We rely on computer systems and information technology to conduct our business, most importantly point-of-sale processing in our restaurants. Our ability to efficiently manage our business depends significantly on the reliability and capacity of our systems. The failure of these systems to operate effectively could cause delays in customer service and reduce efficiency in our operations.

 

Special Note Regarding Forward-Looking Statements

 

Some of the statements in this Form 10-K and the documents we incorporate by reference constitute forward-looking statements. In some cases, forward-looking statements can be identified by terms such as “may”, “will”, “should”, “expect”, “plan”, “intend”, “forecast”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “continue” or the negative of these terms or other comparable terminology. The forward-looking statements contained in this document involve known and unknown risks, uncertainties and situations that may cause our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements may include the matters listed under Risk Factors and elsewhere in this Form 10-K, including, but not limited to, failure of our existing or new restaurants to achieve predicted results, damage to our brands or reputation, our ability to successfully expand our operations, changes in general economic and political conditions that affect consumer spending and intense competition in the restaurant industry. Because we cannot guarantee future results, levels of activity, performance or achievements, undue reliance should not be placed 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.

 

 

None.

 

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 2, 2011:

 

Additionally, there are seven international Bistro restaurants in Mexico and the Middle East as of the end of fiscal 2010, 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 noncontrolling interest.

 

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

 

Expansion Strategy and Site Selection

 

We have historically developed Bistro and Pei Wei restaurants in both new and existing markets utilizing an expansion strategy targeted at metropolitan areas throughout the United States. Within each targeted metropolitan area, we identify specific areas with high traffic patterns and suitable demographic characteristics, including population density, consumer attitudes and 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 2011, we plan to open three to five new Bistro restaurants and six to eight new Pei Wei restaurants. As of the date of this Form 10-K, we had opened one of the new Pei Wei restaurants and none of the new Bistro restaurants planned for fiscal 2011.

 

Bistro restaurants typically range in size from 6,000 to 7,500 square feet and require an average total invested capital of approximately $3.5 million to $4.0 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. We expect that our planned future restaurants will require, on average, a total cash investment per restaurant of approximately $2.5 million to $3.0 million (net of estimated tenant incentives). Preopening expenses are expected to average approximately $350,000 to $400,000 per Bistro restaurant during fiscal 2011.

 

Pei Wei restaurants are generally 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. 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 Pei Wei restaurant during fiscal 2011.

 

We currently lease the sites for all of our Bistro and Pei Wei restaurants and do not intend to purchase real estate for our sites in the future. Current restaurant leases have expiration dates ranging from 2011 to 2025, with the majority of the leases providing for at least one five-year renewal option. There are nine leases scheduled to expire in fiscal 2011 of which seven have been renewed as of January 2, 2011. We are currently negotiating with the landlords on lease renewal options for these two restaurant leases that are scheduled to expire in fiscal 2011. 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.

 

 

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

 

 

 

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:

 

 

Prior to fiscal 2010, we had not historically paid any cash dividends. In February 2010, the Board of Directors approved the initiation of a quarterly variable cash dividend based on our desire to consistently return excess cash flow to our shareholders. The amount of the cash dividend is calculated based on 45% of quarterly net income. Cash dividends are paid quarterly in arrears. Based on seasonal fluctuations in quarterly net income, the amount of cash dividend payments is expected to fluctuate between quarters.

 

On February 11, 2011, there were 116 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.

 

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 current and previous share repurchase programs authorized by our Board of Directors, we have repurchased a total of 6.0 million shares of our common stock for $187.1 million at an average price of $31.32 since July 2006. Included in this total are 0.9 million shares of our common stock repurchased during fiscal 2010 for $41.1 million at an average price of $45.22 using cash on hand. $0.3 million of the amount repurchased during fiscal 2010 relates to shares that were repurchased under the previous share repurchase program that expired December 31, 2009 but did not settle until after January 3, 2010.

 

At January 2, 2011, there remains $59.2 million available under our current share repurchase authorization of $100.0 million, which expires December 2011.

 

The following table sets forth our share repurchases of common stock during each period in the fourth quarter of fiscal 2010:

 

 

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.

