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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the quarterly period ended September 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.
(Exact name of small business issuer in its charter)
California 94-3042862
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
625 Polk Street
San Francisco, CA 94102
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (415) 771-3536
Indicate by check mark whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act 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 .
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The number of shares outstanding of the registrant's Common Stock as of
September 30, 1998, was 3,814,431.
Transitional Small Business Disclosure Format. Yes No X .
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CONDENSED BALANCE SHEET
2
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CONDENSED STATEMENTS OF OPERATIONS
3
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CONDENSED STATEMENT OF CASH FLOWS
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CALIFORNIA CULINARY ACADEMY, INC.
CONDENSED STATEMENT OF CASH FLOWS
Supplemental disclosure of cash paid for:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1998 1997
------ -----
<S> <C> <C>
Interest $0 $0
Income taxes 0 1,000
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
None
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CALIFORNIA CULINARY ACADEMY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared from the
records of the California Culinary Academy, Inc. (the "Academy") without
audit and, in the opinion of management, include all adjustments (consisting
of only normal recurring accruals) necessary to present fairly the financial
position at September 30, 1998, and the interim results of operations and
cash flows for the three months ended September 30, 1998 and September 30,
1997. The balance sheet at June 30, 1998, presented herein, has been derived
from the audited financial statements of the Academy for the fiscal year then
ended.
Accounting policies followed by the Academy are described in Note 1 to the
audited financial statements for the fiscal year ended June 30, 1998.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted for the purposes of the interim
condensed financial statements. The interim condensed financial statements
should be read in conjunction with the audited financial statements including
notes thereto, for the year ended June 30, 1998.
The results of operations for the three months presented herein are not
necessarily indicative of the results to be expected for the full year.
Certain prior year amounts have been reclassified to conform to current year
presentation.
NOTE 2-- LEASE AGREEMENTS
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 $1,500 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-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.
In July 1, 1998, the Academy entered into a lease for a 5,000 square foot
building in La Mesa, California. 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.
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The Academy estimates it will be approximately $1,000 per month. The lease
term extends until June 30, 2003 and the lease provides for three extension
options of five years each. The Academy plans to develop the building into a
College of Food campus.
Academy management estimates that its current facilities can accommodate
approximately 1,230 students which the Academy believes is sufficient for its
foreseeable needs. Once full enrollment in these faculties is achieved, the
Academy believes additional facilities can be located.
NOTE 3 -- RELATED PARTY TRANSACTIONS
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 $35,000 as of September 30, 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW The following discussion should be read in conjunction with the
financial statements and notes thereto.
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 Program, the B&P Certificate program, the
College of Food Basic Professional Culinary Skills Program, and weekend
professional skills program offerings. The AOS Program enrolls students on a
two-week cycle. The program can accommodate up to 25 students per class, with
545 students enrolled as of September 30, 1998. The 30-week B&P Program
enrolls classes on a five week cycle typically ranging in size from 15 to 20
students with 70 students enrolled as of September 30, 1998. The College of
Food programs commenced October 14, 1996 at the Academy's prototype facility
in Salinas, California and opened its second College of Food facility on the
campus of San Diego State University in February 1998. The College of Food
enrolls students every three to four weeks. As of September 30, 1998,
approximately 67 and 63 students were enrolled in the Basic Professional
Culinary Skills program in Salinas and San Diego, respectively. Weekend
professional programs are currently offered every eight or fourteen weeks.
As of September 30, 1998, the Academy had 96 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 career changers. 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 which is generally open to the public seven days per week, banquet
services generally offered seven days per week and a small on-site retail
shop offering student-prepared foods, beverages, cookbooks, video tapes,
kitchen wares and selected 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.
Additionally, the Academy has a multi-year agreement with Simon & Schuster to
author and publish four cookbooks.
Revenues from the Academy's AOS Program and the B&P Program rely exclusively
on enrollments in those programs. Tuition is initially recorded as deferred
revenue at the commencement of each enrollment period and recognized over the
length of a program as students complete course work required for graduation.
The Academy has available housing for students enrolled in the AOS and B&P
programs. In July 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.
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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-month period, beginning September 1,
1998.
Management believes available student housing will continue to have a
favorable impact on new student enrollments and student retention rates.
The Academy believes that manageable growth is achievable through the
addition of extension campuses offering selected courses from the AOS Program
at training facilities such as its Colleges of Food at Salinas and San Diego,
California and by the addition of contract training programs offered to the
food industry. 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 in this Report involve numerous risks and uncertainties,
including those discussed in this Report and the Academy's Annual Report on
Form 10-KSB for the fiscal year ended June 30, 1998, that could cause actual
results to differ materially from those projected. Investors are cautioned
not to place undue reliance on these 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.
The primary risks and uncertainties that could affect future results include,
without limitation: (i) the event of net losses of $999,000 for the year
ended June 30, 1996, and the losses incurred year to date, from which there
can be no assurance that the recent efforts will be successful in achieving
profitable operations, or if achieved, that profitability can be sustained in
future periods; (ii) the inability of management to successfully implement
and manage the Academy's new growth strategy of adding more remote training
facilities and new programs to be offered to the foodservice industry; (iii)
uncertainties associated with overhauling the structure of the A.O.S. degree
program enrollment process and the inability of the Academy to make
appropriate adjustments in a timely manner; (iv) the increased competition
from both for-profit and non-profit culinary arts education institutions; (v)
the continued dependence on financial aid programs to fund a majority of
Academy's students' education, thereby providing a significant portion of the
Academy's revenues, together with the uncertainty that budgetary constraints
or other factors in the future could impact the availability and amount of
both public and private sources of financial aid; (vi) increase of the
Academy's cohort default rate to 25%, the percentage of Academy students who
have defaulted on repayment of government student loans, which could in the
future impair or limit the Academy's participation in government financial aid
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programs; and (vii) the possibility that regulatory agencies that directly or
indirectly impact aspects of the Academy's business could revise regulations
in such a way that the Academy would not be able to comply with new
regulations in a timely manner.
