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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 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  ¨

As of October 29, 2004, 19,106,542 shares of the registrant’s Common Stock, $0.01 par value, were outstanding.

California Pizza Kitchen, Inc. and Subsidiaries

TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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 Operations (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

September 26, 2004

(unaudited)

1. Basis of Presentation

California Pizza Kitchen, Inc. (referred to herein as the “Company”) owns, operates, licenses or franchises 169 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 and July 15, 2004 employees purchased 27,364 and 24,371 shares, respectively, of common stock from the Company under the Company’s employee stock purchase plan. The net proceeds to the Company were $440,000 and $391,000, respectively. Additionally, employees exercised options to purchase 107,336 shares of common stock during the first nine months ended September 26, 2004, which resulted in net proceeds to the Company of $1,535,000.

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On August 16, 2004, the Board of Directors authorized a stock repurchase program to acquire Company common stock from time to time in the open market and through privately negotiated transactions. Under the program, up to $20.0 million of Company common stock could be reacquired from time to time over a 24-month period. As of September 26, 2004, 70,108 shares had been repurchased for an aggregate purchase price of $1.4 million.

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 and the remainder was paid in cash. 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 and July 15, 2003 employees purchased 29,576 and 29,401 shares, respectively, of common stock from the Company under the Company’s employee stock purchase plan. The net proceeds to the Company were $578,000 and $541,000, respectively. Additionally, employees exercised options to purchase 98,249 shares of common stock during the first nine months ended September 28, 2003, which resulted in net proceeds to the Company of $931,000.

3. Long-term Debt and Credit Facilities

The Company has a $20.0 million revolving line of credit with Bank of America, N.A. The line of credit bears interest at either the bank base rate minus 0.75% or LIBOR plus 0.80% and expires on June 30, 2007. No amounts were outstanding as of September 26, 2004. Availability under the line of credit is reduced by outstanding letters of credit, which totaled $4.3 million as of September 26, 2004. The credit facility also includes financial and non-financial covenants, with which the Company was in compliance as of September 26, 2004.

4. Stock Option Plans

The Company grants stock options for a fixed number of shares to certain employees and directors with an exercise price equal to or greater than the fair value of the shares at the date of grant. The Company accounts for stock option grants using the intrinsic value method, and, accordingly, recognizes no compensation expense for the stock option grants.

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The following table represents the effect on net income (loss) and earnings per share if the Company had applied the fair-value based method and recognition provisions to stock-based employee compensation (in thousands, except net income (loss) 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 nine months ended September 26, 2004 and September 28, 2003 is as follows (in thousands):

6. Change in Accounting Estimate

In the third quarter of 2004, the Company evaluated the useful life of certain assets. This included six older restaurants that will be given a new prototype remodel and are an important part of the Company’s strategic initiatives. Accordingly, and in line with accounting principles generally accepted in the United States, the Company reassessed the useful life of these six restaurants and has taken a charge to accelerate depreciation. Additionally, the Company intends to install a new point of sale system in the first quarter of 2005. Accordingly, we accelerated the depreciation on the existing point of sale system to allow for a complete asset retirement. The new point of sale system is expected to reduce administrative time and increase information which is forecasted to allow operations to manage the business with greater precision and accuracy. The consolidated impact in the third quarter of 2004 resulting from these charges was $1,089,000, or a decrease in net income of $781,000 (0.04 per fully diluted share).

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 November 4, 2004, we own and operate 142 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 five classes (as of September 26, 2004): 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; 4) the Class of 2004 which consists of two restaurants and 5) our ASAP locations which consist of four restaurants.

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As of November 4, 2004 we have opened three new prototype full service restaurants, which are larger than our former prototype, and have been designed to encourage a more adult experience and increase alcohol sales. We plan to open one additional new prototype full service restaurant in the fourth quarter of 2004. Additionally, on December 29, 2003 we purchased one previously franchised full service restaurant and one previously franchised ASAP restaurant.

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 nine months ended September 26, 2004 and September 28, 2003 consists of 13 weeks and 39 weeks, respectively. In calculating company-owned comparable restaurant sales for the quarter ended September 26, 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

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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 nine months ended September 26, 2004 and September 28, 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 ASAP restaurants and full service restaurants opened (A) prior to 2002, (B) in 2002, (C) in 2003 and (D) in 2004 is presented in the table below:

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Three months ended September 26, 2004 compared to the three months ended September 28, 2003

