CALIFORNIA CULINARY ACADEMY INC, 10KSB, 1998-09-28

CALIFORNIA CULINARY ACADEMY INC
10KSB, 1998-09-28
EDUCATIONAL SERVICES

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U.S SECURITIES AND EXCHANGE COMMISION
WASHINGTON, D.C. 20549

FORM 10-KSB

(Mark One)

/X/ Annual report under section 13 or 15(d) of the Securities and Exchange Act
of 1934
For the fiscal year ended June 30, 1998

/ / Transition report pursuant to section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the transition period from ___________ to

COMMISSION FILE NUMBER: 0-21932

CALIFORNIA CULINARY ACADEMY, INC.

(Name of small business issuer in its charter)

<TABLE>
<S> <C>
CALIFORNIA 94-3042862
(State or other jurisdiction of incorporation or
organization) (I.R.S. Employer Identification Number)

94102
625 POLK STREET
SAN FRANCISCO, CA
(Address of principal executive offices) (Zip Code)

Issuer's Telephone Number:
(415) 771-3536

Securities registered under Section 12(b) of the
Act: None
Securities registered under Section 12(g) of the
Act: Common Stock, no par value (Title of class)
</TABLE>

Check whether the issuer (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 / /.

Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of the registrant's knowledge, in definitive proxy information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. / /

Revenues for the most recent fiscal year were: $16,732,000

The aggregate market value of the voting stock held by non-affiliates
computed by reference to the closing sale price on September 24, 1998 was
$30,515,448.

The number of shares outstanding of the issuer's Common Stock as of August
31, 1998, was 3,814,431.

Documents incorporated by reference: None

Transitional Small Business Disclosure Format. Yes / / No /X/.

This Annual Report on Form 10-KSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The Company's actual results may differ
materially from the results projected in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in "ITEM 1--Description of Business", including the section therein
entitled "Risk Factors," and in "ITEM 6--Management's Discussion and Analysis
and Plan of Operations".
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PART I

ITEM 1. DESCRIPTION OF BUSINESS.

The California Culinary Academy, Inc., ("Academy") is one of the largest
publicly held, for-profit professional culinary arts training schools in the
United States (based on the number of students enrolled in its programs),
offering a variety of programs to culinary arts professionals, serious amateurs
and other members of the public who may be interested in specific culinary
subjects. The Academy operates at three locations: the main campus located in
San Francisco, California and at extension campuses in Salinas and San Diego,
California. In conjunction with its education activities, the Academy operates
two public restaurants and a small retail shop at its San Francisco campus,
serving a clientele that consists of students, staff and the general public.

The Academy has been in operation since 1977, offering its core programs,
consisting of the Associate of Occupational Studies Culinary Arts Degree Program
("AOS Degree"), the Baking & Pastry Arts Certificate Program ("B&P
Certificate"), weekend continuing education programs for professionals, and
other courses or workshops for interested non-professional students.

In October 1996, the Academy introduced a new concept in culinary education
when it opened its College of Food at its extension campus in Salinas. A second
College of Food was opened in San Diego, California in February 1998. The
strategy of the College of Food is to increase the student's basic knowledge of
kitchen skills, sanitation and supervisory skills, as well as offering
specialized courses in baking and pastry. The College of Food concept is
designed to attract students who wish to enter the culinary field, food service
workers who need specialized training or individuals who simply want to expand
their culinary knowledge.

As of September 1, 1998, the Academy has graduated approximately 5,100
students from its professional programs. In addition, thousands of individuals
have attended one or more of its continuing education classes. For the year
ended June 30, 1998, the Academy averaged approximately 694 full-time students
in its AOS Degree and B&P Certificate programs. These programs are designed to
accommodate up to 25 students in each of approximately 25 enrollment periods per
year for the AOS Degree program and 15 in each of the nine enrollment periods
for the B&P Certificate program. The College of Food, which can accommodate up
to approximately 150 students with new enrollments occurring approximately every
three to four weeks, averaged 33 students during the year ended June 30, 1998.
Because the curriculum at the Academy focuses on practical skills and techniques
that the Academy believes are critical to success in the food industry, the
Academy has historically enjoyed a high job placement rate among it graduates.

The predecessor to the Academy was incorporated in June 1977, as a
Pennsylvania corporation. In October 1986, the Academy was incorporated in the
State of California under the name CCA Acquisition Corporation and was the
surviving corporation in a merger with the Pennsylvania corporation. Upon
completion of the merger, CCA Acquisition Corporation changed its name to
California Culinary Academy, Inc.

EDUCATION PROGRAMS

The Academy's professional programs are designed to prepare students for
entry-level professional positions or for individual advancement to supervisory
positions in food service operation. The primary educational offerings of the
Academy are the AOS Degree and B&P Certificate programs. The Academy has also
applied for certification of its Basic Professional Culinary Skills Program at
the College of Food. Completed coursework from the College of Food's Basic
Professional Culinary Skills Program is transferable into the Academy's AOS
Degree program. In addition to its degree and certificate programs, the Academy
also offers a large variety of non-degree programs for professionals and other
students. All professional programs emphasize "hands on" practical experience.

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Full-time classes at the main campus in San Francisco are offered in two
seven-hour shifts, from 7 AM to 10 PM, Monday through Friday. At the College of
Food, classes are offered in a choice of four hours shifts, from 9 AM to 1 PM or
from 6 PM to 10 PM for part-time students. Part-time students typically have
full or part-time jobs and the choice of classes accommodates their employment
schedules. Continuing education courses are offered on weekends at the Academy's
main campus.

AOS PROGRAM

The Culinary Arts Program provides an intensive 18-month course of study
leading to an Associate of Occupational Studies ("AOS") Degree in Culinary Arts.
The program is divided into two academic terms. Enrollment periods begin every
two weeks, which provides students with flexible scheduling options and most
efficiently utilizes the services of the Academy's chef instructors and the
Academy's facilities.

The curriculum of the AOS Degree program, which integrates classical and
modern culinary techniques with strong kitchen management skills, is designed to
prepare students for professional entry into the food service industry. Courses
include Food Science and Technology, Food History and Anthropology, Baking and
Pastry, Skill Development, Garde Manger, Hospitality Management, Production
Kitchens, Wine Appreciation and other related subjects. In these courses
students learn how to prepare breads, pastries, desserts, appetizers, soups,
sauces, vegetables, salads, sandwiches, hors d'oeuvres, cold buffets, and
entrees. They also learn to identify, fabricate and portion meats, poultry and
fish. The professional kitchen management courses include such topics as
sanitation, hygiene, safety procedures, cost control, human resource management
and styles of table service.

Integral to the coursework is experience operating the Academy's two
restaurants and participating in an externship (see "Restaurants, Retail and
Media"). In connection with the Academy's restaurant operations, student rotate
through kitchen stations in order to gain proficiency in various skills needed
to perform at professional standards in a commercial kitchen, and serve the
general public clientele in both sit-down and buffet-style settings. The AOS
Degree program provides a sequential course of study culminating in a
three-month off-site externship where students gain actual experience working
under a highly qualified professional chef.

As of September 14, 1998, tuition and fees for the AOS Degree program total
approximately $29,800 for the full 18-month course of study. This fee includes
textbooks, uniforms, knife kits, the cost of food used in the classrooms and one
meal per day, in addition to the cost of course instruction. Tuition is payable
in installments during the two academic terms. Financial assistance is available
to eligible students (see "Government Financial Aid Programs and Regulation").

BAKING & PASTRY CERTIFICATE PROGRAM

The B&P Certificate program is designed for those students interested in
professional baking. The program provides 30 weeks of comprehensive study, with
an emphasis on the hands-on application of fundamental techniques and
ingredients. The program is divided into four modules, including (i) breads and
doughs; (ii) cakes; (iii) service pastry and desserts; and (iv) chocolate,
confectionery and showpieces. In addition, the curriculum includes professional
development courses on safety and sanitation, nutrition and human resource
management. Although not included as a required part of the curriculum,
externships are available. Enrollment periods begin approximately every five
weeks and each session can accommodate up to 15 students.

As of September 21, 1998, tuition and fees for the B&P Certificate program
total approximately $13,400 for the full 30-week course of study. This fee
includes textbooks, uniforms, knife kits, cost of food, one meal per day and
supplies. Deferred payment plans and financial assistance are available to
eligible students (see "Government Financial Aid Programs and Regulations")

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BASIC PROFESSIONAL CULINARY SKILLS PROGRAM

The California Bureau for Private Postsecondary and Vocational Education
("BPPVE") has granted a temporary certification of the Academy's 12-credit
course of study offered at the College of Food. A permanent certification is
expected in 1999. The Academy believes that its College of Food Basic Skills
Program will receive the permanent certification being sought; however, there
can be no assurance that the College of Food Basic Skills Program will be
permanently approved by BPPVE in its current configuration or at all.

The College of Food Basic Skills Program requires completion of 352 hours of
study for 12 credits as follows: 32 hours of Safety and Sanitation; 128 hours of
Kitchen Skills; 64 hours of Basic Baking skills; 64 hours of Garde Manger; 32
hours in Breakfast Cookery; and 32 hours of Current topics in Mid-Scale Dining.
Credits from the College of Food Basic Skills Program can be applied toward
earning an AOS Degree or a B&P Certificate through the Academy's core programs
at the main campus.

As of September 1, 1998, tuition and fees for the Certificate of Basic
Professional Culinary Skills Program total approximately $5,000.

NON-DEGREE OR CERTIFICATE PROGRAMS

In addition to its educational programs leading to the AOS Degree in
Culinary Arts, the B&P Certificate, and the College of Food Certificate of Basic
Professional Culinary Skills, the Academy offers non-degree continuing education
courses for professionals and serious amateurs, as well as other courses of
interest to anyone who likes to cook. The professional non-degree continuing
education programs address traditional kitchen skills with emphasis on palate
development, cooking techniques, and sauces.

The courses generally are offered on consecutive weekends, and cover a
variety of subjects. Currently the Academy offers a series of eight-week
culinary courses and a fourteen-week baking and pastry series. Fees for the
non-degree professional programs range from $500 to $1,775. Completed course
work can be applied toward earning an AOS Degree or B&P Certificate.

EDUCATIONAL SERVICES

JOB PLACEMENT FOR PROFESSIONAL PROGRAM STUDENTS AND GRADUATES. The
Academy's Career Services staff assists currently enrolled students and
graduates in obtaining positions in the food industry in a number of ways. The
Career Services Office houses reference material containing current job openings
that include entry level through advanced positions throughout the United States
and foreign countries. For students and graduates who are unable to access the
current job openings on campus, these job openings are also recorded on the Job
Hotline, a telephone announcement that is updated weekly. Twice per year during
the Academy's Spring and Fall Recruitment Weekend, the Career Services staff
coordinates a Career Fair featuring representatives from all areas of the food
industry seeking to hire students and graduates of the Academy. The Career
Services staff also coordinates interview schedules for companies recruiting
students and graduates directly from the Academy during the Recruitment Weekend.
In addition, individual counseling sessions, resume assistance and other career
development materials are available through the Career Services Office. While
the Academy does not guarantee employment specific positions upon graduation, it
believes its name, reputation, and high job placement rate are factors that
attract students to its professional programs.

Students interested in part-time or full-time jobs while they are enrolled
at the Academy can contact the Career Services Office. The Academy provides
students with names of prospective employers seeking catering staff or other
part-time and full-time assistance. Additionally, the Academy itself offers
part-time employment. For example, the Academy's Food and Beverage Department
hires students to assist with special functions and events, such as private
parties and corporate events held in its restaurants. The Academy also offers
federal work-study opportunities.

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ALUMNI RELATIONS. California Culinary Academy alumni relations and career
services personnel are available to refer graduates to other alumni, answer
questions, provide programs, activities and professional opportunities.

RECRUITMENT AND ADMISSIONS. Students are recruited both domestically and
internationally. Statistics compiled in August 1998 show that as of June 30,
1998, approximately 75% of the full-time students enrolled in the Academy's AOS
Degree or B&P Certificate programs are from Northern California. The Academy's
admissions staff reviews applications for admission to the professional
programs. In considering an applicant for admission to the AOS Degree or B&P
Certificate programs, the admissions staff first determines whether an applicant
meets certain minimum prerequisites, including: (i) demonstrated motivation
towards a career in the culinary arts; (ii) graduation from high school with at
least a 2.0 grade point average or passage of an approved high school
equivalency examination and (iii) for those whose native language is other than
English, passage of the TOEFL test of English as a Foreign Language with a score
of at least 550 out of a total of 665. Experience in the food industry is viewed
favorably by the admissions staff but is not considered a prerequisite for
admission to the any of the Academy's programs. Applicants to the Academy's
College of Food programs are required to either have a high school diploma or to
have passed an approved high school equivalency examination, or pass an entrance
examination.

