Forward-Looking Statements

This report contains forward-looking statements that involve risks and uncertainties. These statements relate to our future plans, objectives, expectations and intentions. These statements may be identified by the use of words such as "expects," "anticipates," "intends," "plans" and similar expressions. Our actual results could differ materially from those discussed in these statements. Factors that could contribute to these differences include those discussed under "Risk Factors" of our 2008 Annual Report on Form 10-K and elsewhere in this report. The cautionary statements made in this report should be read as being applicable to all forward-looking statements wherever they appear in this report.

Overview

California Pizza Kitchen, Inc. (referred to hereafter as the "Company" or in the first person notations "we" and "our") is a leading casual dining restaurant chain. As of November 6, 2009, we own, operate, license or franchise 256 locations under the names California Pizza Kitchen, California Pizza Kitchen ASAP ("CPK/ASAP") and LA Food Show in 32 states, the District of Columbia and 10 foreign countries. We have 48 locations that operate under franchise or license agreements and use the California Pizza Kitchen and California Pizza Kitchen ASAP brand names and trademarks. Through a licensing agreement with Kraft, California Pizza Kitchen branded frozen pizzas and flatbread melts are available in approximately 20,000 locations in all 50 states. We opened our first restaurant in 1985 in Beverly Hills, California and during our 24 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 that 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 three concepts. As of September 27, 2009, we had: 1) 197 company-owned full service California Pizza Kitchen restaurants; 2) nine company-owned CPK/ASAP restaurants and 3) two company-owned LA Food Show Grill & Bar restaurants.

We have opened five full service restaurants during 2009. Costs on average are less than $2.8 million for inline restaurants, our predominant structure. For the nine months ended September 27, 2009 pre-opening, costs have been approximately $330,000 per new full service restaurant, excluding the impact of construction period rent.

Cost of sales is comprised of food, beverage and paper supplies, labor and direct operating and occupancy expenses. The components of food, beverage and paper supplies are variable and increase with sales volume. Labor costs include direct hourly and management wages, stock-based compensation, bonuses and 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 restaurant costs. Direct operating and occupancy costs generally increase with sales volume but decline as a percentage of restaurant sales.

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, stock-based compensation, travel and relocation costs, information systems, training, corporate rent and professional and consulting fees.

Depreciation and amortization principally includes depreciation on capital expenditures for restaurants.

Pre-opening costs, which are expensed as incurred, consist of rent from the date construction begins through the restaurant opening date, the costs of hiring and training the initial workforce, travel, 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 restaurant.

Loss on impairment of property and equipment is a non-cash charge recorded when the carrying value of a company-owned restaurant is determined to be non-recoverable and exceeds its fair value. Restaurants are not necessarily closed when impaired. There were no impairment charges for the three and nine months ended September 27, 2009 or September 28, 2008. However, in line with regular quarterly and annual strategic planning reviews to be performed in the fourth quarter, the company will complete an analysis of forecasted restaurant operations which may result in impairment charges.

Store closure costs may include lease termination costs, landlord fees, severance charges or other expenses related to the closure of a company-owned restaurant.

Legal settlement costs generally include material settlement expenses lawsuits that arise in the ordinary course of our business. From time to time, we are also involved in lawsuits with respect to infringements of, or challenges to, our registered trademarks.

Our fiscal year consists of 52 or 53 weeks and ends on the Sunday closest to December 31 in each year. Fiscal 2009 will have 53 weeks. The three- and nine-month periods ended September 27, 2009 and September 28, 2008 each consisted of 13 and 39 weeks, respectively. In calculating company-owned comparable restaurant sales, we include a restaurant in the comparable base once it has been open for 18 months. As of September 27, 2009, we had 195 company-owned restaurants that met this criterion.

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 GAAP. 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, leasing activities, deferred tax assets, intangible assets, long-lived assets and stock-based compensation. 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.