Total Revenues. Total revenues increased by $13.0 million, or 14.0%, to $106.1 million in the third quarter of 2004 from $93.1 million for the third quarter of 2003 due to a $12.9 million increase in restaurant sales and a $110,000 increase in franchise and other revenues. The increase in restaurant sales was due to a 10.5% increase in weekly sales averages for the Pre-2002 class, $11.9 million and $12.3 million in sales derived from the Classes of 2002 and 2003, respectively, $1.1 million in sales derived from two restaurants in the Class of 2004 and $1.5 million in sales derived from four ASAP restaurants. The 18 and 12-month comparable base restaurant increase was 8.7% and 7.5%, respectively. The Company was affected by 121 restaurant closure days during the third quarter of 2004 due to the effects of hurricanes in Florida and restaurant remodel closure days. Eliminating the effects of these restaurant closure days would have resulted in comparable sales of 10.0% and 8.7% on an 18-month and 12-month basis, respectively. The 8.7% increase in 18-month comparable restaurant sales was driven by a 3.3% increase in customer counts, a 4.1% increase in pricing, and menu mix changes of 1.3%. The 7.5% increase in 12-month comparable restaurant sales was driven by a 2.2% increase in customer counts, a 4.1% increase in pricing, and menu mix changes of 1.2%. 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 restaurants to company-owned restaurants in 2004.

Cost of sales. Cost of sales increased by $3.4 million, or 14.9%, to $26.2 million for the third quarter of 2004 from $22.8 million for the third quarter of 2003. Cost of sales as a percentage of restaurant sales increased to 24.9% for the third quarter of 2004 from 24.7% in the comparable quarter for the prior year. This increase was primarily due to higher cheese and chicken costs and lost inventory due to the Florida hurricanes.

Labor. Labor increased by $4.9 million, or 14.8%, to $38.1 million for the third quarter of 2004 from $33.2 million for the third quarter of 2003. Labor as a percentage of restaurant sales increased to 36.2% for the third quarter of 2004 from 35.9% for the third quarter of 2003. The increase in labor as a percentage of restaurant sales was primarily due to restaurant remodel closure days and the deleveraging effect of labor due to the Florida hurricanes.

Direct operating and occupancy. Direct operating and occupancy increased by $3.1 million, or 16.1%, to $22.4 million for the third quarter of 2004 from $19.3 million for the third quarter of 2003. Direct operating and occupancy as a percentage of restaurant sales increased to 21.3% for the third quarter of 2004 from 20.9% for the third quarter of 2003. The increase was primarily due to increased repairs and maintenance and costs associated with a new china rollout.

General and administrative. General and administrative increased by $1.4 million, or 25.9%, to $6.8 million for the third quarter of 2004 from $5.4 million for the third quarter of 2003. General and administrative as a percentage of total revenues increased to 6.4% for the third quarter of 2004 compared to 5.8% for the third quarter of 2003. The increase in general and administrative expenses was primarily due to personnel increases in quality assurance, facilities and operations and increased professional fees associated with Sarbanes-Oxley compliance and our future reincorporation in Delaware.

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Depreciation and amortization. Depreciation and amortization increased by $1.3 million, or 28.9%, to $5.8 million for the third quarter of 2004 from $4.5 million for the third quarter of 2003. The increase was primarily due to the six new restaurants opened after the third quarter of 2003, the purchase of two previously franchised restaurants during the first quarter of 2004 and revised estimates of useful lives which accelerated the depreciation on certain restaurant assets located in the restaurants we are remodeling. Additionally, we revised the estimated useful life of our current point of sale system which will be replaced by a new system in the first quarter of 2005.

Pre-opening. Pre-opening costs decreased by $1.1 million, or 84.6%, to $200,000 for the third quarter of 2004 from $1.3 million for the third quarter of 2003. The decrease was a result of one restaurant opening in the third quarter of 2004 compared to seven restaurant openings in the third quarter of 2003.

Severance charges. There were no severance charges in the third quarter of 2004 compared to $820,000 for the third quarter of 2003. Severance charges in the third quarter of 2003 represented payments related to the resignations of our former President and CEO and former VP and Chief Development Officer under the terms of their separation agreements.

Loss on impairment of property and equipment. We did not incur any loss on impairment of property and equipment for the third quarter of 2004 compared to $13.0 million for the third quarter of 2003. The impairment charges were for 11 Company-owned full service restaurants in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in the third quarter of 2003.

Store closure costs. We incurred store closure costs of $2.7 million in the third quarter of 2004 compared to none in the third quarter of 2003. These costs related to restaurant lease buyout costs associated with three restaurants we will be closing prior to the end of the fourth quarter.

Legal settlement costs. We incurred legal settlement costs of $1.3 million in the third quarter of 2004 compared to none in the third quarter of 2003. These costs related to the proposed terms of a legal settlement of a class action lawsuit filed against us in February of 2003.

Interest income. Interest income increased by $108,000, or 220.4%, to $157,000 for the third quarter of 2004 from $49,000 for the third quarter of 2003. The increase was a result of a higher cash balance in the third quarter of 2004 compared to the third quarter of 2003.