 

 

 

 

 

We began paying cash dividends fiscal 2010. No cash dividends were paid during fiscal 2009, 2008, 2007 and 2006.

 

 

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 2010 financial results and our fiscal 2011 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 2, 2011, we owned and operated 201 full service 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. We own and operate all of our restaurants in the continental U.S.

 

Pei Wei

 

As of January 2, 2011, we owned and operated 168 quick casual Pei Wei restaurants that serve freshly prepared, wok-seared, contemporary pan-Asian cuisine in a relaxed, warm environment with friendly, attentive counter service and take-out flexibility. We opened our first Pei Wei restaurant in July 2000 in the Phoenix, Arizona area.

Global Brand Development

 

Under Global Brand Development we have extended our brand to international markets and retail products, with both businesses operating under licensing agreements.

 

International and Other Venues

 

We are selectively pursuing expansion of our brands into various international markets and other venues. During fiscal 2010 and 2009, we signed four development and licensing agreements with partners who will develop and operate Bistro restaurants in international markets. 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 international restaurant sales. As of January 2, 2011, seven Bistro restaurants were open in Mexico and the Middle East. We continue to engage in discussions with additional potential partners regarding expansion of our brands.

 

Additionally, there are two Bistro restaurants located in Hawaii which are operated under a joint venture arrangement in which we own a noncontrolling interest.

 

Retail

 

During 2009, we entered into an exclusive licensing agreement with Unilever to develop and launch a premium line of frozen Asian-style entrées in the U.S. under the P.F. Chang’s brand. We receive ongoing royalty revenues based on a percentage of product sales, with such percentages escalating over the first three years of the agreement. During the second quarter of 2010, the new product line became available in numerous retail outlets, at which time we began recognizing retail royalty revenues.

 

Other Ventures

 

During 2009, we entered into an agreement with FRC Balance LLC, 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 True Food Kitchen. As of January 2, 2011, we had advanced $5.2 million under the loan facility to fund construction of two new restaurants which opened during fiscal 2010 and to fund the initial stages of construction for one restaurant scheduled to open during fiscal 2011.

 

Our Strategy

 

Our objectives are to be the best operator of Asian restaurants and to expand the presence of our brand in domestic and international markets, other venues and the retail sector while providing superior returns to our investors. 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 a sophisticated dining occasion, 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 due to the continued popularity of Asian cuisine and a relatively lower level of organized competition in this segment, we would consider additional expansion opportunities to the extent such ventures can meet or exceed our return thresholds.

 

We have also partnered with experienced operators in international markets through development and licensing agreements to expand our brands worldwide. Additionally, a premium line of frozen Asian-style entrées developed under a licensing agreement became available during fiscal 2010, which provides another opportunity for consumers to enjoy the high-quality, intensely flavored cuisine that our guests enjoy in our restaurants.

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 may result in decreased leverage that can 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 while maintaining a high value-to-price perception. We continuously update our menu offerings and have injected our restaurants with an updated contemporary look and feel. We also employ marketing initiatives designed to increase brand awareness and help drive guest traffic.

 

The restaurant business is intensely competitive with respect to food quality, price-value relationships, ambiance, service and location, and many existing restaurants compete with us at each of our locations. Additionally, the 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 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 restaurants. There was a considerable reduction in business travel, and corporate spending in general, throughout fiscal 2009 and through the first half of fiscal 2010. Although our large ticket transactions improved sequentially in the second half of the year, our fiscal 2010 revenues were negatively impacted by a decline in corporate spending and large party transactions.

 

Our 2010 Financial Results

 

 

Our 2011 Outlook

 

We anticipate fiscal 2011 consolidated revenue growth of approximately three to four percent compared to fiscal 2010. This increase is comprised of higher expected sales during fiscal 2011 at restaurants that have been open longer than 18 months combined with revenues from nine to thirteen anticipated new restaurant openings during fiscal 2011 and the benefit of a full year of revenues for restaurants that opened during fiscal 2010.

