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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 27, 2004

OR

For the transition period from                      to                     

Commission file number 000-31149

California Pizza Kitchen, Inc.

(Exact name of registrant as specified in its charter)

6053 West Century Boulevard, 11th Floor

Los Angeles, California 90045-6438

(Address of principal executive offices, including zip code)

(310) 342-5000

(Registrant’s telephone number, including area code)

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 reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    YES  x    NO  ¨

There were 19,166,965 shares outstanding Common Stock of the Registrant as of August 2, 2004.

Table of Contents

California Pizza Kitchen, Inc. and Subsidiaries

TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

California Pizza Kitchen, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except for share data)

See accompanying notes

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California Pizza Kitchen, Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)

(in thousands, except per share data)

See accompanying notes

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California Pizza Kitchen, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(in thousands)

See accompanying notes

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California Pizza Kitchen, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 27, 2004

(unaudited)

1. Basis of Presentation

California Pizza Kitchen, Inc. (referred to herein as the “Company”) owns, operates, licenses or franchises 168 restaurants under the names California Pizza Kitchen and California Pizza Kitchen ASAP.

The accompanying consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying unaudited interim financial statements include all adjustments (consisting of normal recurring adjustments), which are necessary for a fair statement of the Company’s consolidated financial condition, results of operations and cash flows for the periods presented. However, these results are not necessarily indicative of results for any other interim periods or for the full fiscal year. The consolidated balance sheet data presented herein for December 28, 2003 was derived from the Company’s audited consolidated financial statements for the fiscal year then ended, but does not include all disclosures required by accounting principles generally accepted in the United States. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires the Company to make certain estimates and assumptions for the reporting periods covered by the financial statements. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses. Actual amounts could differ from these estimates.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to the requirements of the Securities and Exchange Commission. The Company believes the disclosures included in the accompanying interim consolidated financial statements and footnotes are adequate to make the information not misleading, but should be read in conjunction with the consolidated financial statements and notes thereto included in our filings with the Securities and Exchange Commission.

2. Common Stock

On January 15, 2004, employees purchased 27,364 shares of common stock from the Company under the Company’s employee stock purchase plan. The net proceeds to the Company were $440,000. Additionally, employees exercised options to purchase 98,587 shares of common stock during the first six months ended June 27, 2004, which resulted in net proceeds to the Company of $1,435,000.

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On December 29, 2003, the Company purchased certain development rights and the leasehold interests, equipment and other assets utilized in the operation of two California Pizza Kitchen restaurants owned by CAH Restaurants of California, LLC. Approximately 50% of the $2,503,000 aggregate purchase price was paid by the issuance of 67,954 shares of our common stock. The shares were issued to Rick J. Caruso, one of the Company’s directors, who owns CAH Restaurants of California, LLC. The issuance of the shares was exempt under Section 4(2) of the Securities Act of 1933, as amended, and under Regulation D as promulgated thereunder, as a transaction not involving any public offering.

On January 14, 2003, employees purchased 29,576 shares of common stock from the Company under the Company’s employee stock purchase plan. The net proceeds to the Company were $578,000. Additionally, employees exercised options to purchase 83,061 shares of common stock during the first six months ended June 29, 2003, which resulted in net proceeds to the Company of $800,000.

3. Long-term Debt and Credit Facilities

The Company amended and restated a $20.0 million revolving line of credit with Bank of America, N.A on June 30, 2004. The credit facility now expires on June 30, 2007. The line of credit, as amended, bears interest at either the bank base rate minus 0.75% or LIBOR plus 0.80%. The predecessor line of credit that expired on June 30, 2004 bears interest at either the bank base rate minus 0.75% or LIBOR plus 1.0%. No amounts were outstanding as of June 27, 2004. Availability under the line of credit is reduced by outstanding letters of credit, which totaled $4.3 million as of June 27, 2004. The credit facility also includes financial and non-financial covenants, of which the Company was in compliance as of June 27, 2004.

4. Stock Option Plans

In December 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements.