The Academy has evaluation agreements with 18 regional junior colleges
allowing certain courses to be transferred to the Academy for credit. The
Academy believes this arrangement enables it to recruit more effectively from
junior colleges.

The Academy believes that an important recruiting tool is its media
exposure. A 13-part series, COOKING AT THE ACADEMY, was developed and written by
the Academy and produced by the San Francisco public television station KQED.
This series has been shown in its entirety since 1991 though the Public
Broadcasting System to over 250 major media markets in the United States. In the
spring of 1995, a new 26-episode series of COOKING AT THE ACADEMY began airing
on public television stations throughout the country. Additionally, the Academy
has been featured in a syndicated radio talk show, FOOD FOR THOUGHT, airing in
the Monterey Bay area on KCSO radio, as well as DINING AROUND WITH GENE BURNS on
KGO radio in San Francisco. The Academy believes that such widespread exposure
has enhanced the Academy's name recognition, reputation and new student
recruitment efforts (see "Restaurants Retail and Media").

On-site admissions representatives, who are full-time salaried employees,
are responsible for recruiting students at the Academy. These admissions
representatives consult with prospective students who are referred by alumni,
respond to the Academy's advertising or are otherwise motivated to contact the
school.

EDUCATIONAL PROGRAM DEVELOPMENT. The Academy's ability to attract new
students and place graduating students depends to a significant extent on its
ability to offer educational and training programs that provide students with
skills sought after in the food industry. Given the continual changes in
professional cooking and professional baking, the Academy believes it is
critical that the most current methods are taught. The Academy's Educational
Program Committee (consisting of members of the Academy's faculty,
administration, and focus groups from the food industry), attempts to respond
quickly to both the culinary and business needs of the food industry. Recent
enhancements to the AOS Degree curriculum address profiling the culinary arts
program toward the global cuisine of today's industry. Course work in areas such
as Foods of the Americas, Asian Cuisine and a computer software course in food
industry applications respond directly to existing and current demands facing
the Academy's students upon their graduation.

EDUCATION-OPERATIONS DEPARTMENT. The Education-Operations Department is
responsible for the quality and delivery of the educational process, including
direct responsibility for curriculum content and sequencing, chef instructor
training and development, and teaching and evaluation methods. The Vice
President of Education is assisted by Chef managers who oversee each educational
area--Basic Skills, Culinary Production, Baking and Pastry and Related Subjects
in the AOS Degree or B&P Certificate programs and develop, monitor and update
the educational programs offered at the Academy.

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STUDENT RETENTION. The Academy continually focuses significant efforts on
maintaining high retention rates for its students. For the fiscal year ended
June 30, 1998, approximately 87% of the students successfully completed the AOS
Degree program on schedule. Based on past experience, it is estimated that an
additional 5% will graduate at a later date. However, as is the case at most
institutions of higher education, some of the Academy's students end their
studies early for personal, financial or academic reasons. The Academy faculty
maintains weekly office hours to provide academic assistance and to advise
students. The Academy faculty and administration are also available to provide
support and referrals to students experiencing personal difficulties.

RESTAURANTS, RETAIL AND MEDIA

RESTAURANTS. The Academy operates two public restaurants at its San
Francisco campus: the Careme Room, a fine dining restaurant with seating for
approximately 325 diners, and the mid-scale Grill, with seating for
approximately 125 diners. The restaurants are open to the public seven days per
week for lunch and dinner, excluding school holidays. The restaurants are
staffed by students under faculty supervision and serve as an important teaching
environment since they provide "hands-on" experience in restaurant food
preparation, service and management. In addition, the restaurants provide an
additional source of revenue (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations"). As part of the AOS Degree
program, the Academy's students are instructed in dining room service styles, as
well as professional cooking and food and beverage management.

RETAIL. The Academy operates a small retail shop at its San Francisco
campus. The retail shop, which services students, staff and the public, is open
five days per week, offering beverages, cookbooks, videotapes, kitchenware and
selected clothing.

MEDIA. The Academy has a multi-year agreement with Simon & Shuster to
author and publish four cookbooks. To date, two manuscripts have been submitted
and the first book of the series, WRAP AND ROLL, was published in February 1998.
The agreement provides for the Academy to earn fees for the delivery of
acceptable outlines and completed manuscripts to the publisher, in addition to
royalties ranging from 6% to 10% on the sale of the published works.

The Academy developed and wrote the 13-part television series, COOKING AT
THE ACADEMY, produced in 1991 by San Francisco public television station KQED,
which features cooking instruction on specific topics by the Academy's chef
instructors or former chef instructors. Over 135,000 copies of the accompanying
cookbook, COOKING AT THE ACADEMY, have been distributed under various
distribution agreements. In addition, a series entitled CALIFORNIA CULINARY
ACADEMY COOKBOOKS, which includes 30 titles, has sold over two million copies
since 1985.

In 1995, 26 new episodes of COOKING AT THE ACADEMY began airing on public
television stations throughout the country. Over 85,000 copies of the
accompanying cookbook, FESTIVE FAVORITES, have been distributed under various
distribution agreements.

In 1997, the Academy hosted a radio talk show, FOOD FOR THOUGHT, airing in
the Monterey Bay area on KSCO radio, as well as DINING AROUND WITH GENE BURNS on
KGO radio in San Francisco.

The Academy maintains a home page on the Internet at "www.baychef.com" as a
promotion and marketing tool to attract new students. The Academy's website
provides information on the Academy's educational programs and personnel,
program costs and admissions procedures and forms, and allows interested parties
to communicate with the Academy via e-mail and to order selected merchandise
from the Academy's retail store.

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ACCREDITATION OF THE ACADEMY AND ITS PROFESSIONAL PROGRAMS

Accreditation is a process for evaluating educational institutions and their
professional programs. Such evaluation process recognizes the quality of
educational program offerings and entitles the schools to the confidence of the
educational community, federal and state government agencies and the public at
large.

In the United States, this accreditation is given primarily through
non-government, voluntary, institutional or professional associations. Those
groups establish criteria for accreditation, arrange site visits and evaluate
institutions and professional programs that desire accredited status, publicly
designating those that meet their criteria. Accredited schools are subject to
periodic review by accrediting bodies to ensure that the schools maintain the
level of program performance, content, teaching and administrative quality
required by the accrediting body.

The Academy's postsecondary educational programs are recognized by the U.S.
Department of Education ("DOE") and by the California BPPVE. The Academy is
accredited by the American Culinary Federation Educational Institute Accrediting
Commission ("ACFEI") and by the Accrediting Commission for Career
Schools/Colleges of Technology ("ACCSCT").

The Academy is approved by BPPVE to grant to students who successfully
complete the full-time Culinary Arts Degree program, an AOS Degree in Culinary
Arts and a Certificate in Baking and Pastry Arts for those students completing
the full-time B&P Certificate program. Approval from BPPVE is renewed
periodically in accordance with the provisions of the California Education Code.

The Academy has been granted a temporary certification for the Basic
Professional Culinary Skills program in the College of Food from BPPVE. The
Academy's courses of instruction for the AOS Degree and B&P Certificate programs
are approved for veterans training by the Federal Department of Veterans Affairs
under the GI Bill of Rights and the Veterans Education Assistance Programs
("VEAP") and for foreign students under the rules and regulations of the
Immigration and Naturalization Service ("INS").

GOVERNMENT FINANCIAL AID PROGRAMS AND REGULATION

The Academy's students finance their education, in whole or part, through
individual resources, with approximately 75% of students receiving some form of
financial aid assistance. Approximately 45% of the Academy's fiscal 1998
educational program revenues were derived from federal and/or state government-
sponsored financial aid. On the basis of financial information provided by the
student and/or the student's family, the Academy develops an assistance package
for students who are eligible for financial aid. To maintain financial
assistance eligibility, students must demonstrate satisfactory academic
progress.

Extensive and complex regulations govern all of the government grant and
loan programs in which the Academy and its students participate. These programs
are required to be administered in accordance with the standard of care and
diligence of a fiduciary and are subject to annual audits. All of the Academy
financial aid counselors and the Director of Financial Aid are certified by the
State of California. Any regulatory violations could be the basis for
suspension, limitation, or termination proceedings. No suspension, limitation,
or termination proceedings have ever been instituted against the Academy.

In July 1995, the Academy was recertified by the DOE, and as such, is
eligible to continue to participate in the federal financial aid programs under
Title IV of the Higher Education Act ("HEA") through July 31, 1999.

An institution is required to meet certain specified financial standards in
order to participate in Title IV financial aid programs administered by the DOE.
Failure of an institution to adhere to those standards may result in the DOE
requiring that institution to post a letter or credit of other surety to ensure
that the institution is able to fulfill its educational commitments to its
students and pay required

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refunds upon withdrawal. Management believes that the Academy can demonstrate
financial responsibility in accordance with the standards set forth by the DOE.

The Academy devotes significant time and effort in order to properly and
satisfactorily administering the financial aid programs in accordance with
applicable government regulations and responsibilities. The Academy has
established an internal review committee charged with ongoing compliance reviews
to identify problems, to take expeditious corrective action, and to implement
any and all mandated changes in regulations affecting these programs on a timely
basis. In addition, the Academy has developed job descriptions that the Academy
believes comply with Federal Work Study ("FWS") employment at for-profit
postsecondary institutions, has adopted internal written procedures to ensure
compliance with the Title IV restrictions, and has established and maintained
general ledger control accounts and related subsidiary accounts to assist in the
accurate and timely reporting of information to the DOE and other interested
parties.

The following is a list of government financial aid programs in which the
Academy's students participate:

Federal PELL Grant
Federal Supplemental Educational Opportunity Grant ("SEOG")
Federal Stafford Loan Program (subsidized)
Federal Stafford Loan Program (unsubsidized)
Federal Perkins Direct Student Loan Programs ("Perkins")
Federal parent Loans for Undergraduate Students ("PLUS")
Federal Work Study ("FWS")
California State Grants A, B, and C

The Academy is also approved to train veterans and, therefore, students may
be eligible to receive benefits from the Veterans Administration.

The Academy's continued eligibility to participate in the Title IV student
financial aid loan programs is dependent, in part, on maintaining an acceptable
"cohort" default rate. The cohort default rate is defined as the default rate of
all federal financial aid loan programs, other than the Perkins program. The
Perkins program default rate is calculated separately and is the smallest of the
Academy's federally funded financial aid loan programs.

Any institution that has a cohort default rate of 25% or greater for three
consecutive years will not be eligible to participate in certain Title IV
student financial aid programs for approximately three years. The Academy's
cohort default rate for the two-year period ending September 30, 1997 was 9.0%.

Approximately 45% of educational program revenues during fiscal 1998 were
provided by federal and/or state government-sponsored financial aid programs, a
substantial portion of which were derived from various student loan programs.
Participating students make loan application to one of several federally
approved financial institutions. The ability of private financial institutions
to originate loans to the Academy's students is critical to the Academy's
business.

Grants represent funds made available to eligible students by the
government, which do not have to be repaid. The Academy is eligible to
participate in federal PELL Grant and SEOG programs. Both are federal programs
for undergraduates at postsecondary schools in the United States who have
demonstrated sufficient financial need.

All government-subsidized financial assistance programs for students are
subject to political and budgetary considerations outside the control of the
Academy. No assurance can be given that governmental programs currently
providing financial assistance and subsidies to students attending the Academy's
education programs will remain available at present levels. A reduction or
curtailment of funding levels, or

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other unanticipated changes in federal assistance program participation
requirements, would result in lower enrollments and adversely impact the
Academy's business.

RISK FACTORS

The following factors, and the other information contained herein, should be
considered carefully in evaluating the Academy and its business.

RECENT OPERATING RESULTS

The Academy has reported net income (loss) of $160,000 and ($771,000) for
the fiscal years ended June 30, 1997 and 1998, respectively. There can be no
assurance that the Academy will operate profitably in future periods. Further
operating results will depend on numerous factors, including, among others, the
Academy's ability to continue to meet the requirements for participation
government student loan programs (see "Regulations" below) and its ability to
successfully develop and operate its planned new core campus in New Orleans and
new Colleges of Food programs to be established elsewhere.

REGULATIONS

The Academy is subject to extensive regulations by state and federal
governmental agencies and accrediting agencies. At the federal level, the Higher
Education Act of 1965 (the "HEA") and the regulations promulgated thereunder by
the Department of Education (the "DOE") set forth numerous and complete
standards that schools must satisfy in order to participate in the federal
student financial aid programs under Title IV of the HEA ("Title IV Programs").
For the year ended June 30, 1998, the Academy derived approximately 45% of its
revenue from Title IV Programs.

Significant factors relating to Title IV Programs that could adversely
affect the Academy include the following:

- The 85/15 Rule of the Higher Education Act ("HEA"): This state that any
institution that derives more than 85% of its revenue from Title IV
Programs in one year will be ineligible to participate in Title IV the
following year. In fiscal year 1998, 45% of Academy revenues were derived
from Title IV Programs.