We expect to experience higher commodity costs and increased labor wage rates during fiscal 2011 which will be partially offset with a slight menu price increase at both concepts. Despite these cost pressures, we anticipate that fiscal 2011 restaurant operating margins will increase compared to fiscal 2010, primarily due to lapping the impact of the first quarter of 2010 Bistro Happy Hour rollout combined with a higher contribution from Global Brand Development businesses. In addition, we expect an increase in general and administrative expenses in fiscal 2011, primarily related to higher share-based compensation expense.

 

We expect to open three to five new Bistro restaurants and six to eight new Pei Wei restaurants during fiscal 2011. Additionally, we expect to reduce diluted shares outstanding as a result of additional repurchases of our common shares of approximately $60.0 million during fiscal 2011.

 

Overall, the Company expects consolidated diluted earnings per share to range from $2.15 to $2.20 for fiscal 2011, an increase of approximately 10%.

 

2011 Development

 

Bistro

 

We intend to open three to five new Bistro restaurants in 2011. Our Bistro restaurants typically range in size from 6,000 to 7,500 square feet and require an average total invested capital of approximately $3.5 million to $4.0 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 and Construction Risks.” Preopening expenses are expected to average approximately $350,000 to $400,000 per restaurant during fiscal 2011.

 

Pei Wei

 

We intend to open six to eight new Pei Wei restaurants. 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 and Construction Risks.” Preopening expenses are expected to average approximately $140,000 to $160,000 per restaurant during fiscal 2011.

 

Global Brand Development

 

During fiscal 2011, our partners collectively intend to open seven to ten new Bistro restaurants in international markets. These new restaurant openings will require no capital investment from us.

 

Operating Statistics

 

There are several key financial metrics that can be useful in evaluating and understanding our business. These metrics, which are widely used throughout the restaurant industry, include short-term revenue measures such as average weekly sales and total revenues and long-term profitability measures such as return on invested capital, each of which 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).

 

 

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

 

 

 

 

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

 

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.

 

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 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 is calculated using a Monte Carlo simulation model which incorporates 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. The cash value of the performance units will be equal to the amount, if any, by which our final average stock price, as defined in the agreements, exceeds the strike price. The strike price will be adjusted, either up or down,

based on the percentage change in the Russell 2000 Index during the performance period, as defined in the agreements, which approximates three years. The performance units were granted in February 2009, and since the grant date, the Russell 2000 Index has increased 69% while our stock has appreciated 155%.

 

The total value of the performance unit awards was originally subject to a maximum value of $12.50 per unit. During December 2010, the performance unit award associated with one of the Co-Chief Executive Officers was modified such that the maximum value per unit was reduced to $9.00 per unit. All other terms remain the same as specified in the original award agreement.

 

Total cumulative expense recognized for the performance units from date of grant through January 2, 2011 was $5.8 million based on the estimated fair values as of January 2, 2011 of $8.30 per unit for units with a maximum value of $12.50 and $6.41 per unit for units with a maximum value of $9.00. As of January 2, 2011, if the value of the performance units at settlement date is the maximum value per unit, we would recognize additional share-based compensation expense of $7.1 million during fiscal 2011. The amount and timing of the recognition of additional expense will be dependent on the estimated fair value at each quarterly reporting date. Any increases in fair value may not occur ratably over the remaining four quarters of the award term; therefore, share-based compensation expense related to the performance units could vary significantly in future periods.

 

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.

 

Impairment of Long-Lived Assets

 

We review property and equipment and intangible assets with finite lives (those assets resulting from the acquisition of noncontrolling interests in the operating rights of certain of our restaurants) for impairment when events or circumstances indicate these assets might be impaired, but at least quarterly. An analysis is performed at the individual restaurant level and primarily includes an assessment of historical cash flows and other relevant facts and circumstances. 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 future cash flows.

 

In the past, 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, an impairment charge was recognized during fiscal 2008 based on our decision to close ten underperforming Pei Wei restaurants, including several locations that were previously being monitored for impairment. We did not recognize any impairment charges during fiscal 2009 or fiscal 2010.

 

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.

 

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.

 

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.

