CHICAGO PIZZA & BREWERY INC, 10KSB, 1997-03-31

CHICAGO PIZZA & BREWERY INC
10KSB, 1997-03-31
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB
THE SECURITIES EXCHANGE ACT OF 1934

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______

Commission file number 0-21423

CHICAGO PIZZA & BREWERY, INC.
(Exact name of small business issuer as specified in its charter)

California 33-0485615
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

26131 Marguerite Parkway
Suite A
Mission Viejo, California 92692
(714) 367-8616
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)

---------------------

Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock and
Redeemable Warrants

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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. .
----------
State issuer's revenues for its most recent fiscal year: $19,865,390.

The aggregate market value of the common stock of the Registrant
("Common Stock") held by non-affiliates as of December 31, 1996 based on the
market price at February 28, 1997 was $24,269,945. As of March 22, 1997,
there were 6,408,321 shares of Common Stock of the Registrant outstanding and
12,084,584 Redeemable Warrants of the Registrant outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the following documents are incorporated by
reference into Part III of this Form 10-KSB: The Registrant's Proxy
Statement for the Annual Meeting of Shareholders.

Transitional Small Business Disclosure Format (check one): YES NO X .
--- ---
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CHICAGO PIZZA & BREWERY, INC.

PART I

ITEM 1. DESCRIPTION OF BUSINESS

Except for the historical information contained herein, the
discussion in this Form 10-KSB contains certain forward looking statements
that involve risks and uncertainties, such as statements of the Company's
plans, objectives, expectations and intentions. The cautionary statements
made in this Form 10-KSB should be read as being applicable to all related
forward-looking statements wherever they appear in this Form 10-KSB. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, without
limitation, those factors discussed herein and in the Company's prospectus
dated October 8, 1996 (the "Prospectus"), including, without limitation: (i)
the Company's ability to manage growth and conversions, (ii) construction
delays, (iii) marketing and other limitations as a result of the Company's
historic concentration in Southern California and current concentration in
the Northwest, (iv) restaurant and brewery industry competition, (v) impact
of certain brewery business considerations, including without limitation,
dependence upon suppliers and related hazards, (vi) increase in food costs
and wages, including without limitation the recent increase in minimum wage,
(vii) consumer trends, (viii) potential uninsured losses and liabilities,
(ix) trademark and servicemark risks, and (x) other general economic and
regulatory conditions and requirements. For further information, please see
the Company's Prospectus.

BUSINESS AND STRATEGY

Chicago Pizza & Brewery, Inc. (the "Company" or "BJ's") owns eight
restaurants in Southern California (the "California Restaurants"), one
restaurant in Boulder Colorado which opened in February of 1997, and an
interest in one restaurant in Lahaina, Maui, each of which is currently
operated as either a BJ'S PIZZA, GRILL & BREWERY or a BJ'S PIZZA & GRILL. In
early 1996, the Company acquired from Pietro's Corp., a Washington
corporation ("Pietro's") 19 additional restaurants in Oregon and Washington
(the "Northwest Restaurants") which it plans to convert into BJ's
restaurants. The Company has completed a refurbishment program and the
expansion of its menu around its core pizza products in its California
Restaurants. In addition, the Company has introduced handcrafted,
micro-brewed beers in its California Restaurants and has built
micro-breweries in Brea, California and Boulder, Colorado. The Company plans
to refurbish the Northwest Restaurants and add its award-winning pizza
products, some or all of the expanded BJ's menu and its award winning
handcrafted, micro-brewed beer to the menu offerings at the Northwest
Restaurants. If this plan can be successfully executed, all 29 of the
Company's restaurants will fit into one of the three following BJ's concepts:

- BJ'S PIZZA, GRILL & BREWERY is designed to provide a dining
experience in an operating micro-brewery environment where a
variety of proprietary, hand-crafted beers are produced on-site.
The menu features the core pizza products surrounded by a
selection of appetizers, entrees, pastas, sandwiches, specialty
salads and desserts. Currently, the Company operates one of its
California Restaurants and its Boulder, Colorado restaurant as,
and plans to convert several of its Northwest Restaurants into,
the BJ'S PIZZA, GRILL & BREWERY concept.

- BJ'S PIZZA & GRILL is designed to provide a casual,
dining experience with table service featuring a menu of pizza,
pasta, sandwiches, salads and desserts. Currently, the Company
operates seven of its California Restaurants and
the Lahaina, Maui restaurant as, and plans to convert several
of its Northwest Restaurants into, the BJ'S PIZZA & GRILL
concept.

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- BJ'S PIZZA is designed to provide an informal
dining experience with counter-service and a menu featuring pizza
and a limited selection of pastas, sandwiches and salads.
Currently, the Company plans to operate none of the California
Restaurants as, and plans to convert ten to twelve of the
Northwest Restaurants into, the BJ'S PIZZA concept.

Management believes that having three concepts, which can be utilized in
alternative locations, facilities and markets, provides the Company a broader
scope of potential acquisitions and development sites.

According to certain newspaper polls, BJ's pizza is considered among the
best in Orange County, California. It has won numerous awards over the past
years from publications such as the Orange County edition of the Los Angeles
Times, Orange Coast Magazine, Daily Pilot and The Metropolitan, and BJ's
pizza was featured in 1994 on the TV show "Live in LA" as one of the five
best pizzas in the Los Angeles area. Finally, BJ's pizza was voted number one
by the readers of the Orange County Register, a leading Orange County,
California-based newspaper and by the readers of the Maui News.

The Company has completed a campaign to broaden its customer base by: i)
surrounding its core pizza product with a more expansive menu including
appetizers, grilled sandwiches, specialty salads and pastas, ii) adding
hand-crafted, micro-brewed beers through on-site micro-breweries in certain
locations and the sale of internally-produced beer through other Company
restaurants and iii) differentiating the BJ's identity and expanding
merchandising opportunities through a comprehensive new logo and identity
program, new uniforms, a new interior design concept and redesigned signage.

The Company has also sought to expand through acquisitions and
conversions, such as the acquisition of the Northwest Restaurants and the
Brea, California restaurant. The Company is currently actively looking at an
additional site in Valencia, California the hometown of the Six Flags
Magic Mountain amusement park in California, as well as other sites.
However, no assurance can be given that the Company's objectives can be
achieved or that sufficient capital will be available to finance the
Company's business plan.

The Company was formed in 1991 as a California corporation to assume the
management of five "BJ's Chicago Pizzeria" restaurants and to develop
additional BJ's restaurants. Between 1992 and 1995, the Company developed
five additional restaurants, purchased three of those original five
restaurants that it managed and discontinued one of those that it had
developed. As a result of these transactions, at the end of 1995 the Company
owned restaurants in California located in La Jolla Village, Laguna Beach,
Belmont Shore, Seal Beach, Huntington Beach, and Balboa in Newport Beach, as
well as a 53.68% interest in a restaurant in Lahaina, Maui.

During late 1995 and early 1996, the Company converted the restaurants
in Balboa in Newport Beach, La Jolla Village, Laguna Beach, Belmont Shore,
Seal Beach and Huntington Beach, California to the BJ'S PIZZA & GRILL concept
and opened a new BJ'S PIZZA & GRILL restaurant in Westwood Village in Los
Angeles, California. Management believes that customer frequency and sales
volumes at the converted restaurants have been significantly enhanced in 1996
as compared to 1995, primarily due to the conversion to this expanded
concept. The seven restaurants open the entire years of 1995 and 1996
experienced an increase in sales of $856,000 or 13.3%. The La Jolla Village
restaurant, which had the most significant physical upgrade, experienced
sales increases of 44.7% in the comparable periods.

The first BJ'S PIZZA, GRILL & BREWERY opened in Brea, California in
April 1996. This 10,000-square-foot restaurant features elaborate brick walls
and archways, high molded tin ceilings, warm lighting and industrial
railings. The on-premises brewing equipment includes a 30-barrel, copper-clad
kettle, 60-barrel, stainless steel fermentation tanks, kegging equipment, and
a 40,000-pound-capacity corrugated metal grain silo located at the front
entrance to the restaurant. The brewery capacity is sufficient to supply beer
for all of the Company's existing Southern California restaurants. In
addition, the Brea brewery has capacity to and has very recently commenced to
produce beer for

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several other breweries and restaurants. In October of 1996, the Company won
a silver medal in the strong ale category at the Great American Beer Festival
in Denver Colorado for its Jeremiah Red Ale. The Company also opened a BJ'S
PIZZA, GRILL & BREWERY in Boulder, Colorado in February of 1997. This
restaurant includes a ten-barrel brewing system which primarily produces
beer for the Boulder site only. Management believes the relatively low
production cost and high premium pricing associated with micro-brewed beer
can significantly improve margins.

The March, 1996 multi-unit acquisition of the Northwest Restaurants (the
"Pietro's Acquisition") was a key step in the strategy to quickly develop a
market presence for the thick crust, Chicago style pizza and micro-brewery
concept. Management believes that the Company will significantly benefit from
the Pietro's Acquisition as 19 restaurants in the Northwest market will
provide the Company with an immediate and significant presence in that market
area, without the more cumbersome and time-consuming licensing and permitting
issues which would be involved in the development of individual restaurants.
These 19 restaurants will continue to operate under the "Pietro's" name
awaiting conversion to either BJ'S PIZZA, GRILL & BREWERY, BJ'S PIZZA & GRILL
or BJ'S PIZZA concept. Management believes that it can significantly
capitalize on the Pietro's Acquisition based upon the following factors:

1. ESTABLISHED CUSTOMER BASE. Each of the restaurants purchased
already has a customer base which Management feels can be expanded with the
renovation and introduction of the BJ's menu and concept.

2. REDUCTION OR ELIMINATION OF DISCOUNTING. Pietro's relied heavily
on discounting to maintain its share of the pizza market. Discounts during
1996 were 14.2% of total sales. BJ's does very little discounting, relying
instead on the quality of its product and service to compete in the
marketplace. As Pietro's restaurants are converted to BJ's restaurants,
Management intends to reduce or eliminate the use of discounting, which
Management believes will have a positive effect on gross profit margins.

3. POSITIVE IMPACT UPON MARKETING COSTS AS A RESULT OF REDUCED
DISCOUNTING. Due to its widespread use of discount coupons, Pietro's
marketing costs, consisting mainly of printing and distribution, have been
extremely high. Marketing costs averaged approximately 6.1% of sales. BJ's
marketing costs average under 2% of sales. Management believes that the
anticipated reduction in discounting upon conversion of the units to BJ's
restaurants will also significantly reduce marketing costs.

4. CAPITALIZATION UPON INCREASED PURCHASING VOLUMES. Management
believes that it has achieved, significant cost reductions from
capitalizing on the increased purchasing volumes resulting from the
operation of the 19 additional restaurants.

5. ELIMINATION OF DUPLICATE OVERHEAD. Management has eliminated
duplicate overhead in accounting, finance, purchasing and executive
management. Such reductions have reduced overhead in total and as a
percentage of sales.

6. ECONOMIC BENEFITS OF INTERNALLY PRODUCED BEER. The installation
of micro-breweries in several of the converted Pietro's restaurants should
provide the economic benefits of internally produced beer, not only to
those restaurants but to other converted restaurants as well. Management
intends to distribute the beer produced at BJ's micro-breweries, subject to
local regulations, to as many of the other converted restaurants as
possible.

7. INCREASED SALES THROUGH RENOVATION AND CONVERSION. Annual sales
at BJ's seven

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Southern California and one Lahaina, Maui unit open during the entire
1996 year averaged $366 per square foot while sales at the Pietro's
restaurants acquired by the Company averaged $116 per square foot.
Management believes that through renovation and conversion of the acquired
restaurants to BJ's restaurants, the sales volumes could increase to be
more consistent with the volumes of the other BJ's restaurants.

The Company's current objectives are to remodel and refurbish those
restaurants acquired from Pietro's to one of the three "BJ's" concepts over
approximately the next 15 months. The Company originally designated
approximately $4.5 million of the net proceeds of its initial public offering
which closed October 15, 1996 (the "Offering") for use in refurbishment and
redesign of these restaurants. However, Management believes that it will
achieve its desired objectives with a less costly refurbishment program than
originally anticipated, primarily due to the utilization of smaller and less
costly brewery systems, as well as a greater emphasis on the BJ'S PIZZA
concept, as opposed to the more costly BJ'S PIZZA & GRILL concept. As a
result, Management is looking to develop additional BJ'S PIZZA, GRILL &
BREWERY restaurants at other potential sites with any funds remaining from
the original allocation for the development of the Northwest Restaurants. For
instance, Management is currently actively looking at an additional site in
Valencia, California, the hometown of the Six Flags Magic Mountain amusement
park in California, as well as other sites. However, no assurance can be
given that the Company's objectives can be achieved or that sufficient
capital will be available to finance the Company's business plan. An
additional $1,000,000 in Offering proceeds was used to develop the BJ'S
PIZZA, GRILL & BREWERY restaurant in Boulder, Colorado which opened in
February of 1997. The Boulder, Colorado restaurant is a 5,500-square-foot
facility in the Pearl Street Mall, a popular, high-traffic pedestrian
promenade in Boulder, Colorado.