Income tax provision/benefit. The income tax provision/benefit for the third quarter of 2004 and 2003 was based on estimated annual effective tax rates. A rate of 12.8% was applied to the third quarter of 2004 and 33.4% to the third quarter of 2003. The 12.8% rate in the third quarter of 2004 was to bring the Company into line with an average tax rate of 29.0%. These rates comprise the federal and state statutory rates, less any tax credits, based on the estimated annual effective tax rates for the year.

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Nine months ended September 26, 2004 compared to the nine months ended September 28, 2003

Total Revenues. Total revenues increased by $43.5 million, or 16.5%, to $307.3 million in the first nine months of 2004 from $263.8 million for the first nine months of 2003 due to a $43.4 million increase in restaurant sales and a $90,000 increase in franchise and other revenues. The increase in restaurant sales was due to a 9.1% increase in weekly sales averages for the Pre-2002 class, $34.3 million and $34.9 million in sales derived from the Classes of 2002 and 2003, respectively, $2.5 million in sales derived from two restaurants in the Class of 2004 and $4.1 million in sales derived from four ASAP restaurants. The 18 and 12-month comparable base restaurant increase was 7.8% and 6.8%, respectively. The Company was affected by 121 restaurant closure days during the first nine months of 2004 due to the effects of hurricanes in Florida and restaurant remodel closure days. Eliminating the effects of these restaurant closure days would have resulted in comparable sales of 8.2% and 7.2% on an 18-month and 12-month basis, respectively. The 7.8% increase in 18-month comparable restaurant sales was driven by a 3.3% increase in customer counts, a 3.4% increase in pricing, and menu mix changes of 1.1%. The 6.8% increase in 12-month comparable restaurant sales was driven by a 2.3% increase in customer counts, a 3.4% increase in pricing, and menu mix changes of 1.1%. The increase in franchise and other revenues was due primarily to an increase in royalties from Kraft’s distribution of our frozen pizza.

Cost of sales. Cost of sales increased by $11.3 million, or 17.7%, to $75.2 million for the first nine months of 2004 from $63.9 million for the first nine months of 2003. Cost of sales as a percentage of restaurant sales increased to 24.7% for the first nine months of 2004 from 24.4% in the comparable period last year. This increase was primarily due to higher cheese and chicken costs and lost inventory due to the Florida hurricanes.

Labor. Labor increased by $17.1 million, or 18.0%, to $112.2 million for the first nine months of 2004 from $95.1 million for the first nine months of 2003. Labor as a percentage of restaurant sales increased to 36.8% for the first nine months of 2004 from 36.4% for the first nine months of 2003. The increase in labor as a percentage of restaurant sales was primarily due to restaurant remodel closure days and the deleveraging effect of fixed labor due to the Florida hurricanes.

Direct operating and occupancy. Direct operating and occupancy increased by $10.8 million, or 20.0%, to $64.7 million for the first nine months of 2004 from $53.9 million for the first nine months of 2003. Direct operating and occupancy as a percentage of restaurant sales increased to 21.2% for the first nine months of 2004 from 20.6% for the first nine months of 2003. The increase was primarily due to higher repairs and maintenance, the inability of the Classes of 2002 and 2003 to leverage fixed occupancy costs due to lower weekly sales averages and increased advertising expense.

General and administrative. General and administrative increased by $4.2 million, or 26.8%, to $19.9 million for the first nine months of 2004 from $15.7 million for the first nine months of 2003. General and administrative as a percentage of total revenues increased to 6.5% for the first nine months of 2004 compared to 6.0% for the first nine months of 2003. The $4.2 million increase in general and administrative expenses was primarily due to personnel increases in quality assurance, facilities and operations and increased professional fees associated with Sarbanes-Oxley compliance and our future reincorporation in Delaware.

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Depreciation and amortization. Depreciation and amortization increased by $2.0 million, or 15.3%, to $15.1 million for the first nine months of 2004 from $13.1 million for the first nine months of 2003. The increase was primarily due to the six new restaurants opened after the first nine months of 2003, the purchase of two previously franchised restaurants during the first quarter of 2004 and revised estimates of useful lives which accelerated the depreciation related to restaurant assets located in the restaurants we are remodeling. Additionally, we revised the estimated useful life of our current point of sale system which will be replaced by a new system in the first quarter of 2005.

Pre-opening. Pre-opening costs were $264,000 for the first nine months of 2004 compared to $3.0 million for the first nine months of 2003. The decrease was a result of one new restaurant opening in the first nine months of 2004 compared to 17 restaurant openings in the first nine months of 2003.

Severance charges. There were no severance charges in the first nine months of 2004 compared to $820,000 for the first nine months of 2003. Severance charges in the first nine months of 2003 represented payments related to the resignations of our former President and CEO and former VP and Chief Development Officer under the terms of their separation agreements.