- Default Rates: In order to remain eligible for Title IV participation an
institution must not exceed a set limit on student loan default rates. If
an institution exceeds a default rate of 25% for three consecutive years
or 40% in one year, it will lose its eligibility to participate the
following year. The Academy's current student loan default rate is 9.4%.

- Financial Standard: The HEA prescribes specific standards of financial
responsibility that a proprietary institution must satisfy in order to
participate in Title IV Programs. The standards apply three different
rations: an equity ration, a primary reserve ration and a new income
ratio, which are weighed and added together to produce a composite score.
The Academy does not believe that these standards will have a material
adverse effect on its regulatory standing.

- Change of Control: The DOE, most accrediting commissions, and most state
education authorities that regulate the Academy have laws, regulations,
and/or standards pertaining to a change in ownership/change in control of
educational institutions, but these regulation do not uniformly define
what constitutes a change control. The DOE regulations do describe certain
transactions that constitute a change in control, including the transfer
of a controlling interest in voting stock or the filing of an S-K. Once an
institution is deemed to have experienced a change of control, it
immediately becomes ineligible to participate in Title IV Programs and
must apply for readmission into the Program. The Academy believes that it
is likely that the proposed private financing transaction (discussed under
"Management's Discussion and Analysis and Plan of Operations") will

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be deemed a change of control and is prepared to have its Title IV Program
status reviewed upon the closing of such transaction.

COMPETITION

The Academy is one of the largest professional chef training schools in the
United States, based on enrollment statistics in the 1998 SHAW GUIDE. However,
the market for professional training of chefs is fragmented and regionally
oriented. According to the American Culinary Federation Educational Institute,
there are approximately 500 postsecondary culinary programs offered worldwide.
These programs range from simple food programs offered by vocational training
schools to fully accredited four-year programs.

As of June 30, 1998, admissions statistics show that approximately 75% of
the Academy's students reside in Northern California. However, the Academy
believes that it competes in the professional chef training market with, among
others, two not-for-profit institutions; the Culinary Institute of America,
whose main campus is in Hyde Park, New York, and Johnson & Wales University in
Providence, Rhode Island, which has campuses in Maryland, Colorado and Florida.
The Academy believes that both of these institutions have secured significant
financial and equipment contributions to build new facilities and expand their
classrooms. The Academy's business will be affect by its ability to compete
effectively with the Culinary Institute of America and Johnson & Wales, as well
as other competitors currently operating in, or which may subsequently enter,
the professional chef training market.

The Academy believes that competition in the professional chef training
market is based primarily on the quality of an educational institution's faculty
and educational services, the job placement of graduates and the quality of the
academic facilities. The Academy believes that it competes favorably on these
criteria and, in addition, is recognized for its quick reaction time to the
industry's needs and continued improvements in the quality of its training
programs. There is no assurance, however, that the Academy will continue to be
able to do so.

RISKS ASSOCIATED WITH EXPANSION PLANS

The Academy plans to use the proceeds of its proposed private financial
transaction to establish a core campus facility in New Orleans and up two
Colleges of Food programs in other major cities in the United States. The
Academy will need to accomplish a number of objectives in order to complete
successfully the development of these new facilities, including purchasing or
leasing of real estate, obtaining necessary permits and approvals, passing
required inspections and hiring necessary architects and contractors. The
successful development of the planned facilities will also require careful
management of various risks associates with such projects, including
construction delay, cost estimation errors or overruns, equipment or materials
delays or shortages and other factors, many of which are beyond the Academy's
control. There can be no assurance that the Academy will not encounter
unforeseen difficulties as it attempts to establish these new facilities.

In addition, the establishment of these new facilities will result in
substantial new fixed and operating expenses, including expenses associated with
additional real estate, additional personnel, and depreciation. If the Academy
is unable to attract a sufficient number of students to the facilities to offset
these new expenses, the operating results could be materially adversely affected
in future periods.

Furthermore, the development of these new facilities could place a
significant strain on the Academy's management resources and could result in the
diversion of management attention from the day-to-day operation of the Academy's
business. If the Academy is successful in increasing its volume of business, it
will need to continue to implement and improve its operational, financial and
management information systems, procedures, and controls on a timely basis.

10
<PAGE>
PROPRIETARY RIGHTS

The long-standing use by the Academy of the "California Culinary Academy"
tradename gives rise to common law protections. In addition, various state and
federal registrations protect some uses of the name and the logos in which the
name has been used.

FACULTY AND EMPLOYEES

The Academy employed 152 persons at August 2, 1998, of which 17 were
part-time. Those employees included the President/CEO, Chief Financial Officer,
Chief Operating Officer, Vice President of Education, 113 members of the
administrative and operational staff and 35 chef instructors and adjunct
faculty.

ITEM 2. DESCRIPTION OF PROPERTY.

The Academy leases approximately 67,000 square feet of space at 625 Polk
Street in San Francisco, California, a historic building. Effective April 1,
1998, the monthly rental obligation is approximately $95,000, with a declining
payment schedule over time. The Academy is also responsible for its pro rata
share of all leasehold expenses including insurance, taxes, utilities and
maintenance, which were approximately $11,000 per month during fiscal year 1998.
The lease term extends until March 31, 2013, with three five-year renewal
options thereafter.

Academic facilities at the main campus at 625 Polk Street consist of lecture
classrooms and 14 kitchens for practical training, including four baking and
pastry kitchens, a confiserie, two garde manger kitchens, a seafood butchery, a
meat butchery, three professional production kitchens, a demonstration kitchen
and a skill development lab. Table service classroom facilities include two full
service, student-run public restaurants which seat more than 700 customers for
lunch and dinner sever days a week. Other facilities include a retail shop for
the sale of culinary art supplies and student prepared food products from the
garde manger, pastry shop, bakery and confiserie. The Academy also has a library
and offices for administrative, admissions, financial aid, educational services,
faculty and consumer education.

In February 1994, the Academy entered into a two-year lease that provided
for four (4) one (1) year option periods for approximately 1,500 square feet at
700 Polk Street in San Francisco, which it uses for certain of its educational
programs. Rental payments on this location are approximately $2,700 per month.
The lease expired in February 1998 and the Academy is currently renting the
space on a month to month basis.

In July 1996, the Academy entered into a five-year lease for approximately
4,000 square feet in the city of Salinas, California for use as a culinary arts
training center, the prototype College of Food. The lessor is a partnership
whose partners include the Chairman of the Board of Directors and certain
shareholders in the Academy. Independent members of the Board of Directors
approved the lease. Management believes that these lease terms are no less
favorable than those that the Academy may have negotiated with an independent
landlord. The monthly rent for the facility is the greater of approximately
$3,900 or 8% of gross sales, plus a share of common area and exterior
maintenance charges that approximate $1,000 per month.

In August 1997, the Academy entered into a master lease of a 68-room hotel
in San Francisco, approximately one block from the main campus, to provide
student housing. The monthly rental obligation is approximately $29,000. The
Academy is also responsible for payment of its pro rata share of insurance and
real property taxes, which were approximately $2,600 per month during fiscal
year 1998. The lease term extends until August 31, 2012, with three five-year
renewal options thereafter.

In October 1997, the Academy purchased for approximately $1,900,000 an
80-room hotel in San Francisco, across the street from its main campus, which it
intends to use for student housing. In June 1998, the Academy sold the hotel for
$2,220,000 and entered into a lease for the property. Under the terms of the
lease, the landlord will renovate and deliver at least sixty rooms to the
Academy over an eighteen-

11
<PAGE>
month period, beginning September 1, 1998. The base monthly rent under the lease
is $435 per room delivered to the Academy. In addition, the Academy is
responsible for payment of its pro rata share of insurance, real property taxes
and maintenance, which is estimated to be $2,000 per month.

On July 1, 1998, the Academy entered into a lease for a 5,000 square foot
building in La Mesa, California for its second College of Food campus. The
monthly rental obligation is approximately $4,000. The Academy is also
responsible for payment of its pro rata share of insurance, real property taxes
and common area maintenance. The Academy estimates such payments will be
approximately $1,000 per month. The lease term extends until June 30, 2003 and
the lease provides for three renewal options of five years each. The Academy
plans to develop the building into a College of Food campus with a planned
opening date in December 1998.

Academy management estimates that its current facilities can accommodate
approximately 1,200 students, which the Academy believes is sufficient for its
foreseeable needs. Once full enrollment in these facilities is achieved, the
Academy believes additional facilities can be located.

ITEM 3. LEGAL PROCEEDINGS.

The Academy is subject to routine claims and litigation arising out of the
normal conduct of its business. While the outcomes cannot be predicted with
certainty, the Academy believes that the resolution of such matters will not
have a material effect on the Academy's financial condition or results of
operations.

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

At the Annual Meeting of Stockholders of the Academy held on July 7, 1998,
the Academy's stockholders voted in favor of: (i) the election of three
directors to the Academy's Board of Directors, and (ii) the ratification of
Deloitte & Touche LLP as the Academy's independent auditors. The number of votes
for, withheld and against, as well as the number of abstentions and broker
non-votes as to each matter approved at the Annual Meeting of Stockholders were
as follows:

<TABLE>
<CAPTION>
BROKER
MATTER FOR WITHHELD AGAINST ABSTAIN NON-VOTES
- - ----------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Election of Directors:
Leenie Ruben................. 3,229,149 -- -- 271,663 --
Bert Cutino.................. 3,229,149 -- -- 271,663 --
Ralph Brennan................ 3,229,149 -- -- 271,663 --

Ratification of independent
auditors:
Deloitte & Touche LLP........ 3,229,149 -- -- 271,663 --
</TABLE>

12
<PAGE>
PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Academy's Common Stock is traded in the NASDAQ National Market under the
symbol "COOK." The following table set forth the high and low closing sale
prices for the Common Stock as reported on the NASDAQ National Market for the
periods indicated.

<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1997:
Quarter Ended September 30, 1996........................................... $8.500 $ 7.500
Quarter Ended December 31, 1996............................................ $8.875 $ 8.000
Quarter Ended March 31, 1997............................................... $8.687 $ 7.250
Quarter Ended June 30, 1997................................................ $8.250 $ 7.000

FISCAL YEAR ENDED JUNE 30, 1998:
Quarter Ended September 30, 1997........................................... $8.125 $ 7.750
Quarter Ended December 31, 1997............................................ $8.000 $ 7.500
Quarter Ended March 31, 1998............................................... $10.00 $ 7.750
Quarter Ended June 30, 1998................................................ $8.250 $ 7.000
</TABLE>

As of August 31, 1998, there were approximately 59 record holders of the
Academy's Common Stock.

The Academy has never paid cash dividends on its Common Stock. At present,
the Academy intends to retain any earnings for use in its business and does not
anticipate paying cash dividends on its common stock in the foreseeable future.
Beginning September 30, 1996, the Academy was required to pay, and has paid,
quarterly dividends on its outstanding Series A Preferred Stock at the annual
rate of $.4125 per share. An aggregate of $21,688 in cash dividends was paid
during the fiscal year ended June 30, 1998. Pursuant to the terms of the Series
A Preferred Stock Agreement, the Academy converted the outstanding preferred
stock to Common Stock in February 1998.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS.

The following discussion should be read in conjunction with the financial
statements and notes thereto located on pages 17 through 31.

The Academy's revenues are derived primarily from culinary arts education as
well as restaurant, retail and media operations. Culinary arts education
primarily consists of the AOS Degree and B&P Certificate programs, the College
of Food Basic Professional Culinary Skills Program, and weekend professional
skills program offerings. The AOS Degree program enrolls students on a two-week
cycle. The program can accommodate up to 25 students per class. The 30-week B&P
Certificate program enrolls classes on a five week cycle, typically ranging in
size from 15 to 20 students, with five classes enrolled as of June 30, 1998. The
College of Food programs commenced October 14, 1996 at the Academy's prototype
facility in Salinas, California. A second College of Food campus was opened on
the campus of San Diego State University in San Diego, California in February
1998. As of August 16, 1998, approximately 109 students were enrolled in the
Basic Professional Culinary Skills program at the College of Food's two
locations. The College of Food enrolls students every three to four weeks. As of
August 16, 1998, the Academy has 82 students enrolled in various weekend
professional programs.

Consumer education consists of programs oriented to a part-time audience.
The course length and content address the interests of food industry
professionals, home cooks and individuals who are contemplating a change in
their professional careers. These courses include single topic classes and
various three or four class series covering current topics and basic skills.

Restaurant and retail operations include two restaurants and a private
dining room, banquet services and a small on-site retail shop offering
beverages, cookbooks, video tapes, kitchen wares and selected

13
<PAGE>
clothing. Media operations primarily consist of the marketing of the COOKING AT
THE ACADEMY television series and cookbook royalties. Certain expenses such as
food costs and costs of goods sold are related to both educational services and
retail restaurant operations.