The Company adopted the “disclosure only” provisions of SFAS No. 123, as amended by SFAS No. 148, and will continue to use the intrinsic value-based method of accounting prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, no compensation expense has been recognized for our stock option plans. Had compensation expense for our stock option plans been determined based on the fair value at the grant date for awards for the period ended June 27, 2004 and June 29, 2003 consistent with the provisions of SFAS No. 123,

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our after-tax net income and after-tax net income per share would have been reduced to the pro-forma amounts indicated below (in thousands, except net income per share):

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5. Net Income Per Share

Reconciliation of the components included in the computation of basic and diluted net income per share in accordance with SFAS No. 128, “Earnings Per Share,” for the three and six months ended June 27, 2004 and June 29, 2003 is as follows (in thousands):

Overview

California Pizza Kitchen, Inc. (referred to hereafter as “we” and “our”) is a leading casual dining restaurant chain in the premium pizza segment. As of August 6, 2004, we own and operate 140 restaurants under the name “California Pizza Kitchen” or “California Pizza Kitchen ASAP” in 26 states and the District of Columbia. We also franchise our concept and currently have 29 additional restaurants which operate under franchise or license agreements. We opened our first restaurant in 1985 in Beverly Hills, California and during our 19 years of operating history, we have developed a recognized consumer brand and demonstrated the appeal of our concept in a wide variety of geographic areas. Our restaurants, which feature an exhibition-style kitchen centered around an open-flame oven, provide a distinctive casual dining experience, which is family friendly and has a broad consumer appeal.

We manage our operations by restaurant and have aggregated our operations into one reportable segment. For analytical purposes we have broken this segment into four classes: 1) the Pre-2002 class which consists of 94 restaurants; 2) the Class of 2002 which consists of 18 restaurants; 3) the Class of 2003 which consists of 22 restaurants and 4) the Class of 2004 which consists of one restaurant.

As of August 6, 2004 we have opened one new restaurant prototype, which is larger than our former prototype and has been designed to encourage a more adult experience and increase alcohol sales. We plan to open approximately four to six additional new prototype full service restaurants and one ASAP restaurant in 2004 and have begun construction and have signed lease agreements for all of these additional restaurants. On December 29, 2003 we purchased one previously franchised full service restaurant and one previously franchised ASAP restaurant.

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Our revenues are comprised of restaurant sales, franchise royalties and other income. Our restaurant sales are comprised almost entirely of food and beverage sales.

Cost of sales is comprised of food, beverage and paper supply expenses. The components of cost of sales are variable and increase with sales volume. Labor costs include direct hourly and management wages, bonuses, taxes and benefits for restaurant employees. Direct operating and occupancy costs include restaurant supplies, marketing costs, fixed rent, percentage rent, common area maintenance charges, utilities, real estate taxes, repairs and maintenance and other related costs.

General and administrative costs include all corporate and administrative functions that support existing operations and provide infrastructure to facilitate our future growth. Components of this category include management, supervisory and staff salaries and related employee benefits, travel, information systems, training, corporate rent and professional and consulting fees. Depreciation and amortization principally include depreciation on capital expenditures for restaurants. Pre-opening costs, which are expensed as incurred, consist of the costs of hiring and training the initial work force, travel costs, the cost of food used in training, marketing costs, the cost of the initial stocking of operating supplies and other direct costs related to the opening of a new restaurant.

Our fiscal year consists of 52 or 53 weeks and ends on the Sunday closest to December 31 in each year. The three and six months ended June 27, 2004 and June 29, 2003 consist of 13 weeks and 26 weeks, respectively. In calculating company-owned comparable restaurant sales for the quarter ended June 27, 2004 we include a restaurant in the comparable base once it has been open for 18 months. In addition, we will include the 12-month comparable base for prior year comparison purposes through the end of 2004.

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our unaudited Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. When we prepare these financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to investments, self-insurance, deferred tax assets, intangible assets and long-lived assets. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

For further information regarding the accounting policies that we believe to be critical accounting policies and that affect our more significant judgments and estimates used in preparing our consolidated financial statements see our Form 10-K/A filed for fiscal year ended December 28, 2003.