Loss on impairment of property and equipment. We did not incur any loss on impairment of property and equipment for the first nine months of 2004 compared to a loss of $13.0 million for the first nine months of 2003. The impairment charges were for 11 Company-owned full service restaurants, in accordance with SFAS No. 144, in the first nine months of 2003.

Store closure costs. We incurred store closure costs of $2.7 million for the first nine months of 2004 compared to none in the first nine months of 2003. These costs related to restaurant lease buyout costs associated with three restaurants we will be closing prior to the end of the fourth quarter.

Legal settlement costs. We incurred legal settlement costs of $1.3 million for the first nine months of 2004 compared to none in the first nine months of 2003. These costs related to the proposed terms of a legal settlement of a class action lawsuit filed against us in February of 2003.

Interest income. Interest income increased by $130,000, or 53.3%, to $374,000 for the first nine months of 2004 from $244,000 for the first nine months of 2003. The increase was a result of a higher cash balance in the first nine months of 2004 compared to the first nine months of 2003.

Income tax provision. The income tax provision for the first nine months of 2004 and 2003 was based on estimated annual effective tax rates. A rate of approximately 28.6% was applied to the first nine months of 2004 and 33.0% to the first nine 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 nine months of 2004, net

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cash flow provided by operating activities was $31.0 million compared to $27.4 million for the first nine months of 2003. Net cash flow provided by operating activities for the first nine months of 2004 was higher than the first nine months of 2003 primarily due to an increase in net income accompanied by an increase in cash provided by changes in operating assets and liabilities.

Net cash used in investing activities for the first nine months of 2004 was $28.7 million compared to $46.8 million for the first nine 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 and opened one restaurant in the first nine months of 2004 compared to opening 17 restaurants in the same period last year. Capital expenditures of $17.9 million and $35.2 million for the first nine months of 2004 and 2003, respectively, was the result of $8.2 million spent on new restaurants compared to $27.7 million in 2003 and $9.7 million spent on capitalized maintenance and remodels in 2004 compared to $7.5 million in 2003. The purchase of assets of $1.2 million in the first nine months of 2004 consisted of two previously franchised restaurants, one full service and one ASAP.

We have opened three new prototype full service restaurants and remodeled two existing full service restaurants as of November 4, 2004. In addition, we plan to open one new prototype full service restaurant 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 of our cash equivalents into marketable securities for the first nine months of 2004 and 2003 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 proceeds from issuance of common stock was $2.4 million for the first nine months of 2004 compared to $2.1 million for the first nine months of 2003 and consisted of purchases under our employee stock purchase plan of $830,000 and $1,120,000, respectively, and common stock option exercises of $1,535,000 and $931,000, respectively. Additionally, in August 2004, the Board of Directors authorized a stock repurchase program to acquire Company common stock from time to time in open market purchases and through privately negotiated transactions. Under the program, up to $20.0 million of Company common stock could be reacquired. As of September 26, 2004, 70,108 shares had been repurchased for an aggregate purchase price of $1.4 million. Total net cash provided by financing activities was $1.0 million for the first nine months of 2004 compared to $2.1 million for the first nine months of 2003.

The Company has a $20.0 million revolving line of credit with Bank of America, N.A. The line of credit bears interest at either the bank base rate minus 0.75% or LIBOR plus 0.80% and expires on June 30, 2007. No amounts were outstanding as of September 26, 2004. Availability

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under the line of credit is reduced by outstanding letters of credit, which totaled $4.3 million as of September 26, 2004, an increase of $800,000 from the third quarter of 2003. The credit facility also includes financial and non-financial covenants, with which the Company was in compliance as of September 26, 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 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 September 26, 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 November 4, 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

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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 September 26, 2004 our net investment in LA Food Show, Inc. was $1.5 million.

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 September 26, 2004 we have approximately a $314,000 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 $192,000 in such fees during the first three and nine 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, an affiliate of Mr. Caruso.

For the 43 weeks to October 24, 2004, we made aggregated lease payments of $150,000 and $168,000 to entities owned by Mr. Caruso, for two California restaurant locations, Thousand Oaks and Marina Del Rey, respectively. The payments for the Thousand Oaks location consisted of rent and common area maintenance charges of $149,000 and property taxes of $1,000. The payments for the Marina Del Rey location consisted of rent and common area maintenance charges of $112,000 and percentage rent of $56,000. Westlake Promenade, LLC was the owner of record prior to our purchase of the Thousand Oaks restaurant on December 29, 2003 and another of Mr. Caruso’s affiliates purchased Marina Waterside shopping center, where our Marina Del Rey restaurant is located, on January 20, 2004.

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Inflation