The BJ's menu has been developed on a foundation of excellence. BJ's
core product, its deep-dish, Chicago-style pizza, has been highly acclaimed
since it was originally developed in 1978. This unique version of
Chicago-style pizza is unusually light, with a crispy, flavorful crust.
Management believes BJ's lighter crust helps give it a broader appeal than
some other versions of deep-dish pizza. The pizza is topped with high-quality
meats, fresh vegetables and whole-milk mozzarella cheese. BJ's pizza
consistently has been awarded "best pizza" honors by restaurant critics and
public opinion polls in Orange County, California. In addition, BJ's recently
won the award for "best pizza on Maui" in a poll conducted by the Maui News.

Management's objective in developing BJ's expanded menu was to ensure
that all items on the menu maintained and enhanced BJ's reputation for
quality. Many of BJ's food portions have been increased in conjunction with
the new menu, creating a real value orientation. Because of the relatively
low food cost associated with pizza, BJ's highest volume item, Management
believes it will still be able to maintain favorable gross profit margins
while providing a value to the consumer. When the new menu items were first
developed in late 1995 and early 1996, they were introduced at promotional
prices. Management believes this artificially low pricing contributed to the
higher food cost percentage incurred during that time period. Prices on most
of the new items were increased effective May 1996. While the menu is still
very value-oriented, the new pricing is more consistent with Management's
gross profit margin objectives.

BJ's restaurants provide a constantly evolving selection of domestic,
imported and micro-brewed beers. In addition, subject to local regulations
and the capacity of the restaurants, BJ's restaurants feature

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a selection of beers, including the award-winning Jeremiah Red Ale, brewed at
one or more of BJ's micro-breweries. Management believes that this provides
two major benefits:

1. The quality and freshness of the BJ's brewed beers are under
the constant supervision of the Company's Director of Brewing Operations.
This has a positive impact on both the actual quality and the perceived
quality of the beer.

2. Management believes that the production costs of the internally
brewed beer are significantly less than purchased beer. The relatively
low production costs and premium pricing often associated with micro-brewed
beers is having a significant, positive impact on gross profit margins.

MARKETING

To date, the majority of marketing has been accomplished through
community-based promotions and customer referrals. Management's philosophy
has been to "spend its marketing dollars on the plate," or use funds that
would typically be allocated to marketing to provide a better product and
value to its existing guests. Management believes this will result in
increased frequency of visits and greater customer referrals. During the
roll-out of the new menu, however, the Company has utilized more media
advertising than usual in order to gain increased awareness of the
significant changes on the menu and in the restaurants. BJ's expenditures on
advertising and marketing are typically 1% to 2.0% of sales.

BJ's is very much involved in the local community and charitable
causes, providing food and resources for many worthwhile events. Management
feels very strongly about its commitment to helping others, and this
philosophy has benefited the Company in its relations with its surrounding
communities.

The Company distributes very few coupons and does not try to
compete with other pizza chains that rely on heavy discounting. This
philosophy has enabled BJ's to maintain its quality image and its gross
profit margins through a period of "price wars" which have plagued the pizza
industry.

Pietro's had traditionally marketed itself through the widespread
use of discount coupons. Expenditures for advertising were approximately 6.1%
of sales and discounted items accounted for 14.2% of sales. The resulting
reductions in margins forced Pietro's management to reduce the quality of its
product in order to maintain a reasonable food cost. Management believes that
these pizza "price wars" ultimately resulted in reduced value perceptions
among Pietro's clientele, and Pietro's lacked the financial resources to
strategically overcome this obstacle. Through the refurbishment of the
Northwest Restaurants, and the introduction of BJ's quality food and service,
Management believes that discounting will be reduced or eliminated, and
expenditures on marketing should fall to a range more typical for a BJ's
operation. This could have a substantial positive impact on the Company's
profitability. However, no assurances can be given as to the Company's
ability to achieve such profitability.

OPERATIONS

The Company's policy is to staff the restaurants with enthusiastic
people, who can be an integral part of BJ's fun, casual atmosphere. Prior
experience in the industry is only one of the qualities Management looks for
in its employees. Enthusiasm, motivation and the ability to interact well
with the Company's clientele are the most important qualities for BJ's
management and staff.

Both management and staff undergo thorough formal training prior to
assuming their positions at the restaurants. Management has designated
certain managers, servers and cooks as "trainers," who are responsible for
properly training and monitoring all new employees. In addition, the
Company's Director of

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Food and Beverage and regional managers supervise the training functions in
their particular areas.

The Company purchases its food product from several key suppliers.
A majority of food and operating supplies for the California restaurants is
purchased from Jacmar Sales, with which the Company has had a long-term,
valuable relationship. A majority of food and operating supplies for the
Northwest Restaurants is purchased from McDonald Wholesale Company. Product
specifications are very strict, because the Company insists on using fresh,
high-quality ingredients.

Pietro's formerly operated a commissary and distribution center
which, as its number of units was reduced, became an economic and operational
burden. In January 1996, Pietro's discontinued the commissary and
distribution center and contracted with an outside distributor to provide and
distribute product to its restaurants and, as a result, direct food costs
have increased. The reduction in overhead, however, has effectively offset
this increase.

COMPETITION

The restaurant industry is highly competitive. A great number of
restaurants and other food and beverage service operations compete both
directly and indirectly with the Company in many areas including: food
quality and service, the price-value relationship, beer quality and
selection, and atmosphere, among other factors. Many competitors who use
concepts similar to that of the Company are well-established, and often have
substantially greater resources.

Because the restaurant industry can be significantly affected by
changes in consumer tastes, national, regional or local economic conditions,
demographic trends, traffic patterns, weather and the type and number of
competing restaurants, any changes in these factors could adversely affect
the Company. In addition, factors such as inflation and increased food,
liquor, labor and other employee compensation costs could also adversely
affect the Company. The Company believes, however, that its ability to offer
high-quality food at moderate prices with superior service in a distinctive
dining environment, will be the key to overcoming these obstacles.

GOVERNMENT REGULATIONS

The Company is subject to various federal, state and local laws,
rules and regulations that affect its business. Each of the Company's
restaurants is subject to licensing and regulation by a number of
governmental authorities, which may include alcoholic beverage control,
building, land use, health, safety and fire agencies in the state or
municipality in which the restaurant is located. Difficulties obtaining the
required licenses or approvals could delay or prevent the development of a
new restaurant in a particular area or could adversely affect the operation
of an existing restaurant. Similar difficulties, such as the inability to
obtain a liquor, restaurant license or a given restaurant's products and
services could also limit restaurant development and/or profitability.
Management believes, however, that the Company is in compliance in all
material respects with all relevant laws, rules, and regulations.
Furthermore, the Company has never experienced abnormal difficulties or
delays in obtaining the required licenses or approvals required to open a new
restaurant or continue the operation of its existing restaurants.
Additionally, Management is not aware of any environmental regulations that
have had or that it believes will have a materially adverse effect upon the
operations of the Company.

Alcoholic beverage control regulations require each of the
Company's restaurants to apply to a federal and state authority and, in
certain locations, municipal authorities for a license and permit to sell
alcoholic beverages on the premises. Typically, licenses must be renewed
annually and may be revoked or suspended for cause by such authority at any
time. Alcoholic beverage control regulations relate to numerous aspects of
the daily operations of the Company's restaurants, including minimum age of
patrons and employees, hours

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of operation, advertising, wholesale purchasing, inventory control and
handling, and storage and dispensing of alcoholic beverages. The Company has
not encountered any material problems relating to alcoholic beverage licenses
or permits to date and does not expect to encounter any material problems
going forward. The failure to receive or retain, or a delay in obtaining, a
liquor license in a particular location could adversely affect the Company's
ability to obtain such a license elsewhere.

The Company is subject to "dram-shop" statutes in California and
other states in which it operates. Those statutes generally provide a person
who has been injured by an intoxicated person, the right to recover damages
from an establishment that has wrongfully served alcoholic beverages to such
person. The Company carries liquor liability coverage as part of its existing
comprehensive general liability insurance which it believes is consistent
with coverage carried by other entities in the restaurant industry and will
protect the Company from possible claims. Even though the Company carries
liquor liability insurance, a judgment against the Company under a dram-shop
statute in excess of the Company's liability coverage could have a materially
adverse effect on the Company. To date, the Company has never been the
subject of a "dram-shop" claim.

Various federal and state labor laws, rules and regulations govern
the Company's relationship with its employees, including such matters as
minimum wage requirements, overtime and working conditions. Significant
additional, governmental mandates such as an increased minimum wage, an
increase in paid leaves of absence, extensions in health benefits or
increased tax reporting and payment requirements for employees who receive
gratuities, could negatively impact the Company's restaurants.

EMPLOYEES

As of March 15, 1997, the Company employed 515 employees at its
eight California Restaurants, one Hawaii restaurant, and one Boulder,
Colorado restaurant. Additionally, 466 are employed at the recently
acquired restaurants in Washington and Oregon. The Company also employs
nineteen administrative and field supervisory personnel at its corporate
offices. Historically, the Company has experienced relatively little turnover
of restaurant management employees. The Company believes that it maintains
favorable relations with its employees, and currently no unions or collective
bargaining arrangements exist.

INSURANCE

The Company maintains worker's compensation insurance and general
liability coverage which it believes will be adequate to protect the Company,
its business, its assets and its operations. There is no assurance that any
insurance coverage maintained by the Company will be adequate, that it can
continue to obtain and maintain such insurance at all or that the premium
costs will not rise to an extent that they adversely affect the Company or
the Company's ability to economically obtain or maintain such insurance. The
Company does not currently have any key person life insurance.

TRADEMARKS AND COPYRIGHTS

The Company has not secured any rights in connection with its
trademarks, servicemarks or any other proprietary rights related to the use
of the BJ'S PIZZA, GRILL & BREWERY, BJ'S PIZZA & GRILL and BJ'S PIZZA names.
There are other restaurants using the BJ's name throughout the United States,
thus, no assurance can be given that the Company will be able to secure any
such rights in the future or that the use of the BJ's name may not be subject
to claims by third parties.

ITEM 2. PROPERTIES

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The Company's corporate headquarters in California are located in a
2,219-square-foot leased facility in Mission Viejo, California. The initial
term of the lease expires on December 31, 1998 and currently provides for
approximately $33,000 in annual rent, which amount is subject to certain
adjustments and annual increases. As of March 22, 1997, Chicago Pizza
Northwest, Inc., the Company's subsidiary in Washington has headquarters in a
2711-square-foot leased facility in Lynnwood, Washington. This lease expires
on March 13, 2002 and currently provides for approximately $50,000 in annual
rent, which amount is subject to certain adjustments and annual increases,
including without limitation annual Consumer Price Index escalations.

The Company currently leases the following restaurants:

Year Opened/
Acquired Square Feet
-------- -----------
CALIFORNIA
Balboa in Newport Beach . . . . . . . . . 1995 2,600
La Jolla Village. . . . . . . . . . . . . 1995 3,000
Laguna Beach. . . . . . . . . . . . . . . 1995 2,150
Belmont Shore . . . . . . . . . . . . . . 1995 2,910
Seal Beach. . . . . . . . . . . . . . . . 1994 2,369
Huntington Beach. . . . . . . . . . . . . 1994 3,430
Westwood Village, Los Angeles . . . . . . 1996 2,450
Brea. . . . . . . . . . . . . . . . . . . 1996 10,000

COLORADO
Boulder . . . . . . . . . . . . . . . . . 1997 5,500

HAWAII
Lahaina, Maui . . . . . . . . . . . . . . 1994 3,430

OREGON
Hood River. . . . . . . . . . . . . . . . 1996 7,000
Gresham . . . . . . . . . . . . . . . . . 1996 5,016
Eugene I. . . . . . . . . . . . . . . . . 1996 7,500
Milwaukie . . . . . . . . . . . . . . . . 1996 8,064
Salem I . . . . . . . . . . . . . . . . . 1996 6,875
Jantzen Beach . . . . . . . . . . . . . . 1996 7,932
The Dalles. . . . . . . . . . . . . . . . 1996 6,560
Eugene II . . . . . . . . . . . . . . . . 1996 4,443
Eugene IV . . . . . . . . . . . . . . . . 1996 4,345
Salem II. . . . . . . . . . . . . . . . . 1996 5,000
Portland (Stark). . . . . . . . . . . . . 1996 6,405
Portland (Lloyd Center) . . . . . . . . . 1996 4,341
Portland (Burnside) . . . . . . . . . . . 1996 3,483
Portland (Lombard). . . . . . . . . . . . 1996 5,700
Aloha . . . . . . . . . . . . . . . . . . 1996 3,658
North Bend. . . . . . . . . . . . . . . . 1996 3,500
McMinnville . . . . . . . . . . . . . . . 1996 2,900
Woodstock . . . . . . . . . . . . . . . . 1996 1,200

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Year Opened/
Acquired Square Feet
-------- -----------
WASHINGTON
Longview. . . . . . . . . . . . . . . . . 1996 5,300

All of the Company's restaurants, including the Colorado restaurant
opened in February of 1997, are on leased premises and are subject to varying
lease-specific arrangements. For example, some of the leases require a flat
rent, subject to regional cost-of-living increases, while others additionally
include a percentage of gross sales. In addition, certain of these leases
expire in the near future, and there is no automatic renewal or option to
renew. No assurance can be given that leases can be renewed, or, if renewed,
that rents will not increase substantially, both of which would adversely
affect the Company. Other leases are subject to renewal at fair market value,
which could involve substantial increases. Total restaurant lease expense in
1996 was approximately $1,481,000, and, as indicated above, is subject to
various increases.