Results of Operations

Our operating results for the three- and nine-months ended September 27, 2009
and September 28, 2008 are expressed as a percentage of revenues below, except
for cost of sales which is expressed as a percentage of restaurant sales:



                                           Three Months Ended                        Nine Months Ended
                                   September 27,        September 28,        September 27,        September 28,
                                       2009                 2008                 2009                 2008
Revenues:
Restaurant sales                            97.8 %               98.2 %               98.2 %               98.5 %
Royalties from Kraft licensing
agreement                                    1.5 %                1.1 %                1.1 %                0.8 %
Domestic franchise revenues                  0.4 %                0.4 %                0.4 %                0.4 %
International franchise
revenues                                     0.3 %                0.3 %                0.3 %                0.3 %

Total revenues                             100.0 %              100.0 %              100.0 %              100.0 %
Costs and expenses:
Food, beverage and paper
supplies                                    23.0 %               24.8 %               23.6 %               24.7 %
Labor (1)                                   37.8 %               36.6 %               37.8 %               37.2 %
Direct operating and occupancy              22.2 %               21.2 %               21.9 %               20.4 %

Cost of sales                               83.0 %               82.6 %               83.3 %               82.4 %
General and administrative (2)               7.7 %                7.7 %                7.8 %                7.7 %
Depreciation and amortization                6.1 %                6.3 %                5.8 %                6.3 %
Pre-opening costs                            0.1 %                0.6 %                0.4 %                0.7 %
Store closure costs                          0.1 %                0.0 %                0.0 %                0.2 %

Total costs and expenses                    95.2 %               95.7 %               95.8 %               95.9 %

Operating income                             4.8 %                4.3 %                4.2 %                4.1 %
Interest expense, net                       -0.1 %               -0.3 %               -0.1 %               -0.2 %

Income before income tax
provision                                    4.7 %                4.0 %                4.1 %                3.9 %
Income tax provision                         1.2 %                1.1 %                1.2 %                1.2 %

Net income                                   3.5 %                2.9 %                2.9 %                2.7 %

(1) Labor percentage includes approximately 10 basis points attributable to stock-based compensation in both the three and nine months ended September 27, 2009 and September 28, 2008.

(2) General and administrative percentage includes approximately 90 basis points attributable to stock-based compensation in both the three and nine months ended September 27, 2009 and September 28, 2008.

The following table details the number of locations at the end of the third quarter of 2009:

                                        Total Units at                                          Total Units at
                                        June 28, 2009      Opened     Acquired     Closed     September 27, 2009
Third Quarter 2009
Company-owned full service domestic                197          1           -           1                    197
Company-owned ASAP domestic                          9         -            -          -                       9
Company-owned LA Food Show                           2         -            -          -                       2
Franchised domestic                                 18          1           -           1                     18
Franchised international                            27         -            -          -                      27
Sports and entertainment venues                      2         -            -          -                       2

Total                                              255          2           -           2                    255

Three months ended September 27, 2009 compared to the three months ended September 28, 2008

Total Revenues. Total revenues decreased by $9.2 million, or -5.3%, to $164.8 million in the third quarter of 2009 from $174.0 million in the third quarter of 2008 due to a $9.7 million decrease in restaurant sales partially offset by a $0.5 million net increase in Kraft royalties and franchise revenues. The decrease in restaurant sales was primarily due to the decrease in comparable restaurant sales in the third quarter of 2009. The 18-month comparable base full service restaurant sales decrease was 8.0%. We believe the reduced restaurant traffic was primarily due to macro economic factors impacting the casual dining industry. While Kraft royalties increased by 35.2%, international franchise revenues declined 18.0% as the result of lower franchise fees due to no international location openings in the third quarter of 2009 compared to three openings in the third quarter of 2008.

Food, beverage and paper supplies. Food, beverage and paper supplies decreased by $5.4 million, or -12.7%, to $37.0 million in the third quarter of 2009 from $42.4 million in the third quarter of 2008. Food, beverage and paper supplies as a percentage of restaurant sales was 23.0% in the third quarter of 2009 compared to 24.8% in the third quarter of 2008. The decrease in food, beverage and paper supplies as a percentage of restaurant sales was primarily due to decreased pricing in dairy, produce, grocery, fuel surcharges and productivity improvements associated with our initiatives to close the gap between actual and theoretical food costs.