Revenues from the Academy's AOS Degree and B&P Certificate programs rely
exclusively on enrollments in those programs. Tuition is initially recorded as
deferred revenue at the commencement of each enrollment period and recognized as
revenue over the length of program as students complete course work required for
graduation.

The Academy believes that manageable growth is achievable through the
addition of strategically located core campuses, such as its main campus in San
Francisco, as well as extension campuses, such as the College of Food locations
in Salinas and San Diego, California. While management believes that this
strategy will enable it to significantly increase revenues by providing
additional educational and training resources to the food industry, there can be
no assurance that management will be able to successfully implement such a
strategy.

Except for historical information contained herein, this report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The
forward-looking statements contained herein are based upon current expectations,
and actual results may differ materially. Forward-looking statements contained
herein involve numerous risks and uncertainties that could cause actual results
to differ materially from those projected. Investors are cautioned not to place
undue reliance on those forward-looking statements, which reflect management's
analysis only as of the date hereof. The Academy undertakes no obligation to
publicly release the results of any revision to these forward-looking statements
that may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events (see "Business--Risk Factors").

RESULTS OF OPERATIONS

The Academy incurred a net loss of $771,000, or ($0.22) per share for the
fiscal year ended June 30, 1998 ("1998"), compared to a profit of $160,000, or $
0.04 per share, for the fiscal year ended June 30, 1997 ("1997").

Total revenues increased $1,393,000, or 9.1%, from $15,339,000 in 1997 to
$16,732,000 in 1998. Total revenues increased $457,000, or 3.1%, from
$14,882,000 for the fiscal year ended June 30, 1996 ("1996") to $15,339,000 in
1997. Revenues from culinary arts education increased $767,000, or 6.0%, from
$12,682,000 in 1997 to $13,449,000 in 1998. Revenues from culinary arts
education increased $504,000, or 4.0%, from $12,178,000 in 1996 to $12,682,000
in 1997.

Total student count in the AOS Degree, B&P Certificate and College of Food
programs increased by 177 students, or 29.5%, to 776 students as of June 30,
1998 from 599 students as of June 30, 1997. The increase is primarily
attributable to the introduction of the College of Food programs as well as
changes in the frequency of class starts for the AOS Degree program.

Restaurant, retail, media and other sales increased to $2,971,000, or 17.8%
of total revenues, in 1998, compared to $2,657,000, or 17.3% of total revenues,
in 1997. Restaurant, retail, media and other sales decreased by $47,000 or by
1.7% from 1996 to $2,657,000 or 17.3% of total revenues in 1997.

Operating expenses were $14,063,000, or 84.0% of total revenues in 1998
compared to $11,875,000 or 77.4% of total revenues in 1997. The increase was
primarily attributable to an increase in payroll and benefits due to the full
implementation of the sequential curriculum; repairs and maintenance
expenditures, advertising expense, creation of the Student Residence Division,
expansion of the College of Food concept, legal and accounting expenditures
related to a comprehensive strategic business alternative analysis, and legal
expenses and costs associated with the settlement of two long-standing lawsuits.

14
<PAGE>
Operating expenses were $11,875,000 or 77.4% of revenues for the fiscal year
ended June 30, 1997, compared to $12,375,000 or 83.2% of revenues in 1996.

Food and beverage costs were $1,810,000, or 10.8% of total revenues, in
1998, compared to $1,744,000, or 11.4% of total revenues, in 1997. The increase
was primarily attributable to an increase in food and beverage sales. Food and
beverage costs were $1,744,000 or 11.4% of revenues for the fiscal year ended
June 30, 1997 compared to $1,692,000 or 11.4% of revenues in 1996.

In 1998, interest income, net of interest expense, was $13,000, or 0.1% of
total revenues, compared to interest income, net of interest expense, of
$52,000, or 0.3% or total revenues, in 1997. The decrease in net interest income
was primarily attributable to interest on the first trust deed note for a hotel
property purchased in October 1997, which was subsequently and sold and leased
back in June 1998 (see "Description of Property"). In 1997, interest income, net
of interest expense, was $52,000 or 0.3% of revenues, compared to interest
expense, net of income, of $81,000 or 0.5% of revenues in 1996.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Academy has financed its long-term growth through the
issuance of debt and equity securities in both private and public transactions,
borrowings from related parties, lease and debt financing obligations, and cash
flow provided by operations.

As of June 30, 1998, the Academy's principal source of liquidity included
cash and cash equivalents of $2,533,000 and net accounts receivable of
$3,660,000. As of June 30, 1998, the Academy had working capital of $604,000.
Net cash provided by operating activities was $695,000 and $448,000 in 1998 and
1997, respectively. Fluctuation is primarily attributable to an increase in
deferred revenues as a result of increased student enrollment.

PLANNED PRIVATE PLACEMENT

The Academy is currently seeking significant private equity financing in a
transaction that would be exempt from the registration requirements under the
federal securities laws. The proceeds of the proposed financing, if completed,
would be used to fund development of a planned Regional Area Campus in New
Orleans, Louisiana and new College of Food campuses elsewhere in the United
States. The terms of the investment are subject to negotiation with potential
investors and will be publicly announced upon execution of a definitive purchase
agreement. There can be no assurance that such financing will be available to
the Academy on favorable terms or at all.

YEAR 2000 CONSIDERATIONS

The Academy has a number of computer and software systems that are critical
to the efficient and timely processing of information and business transactions.
Most the Academy's suppliers are also dependent on computerized systems process
information. The Academy has determined that most of its computerized systems
are year 2000 compliant and that the few systems that are not compliant can be
brought into compliance by the year 2000 for a minimal cost. The systems that
are currently non-compliant would not pose a significant problem to the Academy
in either cost or disruption of services if they cannot be made compatible.

With the exception of utility companies' who supply electricity, gas, water
and telephone service to Academy's facilities, the Academy estimates that the
year 2000 compliance issue will have minimal effect on its ability to obtain the
products and services required by the Academy. The Academy is unable to assess
the year 2000 issue as it relates to its suppliers of utility services.
Disruption of utilities of any kind could have a major but undeterminable effect
on the Academy's business and profits. Management believes that a disruption in
utilities, and the impact such a disruption would have on its operations, would
be similar in degree and magnitude for the Academy as it would be for its
competitors. There is no

15
<PAGE>
assurance, however, that unforeseen year 2000 problems will not occur that will
have a significant negative effect on Academy's revenues and profits.

ITEM 7. FINANCIAL STATEMENTS.

The balance sheets of the Academy as of June 30, 1998 and 1997, the related
statements of operations, shareholders' equity and cash flows for the years then
ended, and notes to the financial statements are located on pages 17 through 31.

<TABLE>
<CAPTION>
FORM 10-KSB PAGE
-----------------------
<S> <C>
Independent Auditors' Report................................................................. 17

Balance Sheets as of June 30, 1998 and 1997.................................................. 18

Statements of Operations for the years ended June 30, 1998 and 1997.......................... 19

Statements of Shareholders' Equity for the years Ended June 30, 1998 and 1997................ 20

Statements of Cash Flows for the years ended June 30, 1998 and 1997.......................... 21

Notes to Financial Statements................................................................ 22
</TABLE>

16
<PAGE>
INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders of
California Culinary Academy, Inc.
San Francisco, California

We have audited the accompanying balance sheets of the California Culinary
Academy, Inc. (the "Academy") as of June 30, 1998 and 1997, and the related
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Academy'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, such financial statements present fairly, in all material
respects, the financial position of the Academy at June 30, 1998 and 1997, and
the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.

San Francisco, California
September 24, 1998

17
<PAGE>
CALIFORNIA CULINARY ACADEMY, INC.

BALANCE SHEET

JUNE 30, 1998 AND 1997)

(DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................................. $ 2,533 $ 2,308
Accounts receivable, net of allowance of $419 and $360.................................... 3,660 2,847
Inventories............................................................................... 227 341
Prepaid expenses and other assets......................................................... 191 343
Deferred tax asset........................................................................ 188 188
--------- ---------
Total Current Assets.................................................................. 6,799 6,027
--------- ---------
Property and equipment, net................................................................. 4,830 4,965
Intangible assets, net...................................................................... 290 419
Other assets................................................................................ 357 215
--------- ---------
TOTAL ASSETS.......................................................................... $ 12,276 $ 11,626
--------- ---------
--------- ---------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................................................... 593 680
Accrued liabilities....................................................................... 790 558
Deferred revenue.......................................................................... 4,260 3,212
Student prepayments....................................................................... 477 356
Current portion of capital lease obligations.............................................. 75 67
Other current liabilities................................................................. 88
--------- ---------
Total Current Liabilities............................................................. 6,195 4,961
--------- ---------
Capital lease obligations................................................................... 97 148
--------- ---------
TOTAL LIABILITIES..................................................................... 6,292 5,109
--------- ---------

Commitments and Contigencies

Stockholders' Equity:
Convertible preferred stock, no par value, 5,000,000 shares authorized, 1998: 0 and 1997:
254,500 issued and outstanding; liquidation preference of $5.50 per share............... 953
Common stock, no par value, 20,000,000 shares authorized, 1998: 3,795,350 and 1997:
3,393,900 issued and outstanding........................................................ 11,351 9,649
Note receivable from shareholder.......................................................... (489)
Deficit................................................................................... (4,878) (4,085)
--------- ---------
Total Stockholders' Equity............................................................ 5,984 6,517
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................................ $ 12,276 $ 11,626
--------- ---------
--------- ---------
</TABLE>

The accompanying notes are an integral part of these financial statements

18
<PAGE>
CALIFORNIA CULINARY ACADEMY, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Revenues:
Culinary arts education................................................................... $ 13,449 $ 12,682
Restaurants & catering.................................................................... 2,726 2,299
Student housing........................................................................... 312
Retail, media and other................................................................... 245 358
--------- ---------
Total revenues........................................................................ 16,732 15,339
Cost of sales
Food & beverage........................................................................... 1,810 1,744
Program supplies.......................................................................... 926 791
Scholarships & grants..................................................................... 226 216
Merchandise & other....................................................................... 491 498
--------- ---------
3,453 3,249
--------- ---------
Gross Margin................................................................................ 13,279 12,090

Operating expenses
Occupancy................................................................................. 2,027 1,725
Repairs & maintenance..................................................................... 477 393
Telephone, security & other............................................................... 433 388
Depreciation & amortization............................................................... 1,130 1,157
Compensation & benefits................................................................... 6,742 5,844
Outside services.......................................................................... 827 515
Advertising & promotion................................................................... 777 573
Legal & other............................................................................. 1,650 1,280
--------- ---------
14,063 11,875
Interest income............................................................................. 13 52
--------- ---------
Income (loss) before provision for income taxes............................................. (771) 267
Income tax provision........................................................................ 107
--------- ---------
Net income (loss)........................................................................... ($ 771) $ 160
--------- ---------
--------- ---------
Net income (loss) per share:
Basic..................................................................................... ($ 0.22) $ 0.00
--------- ---------
--------- ---------
Diluted................................................................................... ($ 0.22) $ 0.00
--------- ---------
--------- ---------
</TABLE>

The accompanying notes are an integral part of these financial statements

19
<PAGE>
CALIFORNIA CULINARY ACADEMY, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED JUNE 30, 1998 AND 1997

(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
NOTE
PREFERRED STOCK COMMON STOCK RECEIVABLE
----------------------- --------------------- FROM
SHARES AMOUNT SHARES AMOUNT SHAREHOLDER DEFICIT TOTAL
---------- ----------- ---------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of June 30, 1996....... 3,186,100 8,741 $ (4,086) $ 4,655
Issuance of preferred stock,
Series A........................ 254,500 $ 953 953
Exercise of stock options and
warrants........................ 325,300 1,665 1,665
Repurchase of common stock........ (117,500) (757) (757)
Preferred stock dividend
declared........................ (159) (159)
Net income........................ 160 160
---------- ----- ---------- --------- ----- --------- ---------
Balance as of June 30, 1997....... 254,500 $ 953 3,393,900 $ 9,649 $ (4,085) $ 6,517
---------- ----- ---------- --------- ----- --------- ---------
---------- ----- ---------- --------- ----- --------- ---------

Exercise of stock options......... 140,650 $ 749 $ (489) $ 260
Preferred stock dividend
declared........................ (22) (22)
Issuance of preferred stock,
Series A........................ 6,300
Conversion of preferred stock to
common stock.................... (260,800) (953) 260,800 953
Net loss.......................... (771) (771)
---------- ----- ---------- --------- ----- --------- ---------
Balance as of June 30, 1998....... 3,795,350 $ 11,351 $ (489) $ (4,878) $ 5,984
---------- ----- ---------- --------- ----- --------- ---------
---------- ----- ---------- --------- ----- --------- ---------
</TABLE>