With respect to future restaurant sites, the Company believes the
locations of its restaurants are important to its long-term success and will
devote significant time and resources to analyzing prospective sites. The
Company's strategy is to open its restaurants in high-profile locations with
strong customer traffic during day, evening and weekend hours. The Company
has developed specific criteria for evaluating prospective sites, including
demographic information, visibility and traffic patterns.

ITEM 3. LEGAL PROCEEDINGS

Restaurants such as those operated by the Company are subject to a
continuous stream of litigation in the ordinary course of business, most of
which the Company expects to be covered by its general liability insurance.
Punitive damages awards, however, are not covered by general liability
insurance. To date, the Company has not paid punitive damages in respect of
any claims, but there can be no assurance that punitive damages will not be
given with respect to any of such claims or in any other actions which may
arise in any future action.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders in the fourth
quarter of 1996.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

On October 8, 1996, the Company's Common Stock and Redeemable Warrants
became listed in the Nasdaq Small Cap Market ("Nasdaq") (Symbols: CHGO and
CHGOW) in connection with the Offering. On March 21, 1997, the closing
prices of the Common Stock and Redeemable Warrants were $2.75 per share and
$0.50 per Redeemable Warrant, respectively. The table below shows the high
and low sales prices as reported by Nasdaq. The sales prices represent
inter-dealer quotations, without adjustments for retail mark-ups, mark-downs
or commissions.

Calendar Year ended December 31, 1996 Common Stock Redeemable Warrants
- ------------------------------------- ------------ -------------------
High Low High Low
---- --- ---- ---

Fourth Quarter (From October 8, 1996) $6.50 $5.0 $1.75 $0.98

As of March 21, 1997, the Company had 131 shareholders of record and 77
holders of Redeemable Warrants of record.

10
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DIVIDEND POLICY

The Company has not paid any dividends since its inception and has
currently not allocated any funds for the payment of dividends. Rather, it is
the current policy of the Company to retain earnings, if any, for expansion
of its operations, remodeling of existing restaurants and other general
corporate purposes and to not pay any cash dividends in respect of the shares
in the foreseeable future. Should the Company decide to pay dividends in the
future, such payments would be at the discretion of the Board of Directors.

During the three months ended December 31, 1996, the Company did not
sell any equity securities that were not registered under the Securities Act
of 1933, as amended (the "Securities Act").

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data should be read in conjunction with
the Consolidated Financial Statements and related notes thereto as well as
with the discussion below.

Year Ended Year Ended
December 31 December 31
-------------------------------------
1996 1995 1996 1995
-------- -------- ------- -------
(in thousands) (%) (%)
Statement of Operations Data:
Revenues $ 19,865 $ 6,586 100.0% 100.0%
Cost of Sales 6,183 1,848 31.1 28.1
-------- -------- ------- -------
Gross Profit 13,682 4,738 68.9 71.9

Costs and Expenses:
Labor 6,932 2,647 34.9 40.2
Occupancy 1,877 654 9.4 9.9
Operating expenses 2,998 1,250 15.1 19.0
General & administrative 2,258 879 11.4 13.3
Depreciation & amoritzation 1,037 359 5.2 5.5
-------- -------- ------- -------
Total costs and expense 15,102 5,789 76.0 87.9
-------- -------- ------- -------
Loss from operations (1,420) (1,051) (7.1) (16.0)
Other income (expense)
Interest expense, net (507) (472) (2.6) (7.2)
Other (380) (104) (1.9) (1.6)
-------- -------- ------- -------
Total other expense (887) (576) (4.5) (8.7)
-------- -------- ------- -------
Loss before minority interest and taxes (2,307) (1,627) (11.6) (24.7)
Minority interest in partnership 27 27 0.1 0.4
-------- -------- ------- -------
Loss before taxes (2,280) (1,600) (11.5) (24.3)
-------- -------- ------- -------
Income tax expense (9) (6) (0.0) (0.1)
-------- -------- ------- -------
Net loss ($ 2,289) ($ 1,606) (11.5%) (24.4%)
-------- -------- ------- -------
-------- -------- ------- -------

Balance Sheet Data (end of period):
Working capital $ 3,329 $ 22
Intangible assets, net 5,676 5,558
Total assets 18,914 9,943
Total long-term debt (including
current portion) 3,964 4,127
Minority interest 215 253
Shareholders' equity 12,123 4,023

RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with
the Company's Financial Statements and notes thereto included elsewhere in
this Form 10-KSB. Except for the historical information contained herein,
the discussion in this Form 10-KSB contains certain forward looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Form 10-KSB should be read as being applicable to all
related forward-looking statements wherever they appear in this Form 10-KSB.
The Company's actual results could differ materially from those discussed
here. Factors that could cause or contribute to such differences include,
without limitation, those factors discussed herein and in the Company's
prospectus dated October 8, 1996 (the "Prospectus"), including, without
limitation: (i) the Company's ability to manage growth and conversions, (ii)
construction delays, (iii) marketing and other limitations as a result of the
Company's historic concentration in Southern California and current
concentration in the Northwest, (iv) restaurant and brewery industry
competition, (v) impact of certain brewery business considerations, including
without limitation, dependence upon suppliers and related hazards, (vi)
increase in food costs and wages, including without limitation the recent
increase in minimum wage, (vii) consumer trends, (viii) potential uninsured
losses and liabilities, (ix) trademark and servicemark risks, and (x) other
general economic and regulatory conditions and requirements. For further
information, please see the Company's Prospectus.

GENERAL

In March and April, 1996, the Company developed two new restaurants in
Westwood Village (Los Angeles) and Brea, California, respectively. In
addition, on March 29, 1996 the Company acquired 26 restaurants located in
Washington and Oregon by providing the funding for a plan of reorganization
filed with the U.S. Bankruptcy Court by Pietro's Corporation, a Washington
state corporation. The Company sold 7 of the 26 restaurants in the second
quarter of 1996 for no gain or loss. Consequently, the results of operations
for 1996 are not necessarily comparable to the results of operations for the
same period in 1995.

Also during 1996, the Company incurred several significant non-recurring
expenses, which included $390,000 in debt financing costs and $188,000 in
interest associated with certain Convertible Debt (as hereinafter defined)
and a $347,000 consulting fee for shares issued to Woodbridge Holdings, Inc.
in connection with certain corporate development services. These charges
totaled $925,000 or $0.21 loss per share.

11
<PAGE>

The Company's revenues are derived primarily from food and beverage
sales at its restaurants. The Company's expenses consist primarily of food
and beverage costs, labor costs (consisting of wages and benefits), operating
expenses (consisting of marketing costs, repairs and maintenance, supplies,
utilities and other operating expenses), occupancy costs, general and
administrative expenses and depreciation and amortization expenses.

Certain preopening costs, including direct and incremental costs
associated with the opening of a new restaurant, are amortized over a period
of one year from the opening date of such restaurant. These costs include
primarily those incurred to train a new restaurant management team, food,
beverage and supply costs incurred to test all equipment and systems, and any
rent or operating expenses incurred prior to opening. During 1996,
approximately $179,000 of preopening costs were expensed in connection with
the opening of the restaurants in Westwood Village in Los Angeles, California
and in Brea, California. Construction costs, including leasehold capital
improvements are amortized over the remaining useful life of the related
asset, or, for leasehold improvements, over the initial term, if less.

The Company's conversion of five of its restaurants from "BJ's Chicago
Pizzerias" to BJ'S PIZZA & GRILL restaurants resulted in above-normal food
and labor costs in late 1995, and the first half of 1996 -- results which are
similar to that normally experienced in the opening of a new restaurant.
Management believes that the conversions were a significant contributing
factor to substantial comparable store sales increases experienced by the
affected restaurants during 1996. The Company utilizes a calendar year-end
for financial reporting purposes.

RESULTS OF OPERATIONS
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995

REVENUES. Total revenues for the year ended December 31, 1996 increased
to $19,865,000, from $6,586,000 for the comparable period in 1995, an
increase of $13,279,000 or 201.6%. The 26 northwest restaurants, acquired on
March 29, 1996 including, for the period owned by the Company, the 7
restaurants sold during the second quarter (the "Original Northwest
Restaurants") accounted for $9,257,000 of revenues from the date of
acquisition through December 31, 1996. Excluding the Original Northwest
Restaurants, total revenues for the year ended December 31, 1996 increased to
$10,608,000 from $6,586,000, an increase of $4,022,000 or 61.1% for the
comparable period in 1995. Approximately $3,337,000 of the increase was due
to the opening of the Westwood Village (Los Angeles) and Brea, California
restaurants in March and April 1996 respectively, partially offset by the
closure of the La Jolla Prospect restaurant in 1995. Revenues for the seven
stores open the entire comparable period increased to $7,271,000 from
$6,415,000 or 13.3%. Management primarily attributes the increase in
revenues in those stores to the following factors, in order of their
significance: (i) increased customer counts due to the introduction of a new
BJ's menu and concept, (ii) the winter storms experienced during the first
quarter of 1995 which resulted in reduced customer counts during that period
and a related decrease in revenues and (iii) increased customer counts due to
the refurbishment of the La Jolla Village restaurant in November 1995.

COST OF SALES. Cost of food, beverages and paper (cost of sales) for
the restaurants increased to $6,183,000 for the year ended December 31, 1996
from $1,848,000 for the comparable period in 1995, an increase of $4,335,000
or 234.6%. As a percentage of revenues, cost of sales increased to 31.1% for
the period from 28.1% for the comparable period in 1995. The Original
Northwest Restaurants accounted for $3,000,000 of cost of sales from the date
of acquisition through December 31, 1996. Excluding the Original Northwest
Restaurants, cost of sales for the year ended December 31, 1996 increased to
$3,183,000 from $1,848,000 for the comparable period in 1995, an increase of
72.2%. Excluding the Original Northwest Restaurants, as a percentage of
revenues, cost of sales increased to 30.0% for the year ended December 31,
1996 from 28.1% for the comparable period in 1995. Management believes that
cost of sales as a percentage

12
<PAGE>

of sales increased primarily due to the following temporary factors: (i)
additional non-recurring costs incurred, as anticipated, during the testing
and initial implementation phase of the menu expansion, (ii) special
promotional pricing of certain of the new menu items through May 1996, and
(iii) an increase in the cost of mozzarella cheese as compared to the prior
year. The cost of mozzarella cheese, which represents approximately 10.0% of
the Company's total food purchases, was reduced in October 1996. While
Management believes that the most significant factors causing the increase in
food cost percentage were temporary in nature, the increased food cost
percentage may continue as a result of higher relative costs of certain of
the new menu items, which will have an ongoing impact on cost of sales. As a
percentage of revenues, cost of sales excluding the Original Northwest
Restaurants for the three months ended December 31, 1996 was 29.1%.

LABOR. Labor costs for the restaurants increased to $6,932,000 for the
year ended December 31, 1996 from $2,647,000 for the comparable period in
1995, an increase of $4,285,000 or 161.9%. The Original Northwest
Restaurants, acquired on March 29, 1996, accounted for $3,033,000 of labor
costs from the date of acquisition through December 31, 1996. Excluding the
Original Northwest Restaurants, labor costs for the year ended December 31,
1996 increased to $3,899,000 from $2,647,000 for the comparable period in
1995, an increase of 47.3%. Excluding the Original Northwest Restaurants, as
a percentage of revenues, labor costs decreased to 36.8% for the year ended
December 31, 1996 from 40.2% for the comparable period in 1995. This
decrease resulted despite the implementation of the new menu and expanded
concepts which required re-training of all restaurant employees. In
addition, the Company temporarily increased the number of staff members per
shift in both the kitchen and dining room in order to maintain a high level
of service during the transition period. As of June 1996, labor was reduced
to levels which Management believes are more representative of ongoing
staffing requirements. Management believes that this factor, along with
increased revenue for the year ended December 31, 1996, contributed to the
decrease in labor cost as a percent of sales. The recent increase in the
Federal, California and Oregon minimum wage will increase restaurant labor
costs in the future. Management believes that the impact in the California
restaurants of the increase in the Federal and California minimum wage on
labor costs will be mitigated by an October 1, 1996 menu price increase. As a
percentage of revenues, labor costs, excluding the Original Northwest
Restaurants, for the three months ended December 31, 1996 were 35.9%

OCCUPANCY. Occupancy costs increased to $1,877,000 for the year ended
December 31, 1996 from $654,000 for the comparable period in 1995, an
increase of $1,223,000 or 187.0%. The Original Northwest Restaurants
accounted for $917,000 of occupancy costs from the date of acquisition
through December 31, 1996. Excluding the Original Northwest Restaurants,
occupancy costs for the year ended December 31, 1996 increased to $960,000
from $654,000 for the comparable period in 1995, an increase of 46.8%.
Management believes that the increase was due primarily to the opening of the
Westwood (Los Angeles) and Brea, California restaurants in March and April
1996, respectively, offset partially by the closure of the La Jolla -
Prospect restaurant in June 1995. Excluding the Original Northwest
Restaurants, as a percentage of revenues, occupancy costs decreased to 9.0%
for the year ended December 31, 1996 from 9.9% for the comparable period in
1995. Management believes that the decrease in occupancy costs as a percent
of revenue was due to (i) fairly stable occupancy costs in an environment of
increasing comparable store revenue, and (ii) lower occupancy costs relative
to the respective revenues generated by the newly-opened Westwood (Los
Angeles) and Brea, California restaurants. As a percentage of revenues,
occupancy costs, excluding the Original Northwest Restaurants, for the three
months ended December 31, 1996 were 13.5%. Management believes that this
percentage was higher than the rent percentage for the entire year of 1996
due to seasonality and additional property taxes and annual rent incurred
during the three month period ended December 31, 1996.