 

Lease Obligations

 

We lease all of our restaurant properties. At the inception of the lease, each property is evaluated to determine whether the lease will be accounted for as an operating or capital lease. The term 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 as a percentage of revenues over the term of the lease in restaurants where we pay contingent rent.

 

Management makes judgments regarding the probable term for each restaurant property lease, which can impact the classification and accounting for a lease as capital or operating, the 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.

Partnership Structure

 

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

 

At the end of a specific term (generally five years), we have the right, but not the obligation, to purchase the noncontrolling interest in the partner’s respective restaurant or region at fair value. The estimated fair value of the noncontrolling interest is determined by reference to current industry purchase metrics as well as the historical cash flows or net income of the subject restaurant or region. We have the option to pay the agreed upon purchase price in cash over a period of time not to exceed five years. Given that there is no public market for these interests, the fair value determinations are subjective and require the use of various estimates for which significant judgments are required. Prior to fiscal 2009, any excess of the purchase price over the imputed fair value was recorded as an intangible asset and amortized over approximately fifteen years for our Bistro restaurants and approximately ten years for our Pei Wei restaurants. Beginning in fiscal 2009 upon the adoption of new accounting guidance on noncontrolling interests, an intangible asset is no longer recognized upon buyout of noncontrolling interests. Instead, any excess of the purchase price over the imputed fair value is recognized as a reduction to additional paid-in capital in equity.

 

Effective the beginning of fiscal 2007 for new store openings at the Bistro and effective April 2010 for new store openings at Pei Wei, a different partnership program is employed to achieve the same goal. At the restaurant level, our partners at stores opened on or after the effective dates (still “partners” in the philosophical, but not legal, sense) no longer have a direct ownership stake in the profits and losses of restaurants, but are instead eligible to receive monthly incentive payments based upon the profitability of their respective restaurants, as well as participate in an incentive program that rewards improvements in the operating performance of their respective restaurants.

 

In addition, we no longer recognize partner investment expense for new restaurant openings. Incentive payments made to individuals participating in the new program are classified as compensation expense rather than as net income attributable to noncontrolling interests. Accordingly, in the consolidated statements of income, compensation expense for our restaurant-specific Operating and Culinary Partners is reflected as labor expense and for our multi-unit Market Partners, Regional Vice Presidents and Bistro Market Chefs as general and administrative expense.

 

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 2010 and 2008 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 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):

 

 

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):

 

Selected operating statistics for Pei Wei were as follows (dollars in thousands):

 

 

Revenues

 

Our revenues are derived primarily from food and beverage sales. 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

 

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 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

 

Labor expenses consist of restaurant management salaries, hourly staff payroll costs, other payroll-related items, workers’ compensation costs and imputed partner bonus expense. Imputed partner bonus expense represents

the portion of restaurant-level operating results that is allocable to certain noncontrolling partners, but is presented as bonus expense for accounting purposes. 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%).

 

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

 

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 $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

 

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 $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

 

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 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 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

 

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 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. 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.

 

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

 

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 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 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

 

Partner investment expense represents 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. Additionally, for those interests that are bought out prior to the restaurant reaching maturity (typically after five years of operation), partner investment expense includes a reversal of previously recognized expense for the difference between the fair value of the noncontrolling interest at inception date and the fair value at the date of repurchase, to the extent that the former is greater. Each segment contributed as follows:

 

Bistro:  The 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

 

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 for fiscal 2010 and interest-bearing overnight deposits for fiscal 2009. 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 $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 income to realize the benefit of our deferred tax assets.

 

Income (Loss) from Discontinued Operations, Net of Tax

 

The results of the ten closed Pei Wei restaurants 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. See Fiscal 2009 compared to Fiscal 2008 Loss from Discontinued Operations, Net of Tax section for further discussion.

 

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 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.

Fiscal 2009 compared to Fiscal 2008

 

Our consolidated operating results for the fiscal years ended January 3, 2010 (fiscal 2009), comprised of 53 weeks, and December 28, 2008 (fiscal 2008), comprised of 52 weeks, were as follows (dollars in thousands):

 

 

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

Selected operating statistics for the Bistro were as follows (dollars in thousands):