The accompanying notes are an integral part of these financial statements

20
<PAGE>
CALIFORNIA CULINARY ACADEMY, INC.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JUNE 30, 1998 AND 1997

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
--------------------
<S> <C> <C>
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................................................... ($ 771) $ 160
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization............................................................ 1,127 1,157
Tax provision............................................................................ 107
Provision for losses on accounts receivable.............................................. 131 80
Gain on disposal of property............................................................. (197) 2
Deferred rent............................................................................ 157 (27)
Changes in assets and liabilities:
Accounts receivable.................................................................... (944) (122)
Inventories............................................................................ 114 (133)
Prepaid expenses and other assets...................................................... (148) (234)
Accounts payable....................................................................... (87) (69)
Deferred revenues...................................................................... 1,048 (583)
Accrued and other liabilities.......................................................... 265 110
--------- ---------
Net cash provided by operating activities.......................................... 695 448
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment...................................................... (2,813) (1,877)
Proceeds from sale of property and equipment............................................... 2,148
(Increase) decrease in long-term investments............................................... 646
--------- ---------
Net cash used in investing activities.............................................. (665) (1,231)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on term loan agreements................................................. (742)
Principal payments on capital lease obligations............................................ (43) (76)
Proceeds from exercise of stock options and warrants....................................... 260 1,480
Repurchase of common stock................................................................. (757)
Payment of preferred stock dividends....................................................... (22) (63)
Cost of offering--preferred stock.......................................................... (34)
--------- ---------
Net cash provided by (used in) financing activities................................ 195 (192)
--------- ---------

Net increase (decrease) in cash and cash equivalents......................................... 225 (975)
Cash and cash equivalents, beginning of period............................................... 2,308 3,283
--------- ---------
Cash and cash equivalents, end of period..................................................... $ 2,533 $ 2,308
--------- ---------
--------- ---------
</TABLE>

The accompanying notes are an integral part of these financial statements

21
<PAGE>
CALIFORNIA CULINARY ACADEMY, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE FISCAL YEARS ENDED JUNE 30, 1998 AND 1997

NOTE 1--THE COMPANY

The California Culinary Academy, Inc. (the "Academy"), founded in 1977,
operates a professional school for chef training that stresses the fundamental
techniques of modern classical cooking and baking. The operations of the Academy
include an Associate of Occupational Studies ("AOS") Degree Program in Culinary
Arts, a Certificate Program in Baking and Pastry Arts, weekend and short-course
professional and vocational cooking classes, and two public restaurants and a
retail shop located in San Francisco. The Academy is accredited by the
Accrediting Commision of Career Schools and Colleges of Technology of the Career
College Association and the American Culinary Federation Eductional Institute's
Accrediting Commission.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS

The Academy considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.

INVENTORIES

Inventories are stated at the lower of cost or market and consist primarily
of food and beverages. Cost is determined using the first-in, first-out (FIFO)
method.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
range from three to ten years. Leasehold improvements are amortized using the
straight-line method over the remaining term of the lease or the useful life of
the improvements, whichever is shorter.

Property and equipment consists of the following (dollars in thousands):

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Kitchen equipment........................................................ $ 1,859 $ 1,817
Furniture, fixtures and equipment........................................ 4,158 3,542
Construction-in-progress................................................. 17 20
Leasehold improvements................................................... 4,658 4,485
--------- ---------
10,692 9,864
Less accumulated depreciation and amortization........................... (5,862) (4,899)
--------- ---------
$ 4,830 $ 4,965
--------- ---------
--------- ---------
</TABLE>

22
<PAGE>
CALIFORNIA CULINARY ACADEMY, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

FOR THE FISCAL YEARS ENDED JUNE 30, 1998 AND 1997

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS

Intangible assets are stated at cost and consist primarily of the excess of
the purchase price over the net tangible assets acquired in the original
purchase of the Academy. Intangible assets consist of the following (dollars in
thousands):

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Favorable lease rights................................................... $ 1,476 $ 1,476
Goodwill................................................................. 249 249
Other.................................................................... 5 4
--------- ---------
1,730 1,729
Less accumulated amortization............................................ (1,440) (1,310)
--------- ---------
$ 290 $ 419
--------- ---------
--------- ---------
</TABLE>

Amortization is computed using the straight-line method over the estimated
useful lives of the respective assets. The estimated useful lives used in
computing amortization are: favorable lease rights--15 years; goodwill--20
years; and other--one year.

REVENUE RECOGNITION

Tuition is initially recorded as deferred revenue at the commencement of
each enrollment period and is recognized as revenue over the length of program
as students complete course work required for graduation. Revenue on restaurant,
retail and media sales is recognized at the time services are performed or goods
are sold.

ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

NET INCOME (LOSS) PER SHARE

In 1998, the Academy adopted the provisions of Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), Earnings per Share. SFAS 128 requires
a dual presentation of basic and diluted earnings per share ("EPS"). Basic EPS
is computed by dividing net income by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if common stock options were exercised. EPS for all periods
presented have been restated to reflect the adoption of SFAS 128. For the year
ended June 30, 1998, stock options were not included in the diluted EPS share
calculation because their effect would be anti-dilutive.

23
<PAGE>
CALIFORNIA CULINARY ACADEMY, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

FOR THE FISCAL YEARS ENDED JUNE 30, 1998 AND 1997

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following is a reconciliation of the number shares (denominator) used in
the basic and diluted EPS computations for the years ended June 30, 1998 and
1997:

<TABLE>
<CAPTION>
EFFECT OF EFFECT OF
DILUTED CONVERTIBLE
STOCK PREFERRED
BASIC OPTIONS STOCK DILUTED
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
1998
Net income................................................... $ (771,000) $ (771,000)
Dividends on preferred stock................................. $ (22,000) $ (22,000)
------------ ------------
Net income available to common stockholders.................. $ (793,000) $ (793,000)
------------ ------------
------------ ------------
Shares....................................................... 3,660,207 -- -- 3,660,207
------------ ------------
------------ ------------
Earnings per share........................................... $ (0.22) -- -- $ (0.22)
------------ ------------
------------ ------------

1997
Net income................................................... $ 160,000 $ 160,000
Dividends on preferred stock................................. $ (159,000) $ (159,000)
------------ ------------
Net income available to common stockholders.................. $ 1,000 $ 1,000
------------ ------------
------------ ------------
Shares....................................................... 3,308,394 93,666 254,541 3,656,601
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Earnings per share........................................... $ 0.00 -- -- $ 0.00
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Academy to concentrations
of credit risk consist of cash, short-term cash investments, such as money
market investments, and accounts receivable. The Academy invests substantially
all of its excess cash funds in money market accounts through high-quality
financial institutions and grants credit to its students. The Academy believes
that the credit risks associated with money market investments are minimal due
to the high quality of the financial institutions through which the investments
are made. The Academy believes the credit risk associated with its student
accounts receivable is minimal as the majority of students receive some type of
financial aid paid directly to the Academy. To reduce credit risk, the Academy
performs ongoing evaluations of its students' financial condition and assists
qualified students in obtaining student financial aid.

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Supplemental disclosure of cash paid for (dollars in thousands):

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-------------
1998 1997
----- -----
<S> <C> <C>
Interest........................................................................ $ 96 $ 89
Income taxes.................................................................... 0 17
</TABLE>

24
<PAGE>
CALIFORNIA CULINARY ACADEMY, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

FOR THE FISCAL YEARS ENDED JUNE 30, 1998 AND 1997

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Supplemental disclosure of non-cash investing and financing activities:

The Academy issued 254,500 shares of Series A Preferred Stock upon
conversion of $1,400,000 of Convertible Subordinated Debt during the year ended
June 30, 1997.

The Academy received a promissory note of approximately $489,000 from one of
its shareholders, in exchange for the exercise of stock options, for the year
ended June 30, 1998.

On February 4, 1998, the closing price of the common stock equaled or
exceeded $8.00 for 20 consecutive trading days. Pursuant to the automatic
conversion provisions of the Series A preferred stock, 23,580 shares of Series A
preferred stock, representing all the remaining Series A preferred stock
outstanding, was automatically converted to 23,580 shares of common stock.

IMPACT OF NEW ACCOUNTING STANDARDS

In 1998, the Academy adopted Statement of Accounting Standard No. 130 ("SFAS
130"), REPORTING COMPREHENSIVE INCOME. This Statement requires that all items
recognized under accounting standards as components of comprehensive income be
reported in an annual financial statement that is displayed with the same
prominence as other annual financial statements. This Statement also requires
that an entity classify items of other comprehensive income by their nature in
an annual financial statement. For example, other comprehensive income may
include foreign currency translation adjustments, minimum pension liability
adjustments, and unrealized gains and losses on marketable securities classified
as available-for-sale. Comprehensive income does not differ from net income for
the Academy for fiscal years ended June 30, 1998 and 1997.

In June 1997, Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131 ("SFAS 131"), DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION. SFAS 131 establishes annual and
interim reporting standards for an enterprises operating segments and related
disclosures about its products, services, geographic areas and major customers.
Adoption of this statement will not impact the Academy's consolidated financial
position, results of operations or cash flows and any effect will be limited to
the form and content of its disclosures. SFAS 131 is effective for fiscal years
beginning after December 15, 1997.

STOCK-BASED COMPENSATION

The Academy accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board Opinion ("APB") No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to current year
presentation.

NOTE 3--CAPITAL LEASE OBLIGATIONS

The Academy leases computers, photocopiers and other equipment under various
capital lease agreements. Certain lease agreements include purchase options and
renewal provisions at the discretion of the Academy.

25
<PAGE>
CALIFORNIA CULINARY ACADEMY, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

FOR THE FISCAL YEARS ENDED JUNE 30, 1998 AND 1997

NOTE 3--CAPITAL LEASE OBLIGATIONS (CONTINUED)
Future minimum lease payments at June 30, 1998 are as follows (dollars in
thousands):

<TABLE>
<CAPTION>
YEARS ENDING JUNE 30 AMOUNT
- - ------------------------------------------------------------------------------------- -----------
<S> <C>
1999......................................................................... $ 86
2000......................................................................... 66
2001......................................................................... 36
2002 and thereafter.......................................................... 0
-----
Total minimum lease payments......................................................... 188
Less amount representing interest.................................................... (16)
-----
Present value of minimum lease payments.............................................. 172
Less current portion of capital lease obligations.................................... (75)
-----
Long term portion of capital lease obligations..................................... $ 97
-----
-----
</TABLE>

As of June 30, 1998, the associated capital leased equipment had a net book
value of $84,071.

NOTE 4--RELATED-PARTY TRANSACTIONS

In January 1995, the Academy entered into a month-to-month consulting
agreement with a principal shareholder and Chairman of the Board of Directors to
provide consulting services regarding investor relations and other strategic
services. The agreement provides for fees not to exceed $6,000 per month. The
Academy paid fees of $72,000 for the years ended June 30, 1998 and 1997 under
this agreement.

In December 1997, the Chairman of the Board of Directors exercised stock
options under the Company's 1992 stock option plan. In exchange, he delivered a
promissory note for the value of the stock options of $465,000 bearing an
interest rate of 9.5% and a due date no later than December 31, 1998. Accrued
interest on this note was $24,000 as of June 30, 1998.

NOTE 5--PREFERRED STOCK

During March 1996 and July 1996, the Board of Directors and shareholders,
respectively, authorized the Academy to issue up to 5,000,000 shares of
preferred stock in one or more series to be determined by the Board of Directors
from time to time. An amendment to the Articles of Incorporation authorizing the
issuance of preferred stock was filed with the California Secretary of State in
August 1996. On August 23, 1996, the Academy became legally authorized to issue
up to 700,000 shares of Series A preferred stock. On the same date, convertible
subordinated notes in the aggregate principal amount of $1,400,000 automatically
converted to 254,500 shares of Series A preferred stock. The preferred stock was
recorded net of $447,000 of issuance costs.

The non-redeemable Series A preferred stock into which the subordinated
notes converted provides for quarterly dividends at an annual rate of 7.5% per
share from the date of first issuance, when and if declared by the Board of
Directors, with a liquidation preference of $5.50 per share, plus accrued
dividends. Although the Series A preferred stock is nonvoting, in the event the
Academy fails to pay a quarterly dividend, a meeting of the Board of Directors
can be called at which the holders of the Series A preferred stock will be
entitled to elect one-third of the Academy's Board of Directors. Upon payment of
the missed dividend(s), the right to elect one-third of the Board will be
rescinded. Each share of Series A preferred stock is convertible at the option
of the holder into one share of the Academy's common stock at the conversion
price of $5.50 per share. After February 23, 1997, each share of Series A
preferred stock

26
<PAGE>
CALIFORNIA CULINARY ACADEMY, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

FOR THE FISCAL YEARS ENDED JUNE 30, 1998 AND 1997

NOTE 5--PREFERRED STOCK (CONTINUED)
will convert automatically if the closing price of the common stock equals or
exceed $8.00 for 20 consecutive trading days. Certain provisions for price
protection are set forth in the terms of the Series A preferred stock, but in no
event will the conversion price be less than $3.50.