OPERATING EXPENSES. Operating expenses increased to $2,998,000 for the
year ended December 31, 1996 from $1,249,000 for the comparable period in
1995, an increase of $1,749,000 or 140.0%. The Original Northwest
Restaurants, acquired on March 29, 1996, accounted for $1,525,000 of
operating expenses from the date of acquisition through December 31, 1996.
Excluding the Original Northwest Restaurants, operating expenses for the year
ended December 31, 1996 increased to $1,473,000 from $1,249,000 for the
comparable

13
<PAGE>

period in 1995. Management believes that the $224,000 or 17.9% increase
resulted primarily from the opening of the Westwood (Los Angeles) and Brea,
California restaurants in March and April 1996, respectively. Excluding the
Original Northwest Restaurants, as a percentage of revenue, operating
expenses decreased to 13.9% for the year ended December 31, 1996 from 19.0%
for the comparable period in 1995. Management believes that since a
significant portion of operating expenses are fixed costs, the increase in
comparable store revenue was the primary reason for the decrease in operating
expenses as a percentage of sales. Operating expenses include
restaurant-level operating costs, the major components of which include
marketing, repairs and maintenance, supplies and utilities. As a percentage
of revenues, operating expenses, excluding the Original Northwest
Restaurants, for the three months ended December 31, 1996 were 7.2%.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased to $2,258,000 for the year ended December 31, 1996 from
$879,000 for the comparable period in 1995, a $1,379,000 or 156.9% increase.
The Original Northwest Restaurants, accounted for $802,000 of general and
administrative expenses from the date of acquisition through December 31,
1996. Excluding the Original Northwest Restaurants, general and
administrative expenses for the year ended December 31, 1996 increased to
$1,456,000 from $879,000 for the comparable period in 1995 or 65.5%.
Excluding the Original Northwest Restaurants, as a percentage of revenue,
general and administrative expenses increased to 13.7% for the year ended
December 31, 1996 from 13.3% for the comparable period in 1995. General and
administrative expenses for the year ended December 31, 1996 included a
$347,000 non-cash, non-recurring charge due to the issuance of 69,443 shares
of Common Stock in exchange for corporate development services performed
during 1995. Excluding this non-cash charge, general and administrative
expenses as a percentage of revenues, excluding the Original Northwest
Restaurants were 10.4% for the year ended December 31, 1996. Other than the
above described non-cash charge, the increase in revenue from the opening of
the Westwood (Los Angeles) and Brea, California restaurants as well as the
increase in comparable store sales more than offset the increased general and
administrative expenses in preparation for the initial public offering and
anticipated growth.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
to $1,037,000 for the year ended December 31, 1996 from $359,000 for the
comparable period in 1995, an increase of $678,000 or 188.9%. The Original
Northwest Restaurants accounted for $276,000 of depreciation and amortization
from the date of acquisition through December 31, 1996. Excluding the
Original Northwest Restaurants, depreciation and amortization for the year
ended December 31, 1996 increased to $761,000 from $359,000 for the
comparable period in 1995. Management believes that the increase was
primarily due to the (i) depreciation related to the remodeling of the La Jolla
Village restaurant in November 1995, (ii) the addition of the Westwood (Los
Angeles) and Brea, California restaurants in March and April 1996,
respectively, and (iii) the amortization of pre-opening costs relating to the
Westwood, Los Angeles and Brea, California restaurants of $179,000. There
were no pre-opening expenses in 1995.

INTEREST EXPENSE, NET. Interest expense, net of interest income
increased to $507,000 for the year ended December 31, 1996 from $472,000 for
the comparable period in 1995, an increase of $35,000 or 7.4%. The increase
was primarily due to a reduction in debt in May 1995 with a subsequent
increase in convertible debt in March 1996, offset partially by an increase
in interest income from invested proceeds from the Company's initial public
offering in October, 1996. During 1995 the Company issued 222,462 shares of
stock as additional interest valued at $.75 per share in conjunction with a
January 1995 debt private placement. For accounting purposes the value of
these shares, $167,000, was treated as interest expense. The debt was
repaid during the second and third quarters of 1995 with a portion of the
proceeds from a May 1995 private placement resulting in reduced interest
expense.

14
<PAGE>

OTHER. During 1996 the Company borrowed $3,000,000 in Convertible Debt,
accruing interest at 10% per annum, in order to finance the purchase of the
Original Northwest restaurants. The $390,000 in costs, other than interest,
associated with obtaining this debt financing were amortized as other expense
over a one year period beginning April, 1996. On October 15, 1996,
simultaneous with the closing of the Company's initial public offering, the
entire principal and interest of the Convertible Debt converted into Company
common stock and warrants. Consequently, the remaining $185,000 in
unamortized costs relating to the Convertible Debt were written off as of
that date. As a result, the financing costs and interest associated with the
Convertible Debt will no longer impact the Company's results from operations.

In January, 1995 the Company incurred $104,000 in costs associated with
a debt private placement. The debt was repaid during 1995 and the costs
associated with the debt were charged to other expense during that year.

LIQUIDITY AND CAPITAL RESOURCES

On October 15, 1996 the Company completed its initial public offering
(the "Offering", as previously defined) of 1,800,000 shares of Common Stock
and 1,800,000 Redeemable Warrants pursuant to the Prospectus. On November
26, 1996, the Representative of the underwriters of the Offering exercised
the over-allotment option pursuant to the Prospectus to purchase 270,000
additional Redeemable Warrants (the "Over-Allotment Option"). The Offering,
including the Over-Allotment Option resulted in approximately $6,804,000 in
net proceeds. The funds have been and will be used for the continued
development of the Northwest Restaurants, the Boulder, Colorado restaurant,
and other sites, if possible, as well as for the reduction of debt and
working capital.

The Company historically has operated without working capital, but it
does not have significant inventory or trade receivables and customarily
receives several weeks of credit in purchasing food and supplies. For years
prior to 1996, the Company had working capital deficiencies resulting
primarily from its operating losses, acquisition costs and restaurant
development costs. Since the completion of the Offering in October of
1996, the Company has invested in restaurant development and reduced debt.
Net cash used in operating activities for the year ended December 31, 1996
and the year ended December 31, 1995, were $114,000 and $973,000,
respectively.

Prior to the Offering, the Company primarily financed its operations,
acquisitions, development and expansion from various private placements of
securities completed in January, March and September 1995, and convertible
notes issued in March 1996. These funds have been used primarily for
acquiring and/or developing the California restaurants purchased from Roman
Systems, Inc., the Brea and Westwood, California restaurants, the Northwest
Restaurants, menu and restaurant development costs, restaurant refurbishment,
and working capital. Capital expenditures for the year ended December 31,
1996 and the year ended December 31, 1995 were $4,853,000 and $5,132,000,
respectively.

In connection with the development of the Huntington Beach, California
restaurant in 1994, the Company issued a demand note payable to a related
party in the amount of $350,000 with interest accruing at a rate of 6%. This
demand note was collateralized by the Huntington Beach restaurant and
equipment. This demand note was repaid during 1996.

In connection with the 1995 acquisition of restaurants from Roman
Systems, Inc., the Company, in addition to a $550,000 cash down payment and
assumption of certain liabilities, issued a note in favor of the sellers in
the amount of $3,700,000, which note accrues interest at a rate of 7% per
annum and matures on April 1, 2004. This note is payable in monthly
principal and interest installments of $38,195. Under this note the Company
was also required to make additional payments of $25,000 per month toward
the total outstanding principal until an aggregate of $875,000 in additional
principal payments under the note had been made. In October of 1996, the
Company paid an aggregate of $875,000 in principal amount and as a result

15
<PAGE>

was no longer subject to the latter requirement. This note is collateralized
by the restaurants in Balboa in Newport Beach, La Jolla Village and Laguna
Beach, California.

In connection with the 1996 acquisition of the Brea restaurant, the
Company issued a note in favor of the seller in the amount of $228,000 and
assumed a bank note payable in the amount of $751,000, collateralized by a
$200,000 certificate of deposit maturing March 1, 1998. During April 1996
the $228,000 note was repaid. The $751,000 is payable in monthly principal
installments of $12,513 plus interest accrued at the bank's reference rate
plus 2% and matures March 1, 2001.

In connection with the Pietro's Acquisition, the Company funded the
Debtor's Plan of Reorganization in the amount of $2,350,000 and assumed notes
payable to federal and state taxing authorities in the aggregate amount of
$506,000. The Company is required to pay these notes in the following
principal installments: (i) $32,670 per quarter from July 1, 1996 until
April 1, 1997, (ii) $20,071 per quarter from July 1, 1997 until June 30,
2001, and (iii) varying payments totaling $34,122 from October 1, 2001 until
April 1, 2002. In addition, the Company is required to make interest
payments at the rate of 8.25%.

Also in connection with the Pietro's Acquisition, the Company sold an
aggregate of $3,000,000 in Convertible Debt. Upon the closing of the
Company's Offering in October 1996, the entire principal and interest of the
Convertible Debt converted into Common Stock and warrants. In 1996, $390,000
in financing costs and $188,000 in interest associated with this Convertible
Debt were written off. As a result, the financing costs and interest
associated with the Convertible Debt will no longer impact the Company's
results from operation.

With respect to the leases for the La Jolla-Prospect, California and the
Richland, Washington restaurants, which restaurants were closed and sold by
the Company, respectively, the Company remains liable in the event of default
by the current lessees. Contingent liability for the full remaining term of
the leases was estimated at $613,000 and $555,000 for the La Jolla-Prospect
and Richland locations, respectively. The Company may also be liable for
additional expenses, such as, insurance, real estate taxes, utilities and
maintenance and repairs. Management currently has no reason to believe that
such expenses, if incurred, will be significant.

With respect to the Richland, Washington site, Abby's Inc. ("Abby's"),
an affiliate of A-II, L.L.C., an Arizona LLC, which is the purchaser (the
"Purchaser") of the site has agreed to guarantee payment under the lease. In
addition, both Abby's and the Purchaser have agreed to indemnify the Company
with respect to such related liabilities. Finally, in the event of a
default, the landlord of the Richland site has agreed to exhaust all remedies
against the Purchaser and Abby's prior to pursuing any remedies against the
Company. Management currently has no reason to believe that the Purchaser
and/or Abby's is not capable of performing under the lease.

During 1995 and early 1996 the Company developed and implemented its
extended menu, restaurant concept change and brewery concept for the BJ'S
PIZZA GRILL & BREWERY and BJ'S PIZZA & GRILL restaurants. Expenditures for
the new menu items included food development costs, menu development costs,
menu design and printing, management and staff training and new kitchen
equipment to facilitate new menu items. Expenditures for the BJ'S PIZZA,
GRILL & BREWERY and BJ'S PIZZA & GRILL restaurant concepts included new
interior design, logo design, signage design and uniform design.
Expenditures for the brewery concept included the hiring of a director of
brewing operations, beer menu development costs and brewery design.
Management believes they completed the menu development and restaurant
concept development phase of its business plan in the second quarter and that
the costs associated with many of these changes are non-recurring.

Management believes the Company can be profitable through increased
sales relating to its extended menu and to the conversion and refurbishment
of the Northwest Restaurants. Management also believes that

16
<PAGE>

profitability may be enhanced by reduced costs associated with Company
produced beer and vendor volume purchasing associated with the Northwest
Restaurant acquisition, the Company's recent restaurant openings in Westwood
Village (Los Angeles) and Brea, California and the opening of the restaurant
in Boulder, Colorado. Finally, Management expects a further reduction in
costs as a result of the reduction of overhead through consolidation of
general and administrative expenses.

The Company currently intends to utilize remaining capital primarily for
the conversion and refurbishment of restaurants in the Northwest, remaining
development costs associated with the restaurant in Boulder, Colorado, and
the acquisition of other sites, if possible, as well as for working capital
purposes. Management currently anticipates a total of $5,000,000 in
additional capital expenditure requirements, which includes requirements for
the Northwest Restaurant conversions, the Boulder, Colorado restaurant, and
other sites, if possible. Management opened the restaurant in Boulder,
Colorado, in February of 1997 and is currently in various stages of
converting several of the Northwest restaurants. Of these Northwest
Restaurants, while no assurances can be given, Management anticipates that a
BJ'S PIZZA & GRILL in Eugene, Oregon will be open approximately in April of
1997. The Company intends to continue to develop and convert the Northwest
Restaurants through 1997 and to complete the conversion in the second quarter
of 1998. Management believes that the net proceeds from the Company's
Offering and operating cash flow will be sufficient for the Company to fund
its operations and continue to meet its business plan over the next 15
months. While Management will be required to close certain restaurants or
sections of such restaurants while undergoing conversion, Management believes
that it can somewhat lessen the impact of such closings by coordinating with
neighboring locations, where possible, to continue delivery operations.
However, no assurance can be given that Management can successfully implement
such objective. Further, there can be no assurance that future events,
including problems, delays, additional expenses and difficulties encountered
in expansion and conversion of restaurants, will not require additional
financing, or that such financing will be available if necessary.