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Results of Operations

Our operating results for the three and six months ended June 27, 2004 and June 29, 2003 are expressed as a percentage of revenues below, except for restaurant operating costs and expenses, which are expressed as a percentage of restaurant sales:

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As a result of recently experienced variations in performance among our restaurants opened within the past two years when compared to our more mature restaurants, we now present supplemental operating data for our restaurants which have been grouped by class in an effort to better clarify unit level economics. Accordingly, supplemental information for company-owned restaurants opened (A) prior to 2002, (B) in 2002, (C) in 2003, and (D) in 2004, is presented in the table below:

(1) Restaurant operating margin is defined as restaurant sales less restaurant operating costs.

(2) Restaurant operating margin percentages are expressed as a percentage of restaurant sales.

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Three months ended June 27, 2004 compared to the three months ended June 29, 2003

Total Revenues. Total revenues increased by $14.6 million, or 16.7%, to $102.5 million in the second quarter of 2004 from $87.9 million for the second quarter of 2003 due to a $14.6 million increase in restaurant sales and a $25,000 increase in franchise and other revenues. The increase in restaurant sales was due to an 8.4% increase in weekly sales averages for the Pre-2002 class, $11.5 million in sales derived from each of the Classes of 2002 and 2003, $676,000 in sales derived from one restaurant in the Class of 2004 and $1.4 million in sales derived from four ASAP restaurants. The 18 and 12-month comparable base restaurant increase was 7.3% and 6.6%, respectively. The 7.3% increase in 18-month comparable restaurant sales was driven by a 2.1% increase in customer counts, a 4.5% increase in pricing and menu mix changes of 0.7%. The 6.6% increase in 12-month comparable restaurant sales was driven by a 1.5% increase in customer counts, a 4.5% increase in pricing and menu mix changes of 0.6%. The increase in franchise and other revenues was primarily due to an increase in comparable sales for ASAP franchises and Kraft income partially offset by the transfer of two previously franchised stores to company-owned stores in 2004.

Cost of sales. Cost of sales increased by $3.7 million, or 17.4%, to $25.0 million for the second quarter of 2004 from $21.3 million for the second quarter of 2003. Cost of sales as a percentage of restaurant sales increased to 24.6% for the second quarter of 2004 from 24.4% in the comparable quarter for the prior year. This increase was primarily due to higher cheese and chicken costs offset by better management of grocery items which resulted in lower costs.

Labor. Labor increased by $6.2 million, or 19.7%, to $37.6 million for the second quarter of 2004 from $31.4 million for the second quarter of 2003. Labor as a percentage of restaurant sales increased to 36.9% for the second quarter of 2004 from 36.0% for the second quarter of 2003. The increase in labor as a percentage of restaurant sales was primarily due to training costs related to new menu rollout and the deleveraging effect on the fixed nature of management salaries for the 18 and 22 stores in the Classes of 2002 and 2003, respectively.

Direct operating and occupancy. Direct operating and occupancy increased by $3.5 million, or 19.6%, to $21.4 million for the second quarter of 2004 from $17.9 million for the second quarter of 2003. Direct operating and occupancy as a percentage of restaurant sales increased to 21.1% for the second quarter of 2004 from 20.6% for the second quarter of 2003. The increase was primarily due to the deleveraging effect on occupancy costs from the Classes of 2002 and 2003 that have lower weekly sales averages and increased advertising expense.

General and administrative. General and administrative increased by $1.0 million, or 18.9%, to $6.3 million for the second quarter of 2004 from $5.3 million for the second quarter of 2003. General and administrative as a percentage of total revenues increased to 6.2% for the second quarter of 2004 compared to 6.0% for the second quarter of 2003. This increase in general and administrative expenses was primarily due to personnel increases in quality assurance, facilities and operational departments and increased professional fees.

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Depreciation and amortization. Depreciation and amortization increased by $300,000, or 7.5%, to $4.7 million for the second quarter of 2004 from $4.4 million for the second quarter of 2003. The increase was primarily due to the 12 new restaurants opened after the second quarter of 2003 and the purchase of two previously franchised restaurants during the first six months of 2004.