The Academy granted certain registration rights to the holders of the
convertible notes (and subsequently, the preferred shareholders). Certain
penalties were payable to the holders of the Series A preferred stock if the
Academy did not use its best efforts to file a registration statement to
register for resale the common stock underlying the Series A preferred stock
conversion right with an effective date not later than November 23, 1996. Such
registration statement was declared effective on April 15, 1997. Penalties
payable to the Series A preferred shareholders were accrued as of June 30, 1997.
A total of 6,300 shares of Series A preferred stock and $35,000 in cash was
distributed in connection with this penalty.

In July 1997, certain Series A preferred stock shareholders elected to
convert approximately 145,000 preferred shares into common stock. The remaining
preferred shares were automatically converted in February 1998 (see Note 2).

NOTE 6--SHAREHOLDERS' EQUITY

STOCK OPTION PLANS

The Academy established the 1992 Stock Option Plan (the "1992 Plan") during
the year ended August 31, 1993 and allocated a total of 383,595 shares to be
granted under the Plan. Under the Plan, incentive stock options and
non-qualified options can be granted at prices not less than 100 percent of the
fair market value of the stock at the date of grant. Options are exercisable
from one to five years from the date of grant.

The 1997 Directors' Non-Qualified Stock Option Plan, as amended (the "1997
Directors' Plan"), under which a total of 240,000 non-qualified stock options to
purchase shares of Common Stock were issued. All 240,000 options provided by the
1997 Directors' Plan have been granted at the fair market value as of the date
of grant. Such options vested immediately and expire on June 1, 2002.

Subsequent to June 30, 1998, the Academy received shareholder ratification
of its 1998 Stock Option Plan (the "1998 Plan"). The Plan permits the granting
of incentive and non-qualified stock options to employees to purchase up to
300,000 shares of common stock at prices not less than fair market value as of
the date of grant. The options generally expire in ten years and vest in
increments as determined by the Board of Directors.

27
<PAGE>
CALIFORNIA CULINARY ACADEMY, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

FOR THE FISCAL YEARS ENDED JUNE 30, 1998 AND 1997

NOTE 6--SHAREHOLDERS' EQUITY (CONTINUED)
Option activity under the 1992 and 1998 Plans and 1997 Directors' Plan are
as follows:

<TABLE>
<CAPTION>
OUTSTANDING
OPTIONS (000'S) PRICE RANGE
--------------- --------------
<S> <C> <C>
Balance at June 30, 1996........................................ 432 $4.18 - $8.00
Options granted................................................. 524 $6.27 - $7.70
Options exercised............................................... (98) $4.18 - $8.00
Options canceled................................................ (56) $6.25 - $8.00
Balance as of June 30, 1997..................................... 802 $4.18 - $8.00
Options granted................................................. 5 $7.50
Options exercised............................................... (141) $4.18 - $7.75
Options canceled................................................ (120) $4.18 - $7.75
Balance as of June 30, 1998..................................... 546 $4.18 - $8.00

Exercisable options as of June 30, 1998......................... 495 $4.18 - $8.00
</TABLE>

Additional information regarding options outstanding as of June 30, 1998 is
as follows:

<TABLE>
<CAPTION>
WEIGHTED
RANGE OF AVERAGE WEIGHTED WEIGHTED
EXERCISE NUMBER REMAINING AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- - -------------- ----------- ------------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$4.18 162,520 4.24 $ 4.18 162,520 $ 4.18
$6.25 - $6.70 290,000 6.51 $ 6.29 250,000 $ 6.47
$7.13 - $8.00 93,750 8.03 $ 7.73 82,158 $ 7.93
$4.18 - $8.00 546,270 7.21 $ 6.96 494,678 $ 6.83
</TABLE>

As discussed in Note 2, the Academy continues to account for its stock-based
awards using the intrinsic value method in accordance with APB No. 25,
Accounting for Stock Issued to Employees, and its related interpretations.
Accordingly, no compensation expense has been recognized in the financial
statements for employee stock arrangements.

ADDITIONAL STOCK PLAN INFORMATION

Statement of Financial Accounting Standards No. 123 ("SFAS 123"), ACCOUNTING
FOR STOCK BASED COMPENSATION, requires the disclosure of pro forma net income
and earnings per share had the Academy adopted the fair value method as of the
beginning of fiscal 1996. Under SFAS 123, the fair value of stock based awards
to employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions including future stock price volatility and expected time to
exercise, which greatly affect the calculated values.

The weighted average fair values per share of options granted during the
years ended June 30, 1998 and 1997 were $1.03 and $1.82, respectively. For
determining pro forma earnings per share, the fair values of each option granted
were estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions for the years ended June 30, 1998 and 1997,
respectively: (i) expected life, 12 months following vesting, (ii) expected
stock volatility of 20% and 18%, (iii) risk-free interest rate of 6.5% and 6.0%;
and (iv) no dividends during the expected term. The Academy's calculations are
based on

28
<PAGE>
CALIFORNIA CULINARY ACADEMY, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

FOR THE FISCAL YEARS ENDED JUNE 30, 1998 AND 1997

NOTE 6--SHAREHOLDERS' EQUITY (CONTINUED)
a multiple option valuation approach and forfeitures are recognized as they
occur. If the computed fair values of the 1998 and 1997 awards had been
amortized to expense over the vesting period of the awards, pro forma net loss
would have been $948,000 ($0.25 per basic and diluted share) in the year ended
June 30, 1998 and pro forma net income would have been $135,000 ($0.04 per basic
and diluted share) in the year ended June 30, 1997. However, the impact of
outstanding non-vested stock options granted prior to 1996 has been excluded
from the pro forma calculation; accordingly, the 1998 and 1997 pro forma
adjustments are not indicative of future period pro forma adjustments, when the
calculation will apply to all applicable stock options.

NOTE 7--INCOME TAXES

The provision (benefit) for income taxes for the years ended June 30, 1998
and 1997 consists of the following (dollars in thousands):

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------
1998 1997
----- ---------
<S> <C> <C>
Current........................................................................ $ 0 $ 175
Deferred....................................................................... 0 (68)
--- ---------
$ 0 $ 107
--- ---------
--- ---------
</TABLE>

A reconciliation of the effective tax rate for income taxes to the Federal
statutory rate is as follows:

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Federal statutory rate...................................................... 34.0% 34.0%
State tax, net of federal income tax deferral............................... 5.8% 7.1%
Other items................................................................. (17.3%) (1.1%)
Valuation allowance......................................................... (22.5%)
--------- ---
Income tax rate............................................................. 0.0% 40.0%
--------- ---
--------- ---
</TABLE>

29
<PAGE>
CALIFORNIA CULINARY ACADEMY, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

FOR THE FISCAL YEARS ENDED JUNE 30, 1998 AND 1997

NOTE 7--INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities result from differences in the timing of
the recognition of certain income and expense items for tax and financial
accounting purposes. The components of the net deferred tax asset include the
following deferred tax assets and liabilities (dollars in thousands):

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets (liabilities)
Accrued vacation........................................................... $ 54 $ 38
Allowance for doubtful accounts............................................ 180 154
Net operating loss carryforward............................................ 940 637
Depreciation............................................................... (18) (40)
Amortization............................................................... (124) (179)
Other...................................................................... (204) (87)
Valuation allowance........................................................ (505) (200)
--------- ---------
Net deferred tax asset....................................................... $ 323 $ 323
--------- ---------
--------- ---------
</TABLE>

As of June 30, 1998 the Academy has federal and California net operating
loss carry forwards, for tax return purposes, of approximately $2,559,000 and
$792,000, respectively, which are available to offset future taxable income, if
any. The federal net operating losses begin expiring in 2005 through 2017.
California net operating loss carry forwards begin expiring in 2001 through
2003.

A valuation allowance has been provided for that portion of deferred tax
assets where it is more likely than not that the future tax benefits of these
items will not be realized. The factors affecting the realizably of the deferred
asset balance at June 30, 1998 have not changed significantly from the previous
year.

NOTE 8--PROMISSORY NOTES

In July 1996, a former executive officer of the Academy elected to exercise
approximately 112,000 vested stock options. The Academy subsequently entered
into a transaction with this former officer, wherein the Academy purchased and
retired this stock in exchange for approximately $717,000, which approximated
fair market value and was comprised of approximately $560,000 in cash and
$157,000 in promissory notes receivable bearing an interest rate of 8.75%. As of
June 30, 1997, the outstanding balance of these notes was approximately $38,000.
The notes were repaid in full during 1998.

NOTE 9--COMMITMENTS AND CONTINGENCIES

PURCHASE AGREEMENT

In September 1994, the Academy entered into an agreement with a company to
purchase $1,650,000 of knives, tools, gadgets, and equipment over an unlimited
period of time. In exchange, the company underwrote one-third of the production
costs of the Academy's television cooking series COOKING AT THE ACADEMY. As of
June 30, 1998, the Academy had purchased approximately $697,000 of knives,
tools, gadgets, and equipment.

FACILITY LEASE

The Academy leases restaurant, school and office facilities under an
operating lease. As of June 30, 1998, the lease provides for rent payments of
approximately $95,000 per month, adjusting downward to

30
<PAGE>
CALIFORNIA CULINARY ACADEMY, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

FOR THE FISCAL YEARS ENDED JUNE 30, 1998 AND 1997

NOTE 9--COMMITMENTS AND CONTINGENCIES (CONTINUED)
approximately $77,000 per month in April 2001, the fifth year of the lease, and
requires the Academy to pay its pro rata share of common area maintenance,
insurance and tax expenses of approximately $13,000 per month. The Academy
leases facilities in Salinas, California for its College of Food under an
operating lease. The lease payment is the greater of approximately $3,900 per
month or 8% of gross sales and requires the Academy to pay is pro rata share of
common area and exterior maintenance charges, which are approximately $1,000
each month. The Academy leases space in another building close to its main
campus, which is used for its educational programs. The lease payment is $2,700
per month.

Future minimum lease payments for all operating leases as of June 30, 1998
are approximately as follows (dollars in thousands):

<TABLE>
<CAPTION>
YEARS ENDING JUNE 30 AMOUNT
- - ----------------------------------------------------------------------------------- ---------
<S> <C>
1999....................................................................... $ 1,967
2000....................................................................... 1,930
2001....................................................................... 1,753
2002....................................................................... 1,636
2003....................................................................... 1,657
2004 and thereafter........................................................ 15,887
---------
$ 24,830
---------
---------
</TABLE>

Rent expense for the years ended June 30, 1998 and 1997, was approximately
$1,459,000 and $1,295,000, respectively.

STUDENT FINANCIAL ASSISTANCE PROGRAMS

Approximately 45% percent of the Academy's education program revenues are
provided by students participating in student financial assistance programs
administered by the Department of Education ("DOE") and the State of the
California.

The Academy is subject to periodic audit by the DOE of its compliance within
DOE funding requirements. While management believes that the Academy can
demonstrate financial responsibility in accordance with the standards set for by
the DOE, the possibility of adverse DOE findings exists. The financial statement
effect of potential adverse findings is unknown.

NOTE 10--401(K) RETIREMENT PLAN

Employees become eligible to participate in a defined 401(k) plan
immediately upon hire, assuming that other eligibility requirements are also
satisfied. The 401(k) plan allows for employee contributions and discretionary
employer matching contributions. On January 1, 1997, the Academy amended the
401(k) plan to permit discretionary employer matching contributions in the form
of the Academy's Common Stock. Matching contributions are determined quarterly
and contributed at the end of the plan year. The Academy contributions to the
401(k) plan for the years ended June 30, 1998 and 1997 were approximately
$166,000 and $35,000, respectively.

NOTE 11--FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash and equivalents, accounts receivable and
payable and term loans are reasonable estimates of their fair values. Rates
currently available to the Academy for debt with similar terms and remaining
maturities are used to estimate fair value of debt.

31
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Not applicable

PART III

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

The executive officers and directors of the Academy as of September 25, 1998
are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITIONS
- - ----------------------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
Theodore G. Crocker (1)............ 53 Chairman of the Board
Ralph Brennan...................... 47 Director
James D. Cockman (1)(2)............ 65 Director
Bert P. Cutino (2)................. 59 Director
Keith H. Keogh..................... 46 Director and Chief Executive Officer
Paul H. Prudhomme.................. 58 Director
Leenie Ruben....................... 56 Director
Jan Schroeder...................... 61 Vice President-Education
Thomas A. Spanier.................. 52 Vice President-Development and Chief Operating Officer
Charles E. White................... 56 Vice President and Chief Financial Officer
</TABLE>

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

(1) Member of the Compensation Committee

(2) Member of the Audit Committee

The bylaws of the Academy provide for a board of between seven and nine
members. The board is currently fixed at seven members. All directors hold
office until the next annual meeting of shareholders or until their successors
have been duly elected and qualified. Officers serve at the discretion of the
Board of Directors. There are no family relationships between any of the
Academy's directors and executive officers.