IMPACT OF INFLATION

Impact of inflation on food, labor and occupancy costs can significantly
affect the Company's operations. Many of the Company's employees are paid
hourly rates related to the federal minimum wage, which has been increased
numerous times and remains subject to increase. Management believes that food
costs, which increased in the first quarter due to the expanded menu, will
stabilize and efficiencies may be obtained in purchasing and brew-pub
operations.

SEASONALITY AND ADVERSE WEATHER

The Company's results of operations have historically been impacted by
seasonality, which directly impacts tourism at the Company's coastal
locations.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" effective with its fiscal year
ending December 31,1996. SFAS No. 121 requires an entity to review
long-lived assets and certain identifiable intangibles whenever events or
changes in circumstances indicate the carrying amount of an asset may not be
recoverable. Impairment losses are recognized when the carrying amount of
the asset exceeds the estimated fair value of the asset. There was no impact
on the Company as a result of implementing SFAS No. 121.

The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 defines a fair value
based method of accounting for an employee stock option. Fair value of the
stock option is determined considering factors such as the exercise price,
the expected life of the option, the current price of the underlying stock
and its volatility, expected dividends on the stock, and the risk-free
interest rate for the expected term of the option. Under the fair value
based method, compensation cost is measured at the grant date based on the
fair value of the award and is recognized over the service period. Pro forma
disclosures for entities that elect to continue to measure compensation cost
under the intrinsic method provided by Accounting Principles Board Opinion
No. 25 must include the effects of all awards granted in fiscal years that
begin after December 15, 1994.

17
<PAGE>

In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share," which establishes standards for computing and
presenting earnings per share. SFAS No. 128 requires the replacement of
primary earnings per share with basic earnings per share. Basic earnings per
share excludes dilution, and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding during the period. The Company will be required to adopt the
provisions of SFAS No. 128 for 1997.

Other recently issued standards of the FASB are not expected to affect
the Company as conditions to which those standards apply are absent.

ITEM 7. FINANCIAL STATEMENTS

See the Index to Financial Statements attached hereto.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

The information required by this Item is incorporated herein by
reference to the information contained in the Proxy Statement relating to the
Annual Meeting of Shareholders, which will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the year ended
December 31 1996.

ITEM 10. EXECUTIVE COMPENSATION

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

18
<PAGE>

(a) List of Exhibits
Exhibit
Number Description
------ -----------

2.1 Debtor's Plan of Reorganization incorporated by reference to
Exhibit 2.1 of the Registration Statement on Form SB-2, as filed
on June 28, 1996 (Registration No. 333-5182-LA), and declared
effective by the Securities and Exchange Commission on October 8,
1996 (referred to herein as the "Registration Statement").

2.2 Asset Purchase Agreement by and between the Company and Roman
Systems, Inc. incorporated by reference to Exhibit 2.2 of the
Registration Statement.

2.3 Secured Promissory Note by and between the Company and Roman
Systems, Inc. filed as Exhibit 2.3 of the Registration Statement.

3.1 Amended and Restated Articles of Incorporation of the Company, as
amended, incorporated by reference to Exhibit 3.1 of the Registration
Statement.

3.2 Bylaws of the Company, incorporated by reference to Exhibit 3.2 of
the Registration Statement.

4.1 Specimen Common Stock Certificate of the Company, incorporated by
reference to Exhibit 4.1 of the Registration Statement.

4.2 Warrant Agreement, incorporated by reference to Exhibit 4.2 of the
Registration Statement.

4.3 Specimen Common Stock Purchase Warrant, incorporated by reference
to Exhibit 4.3 of the Registration Statement.

4.4 Form of Representative's Warrant, incorporated by reference to
Exhibit of the Registration Statement

10.1 Form of Employment Agreement of Jeremiah J. Hennessy, incorporated
by reference to Exhibit 10.1 of the Registration Statement.

10.2 Form of Employment Agreement of Paul Motenko, incorporated by
reference to Exhibit 10.2 of the Registration Statement.

10.3 Form of Indemnification Agreement with Officers and Directors,
incorporated by reference to Exhibit 10.6 of the Registration
Statement.

10.4 Chicago Pizza & Brewery, Inc. Stock Option Plan, incorporated by
reference to Exhibit 10.7 of the Registration Statement.

10.5 Lease Agreement - Corporate Headquarters, Mission Viejo,
incorporated by reference to Exhibit 10.9 of the Registration
Statement.

10.6 Lease Agreement - Corporate Headquarters, Chicago Pizza Northwest,
incorporated by reference to Exhibit 10.10 of the Registration
Statement

10.7 Consulting Agreement between the Company and ASSI, Inc. --
Pietro's, incorporated by reference to Exhibit 10.11 of the
Registration Statement.

10.8 Consulting Agreement between the Company and ASSI, Inc. -- Nevada,
incorporated by reference to Exhibit 10.12 of the Registration
Statement.

19
<PAGE>

Exhibit
Number Description
------ -----------

10.9 Note Purchase Agreement by and between the Company and ASSI, Inc.,
incorporated by reference to Exhibit 10.13 of the Registration
Statement.

10.10 Note Purchase Agreement by and between the Company and Norton
Herrick, incorporated by reference to Exhibit 10.14 of the
Registration Statement.

10.11 Asset Purchase Agreement by and between the Company and Abby's,
Inc., incorporated by reference to Exhibit 10.15 of the
Registration Statement.

10.12 BJ's Lahaina, L.P. Partnership Agreement, incorporated by
reference to Exhibit 10.16 of the Registration Statement.

10.13 Pepsi Supplier Agreement, incorporated by reference to Exhibit
10.17 of the Registration Statement.

10.14 Underwriting Agreement between the Company and The Boston Group,
L.P., as Representative of the Several Underwriters named therein,
incorporated by reference to Exhibit 1.1 of the Registration
Statement.

21 List of Subsidiaries, incorporated by reference to Exhibit 21.1 of
the Registration Statement.

27 Financial Date Schedule

(b) The Company filed no Reports on Form 8-K during the last quarter
of 1996.

20
<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

CHICAGO PIZZA & BREWERY, INC.

By: /s/PAUL A. MOTENKO
-----------------------------------------
Paul A. Motenko, Chief Executive Officer

Pursuant to the requirements of the Securities and Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.

Signature Capacity Date
--------- -------- ----

By: /s/PAUL A. MOTENKO Director, Chief Executive Officer, March 29, 1997
------------------- Chairman of the Board and Vice-
Paul A. Motenko President and Secretary

By: /s/JEREMIAH J. HENNESSY President, Chief Operating March 29, 1997
------------------------ Officer, Chief Financial Officer,
Jeremiah J. Hennessy Principal Accounting Officer and
Director

By: /s/ALEXANDER M. PUCHNER Director of Brewing Operations March 29, 1997
------------------------ and Director
Alexander M. Puchner

By: /s/BARRY J. GRUMMAN Director March 29, 1997
--------------------
Barry J. Grumman

21
<PAGE>

CHICAGO PIZZA & BREWERY, INC.
__________

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
----

Report Of Independent Accountants F-2

Consolidated Balance Sheets As Of December 31, 1996 and 1995 F-3

Consolidated Statements Of Operations For The Years Ended
December 31, 1996 and 1995 F-4

Consolidated Statements Of Shareholders' Equity For The Years
Ended December 31, 1996 and 1995 F-5

Consolidated Statements Of Cash Flows For The Years
Ended December 31, 1996 and 1995 F-6

Notes To Consolidated Financial Statements F-7

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS
__________

To the Shareholders
Chicago Pizza & Brewery, Inc.

We have audited the accompanying consolidated balance sheets of Chicago Pizza
& Brewery, Inc. (the "Company"), as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years ended December 31, 1996 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Chicago Pizza & Brewery, Inc. as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1996 and 1995, in conformity with generally accepted
accounting principles.

COOPERS & LYBRAND L.L.P.

Los Angeles, California
March 24, 1997

F-2
<PAGE>

CHICAGO PIZZA & BREWERY, INC.

CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
__________
<TABLE>
<CAPTION>

1996 1995
---- ----
<S> <C> <C>
A S S E T S:
Current assets:
Cash and cash equivalents $ 5,485,808 $ 1,791,769
Restricted cash 200,000 200,000
Accounts receivable 157,422 11,100
Inventory 256,668 62,525
Prepaids and other current assets 343,176 285,432
------------ ------------

Total current assets 6,443,074 2,350,826

Property and equipment, net 6,234,061 1,870,531
Other assets 191,118 163,608
Restricted cash 369,123
Intangible assets, net 5,676,349 5,558,244
------------ ------------

Total assets $ 18,913,725 $ 9,943,209
------------ ------------
------------ ------------

LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 1,264,798 $ 446,597
Accrued expenses 1,199,092 900,326
Notes payable to related parties 328,681 967,474
Current portion of long-term debt 255,636
Current portion of obligations under capital lease 66,266 14,655
------------ ------------

Total current liabilities 3,114,473 2,329,052

Notes payable to related parties 2,386,547 3,122,761
Obligations under capital lease 110,322 22,239
Long-term debt 816,187
Other liabilities 147,771 193,167
------------ ------------

Total liabilities 6,575,300 5,667,219
------------ ------------

Minority interest in partnership 215,128 252,541

Commitments (Note 8)

Shareholders' equity:
Preferred stock, 5,000,000 shares authorized, none issued
or outstanding
Common stock, no par value, 60,000,000 and 20,000,000
shares authorized as of December 31, 1996 and 1995,
respectively, 6,408,321 and 3,788,878 shares issued and
outstanding as of December 31, 1996 and 1995, respectively 15,039,646 5,568,467
Capital surplus 1,196,029 278,750
Accumulated deficit (4,112,378) (1,823,768)
------------ ------------

Total shareholders' equity 12,123,297 4,023,449
------------ ------------

Total liabilities and shareholders' equity $ 18,913,725 $ 9,943,209
------------ ------------
------------ ------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-3
<PAGE>

CHICAGO PIZZA & BREWERY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31, 1996 and 1995
__________

1996 1995
---- ----

Revenues $ 19,865,390 $ 6,586,195
Cost of sales 6,182,528 1,848,282
------------ -----------

Gross profit 13,682,862 4,737,913

Costs and expenses:
Labor and benefits 6,932,481 2,647,089
Occupancy 1,877,321 654,138
Operating expenses 2,998,333 1,249,418
General and administrative 2,257,701 878,681
Depreciation and amortization 1,037,320 359,282
------------ -----------

Total cost and expenses 15,103,156 5,788,608
------------ -----------

Loss from operations (1,420,294) (1,050,695)

Other expense:
Interest expense, net (506,959) (471,653)
Other (380,010) (104,000)
------------ -----------
Total other expense (886,969) (575,653)

Loss before minority interest and
income taxes (2,307,263) (1,626,348)

Minority interest in partnership 27,223 26,828
------------ -----------

Loss before income taxes (2,280,040) (1,599,520)

Income tax expense (8,570) (6,400)
------------ -----------

Net loss ($2,288,610) ($1,605,920)
------------ -----------
------------ -----------

Net loss per common share ($0.52) ($0.55)
------------ -----------
------------ -----------

Weighted average number of common shares
outstanding 4,391,709 2,935,819
------------ -----------
------------ -----------

The accompanying notes are an integral part of these consolidated financial
statements.