Labor. Labor decreased by $1.7 million, or -2.7%, to $60.9 million in the third quarter of 2009 from $62.6 million in the third quarter of 2008. As a percentage of restaurant sales, labor was 37.8% in the third quarter of 2009 compared to 36.6% in the third quarter of 2008. The percentage increase in labor was primarily due to the 11% increase in the minimum wage effective July 24, increased medical insurance costs and deleveraging of other fixed labor costs against lower sales in the third quarter of 2009.

Direct operating and occupancy. Direct operating and occupancy costs decreased by $0.3 million, or -0.8%, to $35.8 million in the third quarter of 2009 from $36.1 million in the third quarter of 2008. Direct operating and occupancy costs as a percentage of restaurant sales was 22.2% in the third quarter of 2009 compared to 21.2% in the third quarter of 2008. The percentage increase in direct operating and occupancy costs was primarily due to increased rent expense resulting from the inclusion of the renewal option period in the lease term for certain locations offset by lower utility expenses and delivery costs.

General and administrative. General and administrative costs decreased by $0.7 million, or -5.3%, to $12.6 million in the third quarter of 2009 from $13.3 million in the third quarter of 2008. General and administrative costs as a percentage of total revenue remained constant at 7.7% in both the third quarter of 2009 and the third quarter of 2008. The dollar decrease in general and administrative expenses was primarily due to lower travel and entertainment expenses.

Depreciation and amortization. Depreciation and amortization decreased by $0.9 million, or -8.2%, to $10.1 million in the third quarter of 2009 from $11.0 million in the third quarter of 2008. The decrease in depreciation expense was primarily due to a change in accounting estimate which extended the useful lives of certain leaseholds from 10 to 15 years. The decrease was partially offset by the addition of five new full service restaurants opened since the third quarter of 2008.

Pre-opening costs. Pre-opening costs decreased by $0.9 million, or -81.8%, to $0.2 million in the third quarter of 2009 from $1.1 million in the third quarter of 2008. We opened one full service restaurant in the third quarter of 2009 versus four in the third quarter of 2008. There are no costs associated with ASC 840-20, Operating Leases (formerly FSP 13-1 Accounting for Rental Costs Incurred During a Construction Period), included in the pre-opening costs in the third quarter of 2009 compared to $0.3 million in the third quarter of 2008.

Store closure costs. Store closure costs were $0.2 million in the third quarter of 2009 compared to no store closure costs in the third quarter of 2008. Store closure costs in the third quarter of 2009 related to the closing of one restaurant four months prior to its lease expiration.

Interest expense, net. Net interest expense decreased to $166,000 in the third quarter of 2009 from $447,000 in the third quarter of 2008. Interest expense primarily relates to borrowings against our line of credit which were lower and at favorable interest rates in the third quarter of 2009 compared to the third quarter of 2008.

Income tax provision. The effective income tax rate was 25.9% for the third quarter of 2009 compared to 28.9% for the third quarter of 2008. The effective income tax rate for 2009 differed from the statutory income tax rate primarily due to FICA and wage tax credits. The additional decrease during the quarter resulted from a lower forecasted earnings before tax and return to provision adjustments for state credits.

Net income. Net income increased by $0.8 million to $5.8 million in the third quarter of 2009 from $5.0 million in the third quarter of 2008. Net income as a percentage of revenues increased to 3.5% in the third quarter of 2009 from 2.9% in the prior year.

Nine months ended September 27, 2009 compared to the nine months ended September 28, 2008

Total Revenues. Total revenues decreased by $18.5 million, or -3.6%, to $496.8 million in the first nine months of 2009 from $515.3 million in the first nine months of 2008 due to a $19.5 million decrease in restaurant sales partially offset by a $1.0 million net increase in Kraft royalties and franchise revenues. The decrease in restaurant sales was primarily due to the decrease in comparable restaurant sales in the first nine months of 2009. The 18-month comparable base full service restaurant sales decrease was 6.9%. We believe the reduced restaurant traffic was primarily due to macro economic factors impacting the casual dining industry. While Kraft royalties increased by 27.7%, domestic franchise revenues declined 3.8% resulting from reduced airport traffic. In addition, international franchise revenues declined 4.0% as the result of lower franchise fees due to the opening of three international locations in the first nine months of 2009 compared to seven locations in the first nine months of 2008.