Pre-opening. There were no pre-opening costs for the second quarter of 2004 compared to $1.1 million incurred in the second quarter of 2003. The decrease was a result of no stores opening in the second quarter of 2004 compared to four stores opening in the second quarter of 2003.

Interest income. Interest income increased by $38,000, or 45.8%, to $121,000 for the second quarter of 2004 from $83,000 for the second quarter of 2003. The increase was a result of a higher cash balance in the second quarter of 2004 compared to the second quarter of 2003.

Income tax provision. The income tax provision for the second quarter of 2004 and 2003 was based on estimated annual effective tax rates. A rate of 31.4% was applied to the second quarter of 2004 and 32.5% to the second quarter of 2003. These rates comprise the federal and state statutory rates, less any tax credits, based on the estimated annual effective tax rates for the year.

Six months ended June 27, 2004 compared to the six months ended June 29, 2003

Total Revenues. Total revenues increased by $30.5 million, or 17.9%, to $201.2 million in the first six months of 2004 from $170.7 million for the first six months of 2003 due to a $30.5 million increase in restaurant sales and a $21,000 decrease in franchise and other revenues. The increase in restaurant sales was due to an 8.4% increase in weekly sales averages for the Pre-2002 class, $22.4 million and $22.6 million in sales derived from the Classes of 2002 and 2003, respectively, $1.3 million in sales derived from one restaurant in the Class of 2004 and $2.6 million in sales derived from four ASAP restaurants. The 18 and 12-month comparable base restaurant increase was 7.3% and 6.4%, respectively. The 7.3% increase in 18-month comparable restaurant sales was driven by a 3.4% increase in customer counts, a 3.1% increase in pricing and menu mix changes of 0.8%. The 6.4% increase in 12-month comparable restaurant sales was driven by a 2.6% increase in customer counts, a 3.1% increase in pricing and menu mix changes of 0.7%. The decrease in franchise and other revenues was due primarily to a decrease in royalties from Kraft’s distribution of our frozen pizza.

Cost of sales. Cost of sales increased by $7.8 million, or 18.9%, to $49.0 million for the first six months of 2004 from $41.2 million for the first six months of 2003. Cost of sales as a percentage of restaurant sales increased to 24.6% for the first six months of 2004 from 24.3% in the comparable period. This increase was primarily due to higher cheese and chicken costs.

Labor. Labor increased by $12.1 million, or 19.5%, to $74.0 million for the first six months of 2004 from $61.9 million for the first six months of 2003. Labor as a percentage of restaurant sales increased to 37.1% for the first six months of 2004 from 36.6% for the first six months of 2003. The increase in labor as a percentage of restaurant sales was primarily due to training costs related to new menu rollout and the deleveraging effect on the fixed nature of management salaries for the 18 and 22 stores in the Classes of 2002 and 2003, respectively.

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Direct operating and occupancy. Direct operating and occupancy increased by $7.7 million, or 22.3%, to $42.3 million for the first six months of 2004 from $34.6 million for the first six months of 2003. Direct operating and occupancy as a percentage of restaurant sales increased to 21.2% for the first six months of 2004 from 20.5% for the first six months of 2003. The increase was primarily due to the deleveraging effect on occupancy costs from the Classes of 2002 and 2003 that have lower weekly sales averages and increased advertising expense.

General and administrative. General and administrative increased by $2.8 million, or 27.2%, to $13.1 million for the first six months of 2004 from $10.3 million for the first six months of 2003. General and administrative as a percentage of total revenues increased to 6.5% for the first six months of 2004 compared to 6.0% for the first six months of 2003. The $2.8 million increase in general and administrative expenses was primarily due to personnel increases in quality assurance, facilities and operational departments and increased professional fees.

Depreciation and amortization. Depreciation and amortization increased by $800,000, or 9.4%, to $9.3 million for the first six months of 2004 from $8.5 million for the first six months of 2003. The increase was primarily due to the 12 new restaurants opened after the second quarter of 2003 and the purchase of two previously franchised restaurants during the first six months of 2004.