F-4
<PAGE>

CHICAGO PIZZA & BREWERY, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
__________
<TABLE>
<CAPTION>
Chicago Pizza & Brewery, Inc. Roman Systems
Common Stock Common Stock Partners'
---------------------------- Capital ---------------- Capital Accumulated
Shares Amount Surplus Shares Amount (Deficit) Deficit Total
------ ------ ------- ------ ------ --------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 1,622,664 $ 170,118 20,000 $ 10,000 $ 38,855 ($ 846,535) ($627,562)
Adjustment to consolidate previously
combined entities (20,000) (10,000) (38,855) 628,687 579,832
Common stock issued for consulting
services 69,792 52,344 52,344
Common stock issued for the
purchase of Roman Systems 348,960 261,720 261,720
Common stock issued for private
placement offerings, net 1,747,462 5,084,285 5,084,285
Warrants issued for financing $ 42,000 42,000
Warrants issued for private placement
offerings 236,750 236,750
Net loss (1,605,920) (1,605,920)
---------- ---------- ---------- ----------- -----------

Balance, December 31, 1995 3,788,878 5,568,467 278,750 (1,823,768) 4,023,449

Initial public offering of common
stock, net 1,800,000 6,348,964 6,348,964
Initial public offering of warrants, net 454,779 454,779
Conversion of note payable 750,000 2,775,000 412,500 3,187,500
Warrants issued for consulting services 50,000 50,000
Common Stock issued for consulting
services 69,443 347,215 347,215
Net loss (2,288,610) (2,288,610)
---------- ---------- ---------- ------- ------- ------- ----------- -----------

Balance, December, 31, 1996 6,408,321 $ 15,039,646 $1,196,029 - $ - $ - ($4,112,378) $12,123,297
---------- ---------- ---------- ------- ------- ------- ----------- -----------
---------- ---------- ---------- ------- ------- ------- ----------- -----------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-5
<PAGE>

CHICAGO PIZZA & BREWERY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996 and 1995
__________

<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net loss ($2,288,610) ($1,605,290)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,037,320 359,282
Amortization of debt financing costs 390,000
Minority interest in partnership (27,223) (26,828)
Noncash interest and consulting expense 559,715 174,847
Noncash payment of Director fees 21,000
Changes in assets and liabilities:
Accounts receivable (59,054) 4,850
Inventory (45,799) 4,313
Prepaids and other current assets (150,879) (227,381)
Other assets 91,437 142,238
Accounts payable 590,421 (31,713)
Accrued expenses (165,766) 212,040
Other liabilities (45,396)
----------- -----------
Net cash used in operating activities (113,834) (973,272)
----------- -----------

Cash flows provided by (used in) investing activities:
Acquisition of Roman Systems and limited partnership interests (4,421,142)
Acquisition of Chicago Pizza Northwest, net of cash acquired (2,479,343)
Acquisition of Brea, California micro-brewery leasehold interest (930,400)
Purchases of equipment (2,363,220) (710,532)
Purchase of trademark and liquor license (30,000)
Proceeds from Abby's sale, net of expenses 950,000
----------- -----------

Net cash used in investing activities (4,852,963) (5,131,674)
----------- -----------

Cash flows provided by (used in) financing activities:
Borrowings on related party debt 4,988,113
Borrowing on short-term debt 3,327,912
Borrowing on long-term debt 750,771
Payments on related party debt (1,375,007) (2,096,587)
Payments on debt (512,865)
Transfer to restricted cash (200,000)
Capital lease payments (41,527) (11,888)
Financing costs for private placement offering (953,812)
Proceeds from stock issuance, net of costs 6,456,964 5,871,250
Proceeds from warrants, net of costs 454,779 249,750
Distributions to partners (10,191)
Debt financing costs (390,000)
----------- -----------

Net cash provided by financing activities 8,660,836 7,846,826
----------- -----------

Net increase in cash and cash equivalents 3,694,039 1,741,880

Cash and cash equivalents, beginning of period 1,791,769 49,889
----------- -----------

Cash and cash equivalents, end of period $5,485,808 $1,791,769
----------- -----------
----------- -----------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-6
<PAGE>

CHICAGO PIZZA & BREWERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________

1. The Company And Summary Of Significant Accounting Policies:

ORGANIZATION

Chicago Pizza & Brewery, Inc. (the "Company") was formed in 1991 by
Mr. Jeremiah Hennessy and Mr. Paul Motenko (the "Owners") to operate and
manage five existing "BJ's Chicago Pizzeria" restaurants in Southern
California owned by Roman Systems, Inc. ("Roman Systems") under a
Management Agreement (the "Management Agreement") with Roman Systems.
Pursuant to the Management Agreement, the Company had the right and
obligation to open, operate and manage BJ's Chicago Pizzeria restaurants.
In 1992, the Owners formed CPA-BG, Inc. ("CPA-BG") and opened two
restaurants with CPA-BG as the general partner of BJ's Belmont Shore, L.P.
and BJ's La Jolla, L.P. in 1992 and 1993, respectively. In 1994, the
Company opened two BJ's Chicago Pizzeria restaurants in Huntington Beach
and Seal Beach. Additionally, in 1994, the Company opened a restaurant in
Lahaina, Hawaii as a limited partner of BJ's Lahaina, L.P. The general
partners of BJ's Lahaina, L.P. were CPA010, Inc. ("CPA010"), which was
formed by the Owners, and Blue Max, Inc. ("Blue Max").

Effective January 1, 1995, pursuant to the Asset Purchase Agreement between
the Company and Roman Systems (the "Asset Purchase Agreement"), the Company
purchased the three existing BJ's Chicago Pizzeria restaurants operated and
managed under the Management Agreement and terminated the Management
Agreement. As part of the Asset Purchase Agreement, the Company assumed
responsibility for closing two of Roman Systems' existing BJ's Chicago
Pizzeria restaurants in Santa Ana and San Juan Capistrano, California and
assumed the net liabilities related thereto. These restaurants were closed
in 1995.

Effective January 1, 1995, the Company purchased the limited partnership
interests of BJ's Belmont Shore, L.P. and BJ's La Jolla, L.P. The general
partnership interests of CPA-BG were transferred to the Company for no
consideration prior to the acquisition of the limited partnership
interests. The general partnership interests in BJ's Lahaina, L.P. were
also transferred to the Company for no consideration. Additionally, the
Company closed a BJ's Chicago Pizzeria restaurant in 1995. As of
December 31, 1995, the Company owned seven BJ's Chicago Pizzeria
restaurants, all in coastal locations in Southern California and Hawaii.

F-7
<PAGE>

CHICAGO PIZZA & BREWERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________

1. The Company And Summary Of Significant Accounting Policies, Continued:

ORGANIZATION, Continued

On March 29, 1996, the Company acquired 26 restaurants located in Oregon
and Washington by providing the funding for the Debtor's (Pietro's Corp.)
Plan of Reorganization, Dated February 29, 1996, as modified (the "Debtor's
Plan") and thereby acquired all the stock in the reorganized entity known
as Chicago Pizza Northwest, Inc. ("CPNI"). The Debtor's Plan was confirmed
by an order of the Bankruptcy Court on March 18, 1996 and the Company
funded the Debtor's Plan on March 29, 1996. The operating results for the
acquired restaurants have been included in the Company's consolidated
financial operations since the date of acquisition.

On May 15, 1996, the Company agreed to sell seven of the restaurants
purchased from Pietro's Corp. Two of the restaurants were sold on May 31,
1996, two additional restaurants were sold on June 24, 1996 and three
additional restaurants were sold on June 26, 1996. The operating results
for the seven restaurants sold were included in the Company's consolidated
operating results for the period they were owned by the Company. No gain
or loss was recognized on the sale of the restaurants.

The following summarized, unaudited pro forma results of operations for the
years ended December 31, 1996 and 1995 assume the acquisition of Pietro's
Corporation occurred as of the beginning of the respective periods:

Pro Forma Pro Forma
Year Ended Year Ended
December 31, December 31,
1996 1995
------------ ------------
Revenues $ 23,644,919 $ 21,219,932

Net loss ($ 2,454,537) ($ 2,057,005)

Loss per share ($ 0.56) ($ 0.70)

BASIS OF PRESENTATION

The accompanying financial statements of the Company as of and for the
years ended December 31, 1996 and 1995 are presented on a consolidated
basis, and include the accounts of the Company and BJ's Lahaina, L.P. All
significant intercompany transactions and balances have been eliminated.

F-8
<PAGE>

CHICAGO PIZZA & BREWERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________

1. The Company And Summary Of Significant Accounting Policies, Continued:

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of highly liquid investments with an
original maturity of three months or less when purchased. Cash and cash
equivalents are stated at cost, which approximates market value.

RESTRICTED CASH

During 1995, in connection with the Westwood property lease, the Company
deposited $200,000 into a restricted cash account, which could not be
eliminated without the written consent of the lessor. The landlord consent
was obtained in 1996 and the restriction was eliminated.

In 1996, as part of the acquisition of the Brea restaurant location, the
Company assumed an existing bank loan with the condition that a $200,000
certificate of deposit be restricted as collateral. Additionally, as part
of the Pietro's Acquisition, the Company acquired U.S. Treasury Notes,
which are restricted for Washington State Workers' Compensation insurance.
The fair market value of these notes at December 31, 1996 was $369,123.

INVENTORY

Inventory is stated at the lower of cost (first-in, first-out) or market
and is comprised primarily of food and beverages for the restaurant
operations.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Renewals and betterments that
materially extend the life of an asset are capitalized while maintenance
and repair costs are charged to operations as incurred. When property and
equipment are sold or otherwise disposed of, the asset account and related
accumulated depreciation and amortization accounts are relieved, and any
gain or loss is included in operations.

F-9
<PAGE>

CHICAGO PIZZA & BREWERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________

1. The Company And Summary Of Significant Accounting Policies, Continued:

PROPERTY AND EQUIPMENT, Continued

Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the related assets or, for leasehold
improvements, over the term of the lease, if less. The following are the
estimated useful lives:

Furniture and fixtures 7 years
Equipment 7-10 years
Leasehold improvements 7-25 years

Smallwares are capitalized upon the opening of a new restaurant. All
subsequent purchases of smallwares are expensed as incurred.

LEASES

Leases that meet certain criteria are capitalized and included with
property and equipment. The resulting assets and liabilities are recorded
at the lesser of cost or amounts equal to the present value of the minimum
lease payment at the beginning of the lease term. Such assets are
amortized evenly over the related life of the lease or the useful lives of
the assets. Interest expense relating to these liabilities is recorded to
effect constant rates over the terms of the leases. Leases that do not
meet the criteria for capitalization are classified as operating leases and
rentals are charged to expense as incurred.

PREPAIDS AND OTHER CURRENT ASSETS

The Company capitalizes restaurant preopening costs which include the
direct and incremental costs associated with the opening of a new
restaurant. These are primarily costs incurred to develop new restaurant
management teams, and the food, beverage and supply costs incurred to
perform testing of all equipment, concept, systems and recipes. The
capitalized costs are amortized on a straight-line basis over a period of
one year, beginning on the restaurant's opening date. Preopening costs
totaled $204,634 and $68,405 as of December 31, 1996 and December 31, 1995,
respectively.

F-10
<PAGE>

CHICAGO PIZZA & BREWERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________

1. The Company And Summary Of Significant Accounting Policies, Continued:

INTANGIBLE ASSETS

Goodwill from the acquisition of the net assets of Roman Systems and the
acquisition of the limited partnership interests of BJ's Belmont Shore,
L.P. and BJ's La Jolla, L.P. as of January 1, 1995 as well as the
acquisition of Pietro's as of March 29, 1996 represents the excess of cost
over fair value of net assets acquired and is being amortized over 40 years
using the straight-line method. Also included in intangible assets, are
trademarks which are being amortized over 10 years.

During 1994, the Company obtained the lease rights to open a BJ's Chicago
Pizzeria restaurant in Lahaina. The original lessee of the property has a
sublease of the property to Blue Max. The Company purchased the stock of
Blue Max to acquire the sole assets of the Company, the liquor license for
Lahaina. The total amount paid was $100,000 which consisted of $25,000 for
the liquor license, $25,000 to obtain the lease and $50,000 for the
covenant not to compete. The lease right and the covenant not to compete
are being amortized over 8.5 years, using the straight-line method.

The Company periodically evaluates the carrying value of goodwill including
the related amortization periods. The Company determines whether there has
been impairment by comparing the anticipated undiscounted future operating
income of the acquired restaurants with the carrying value of the goodwill.

ADVERTISING COSTS

Advertising costs are expensed as incurred. Advertising expense for the
years ended December 31, 1996 and 1995 was $741,194 and $131,315,
respectively.

INCOME TAXES

For the year ended December 31, 1996 and 1995, the Company operated on a
consolidated tax basis as a "C" corporation (Chicago Pizza & Brewery).
BJ's Lahaina, L.P. operated as a limited partnership. In the first quarter
of 1996, the Company acquired Chicago Pizza Northwest, Inc.

F-11
<PAGE>

CHICAGO PIZZA & BREWERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________

1. The Company And Summary Of Significant Accounting Policies, Continued:

INCOME TAXES, Continued

The Company utilizes Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes," which requires the recognition of
deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred income taxes are recognized
for the tax consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting amounts at
each year-end based on enacted tax laws and statutory tax rates applicable
to the periods in which differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred
tax assets to the amount expected to be realized. The provision for income
taxes represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.

MINORITY INTEREST

For the consolidated financial statements as of December 31, 1996 and 1995,
minority interest represents limited partners' interests totaling 46.32%
for BJ's Lahaina, L.P.

USE OF ESTIMATES

The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions for the reporting period and as of the financial statement
date. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported amounts of revenues and expenses. Actual
results could differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107. "Disclosure about Fair Value of Financial Instruments,
requires disclosure of fair value information about most financial
instruments both on and off the balance sheet, if it is practicable to
estimate. SFAS No. 107 excludes certain financial instruments, such as
certain insurance contracts, and all non-financial instruments from its
disclosure requirements. A financial instrument is defined as contractual
obligation that ultimately ends with the delivery of cash or an ownership
interest in an entity. Disclosures regarding the fair value of financial
instruments have been derived using external market sources, estimates
using present value or other valuation techniques. Cash, accounts payable,
accrued liabilities and short term debt are reflected in the financial
statements at fair value because of the short-term maturity of these
instruments. The fair value of long-term debt closely approximates its
carrying value.