Food, beverage and paper supplies. Food, beverage and paper supplies decreased by $10.5 million, or -8.4%, to $115.1 million in the first nine months of 2009 from $125.6 million in the first nine months of 2008. Food, beverage and paper supplies as a percentage of restaurant sales was 23.6% in the first nine months of 2009 compared to 24.7% in the first nine months of 2008. The decrease in food, beverage and paper supplies as a percentage of restaurant sales was primarily due to decreased pricing in dairy, produce and fuel surcharges and productivity improvements associated with our initiatives to close the gap between actual and theoretical food costs.

Labor. Labor decreased by $4.2 million, or -2.2%, to $184.6 million in the first nine months of 2009 from $188.8 million in the first nine months of 2008. As a percentage of restaurant sales, labor was 37.8% in the first nine months of 2009 compared to 37.2% in the first nine months of 2008. The percentage increase in labor was primarily due to the deleveraging of fixed labor costs against lower sales in the first nine months of 2009.

Direct operating and occupancy. Direct operating and occupancy costs increased by $3.1 million, or 3.0%, to $106.6 million in the first nine months of 2009 from $103.5 million in the first nine months of 2008. Direct operating and occupancy costs as a percentage of restaurant sales was 21.9% in the first nine months of 2009 compared to 20.4% in the first nine months of 2008. The dollar increase in direct operating and occupancy costs was primarily due to increased rent resulting from the inclusion of the renewal option period in the lease term for certain locations offset by lower utility expenses and delivery costs.

General and administrative. General and administrative costs decreased by $0.7 million, or -1.8%, to $38.7 million in the first nine months of 2009 from $39.4 million in the first nine months of 2008. General and administrative costs as a percentage of total revenue increased to 7.8% in the first nine months of 2009 from 7.7% in the first nine months of 2008. The increase in general and administrative expenses as a percentage of total revenue was primarily due to the deleveraging of general and administrative costs against lower sales partially offset by lower travel and entertainment expenses.

Depreciation and amortization. Depreciation and amortization decreased by $3.8 million, or -11.7%, to $28.7 million in the first nine months of 2009 from $32.5 million in the first nine months of 2008. The decrease in depreciation expense was primarily due to a change in accounting estimate which extended the useful lives of certain leaseholds from 10 to 15 years. The decrease was partially offset by the addition of five new full service restaurants opened since the end of the third quarter 2008.

Pre-opening costs. Pre-opening costs decreased by $1.8 million, or -48.6%, to $1.9 million in the first nine months of 2009 from $3.7 million in first nine months of 2008. We opened five full service restaurants in the first nine months of 2009 compared to opening twelve full service restaurants in the first nine months of 2008. Pre-opening costs include $0.3 million associated with ASC 840-20, Operating Leases (formerly FSP 13-1 Accounting for Rental Costs Incurred During a Construction Period), included in the pre-opening costs in the first nine months of 2009 compared to $0.9 million in the first nine months of 2008.

Store closure costs. Store closure costs decreased by $0.6 million, or -75.0%, to $0.2 million in the first nine months of 2009 from $0.8 million in the first nine months of 2008. Store closure costs in the first nine months of both 2009 and 2008 related to the closure of one restaurant.

Interest expense, net. Net interest expense decreased to $663,000 in the first nine months of 2009 from $769,000 in the first nine months of 2008. Interest expense primarily relates to borrowings against our line of credit which were lower and at favorable interest rates in the first nine months of 2009 compared to the first nine months of 2008.

Income tax provision. The effective income tax rate was 28.5% for the first nine months of 2009 compared to 30.9% for the first nine months of 2008. The effective income tax rate for 2009 differed from the statutory income tax rate primarily due to FICA and wage tax credits. The additional decrease during the quarter resulted from a lower forecasted earnings before tax and return to provision adjustments for state credits.