Pre-opening. Pre-opening costs were $64,000 for the first six months of 2004 compared to $1.8 million for the first six months of 2003. The decrease was a result of no new stores opening in the first six months of 2004 compared to 10 stores opening in the first six months of 2003.

Interest income. Interest income increased by $40,000, or 22.6%, to $217,000 for the first six months of 2004 from $177,000 for the first six months of 2003. The increase was a result of a higher cash balance in the first six months of 2004 compared to the first six months of 2003.

Income tax provision. The income tax provision for the first six months of 2004 and 2003 was based on estimated annual effective tax rates. A rate of 31.6% was applied to the first six months of 2004 and 33.2% to the first six months of 2003. These rates comprise the federal and state statutory rates, less any tax credits, based on the estimated annual effective tax rates for the year.

Liquidity and capital resources

We have funded our capital requirements through cash flow from operations and proceeds from the initial public offering of our stock on August 2, 2000. For the first six months of 2004, net cash flow provided by operating activities was $21.2 million compared to $19.8 million for the first six months of 2003. Net cash flow provided by operating activities for the first six months of 2004 was higher than the first six months of 2003 primarily due to an increase in net income accompanied by a decrease in cash provided by changes in operating assets and liabilities.

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Net cash used in investing activities for the first six months of 2004 was $18.8 million compared to $33.8 million for the first six months of 2003. We use cash to fund the development and construction of new restaurants and to remodel our existing restaurants. We purchased two previously franchised restaurants in the first six months of 2004 compared to opening ten restaurants in the same period last year. Capital expenditures of $8.1 million and $24.2 million for the first six months of 2004 and 2003, respectively, was the result of $3.3 million spent on new restaurants compared to $19.0 million in 2003 and $4.8 million spent on capitalized maintenance and remodels in 2004 compared to $5.2 million in 2003. The purchase of assets of $1.2 million in the first six months of 2004 consisted of two previously franchised restaurants, one full service and one ASAP.

We have opened one new prototype full service restaurant and remodeled one existing full service restaurant as of August 6, 2004. In addition, we will open approximately four to six full service restaurants during the remainder of 2004. This compares to a total of 22 full service restaurants in fiscal year 2003. The new restaurant prototype, which is larger than our former prototype and has been designed to encourage a more adult experience and increase alcohol sales, will require on average a higher net investment than our historical restaurants. However, we expect corresponding sales to be higher and to ultimately generate a higher restaurant cash flow. Pre-opening expenses for each of these new restaurants is expected to average approximately $200,000 per restaurant; however, any unexpected delays in construction, labor shortages or other factors could result in higher than anticipated pre-opening costs.

Additionally, we invested $9.5 million and $7.5 million of our cash equivalents into marketable securities for the first six months of 2004 and 2003, respectively, to maximize our interest income. In 2003, we invested $2.0 million for a 25% equity interest in a new restaurant concept called LA Food Show.

Net cash provided by financing activities was $1.9 million for the first six months of 2004 compared to $1.4 million for the first six months of 2003 and consisted of employee stock purchase plan of $440,000 and $578,000, respectively, and common stock option exercises of $1.4 million and $800,000, respectively.

The Company amended and restated a $20.0 million revolving line of credit with Bank of America, N.A on June 30, 2004. The credit facility now expires on June 30, 2007. The line of credit, as amended, bears interest at either the bank base rate minus 0.75% or LIBOR plus 0.80%. The predecessor line of credit that expired on June 30, 2004 bears interest at either the bank base rate minus 0.75% or LIBOR plus 1.0%. No amounts were outstanding as of June 27, 2004. Availability under the line of credit is reduced by outstanding letters of credit, which totaled $4.3 million as of June 27, 2004, an increase of $800,000 from the second quarter of 2003. The credit facility also includes financial and non-financial covenants, of which the Company was in compliance as of June 27, 2004.