Mr. Crocker has served as Chairman of the Board since March 1987. Since
1980, Mr. Crocker has also been primarily employed as the President of Crocker &
Associates, a real estate development company located in Watsonville,
California. Mr. Crocker holds an Associate of Arts degree from Cabrillo Junior
College.

Mr. Brennan was nominated to the Board of Directors in May 1998. A member of
the Brennan restaurant family in New Orleans, he is the co-owner of Mr. B's
Bistro and owner of Bacco and Ralph Brennan's Red Fish Grill in New Orleans'
French Quarter.

Mr. Cockman has served as a member of the Board of Directors since January
1997. He currently serves as the Chairman and Chief Executive Officer of
American Culinary Equipment, Inc., Greenville, South Carolina, a manufacturer
and marketer of professional stainless steel kitchen equipment to the
foodservice industry. Mr. Cockman serves on the boards of Ryans Family Steak
House, Greenville, South Carolina and Clayton Homes, Inc., Knoxville, Tennessee.

Mr. Cutino was nominated to the Board of Directors in May 1998. Since
October 1968 to the present, Cutino has been Executive Chef/Owner of the Sardine
Factory Restaurant in Monterey, California. Mr. Cutino has served as a member of
the Board of Advisors to the California Culinary Academy during the past 8
years.

Mr. Keogh joined the Academy as Executive Vice President and Chief Operating
Officer in June 1995. In April 1996, he was appointed as President and Chief
Operating Officer of the Academy, and in May, 1998, he was appointed as Chief
Executive Officer of the Academy and joined the Board of

32
<PAGE>
Directors. Concurrently, he resigned his position as Chief Operating Officer.
From 1971 until joining the Academy, Mr. Keogh had been employed at Walt Disney
World, Orlando, Florida, and held various positions, including Executive Chef,
Research and Development--Theme Parks. Mr. Keogh was the Manager of the Culinary
Team USA (the US Culinary Olympic Team) from 1988 to 1996 and past president of
the World Association of Cooks Societies and the American Culinary Federation.

Chef Prudhomme has served as a member of the Board of Directors since June
1997. For more than five years, Chef Paul Prudhomme has been the proprietor of
the K-Paul's Louisiana Kitchen, located in the French Quarter of New Orleans,
Louisiana. Chef Prudhomme also has developed and, for more than five years, has
been distributing a line of natural herbs and spices, "Chef Prudhomme's Magic
Seasoning Blends." Chef Prudhomme is also the author of several cookbooks.

Ms. Rubin was nominated to the Board of Directors in May 1998. In 1982, she
founded Marketing Spectrum, a marketing and research firm. As President of
Marketing Spectrum, she has conducted business with an extensive range of
clients in the food service industry, including such major brand name companies
as Kraft, General Mills and Olive Garden.

Jan Schroeder joined the Academy in May 1998 as Vice President-Education.
From September 1995 to May 1998, she was President of Pace Consultancy,
providing education related consulting services to a range of educational
institutions, including the California Culinary Academy. From 1981 to September
1995, Ms. Schroeder served as Executive Vice President of the Academy of Art
College. Ms. Schroeder holds a BA degree in Fine Arts and an MA degree in
Educational Administration from Miami University.

Thomas A. Spanier joined the Academy in May 1998 as Vice
President-Development and Chief Operating Officer. From February 1998 to May
1998, he consulted with the Academy as interim CFO. From August 1994 until May
1998, he was an independent business consultant, providing interim management
services as well as consulting services to a range of high technology and
marketing companies. From April 1993 to August 1994, Mr. Spanier was Executive
Vice President and Chief Operations Officer of the Academy. Mr. Spanier holds a
BS degree in Business (Managerial Economics) from the University of California,
Berkeley and an MBA from Harvard Business School.

Charles E. White joined the Academy in May 1998 as Vice President and Chief
Financial Officer. Mr. White has provided consulting and turn-around management
services to a range of companies in the restaurant, real estate development and
hospitality industries. From 1996 until 1998, he was Chief Operating Officer of
Stars Restaurants. From June 1993 to June 1995, he was General Manager and Chief
Executive Officer of Lummi Casino, and since 1986, he has been President and
Chief Executive Officer of Pea Soup Andersen's. Mr. White is a CPA Certified
Hotel Administrator. He holds a BS degree in Accounting from San Diego State
University, an MBA from Southland University and a LLB degree from La Salle
Extension University.

During the fiscal year ended June 30, 1998, the Board of Directors held
twelve meetings. No member of the Board attended fewer than 75% of the meetings
in the last fiscal year.

COMMITTEES OF THE BOARD

The Academy's Board of Directors has established a Compensation Committee
and an Audit Committee. Each Committee has at least one outside director. The
Compensation Committee establishes salaries, incentives and other forms of
compensation for directors, officers and other employees of the Academy. The
Audit Committee oversees actions taken by the Academy's independent auditors and
reviews the Academy's internal financial controls. The Compensation and Audit
Committees each held two meetings during the fiscal year ended June 30, 1998.
The Board has delegated certain advisory authority to each committee, but the
decision making and management responsibilities of the Academy remain with the
full Board. No committee member attended fewer that 75% of the meetings of the
committees of which he was a member in the last fiscal year.

33
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

The Academy's executive officers and directors are required under the
Securities Exchange Act of 1934 to file with the Securities and Exchange
Commission reports of ownership and changes in ownership in their holdings of
the Academy's Common Stock. Based on an examination of these reports and on
written representations provided to the Academy, all such reports required to be
filed for the fiscal year ended June 30, 1998 have been timely filed.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

As permitted by the General Corporation Law of California (the "Corporations
Code"), the Academy's Articles of Incorporation eliminate, to the fullest extent
permitted under California law, the personal liability of a director to the
Academy for monetary damages in an action brought by or in the right of the
Academy for breach of a director's duties to the Academy and its shareholders.
Under current California law, liability is not eliminated for (i) acts or
omissions that involve intentional misconduct or a knowing and culpable
violation of law; (ii) acts or omissions that a director believed to be contrary
to the best interests of the corporation or its shareholders or that involve the
absence of good faith on the part of the director; (iii) any transaction from
which a director derived an improper personal benefit; (iv) acts or omissions
that show a reckless disregard for the director's duty to the corporation or its
shareholders in circumstances in which the director was aware, or should have
been aware, in the ordinary course of performing a director's duties, of a risk
of serious injury to the corporation or its shareholders; (v) acts or omissions
that constitute and unexcused pattern of inattention that amounts to an
abdication of the director's duty to the corporation or its shareholders; (vi)
contracts or other transactions between corporations and directors have
interrelated directors in violation of Section 310 of the Corporations Code, and
(vii) distributions, loans or guarantees made in violation of Section 316 of the
Corporations Code. In addition, the Academy's Articles of Incorporation and
bylaws provide for indemnification, to the fullest extent permitted under the
Corporations Code, of directors, officers and agents of the Academy and persons
who serve at the request of the Academy as a director, officer, employee,
trustee or agent of another corporation, partnership, joint venture, trust or
other enterprise.

The Academy has also entered into indemnification agreements with its
directors and executive officers, as permitted under the bylaws. The
indemnification agreements provide that the directors and executive officers
will be indemnified to the fullest extent permitted by applicable law against
all expenses (including attorneys' fees), judgements, fines and amounts
reasonably paid or incurred by them for settlement in any threatened, pending or
completed action, suit or proceeding, including any derivative actions, on
account of their services as a director or executive officer of the Academy or
of any subsidiary of the Academy or of any other company or enterprise in which
they are serving at the request of the Academy. No indemnification will be
provided under the indemnification agreements, however, to any director or
executive officer in certain limited circumstances, including on account of
knowingly fraudulent, deliberately dishonest or willful misconduct. To the
extent the provisions of the indemnification agreements exceed the
indemnification permitted by applicable law, such provisions may be
unenforceable or may be limited to the extent they are found by a court of
competent jurisdiction to be contrary to public policy. In addition, in the
opinion of the Securities and Exchange Commission, indemnification for
liabilities arising under the Securities Act of 1933, as amended (the "Act"), is
against public policy and, therefore, unenforceable. Accordingly, these
indemnification provisions may not limit the liability of directors and
executive officers under the Act.

ITEM 10. EXECUTIVE COMPENSATION.

The following table sets forth certain information regarding compensation
paid by the Academy for services rendered during each of the Academy's last two
completed fiscal years for the Academy's Chief Executive Officer and all other
executive officers whose total annual salary and bonus exceeded $100,000 for the
fiscal year ended June 30, 1998 (the "Named Executive Officers").

34
<PAGE>
SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION ALL OTHER
SALARY AWARDS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($$) OPTIONS/SAR'S # ($$)
- - -------------------------------------------------------------- --------- --------- ----------------- -------------
<S> <C> <C> <C> <C>
Theodore G. Crocker........................................... 1998 72,000(1)
Chairman of the Board 1997 72,000(1)

Keith H. Keogh................................................ 1998 195,000 10,522(2)
President and Chief Executive Officer 1997 184,769 10,010(3)
</TABLE>

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

(1) Represents $72,000 for consulting services rendered.

(2) Includes $ 772 in payments on life insurance policies and $9,750 in employer
contributions to the 401(k) Plan.

(3) Includes $772 in payment on life insurance policies and $9,238 in employer
contributions to the 401(k) Plan.

Directors who are employees of the Academy are not separately compensated
for their services as directors or as members of committees of the Board of
Directors. During fiscal 1998, directors who were not employees of the Academy
and who resided in Northern California received $9,000 per annum as an annual
retainer for serving on the Board. During fiscal 1998, directors who were not
employees of the Academy and who resided outside of Northern California received
$12,000 per annum as an annual retainer for serving on the Board. In December
1997, William DeMar, a director who joined the Board of Directors on December 5,
1997, was granted options for 40,000 Common Stock shares of the Academy under
the 1997 Directors Non-Qualified Stock Option Plan.

Other than the 401(k) Plan described below, the Academy has no retirement,
pension or profit sharing program for the benefit of its directors, officers or
other employees, but the Board of Directors may recommend one or more such
programs for adoption in the future.

STOCK OPTIONS

The Academy's 1992 Stock Option Plan ("1992 Plan"), 1998 Stock Option Plan
("1998 Plan"), 1997 Directors Non-Qualified Stock Option Plan ("Directors Plan")
(collectively, the "Option Plans") permits the granting of incentive stock
options ("ISO's"), or non-qualified stock options ("NQSO's") at the discretion
of the Board or a committee designated by the Board to administer the Plan (the
"Administrator"). Subject to the terms of the Option Plans, the Administrator
determines the terms and conditions of options granted under the Option Plans,
including the exercise price and option term. The Option Plans provide that the
Administrator must establish an exercise price for ISO's that is not less than
the fair market value per share at the date of grant. The exercise price of
NQSO's may not be less than 85% of the fair market value per share on the date
of grant. Each ISO must expire within ten years of the date of grant. However,
if ISO's are granted to persons owning more than 10% of the voting stock of the
Academy, the Option Plans provide that the exercise price must be not less than
110% of the fair market value per share at the date of grant and that the term
of the option may not exceed five years. No ISO may be granted to an employee
who when aggregated with all other ISO's granted to such employee by the Academy
or any parent, subsidiary or affiliate (as defined by the Option Plans) would
result in the vesting of shares having and aggregate fair market value
(determined for each share as of the date of grant of the ISO covering such
share) in excess of $100,000 in any calendar year. No such limit applies to the
grant of NQSO's.

As of April 1994, the number of shares authorized for issuance under the
1992 Plan was 450,000 shares. In March 1996, the Board of Directors voted to
increase the number of shares reserved for issuance under the 1992 Plan by
100,000 shares. Such increase was approved by an affirmative vote of the

35
<PAGE>
shareholders at the annual shareholders meeting in March 1996. Unless sooner
terminated by the Board of Directors, the 1992 Plan terminates in December 2002.

The 1998 Plan was approved by a vote of the shareholders at the annual
shareholders meeting in July 1998. Under the 1998 Plan, 300,000 Options are
authorized for issuance. Unless sooner terminated by the Board of Directors, the
1998 Plan terminates in July 2008. The 1998 Plan replaced the 1997 Stock Option
Plan, which was adopted by the Board in June 1997, but, never implemented or
submitted to a shareholder vote.

The Directors Plan was ratified by a vote of the shareholders at the annual
shareholders meeting in July 1998. Under the Directors Plan, 240,000 options are
authorized. As of September 1, 1998, all the authorized options had been
granted.