Net income. Net income increased by $0.5 million to $14.5 million in the first nine months of 2009 from $14.0 million in the first nine months of 2008. Net income as a percentage of revenues was 2.9% in the first nine months of 2009 and 2.7% in the first nine months of 2008.

Liquidity and capital resources

We fund our capital requirements principally through cash flow from operations and borrowings from our line of credit. For the first nine months of 2009, net cash flows provided by operating activities were $55.7 million compared to $58.9 million for the first nine months of 2008. Net cash flows provided by operating activities for the first nine months of 2009 were lower than the first nine months of 2008 primarily due to an increased use of cash for accounts payable, accrued liabilities and other receivables and decreases in depreciation and amortization offset by a decreased use of cash for prepaid expenses and other liabilities and decreases in deferred tax assets and deferred rent credit amortization.

Net cash flows used in investing activities for the first nine months of 2009 decreased to $21.9 million from $43.2 million for the first nine months of 2008 due to decreased capital expenditures related to new restaurants, minor remodels and capitalized maintenance. We opened five new full service restaurants in the first nine months of 2009. Costs on average are less than $2.8 million for inline restaurants, our predominant structure. For the nine months ended September 27, 2009 pre-opening, costs have been approximately $330,000 per new full service restaurant, excluding the impact of construction period rent. CPK/ASAPs, our fast casual concept, are approximately half the size of our full service restaurants. We currently have nine CPK/ASAP restaurants and have ceased all new development of company-owned CPK/ASAPs. Existing CPK/ASAP restaurants have been identified for conversion to full service restaurants or will close in line with lease terminations or exercise of early lease termination provisions.

Net cash flows used in financing activities for the first nine months of 2009 increased to $33.8 million from $10.9 million for the first nine months of 2008 due to net repayments on the credit facility in the first nine months of 2009 compared to net borrowings on the credit facility in the first nine months of 2008 offset by higher net proceeds from the issuance of common stock in the first nine months of 2009 as compared to the first nine months of 2008 and less cash used for stock repurchases in first nine months of 2009 compared to first nine months of 2008.

In January 2008, the Company entered into a Second Amendment to its Amended and Restated Credit Agreement (the "Amendment") with Bank of America to amend the Amended and Restated Credit Agreement dated June 30, 2004 (the "Original Credit Agreement"). The Amendment increased the revolving line of credit from $75.0 million to $100.0 million. On May 7, 2008, the Company replaced its $100.0 million credit facility by entering into a new five-year revolving credit facility (the "Facility") with a syndicate of banks, featuring a maximum available borrowing capacity of $150.0 million. The Facility contains an uncommitted option to increase, subject to satisfaction of certain conditions, the maximum borrowing capacity by up to an additional $50.0 million. The Facility contains certain restrictive and financial covenants, including that the Company maintain a minimum consolidated fixed charge coverage ratio and a maximum lease adjusted leverage ratio. The Facility is guaranteed by one of the Company's subsidiaries and stipulates certain events of default. Borrowings under the Facility bear interest at either the London Interbank Offering Rate (LIBOR) or the prime rate, at the Company's option, plus a spread ranging from 100 to 150 basis points for LIBOR loans or zero to 25 basis points for prime rate loans. The Company also pays a commitment fee on the unused facility ranging from 20 to 30 basis points per annum. Both the interest rate spread and the commitment fee level depend on the lease adjusted leverage ratio as defined in the terms of the Facility. The Facility also includes a $15.0 million sublimit for standby letters of credit. As of September 27, 2009, the Company had borrowings outstanding under the Facility totaling $37.0 million with an average annual interest rate of 1.72%. Availability under the line of credit is also reduced by outstanding letters of credit totaling $6.6 million as of September 27, 2009, which are used to support the Company's self-insurance programs. Available borrowings under the line of credit were $106.4 million as of September 27, 2009. The Facility matures in May 2013. As of September 27, 2009, the Company is in compliance with all debt covenants. The Company expects to use any excess cash generated in 2009 to pay down debt.

Net proceeds from issuance of common stock were $3.2 million for the first nine months of 2009 compared to $1.7 million for the first nine months of 2008 and consisted of purchases under our employee stock purchase plan of $0.9 million . . .