Our capital requirements, including costs related to opening additional restaurants, have been and will continue to be significant. Our future cash requirements and the adequacy of available funds will depend on many factors, including the pace of expansion, real estate markets, site locations and the nature of the arrangements negotiated with landlords. We believe that our current cash

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balances, together with anticipated cash flows from operations and funds anticipated to be available from our credit facility, will be sufficient to satisfy our working capital and capital expenditure requirements on a short-term and long-term basis. Changes in our operating plans, acceleration of our expansion plans, lower than anticipated sales, increased expenses, non-compliance with our credit facility, financial and non-financial covenant requirements or other events may cause us to seek additional financing sooner than anticipated. Additional financing may not be available on acceptable terms, or at all. Failure to obtain additional financing as needed could have a material adverse effect on our business and results of operations.

As of June 27, 2004 we had no financing transactions, arrangements or other relationships with any unconsolidated entities or related parties, except as described below in “Related Party Transactions.” Additionally, we had no financing arrangements involving synthetic leases or trading activities involving commodity contracts.

Contractual Commitments

The following table summarizes our contractual commitments as of August 1, 2004 (in millions):

Related Party Transactions

On March 6, 2003 we paid $2.0 million for a 25.0% stake in LA Food Show, Inc., an upscale family casual dining restaurant created by our co-founders, Co-Chairmen of the Board of Directors and Co-Chief Executive Officers, Larry S. Flax and Richard L. Rosenfield. Messrs. Flax and Rosenfield own the remaining 75.0% of equity in LA Food Show, Inc. Under the terms of the agreement we reserve the right of first negotiation for the 75.0% of outstanding equity we do not currently own. We have pre-emptive rights in future financings by LA Food Show so long as we maintain an ownership interest of at least 15.0%, and are entitled to one of three seats on the LA Food Show Board of Directors.

We have accounted for this investment in accordance with the equity method of accounting as interpreted by APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” APB Opinion No. 18 requires an investor to record the initial investment at cost and adjust the carrying value of its investment to recognize the investor’s share of the earnings or loss after the date of acquisition. At June 27, 2004 our net investment in LA Food Show, Inc. was $1.6 million.

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Effective September 29, 2003, we entered into an employee leasing arrangement with LA Food Show under which we provide LA Food Show with all of its restaurant level employees and managers, as well as administrative and support services such as payroll, marketing, human resources, facilities management, accounting, information technology and training. LA Food Show reimburses us for all of the leased employees’ wages, benefits and other employee-related costs, as well as all business-related expenses incurred by the leased employees. As of August 1, 2004 we have approximately a $217,000 receivable associated with the employee lease agreement.

One of our directors, Mr. Caruso, also serves as President and is sole owner of CAH Restaurants of California, LLC. We had entered into franchise and development agreements with CAH Restaurants of California, LLC pursuant to which it operated two California Pizza Kitchen restaurants. CAH Restaurants of California, LLC paid franchise and royalty fees to us under these agreements. We recorded an aggregate of $61,000 and $126,000 in such fees during the first three and six months of 2003, respectively. On December 29, 2003 we acquired the territory rights and assets used to operate two restaurants from CAH Restaurants of California, LLC for $2.5 million. These California restaurants, one ASAP and one full service are located in Thousand Oaks and Ventura, respectively. The transaction was executed with $1.2 million cash with the balance of the purchase price paid in common stock. CAH Restaurants of California, LLC assigned its right to receive these shares to Mr. Caruso. As part of the acquisition, we assumed the leases for the two restaurants, one of which is entered into with Westlake Promenade, LLC, which is wholly owned by Mr. Caruso.

For the 31 weeks to August 1, 2004, we made aggregated lease payments of $120,000 and $122,000 to Caruso Affiliated Holdings (CAH), owned and controlled by Mr. Caruso, for two California store locations, Thousand Oaks and Marina Del Rey, respectively. The payments for the Thousand Oaks location consisted of rent and common area maintenance charges of $119,000 and property taxes of $1,000. The payments for the Marina Del Rey location consisted of rent and common area maintenance charges of $87,000 and percentage rent of $35,000. CAH was the owner of record prior to our purchase of the Thousand Oaks store on December 29, 2003 and CAH purchased Marina Waterside shopping center, where our Marina Del Rey store is located, on January 20, 2004.