In the event of a merger in which at the Academy is not the surviving
corporation the sale of substantially all of the assets of the Academy, all
outstanding options under each of the Academy's Plans shall, notwithstanding any
contrary terms of the grant, accelerate and become exercisable in full prior to
the consummation of such merger at such times and on such conditions as the
Administrator shall determine, unless the successor corporation assumes the
outstanding options or substitutes substantially equivalent options. Shares
subject to options granted under each of the Plans that have lapsed or
terminated are returned to the Plan.

The following table sets forth information regarding exercises of stock
options during the fiscal year ended June 30, 1998 by the executive officers
named in the Summary Compensation Table:

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUE

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF IN-THE-MONEY
SHARE OPTIONS/SAR'S OPTIONS/SAR'S
ACQUIRED VALUE AT FISCAL YEAR END AT FISCAL YEAR END
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- - -------------------------------- --------------- ------------- ---------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Theodore G. Crocker............. 0 $ 0 97,990 0 $ 349,824(1) 0
10,000 0 $ 21,900(2) 0
40,000 0 $ 59,200(3) 0

Keith H. Keogh.................. 0 $ 0 60,000 0 $ 0(4) 0
80,000 40,000 $ 84,000(5) $ 42,000(5)
</TABLE>

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

(1) Calculated as the difference between the fair market value of the Common
Stock at June 30, 1998 of $7.750 and the option exercise price of $4.18 per
share.

(2) Calculated as the difference between the fair market value of the Common
Stock at June 30, 1998 of $7.750 and the option exercise price of $5.56 per
share.

(3) Calculated as the difference between the fair market value of the Common
Stock at June 30, 1998 of $7.750 and the option exercise price of $6.27 per
share.

(4) Calculated as the difference between the fair market value of the Common
Stock at June 30, 1998 of $7.750 and the option exercise price of $8.00 per
share.

(5) Calculated as the difference between the fair market value of the Common
Stock at June 30, 1998 of $7.750 and the option exercise price of $6.70 per
share.

401(K) RETIREMENT PLAN

The Academy maintains an employee benefit plan qualified under Section
401(k) of the Internal Revenue Code (the "401(k) Plan"). Employees become
eligible to participate in the 401(k) Plan immediately upon hire, assuming other
eligibility requirements are also satisfied. Under the 401(k) Plan, there is no
fixed dollar amount of retirement benefits, and actual benefits received by
employee will depend on the

36
<PAGE>
amount of each employee's account balance at the time of retirement. The account
balance will reflect annual allocations, the period of time an employee
participates in the 401(k) Plan and the success of the 401(k) Plan in investing
and reinvesting the assets of the trust fund. A participant's vested benefit is
distributed upon death, disability or termination of employment, however,
terminated employees may elect to keep vest benefits in the plan if such vested
benefits are greater than an amount stipulated on the Plan. The Plan is not
insured by the Pension Benefit Guaranty Corporation.

The 401(k) Plan includes an arrangement under which employees may elect to
have the Academy contribute a portion of their compensation to the 401(k) Plan.
The Plan does not allow an employee to make direct contributions to the trust
fund. Such contributions are elective deferrals, and the amount may not exceed
certain dollar limitations established by the Internal Revenue Service.

The Academy has the option of matching employee contributions to the 401(k)
Plan with cash or Academy Common Stock.

ITEM 11. SECURITY OWNERSHIP OR CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth information as of September 1, 1998, with
respect to the beneficial ownership of Common Stock by each shareholder owning
5% or more of the Academy's Common Stock, by each director, the Named Executive
Officers, and by all executive officers and directors as a group.

SHARES BENEFICIALLY OWNED (1)

<TABLE>
<CAPTION>
DIRECTORS AND 5% SHAREHOLDERS NUMBER PERCENT
- - -------------------------------------------------------------------------------------------- ---------- -----------
<S> <C> <C>
Theodore G. Crocker......................................................................... 1,320,117(2) 30.6%
625 Polk Street
San Francisco, CA 94102

James D. Cockman............................................................................ 40,000(3) *
625 Polk Street
San Francisco, CA 94102

Paul H. Prudhomme........................................................................... 40,000(4) *
625 Polk Street
San Francisco, CA 94102

Keith Keogh................................................................................. 147,590(5) 3.9%
625 Polk Street
San Francisco, CA 94102

Bert Cutino................................................................................. 500 *
625 Polk Street
San Francisco, CA 94102

Ralph Brennan............................................................................... 500 *
625 Polk Street
San Francisco, CA 94102

All Executive Officers and Directors as a Group (8 persons)................................. 1,548,707 37.0%
</TABLE>

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

* Indicates less than 1%.

(1) Beneficial ownership of shares by directors, officers and 5% or more
shareholders includes both outstanding Common Stock and shares issuable upon
exercise of warrants or options that are currently exercisable or will be
exercisable within 60 days after the date of the table. Except as indicated
in the footnotes to this table and pursuant to applicable community property
laws the

37
<PAGE>
persons named in the table have sole voting and investment power with
respect to all shares of Common Stock beneficially owned by them.

(2) Includes 147,990 shares of Common Stock issuable upon exercise of currently
exercisable options.

(3) Includes 40,000 shares of Common Stock issuable upon exercise of currently
exercisable options.

(4) Includes 40,000 shares of Common Stock issuable upon exercise of currently
exercisable options.

(5) Includes 140,000 shares of Common Stock issuable upon exercise of currently
exercisable options.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

In July 1992, and from time to time prior to August 1, 1991, the Mr.
Crocker, along with Robert J. Marani and William G. DeMar, then members of the
Board of Directors, and all principal shareholders, made unsecured loans to the
Academy. These loans were evidenced by promissory notes and subsequently repaid.
The loans carried interest at then prevailing interest rates and called for
warrants to be issued that entitled the holders thereof to purchase an aggregate
of 82 shares of the Academy's then Series A Preferred Stock. Warrants issued in
conjunction with these loans were converted, concurrently with the completion of
the Initial Public Offering in July 1993, into warrants to purchase 97,990
shares of Common Stock at an exercise price of $4.18 per share. During 1994, the
original expiration date of the warrants was extended for an additional two
years to August 31, 1996. On August 31, 1996, such warrants were exercised.

In January 1995, the Academy entered into a month-to-month consulting
agreement whereby Mr. Crocker provides investor relations and other strategic
services in return for a fixed monthly payment for office rent and costs. The
agreement provides for fees not to exceed $6,000 per month. The Academy paid
$72,000 in fees in both the years ended June 30, 1998 and 1997 to Mr. Crocker.

In January 1996, the Academy entered into an agreement with Bailey & Company
Inc. to serve as the selling agents for the placement of up to $5,000,000 in
Convertible Subordinated Notes ("Notes"). Bruce Bailey, the Chairman and
President of Bailey & Company, Inc. was a member of the Academy's Board of
Directors. The agent was entitled to receive a commission of 7% of the gross
proceeds sold, a non-accountable expense allowance of 3% and warrants to
purchase 10% of the number of shares sold in the offering. In April 1996, the
Academy issued $1,4000,000 of Notes and the selling agent received the warrants
and $189,000 commissions and fees.

During the year ended June 30, 1998, the Academy paid Grover T. Wickersham,
P.C. approximately $28,000 for legal services and approximately $39,000 in
additional billing for services rendered by Grover T. Wickersham, P.C. during
the fiscal year ended June 30, 1998 will be paid in fiscal year 1999. Grover T.
Wickersham, the principal member of such firm was a member of the Academy's
Board of Directors.

In July 1996, the Academy entered into a five-year lease for approximately a
3,800 square foot facility in Salinas, California. The lessor is a partnership
controlled by Mr. Crocker and Robert J. Marani, a shareholder and then member of
the Academy's Board of Directors. Independent members of the Board of Directors
have approved the lease. Management believes that these lease terms are no less
favorable than those which it may have negotiated with an independent landlord.
The new facility is an extension campus, which opened in October 1996. The
monthly rent for the facility is the greater of approximately $3,900 or 8% of
gross sales, plus a share of common area and exterior maintenance charges that
approximate $1,000 per month. The Academy paid a lease acquisition fee of
$150,000 upon execution of the lease agreement.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a) The exhibits in the accompanying Index to Exhibits on page 40 of this report
are filed or incorporated by reference as part of this report

(b) The Academy filed no Current reports on Form 8-K during the quarter ended
June 30, 1998.

38
<PAGE>
SIGNATURES

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

<TABLE>
<S> <C> <C>
Dated: September 28, 1998 CALIFORNIA CULINARY ACADEMY, INC.

By: /s/ KEITH KEOGH
-----------------------------------------
Keith Keogh
CHIEF EXECUTIVE OFFICER
</TABLE>

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- - ------------------------------ -------------------------- -------------------
<C> <S> <C>

/s/ THEODORE G. CROCKER
- - ------------------------------ Chairman of the Board September 28, 1998
Theodore G. Crocker

/s/ CHARLES E. WHITE
- - ------------------------------ Chief Financial Officer September 28, 1998
Charles E. White

/s/ KEITH KEOGH
- - ------------------------------ Chief Executive Officer September 28, 1998
Keith Keogh and Director

/s/ BERT CUTINO
- - ------------------------------ Director September 28, 1998
Bert Cutino

/s/ JAMES D. COCKMAN
- - ------------------------------ Director September 28, 1998
James D. Cockman

/s/ RALPH BRENNAN
- - ------------------------------ Director September 28, 1998
Ralph Brennan

/s/ PAUL H. PRODHOMME
- - ------------------------------ Director September 28, 1998
Paul H. Prodhomme

/s/ LENNIE RUBEN
- - ------------------------------ Director September 28, 1998
Lennie Ruben
</TABLE>

39
<PAGE>
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT
NUMBER EXHIBIT
- - ---------- ----------------------------------------------------------------------------------------------------
<C> <S>
3.1(1) Amended and Restated Articles of Incorporation
3.2(1) Bylaws, as currently in effect
4.1(1) Specimen of Common Stock Certificate
4.2(2) Form of Representative's Warrant
10.1(1) 1992 Stock Option Plan, form of Incentive Stock Option Agreement, form of Nonqualified Stock Option
Agreement
10.2(1) Form of Indemnification Agreement with Directors and Officers of the Registrant and Schedule of
Indemnities
10.5(1) U.S. Department of Education Program Letter of Agreement dated March 1993
10.6(1) Form of Enrollment Agreement
10.18(5) Consulting Agreement between Registrant and Theodore G. Crocker dated January 1, 1994
10.21(5) Agreement between Registrant and Trident Trading Company, Inc.
(Wusthof-Registered Trademark---Trident) dated August 5, 1994
10.25(7) Lease Agreement between Registrant and Toshiba America Information Systems, Inc. dated November 2,
1995
10.25(8) Amended Financing Agreement between Registrant and Wells Fargo Bank dated
February 1, 1996
10.26(8) Agreement between Registrant and Simon & Schuster, Inc. dated February 22, 1996
10.27 Loan Agreement between Registrant and Mid-Peninsula Bank dated June 14, 1996
10.29(10) Lease for premises at Natividad Plaza, Salinas, CA
10.30(10) Agreement between Registrant and Noel-Levitz, Inc. dated July 1, 1996
10.31 Lease Agreement between Registrant and 625 Polk Investment Company, a limited partnership, dated as
of May 1, 1997
10.32 1997 Stock Option Plan
10.33 Executive Employment Agreement between Registrant and Keith H. Keogh, Dated
May 31, 1995
11.0 Statement re: Computation of Earnings per Share
21.0 Company has no Subsidiaries
23.1 Independent Auditor's Consent
27.0 Financial Data Schedule
</TABLE>

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

(1) Previously filed as an exhibit to the original filing of the Registration
Statement on Form SB-2 (file No. 33-62720-LA) filed May 14, 1993

(2) Previously filed as an exhibit to Amendment No. 1 of the Registration
Statement filed June 7, 1993

(3) Previously filed as an exhibit to Form 10-KSB/A for the fiscal year ended
August 31, 1994

(4) Previously filed as an exhibit to Form 10-QSB for the quarter ended May 31,
1994

(5) Previously filed as an exhibit to Form 10-QSB for the fiscal year ended
June 30, 1994

(6) Previously filed as an exhibit to Form 10-QSB for the fiscal year ended
June 30, 1995

(7) Previously filed as an exhibit to Form 10-QSB for the quarter ended
December 31, 1995

(8) Previously filed as an exhibit to Form 10-QSB for the quarter ended March
31, 1996

(9) Previously filed as an exhibit to Form 10-QSB for the quarter ended June
30, 1996

(10) Previously filed as an exhibit to Form 10-QSB for the quarter ended
September 30, 1996

<PAGE>
EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statement No.
33-93266 on Form S-8 and Registration Statement 33-17205 on Form S-3 of our
report dated September 24, 1998 appearing in this Annual Report on Form 10-KSB
of the California Culinary Academy, Inc. for the year ended June 30, 1998.

San Francisco, California
September 28, 1998