PER SHARE INFORMATION

Per share information is based on the weighted average number of common
shares outstanding and the dilutive effect of common share equivalents, if
any.

F-12
<PAGE>

CHICAGO PIZZA & BREWERY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________

1. The Company And Summary Of Significant Accounting Policies, Continued:

STOCK SPLIT

In December 1994 and May 1995, the Board of Directors declared a 19,000-
for-1 stock split and a .34896-for-1 reverse stock split, respectively, of
the Company's common stock. All references to the number of shares and per
share amounts have been adjusted to give retroactive effect to the stock
splits for all periods presented.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" effective with its fiscal year ending December 31,1996. SFAS No. 121
requires an entity to review long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. Impairment losses are
recognized when the carrying amount of the asset exceeds the estimated fair
value of the asset. There was no impact on the Company as a result of
implementing SFAS No. 121.

STOCK-BASED COMPENSATION

The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 defines a fair
value based method of accounting for an employee stock option. Fair value
of the stock option is determined considering factors such as the exercise
price, the expected life of the option, the current price of the underlying
stock and its volatility, expected dividends on the stock, and the
risk-free interest rate for the expected term of the option. Under the
fair value based method, compensation cost is measured at the grant date
based on the fair value of the award and is recognized over the service
period. Pro forma disclosures for entities that elect to continue to
measure compensation cost under the intrinsic method provided by Accounting
Principles Board Opinion No. 25 must include the effects of all awards
granted in fiscal years that begin after December 15, 1994.

F-13
<PAGE>

CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------

1. The Company And Summary Of Significant Accounting Policies, Continued:

RECENTLY ISSUED ACCOUNTING STANDARDS

In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share," which establishes standards for
computing and presenting earnings per share. SFAS No. 128 requires the
replacement of primary earnings per share with basic earnings per share.
Basic earnings per share excludes dilution, and is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding during the period. The Company will be required
to adopt the provisions of SFAS No. 128 for 1997. The implementation of
SFAS NO. 128 is not expected to significantly change the calculation of
earnings per share.

Other recently issued standards of the FASB are not expected to affect the
Company as conditions to which those standards apply are absent.

BUSINESS OPERATIONS

The Company has incurred net losses during its organization and acquisition
of restaurants. While many of these costs were created by the ramping-up
of the organization and restaurant concept development, including a more
expansive menu, food testing, and micro-brewery concepts, management
believes that such costs will be reduced in the future. Management's plans
for a return to profitability include increasing sales through a more
expansive menu and refurbishing of restaurants in the Northwest, increasing
micro-brew beer sales, reducing the cost of sales through vendor volume
purchases, reducing general and administrative costs by consolidation of
the Company's existing corporate structure and CPNI's corporate structure
and reduction of interest expense through use of a portion of the proceeds
from the initial public offering to pay off debt.

While there can be no assurance that management's plans, if executed, will
return the Company to profitability, management believes their plans
provide the Company with a strong base to accomplish their goals.

2. Concentration Of Credit Risk:

Financial instruments which potentially subject the Company to a
concentration of credit risk, as defined by SFAS No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance Sheet Risk and
Concentrations of Credit Risk," principally consist of cash and cash
equivalents. The Company maintains its cash accounts at various banking
institutions. At times, cash balances may be in excess of the FDIC
insurance limit. Cash equivalents represent money market funds and
certificates of deposits.

Continued

F-14

<PAGE>

CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------

3. Property and Equipment:

Property and equipment consisted of the following as of:

December 31,
--------------------------
1996 1995
---------- ----------
<S> <C> <C>
Furniture and fixtures $ 236,901 $ 96,349
Equipment 2,466,648 618,101
Leasehold improvements 3,507,971 1,421,939
---------- ----------
6,211,520 2,136,389
Less, accumulated depreciation and amortization
(918,610) (265,858)
Construction in progress 941,151 -
---------- ----------

$6,234,061 $1,870,531
---------- ----------
---------- ----------
</TABLE>

4. Intangible Assets:

Intangible assets consisted of the following as of:

December 31,
-------------------------
1996 1995
--------- ---------
<S> <C> <C>
Goodwill $5,798,251 $5,555,128
Trademarks 48,000 38,000
Covenant not to compete 50,000 50,000
Lease right for Lahaina lease 25,000 25,000
Liquor licenses 65,000 45,000
--------- ---------

5,986,251 5,713,128
Less, accumulated amortization 309,902 154,884
--------- ---------

$5,676,349 $5,558,244
--------- ---------
--------- ---------

</TABLE>

Continued

F-15

<PAGE>

CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------

5. Accrued Expenses:

Accrued expenses consisted of the following as of:

December 31,
------------------------
1996 1995
---------- --------
<S> <C> <C>
Accrued professional fees $306,089 $216,151
Accrued rent 282,572 215,271
Payroll related liabilities 403,725 116,854
Accrued interest 40,235 33,308
Other 166,471 318,742
---------- --------

$1,199,092 $900,326
---------- --------
---------- --------

</TABLE>

6. Debt:

RELATED-PARTY DEBT

Related-party debt consisted of the following as of:

December 31,
-------------------------
1996 1995
---------- ---------
<S> <C> <C>

Note payable to related party, with interest rate
of 6%, due on demand, collateralized by the
property and equipment of BJ's Huntington
Beach restaurant $350,000
Note payable to shareholder, with interest rate of
6%, due on demand $20,296 74,686

</TABLE>

Continued

F-16

<PAGE>

CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------

6. Debt, Continued:

RELATED-PARTY DEBT, Continued

December 31,
-------------------------
1996 1995
---------- ---------
<S> <C> <C>
Note payable to related party, with interest rate
of 12%, maturing on March 22, 1998 $ 31,021
Note payable to Roman Systems, with interest
rate of 7%, maturing April 1, 2004,
collateralized by the BJ's Laguna, BJ's La
Jolla and BJ's Balboa restaurants $2,597,578 3,487,528
Note payable to Roman Systems, with interest
rate of 2.25% plus the bank's reference rate
(8.25% at December 31, 1996 and 8.5% at
December 31, 1995), due in monthly
installments of $3,500, maturing June 1, 1999 97,354 147,000
---------- ---------

Total related-party debt 2,715,228 4,090,235

Less, current portion 328,681 967,474
---------- ---------

$2,386,547 $3,122,761
---------- ---------
---------- ---------

</TABLE>

Total interest incurred during the years ended December 31, 1996 and 1995,
was approximately $567,000 and $532,000, respectively. Future maturities
of related party debt for each of the five years subsequent to December 31,
1996 and thereafter are as follows:

1997 $328,681
1998 336,306
1999 335,581
2000 350,147
2001 378,068
Thereafter 986,445
---------

$2,715,228
---------

Continued

F-17
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------

6. Debt, Continued:

OTHER LONG-TERM DEBT

Other long-term debt consisted of the following as of December 31, 1996:

<TABLE>
<S> <C>
Note payable with interest rate of 2% plus the bank's reference rate
(8.25% at December 31, 1996), due in monthly installments of
$12,513, maturing March 1, 2001, collateralized by $200,000
certificate of deposit maturing March 1, 1998. $631,157
Notes payable for Pietro's outstanding tax claims as part of the
Debtor's Plan of Reorganization, due in quarterly installments of
$32,670 from July 1, 1996 through April 1, 1997 and $20,071
from July 1, 1997 through June 30, 2001 and varying payments
totaling an aggregate of $34,122 from October 1, 2001 until
April 1, 2002. Interest accrues at 8.25% 440,666
---------

1,071,823
Less, current portion 255,636
---------

$816,187
---------
---------

</TABLE>

CONVERTIBLE NOTES

In February 1996, the Company issued $3,000,000 in Convertible Notes with
an interest rate of 10%. At the completion of the Company's initial public
offering, the principal and accrued interest thereon automatically
converted into 750,000 shares of common stock and 4,500,000 warrants. The
Company incurred $390,000 in financing costs related to these notes, which
is included in other expense on the accompanying consolidated statement of
operations.

Continued

F-18

<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------

7. Capital Leases:

The Company leases computer and other equipment under capital lease
arrangements. The equipment related to the capital leases have an original
cost of $234,539 and $53,318 at December 31, 1996 and 1995, respectively.
Accumulated amortization related to these leases is $23,819 and $7,791 as
of December 31, 1996 and 1995, respectively. The obligations under capital
leases have interest rates ranging from 6.9% to 13.9% and mature at various
dates through 2001. Annual future minimum lease payments for years
subsequent to December 31, 1996 are as follows:

1997 $65,071
1998 50,363
1999 43,463
2000 36,791
2001 21,554
--------

Total minimum payments 217,242

Less, amount representing interest 40,654
--------

Obligations under capital leases 176,588

Less, current portion 66,266
--------

Long-term portion $110,322
--------
--------

8. Commitments:

The Company leases its restaurant and office facilities under noncancelable
operating leases with terms ranging from approximately 7 to 25 years with
renewal options ranging from 5 to 15 years. Rent expense for the years
ended December 31, 1996 and 1995, was $1,536,669 and $547,900,
respectively.

The Company has certain operating leases which contain fixed escalation
clauses. Rent expense for these leases has been calculated on a straight-
line basis over the term of the leases. A deferred credit in the amount of
$265,575 has been established and included in accrued expenses at
December 31, 1996 for the difference between the amount charged to expense
and the amount paid. The deferred credit will be amortized over the life
of the leases.

Continued

F-19

<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------

8. Commitments, Continued:

A number of the leases also provide for contingent rentals based on a
percentage of sales above a specified minimum. Total contingent rentals for
the years ended December 31, 1996 and 1995 were $48,233 and $45,763,
respectively.

The following are the future minimum rental payments under noncancelable
operating leases for each of the five years subsequent to December 31, 1996
and in total thereafter:

1997 $1,920,420
1998 1,715,884
1999 1,519,212
2000 1,304,700
2001 1,154,276
Thereafter 5,043,263
----------

$12,657,755
----------
----------

With respect to the leases for the La Jolla - Prospect, California and the
Richland, Washington restaurants, both of which were closed and sold by the
Company: the Company remains liable in the event of default by the current
lessees. The Company may also be liable for additional expenses, such as
insurance, real estate taxes, utilities and maintenance and repairs.
Management currently has no reason to believe that such expenses, if
incurred, will be significant.

LEGAL PROCEEDINGS

The Company is not a party to any pending legal proceedings which it
believes will have a material adverse effect on its consolidated financial
position or consolidated results of operations.

EMPLOYMENT AGREEMENTS

Effective March 26, 1996, the Company entered into employment agreements
with Paul Motenko and Jeremiah J. Hennessy. The agreements provide for a
minimum annual salary of $135,000 subject to escalation annually in
accordance with the Consumer Price Index and certain benefits through 2004
and may be terminated by either party. The agreements also contain
provisions for additional cash compensation based on earnings or income of
the Company. The agreements contain provisions which grant the employees
the right to receive salary and benefits, as individually defined, if such
employee is terminated by the Company without cause.

Continued

F-20

<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------

8. Commitments, Continued:

CONSULTING AGREEMENT

In February 1996 the Company entered into a consulting agreement
("Consulting Agreement") with ASSI, Inc. pursuant to which ASSI, Inc.
agrees to advise the Company with site selection and marketing and
development strategy for penetrating the Las Vegas, Nevada market. In
consideration for such services, the Company shall pay ASSI, Inc. an annual
fee equal to 10% of the Net Profits, as defined, of the acquired Las Vegas,
Nevada restaurants. As additional consideration for consulting services,
the Company issued to ASSI, Inc. an aggregate of 100,000 warrants to
purchase shares of common stock of the Company at an exercise price of
$3.85 per share. The Consulting Agreement expires on December 31, 2000.
The warrants were automatically converted into warrants included in the
initial public offering.

The Company also entered into a consulting agreement ("Pietro's Consulting
Agreement") with ASSI, Inc. regarding the Pietro's Corp. Acquisition (see
Note 13). Under this agreement, ASSI, Inc. agrees to advise the Company in
connection with the reconstruction, expansion, marketing and strategic
development of the restaurants acquired from Pietro's Corp. In
consideration for such services, the Company shall pay to ASSI, Inc. an
annual fee equal to 5% of Net Profits, as defined, of the 26 restaurants
acquired, 19 of which the Company has retained. As additional
consideration for the consulting services, the Company issued to ASSI, Inc.
an additional aggregate of 100,000 warrants to purchase shares of common
stock of the Company at an exercise price of $3.85 per share. The Pietro's
Consulting Agreement expires on December 31, 2000. The warrants were
automatically converted to warrants included in the initial public
offering.

During 1994, the Company entered into a consulting agreement with
Woodbridge Holdings, Inc. ("WHI") regarding the selection of professional
advisors and corporate development. The agreement expired May 1, 1995 and
was not renewed. In exchange for the services provided, WHI was issued
$60,000 in cash, 69,792 shares of common stock in May of 1995, and 69,443
shares of common stock to be issued in conjunction with the Company's
initial public offering. The shares issued in 1995 were valued at $0.75
per share or $52,344, and the shares issued in conjunction with the initial
public offering were valued at $5.00 per share or $347,215.