Inflation

The primary inflationary factors affecting our operations are food and labor costs. A large number of our restaurant personnel are paid at rates based on the applicable minimum wage, and increases in the minimum wage directly affect our labor costs. Many of our leases require us to pay for taxes, maintenance, repairs, insurance and utilities, all of which are generally subject to inflationary increases. We believe inflation has not had a material impact on our results of operations in recent years.

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Risk Factors

Our growth strategy requires us to open new restaurants at a measured pace. We may not be able to achieve our planned expansion.

We are pursuing a disciplined growth strategy, which to be successful depends on our ability, and the ability of our franchisees and licensees, to open new restaurants and to operate these new restaurants on a profitable basis. The success of our planned expansion will be dependent upon numerous factors, many of which are beyond our control; including the hiring, training and retention of qualified operating personnel, especially managers; identification and availability of suitable restaurant sites; competition for restaurant sites; negotiation of favorable lease terms; timely development of new restaurants, including the availability of construction materials and labor; management of construction and development costs of new restaurants; securing required governmental approvals and permits; competition in our markets; and general economic conditions.

Our success depends on our ability to locate a sufficient number of suitable new restaurant sites.

One of our biggest challenges in meeting our growth objectives will be to secure an adequate supply of suitable new restaurant sites. We have experienced delays in opening some of our restaurants and may experience delays in the future. There can be no assurance that we will be able to find sufficient suitable locations for our planned expansion in any future period. Delays or failures in opening new restaurants could materially adversely affect our business, financial condition, operating results or cash flows.

We could face labor shortages, which could slow our growth.

Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including restaurant managers, kitchen staff and servers, necessary to keep pace with our expansion schedule. Qualified individuals of the requisite caliber and number needed to fill these positions are in short supply in some areas. Although we have not experienced any significant problems in recruiting or retaining employees, any future inability to recruit and retain sufficient individuals may delay the planned openings of new restaurants. Any such delays or any material increases in employee turnover rates in existing restaurants could have a material adverse effect on our business, financial condition, operating results or cash flows. Additionally, competition for qualified employees could require us to pay higher wages to attract sufficient employees, which could result in higher labor costs.

Our expansion into new markets may present increased risks due to our unfamiliarity with the area.

As part of our expansion strategy we will be opening up restaurants in markets in which we have no prior operating experience. These new markets may have different competitive conditions, consumer tastes and discretionary spending patterns than our restaurants in our existing markets. In addition, our new restaurants will typically take several months to reach budgeted operating levels due to problems associated with new restaurants, including lack of market awareness,

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inability to hire sufficient staff and other factors. Although we have attempted to mitigate these factors by paying careful attention to training and staffing needs, there can be no assurance that we will be successful in operating new restaurants on a profitable basis.

Our expansion may strain our infrastructure, which could slow our restaurant development.

We also face the risk that our existing systems and procedures, restaurant management systems, financial controls, and information systems will be inadequate to support our planned expansion. We cannot predict whether we will be able to respond on a timely basis to all of the changing demands that our planned expansion will impose on management and these systems and controls. If we fail to continue to improve our information systems and financial controls or to manage other factors necessary for us to achieve our expansion objectives, our business, financial condition, operating results or cash flows could be materially adversely affected.

Our restaurant expansion strategy focuses primarily on further penetrating existing markets. This strategy can cause sales in some of our existing restaurants to decline.

In accordance with our expansion strategy, we intend to open new restaurants primarily in our existing markets. Since we typically draw customers from a relatively small radius around each of our restaurants, the sales performance and customer counts for restaurants near the area in which a new restaurant opens may decline due to cannibalization of the existing restaurant’s customer base.

Our operations are susceptible to changes in food and supply costs, which could adversely affect our margins.

Our profitability depends, in part, on our ability to anticipate and react to changes in food and supply costs. Our centralized purchasing staff negotiates prices for all of our ingredients and supplies through either contracts (terms of one month up to one year) or commodity pricing formulas. Our national master distributor delivers goods at a set, flat fee per case twice a week to all of our restaurants. Our contract with our national master distributor, Meadowbrook Meat Company, Inc., is up for renewal in July 2007. Furthermore, various factors beyond our control, including adverse weather conditions and governmental regulations, could also cause our food and supply costs to increase. We cannot predict whether we will be able to anticipate and react to changing food and supply costs by adjusting our purchasing practices. A failure to do so could adversely affect our operating results or cash flows.

Changes in consumer preferences or discretionary consumer spending could negatively impact our results.

Our restaurants feature pizzas, pastas, salads and appetizers in an upscale, family-friendly, casual environment. Our continued success depends, in part, upon the popularity of these foods and this style of informal dining. Shifts in consumer preferences away from this cuisine or dining style could materially adversely affect our future profitability. Also, our success depends to a significant extent on numerous factors affecting discretionary consumer spending, including economic conditions, disposable consumer income and consumer confidence. Adverse changes

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in these factors could reduce customer traffic or impose practical limits on pricing, either of which could materially adversely affect our business, financial condition, operating results or cash flows. Like other restaurant chains, we can also be materially adversely affected by negative publicity concerning food quality, illness, injury, publication of government or industry findings concerning food products served by us, or other health concerns or operating issues stemming from one restaurant or a limited number of restaurants.

Thirty-seven percent of our U.S. based restaurants are located in California. As a result, we are highly sensitive to negative occurrences in that state.

Our franchisees and we currently operate a total of 59 restaurants in California (54 are company-owned and five are owned by franchisees), of which 45 are concentrated in the greater Los Angeles and San Diego metropolitan areas. As a result, we are particularly susceptible to adverse trends and economic conditions in California. In addition, given our geographic concentration, negative publicity regarding any of our restaurants in California could have a material adverse effect on our business and operations, as could other regional occurrences such as local strikes, earthquakes or other natural disasters.

Increases in the minimum wage may have a material adverse effect on our business and financial results.

A number of our employees are subject to various minimum wage requirements. The federal minimum wage has remained at $5.15 per hour since September 1, 1997. However, 37.0% of our U.S. based restaurants are located in California and receive compensation equal to the California minimum wage, which rose from $6.25 per hour effective January 1, 2001 to $6.75 per hour effective January 1, 2002. There may be similar increases implemented in other jurisdictions in which we operate or seek to operate. The possibility exists that the federal minimum wage will be increased in the near future. These minimum wage increases may have a material adverse effect on our business, financial condition, results of operations or cash flows.

Rising insurance costs could negatively impact profitability.

The rising cost of insurance (worker’s compensation insurance, general liability insurance, health insurance and directors and officers’ liability) could have a negative impact on our profitability if we are not able to negate the effect of such increases by continuing to improve our operating efficiencies.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expense.

Keeping abreast of, and in compliance with, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq Stock Market rules, has required an increased amount of management attention and external resources. We remain committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to comply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

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The restaurant industry is affected by litigation and publicity concerning food quality, health and other issues, which can cause customers to avoid our restaurants and result in liabilities.

We are sometimes the subject of complaints or litigation from customers or employees alleging illness, injury or other food quality, health or operational concerns. Adverse publicity resulting from these allegations may materially adversely affect our restaurants, regardless of whether the allegations are valid or whether California Pizza Kitchen is liable. In fact, we are subject to the same risks of adverse publicity resulting from these sorts of allegations even if the claim involves one of our franchisees or licensees. Further, employee claims against us based on, among other things, wage discrimination, harassment or wrongful termination may divert our financial and management resources that would otherwise be used to benefit the future performance of our operations. We have been subject to these employee claims before, and a significant increase in the number of these claims or any increase in the number of successful claims could materially adversely affect our business, financial condition, operating results or cash flows. We also are subject to some states’ “dram shop” statutes. These statutes generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person.

Future changes in financial accounting standards may cause adverse unexpected operating results and affect our reported results of operations.

A change in accounting standards can have a significant effect on our reported results and may affect our reporting of transactions completed before the change is effective. As an example, any changes requiring that we record compensation expense in our consolidated statements of income for employee stock options using the fair value method could have a significant negative effect on our reported results. New pronouncements and varying interpretations of pronouncements have occurred and may occur in the future. Changes to existing accounting rules or the questioning of current accounting practices may adversely affect our reported financial results.