Continued

F-21

<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------

9. Shareholders' Equity:

INITIAL PUBLIC OFFERING

In October 1996, the Company completed an initial public offering (the
"IPO") of 1,800,000 shares of common stock at $5.00 per share, and
2,070,000 warrants at $0.25 per share which generated $9,517,500 in
proceeds less underwriting commissions and other related expenses of
$2,713,757.

PREFERRED STOCK

The Company is authorized to issue 5,000,000 shares in one or more series
of preferred stock and to determine the rights, preferences, privileges and
restrictions to be granted to, or imposed upon, any such series, including
the voting rights, redemption provisions (including sinking fund
provisions), dividend rights, dividend rates, liquidation rates,
liquidation preferences, conversion rights and the description and number
of shares constituting any wholly unissued series of preferred stock. No
shares of preferred stock were outstanding at December 31, 1996 or 1995.
The Company currently has no plans to issue shares of preferred stock.

COMMON STOCK

Shareholders' of the Company's outstanding common stock are entitled to
receive dividends if and when declared by the Board of Directors.
Shareholders are entitled to one vote for each share of common stock held
of record. Pursuant to the requirements of California law, shareholders are
entitled to cumulate votes in connection with the election of directors.

CAPITAL SURPLUS

In May 1995, the Company issued warrants to purchase up to 300,000 shares
of common stock at a price of $5.00 per share to each of Barry Grumman, a
director of the Company, and Lexington Ventures, Inc. Each of Mr. Grumman
and Lexington Ventures, Inc. were issued their respective warrants at a
price of $0.07 per warrant or a total price to each of $21,000.
Mr. Grumman's liability for payment of the warrants was extinguished in
exchange for past services to the Company as a Director which had not been
compensated.

Proceeds from the valuation or sale of warrants issued in conjunction with
the private placement offerings totaled $236,750. The warrants were
automatically converted into warrants included in the Company's initial
public offering.

Continued

F-22

<PAGE>

CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------

9. Shareholders' Equity, Continued:

PRIVATE PLACEMENTS

In January 1995, the Company completed a private placement of 17 Units at
$50,000 per Unit, consisting of (i) a Series A Promissory Note in the
principal amount of $50,000 and due December 31, 1995 and (ii) 13,086
shares of common stock. The net proceeds to the Company were $496,000 (net
of issuance costs of $104,000). The Series A Promissory Notes bore
interest, payable quarterly, at a rate of 10% until June 30, 1995 and 13.5%
thereafter. The Promissory Notes were repaid in the third quarter of 1995
with proceeds from the September 1995 placement described below.

In March 1995, the Company completed a private placement of 4 Units at
$100,000 per Unit, consisting of (i) a $98,000 promissory note bearing
interest at a rate of 10% per annum with interest and principal due upon
the earlier of completion of an initial public offering of the Company's
common stock, or 18 months from the date of issuance and (ii) warrants
(valued at a price of $.0573) to purchase 34,896 shares of common stock at
a price of $2.87 per share. The net proceeds to the Company were $400,000.
The promissory notes were repaid in the third quarter of 1995 with proceeds
from the September 1995 private placement described below. These warrants
were automatically converted into warrants included in the initial
public offering.

In September 1995, the Company completed a private placement of 61 Units at
$100,000 per Unit, consisting of (i) 25,000 shares of common stock at a
price of $3.85 per share and (ii) warrants to purchase 75,000 shares of
common stock at an initial exercise price of $3.85 per share for a price of
$0.05 per warrant. The net proceeds to the Company were $4,917,438 (net of
issuance costs of $953,812). These warrants were automatically converted
into warrants included in the initial public offering.

Continued

F-23

<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------

10. Income Taxes:

The following table presents the current and deferred provision for federal
and state income taxes for the years ended December 31,:

1996 1995
------ ------
<S> <C> <C>
Current:
Federal
State $8,570 $6,400
------ ------
8,570 6,400

Deferred:
Federal
State
------ ------
$8,570 $6,400
------ ------
------ ------

</TABLE>

The temporary differences which give rise to deferred tax provision
(benefit) for the years ended December 31, consist of:

<TABLE>

1996 1995
-------- --------
<S> <C> <C>
Property and equipment ($72,177) ($26,320)
Goodwill 22,692 106,511
Accrued liabilities 125,624 (109,155)
Investment in partnerships 685 (35,366)
Net operating losses (789,391) (651,142)
Income tax credits (81,062)
Other (18,020) (548)
Change in valuation allowance 811,649 716,020
------- ------

$ - $ -
------ ------
------ ------

</TABLE>

Continued

F-24

<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------

10. Income Taxes, Continued:

The provision (benefit) for income taxes differs from the amount that would
result from applying the federal statutory rate as follows:

For The Years Ended
December 31,
-------------------
1996 1995
------ ------
<S> <C> <C>
Statutory regular federal income tax benefit (34.0%) (34.0%)
Change in valuation allowance 36.2 33.8
Other (1.8) 0.3
------ ------

0.4% 0.1%
------ ------
------ ------

</TABLE>

The components of the deferred income tax asset and (liability) as of
December 31 are as follows:

1996 1995
------ ------
<S> <C> <C>
Property and equipment $101,043 $28,867
Goodwill (129,203) (106,511)
Accrued liabilities 37,928 163,552
Investment in partnerships 19,719 20,404
Net operating losses 1,575,274 785,883
Income tax credits 81,062
Other 18,569 548
------ ------

1,704,392 892,743
Valuation allowance (1,704,392) (892,743)
------ ------

Net deferred income taxes $ $ -
------ ------
------ ------

</TABLE>

As of December 31, 1996, the Company had net operating loss carryforwards
for federal and state purposes of approximately $4,069,000 and $2,065,000,
respectively. The net operating loss carryforwards begin expiring in 2008
and 1997, respectively.

The utilization of net operating loss ("NOL") and credit carryforwards may
be limited under the provisions of Internal Revenue Code Section 382 and
similar state provisions due to the Inital Public Offering in 1996.

Continued

F-25

<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------

11. Supplemental Cash Flow Information:

For The Years Ended
December 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>

Cash paid for:
Interest $606,482 $379,676
Taxes $ 8,570 $ -

</TABLE>

Supplemental information on noncash investing and financing activities:

For The Years Ended
December 31,
-----------------------
1996 1995
---------- --------
<S> <C> <C>
Equipment purchases under a capital lease $181,221 $20,968
Common stock or warrants issued for consulting
services $397,215 $52,344
Common stock issued for asset purchase of
Roman Systems $ - $261,720
Purchase of CPNI (assumed liabilities) $1,411,595 $ -
Conversion of notes payable into common stock
and warrants $3,000,000 $ -
Prepaid IPO costs $108,000 $ -
Interest expense on convertible debt $187,500 $ -
</TABLE>

Continued

F-26

<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------

12. 1996 Stock Option Plan:

The Company adopted the 1996 Stock Option Plan as of August 7, 1996 under
which options may be granted to purchase up to 600,000 shares of common
stock. The 1996 Stock Option Plan provides for the options issued to be
either incentive stock options or non-statutory stock options as defined
under Section 422A of the Internal Revenue Code. The exercise price of the
shares under the option shall be equal to or exceed 100% of the fair market
value of the shares at the date of option grant. The 1996 Stock Option
Plan expires on June 30, 2005 unless terminated earlier. The options
generally vest over a three-year period. There were no options granted
during 1995.

Shares Under Option Shares Price Per Share
------------------- ------- ---------------

Granted 487,500 $5.00 - $5.03
Exercised - -
Terminated - -
------- ---------------

Outstanding at December 31, 1996 487,500 $5.00 - $5.03
------- ---------------
------- ---------------

Exercisable at December 31, 1996 269,898 $5.00 - $5.03
------- ---------------
------- ---------------

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" and will continue to use the intrinsic value based method of
accounting prescribed by Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees." Accordingly, no compensation
cost has been recognized for the stock option plans. Had compensation
cost for the Company's stock option plans been determined based on the fair
value at the grant date for awards in 1996 consistent with the provisions
of SFAS No. 123, the Company's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below:

Net loss, as reported ($2,288,610)
Net loss, pro forma ($2,530,442)
Loss per share, as reported ($0.52)
Loss per share, pro forma ($0.58)

The fair value of each option grant issued is estimated at the date of
grant using the Black-Scholes option-pricing model with the following
weighted average assumptions: (a) no dividend yield on the Company's
stock, (b) expected volatility of the Company's stock of 49%, (c) a risk-
free interest rate ranging from 5.78% to 6.30% and (d) expected
option lives of one to five years.

Continued

F-27

<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------

13. Acquisitions And Transfers:

ROMAN SYSTEMS

Effective January 1, 1995, the Company purchased the net assets of Roman
Systems for $550,000 in cash, issued a note payable totaling $3,746,113,
assumed liabilities totaling $873,344 including loans, accrued salaries and
certain other expenses and paid $130,000 in acquisition costs.
Additionally, 348,960 shares of common stock of the Company, valued at
$261,720, were issued to the sellers. The acquisition was accounted for as
a purchase.

BELMONT SHORE, L.P. AND LA JOLLA, L.P.

Effective January 1, 1995, the Company purchased the limited partnership
interests of BJ's Belmont Shore, L.P. and BJ's La Jolla, L.P. The general
partner interests of the above-mentioned Partnerships, held by CPA-BG, were
transferred to the Company for no consideration prior to the closing of the
acquisition of the limited partnership interests. An aggregate 226,824
shares of common stock of the Company, valued at $170,118, were transferred
to the sellers for the right, title and interest in the limited
partnerships in November 1994. Additionally, the Company assumed
liabilities of $207,068 and paid acquisition costs of $70,000.

BJ'S LAHAINA, L.P.

Effective January 1, 1995, the general partners of BJ's in Lahaina, L.P.,
CPA010 and Blue Max transferred their general partnership interests to the
Company for no consideration.

PIETRO'S CORP.

On March 29, 1996, the Company acquired 26 restaurants located in Oregon
and Washington by providing the funding for the Debtor's Plan and thereby
acquired all the stock in the reorganized entity known as Chicago Pizza
Northwest, Inc. The Debtor's Plan was confirmed by an order of the
Bankruptcy Court on March 18, 1996 and the Company funded the Plan on
March 29, 1996. The Company paid $2,350,000 to fund the Debtor's Plan plus
acquisition costs of $353,073. Additionally, the Company assumed a
$506,006 liability for taxes plus interest which will be paid over six
years.

Continued

F-28

<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------

13. Acquisitions And Transfers, Continued:

BREA, CALIFORNIA

On March 27, 1996, the Company completed the acquisition of a restaurant
and brew-pub site in Brea, California. The purchase price totaled $930,400
including acquisition costs. The restaurant opened as BJ's Pizza, Grill &
Brewery on April 1, 1996.

WESTWOOD, CALIFORNIA

In 1995, the Company entered into a lease for its Westwood restaurant and
brew-pub location. The site was renovated and opened on March 15, 1996.

ABBY'S SALE

On May 15, 1996, the Company agreed to sell seven newly acquired Chicago
Pizza Northwest, Inc. restaurants to Abby's, Inc. Two of the restaurants
were sold on May 31, 1996 two more were sold on June 24, 1996, and three
more were sold on June 26, 1996. The remaining 19 restaurants will be
converted into "BJ's Pizza," "BJ's Pizza & Grill" or "BJ's Pizza, Grill &
Brewery" restaurants.

The sales for the seven restaurants sold totaled approximately $3,492,000
for the year ended December 25, 1995. Operating profit excluding overhead
allocation totaled approximately $268,000 for the year ended December 25,
1995. Loss after overhead allocation relating to the seven restaurants
totaled approximately $327,000 for the year ended December 25, 1995.

14. Quarterly Financial Data (Unaudited):

Summarized unaudited quarterly financial data for the Company is as
follows:

September 30, September 30, December 31, December 31,
Quarter Ended 1996 1995 1996 1995
- ------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>

Total revenues $6,009,515 $1,952,913 $5,547,821 $1,425,916

Loss from operations ($61,370) ($278,874) ($671,022) ($339,689)

Net loss ($308,293) ($430,306) ($905,573) ($377,320)

Primary net loss per share ($0.08) ($0.12) ($0.15) ($0.13)

</TABLE>

F-29

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CHICAGO PIZZA & BREWERY INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR
ENDED DEC. 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,486
<SECURITIES> 0
<RECEIVABLES> 157
<ALLOWANCES> 0
<INVENTORY> 257
<CURRENT-ASSETS> 6,443
<PP&E> 7,153
<DEPRECIATION> (919)
<TOTAL-ASSETS> 18,914
<CURRENT-LIABILITIES> 3,114
<BONDS> 0
0
0
<COMMON> 15,040
<OTHER-SE> 1,196
<TOTAL-LIABILITY-AND-EQUITY> 18,914
<SALES> 19,865
<TOTAL-REVENUES> 19,865
<CGS> 6,183
<TOTAL-COSTS> 15,103
<OTHER-EXPENSES> 353
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 507
<INCOME-PRETAX> (2,280)
<INCOME-TAX> 9
<INCOME-CONTINUING> (2,289)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,289)
<EPS-PRIMARY> (0.52)
<EPS-DILUTED> (0.52)

</TABLE>