Investors are cautioned not to place undue reliance on these 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.
RESULTS OF OPERATIONS
REVENUES
Culinary arts education revenue increased 25.7 % to $4,126,000 for the
quarter ended September 30, 1998 from $3,282,000 reported in the same period
last year. The increase in culinary arts education revenue is due primarily
to increases in student enrollment in all education programs.
Restaurant & catering and other revenue decreased 19.2% to $527000 for the
quarter ended September 30, 1998 from $652,000 in the same period last year.
The decrease for the quarter is primarily due to reduced media revenues for
the quarter and reduced restaurant patronage during the quarter, consistent
with reduced restaurant revenues in the region.
COST OF SALES
Food and beverage cost decreased 8.9% to $387,000 for the quarter ended
September 30, 1998 from $425,000 reported in the same period last year. The
reduction of food and beverage cost during the quarter is attributable to the
decrease in restaurant and catering revenue and is partially offset by
increased costs relating to increased culinary arts education enrollment.
The food and beverage cost as a percent of related culinary arts education
and restaurant revenue is consistent with the comparable periods last year.
Other costs of sales decreased 3.6% to $398,000 for the quarter ended
September 30, 1998 from $413,000 reported in the same period last year. The
decrease for the quarter ended September 30, 1998 is attributed primarily to
lower cost of merchandise associated with student supply packages.
OPERATING EXPENSES
Occupancy cost increased 24.3% to $552,000 for the quarter ended September
30, 1998 from $444,000 from the same period last year. The increase is due
primarily to the lease of a 68 room residential hotel in September 1997 and
is partially offset by a reduction in rent for the Academy's main campus
facility as a result of lease negotiation completed in May 1997.
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Depreciation and amortization remained constant at $269,000 for the quarter
ended September 30, 1998.
Compensation and benefits cost increased 12.2% to $1,818,000 for the quarter
ended September 30, 1998 from $1,621,000 for the same period last year. The
increase is due primarily to restructuring of the curriculum schedule and
administrative functions; addition of staff in the College of Food to support
increased enrollment and the opening of a second campus in San Diego in
February 1998; addition of administrative and marketing staff to support
growth in enrollments and revenue; and normal wage increases.
As expected, all other operating expenses decreased for the quarter ended
September 30, 1998 as compared to the same period last year.
INTEREST INCOME
Interest income consists primarily of interest earned on cash equivalents and
short-term investments. Interest income increased due to higher cash balances
during the quarter.
INCOME TAX PROVISION
The Academy has provided for federal and state income taxes at 6.4% for the
quarter ended September 30, 1998. The effective tax rate is the result of net
operating losses incurred though June 30, 1998 and gives effect to the
corporate alternative minimum income tax for the fiscal year ending June 30,
1999.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Academy financed its growth from the issuance of equity
securities in private and public transactions, borrowings from related
parties, lease and debt financing obligations and cash flow provided
by operations.
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At September 30, 1998, the Academy's principal sources of liquidity included
cash and cash equivalents of $1,893,000 and net accounts receivable of
$4,601,000. Cash and cash equivalents decreased from $2,533,000 at June 30,
1998 due primarily to the Academy's using cash and cash flow from operations
to fund deposits and expenses for the development of the planned Regional
Area Campus in New Orleans, LA and for the College of Food campus facility
located in La Mesa, California. Additionally, cash was used to build and
increase the number of student classrooms in San Francisco. The increase in
net accounts receivable is due primarily to increased enrollments. The
Academy has only long-term obligations of $92,000 and working capital of
$1,030,000 at September 30, 1998 compared to $97,000 and $604,000 as of June
30, 1998, respectively.
As of September 30, 1998, the Academy had no outstanding bank loans or other
material capital commitments.
PLANNED PRIVATE PLACEMENT
The Academy is currently seeking 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 publicy 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 the information and business
transactions. 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 company believes that its systems that are currently non-compliant would
not pose a significant problem for the Academy in terms of cost or disruption
of services if they cannot be made compatible.
During the first quarter of fiscal 1999, the Academy established a committee
to assess its Y2K compliance and the changes necessary to become compliant.
That committee has determined that most systems are Y2K compliant. The
Academy has engaged a consultant to work with the Company on those few
systems that are not Y2K compliant. The Company believes that this compliance
work will be completed by the end of fiscal year ending June 30, 1999 for a
minimal cost.
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 at it relates to its suppliers of utility
services. Disruption of utilities of any kind could have a major but
undeterminable effect on Academy's business and profits. The Company has not
yet developed a contingency plan to address the interruption of utility
services. There is no assurance, however, that unforeseen year 2000 problems
will occur that will have a significant negative effect on Academy's revenues
and profits.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CALIFORNIA CULINARY ACADEMY, INC.
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, June 30, September 30,
1998 1998 1997
------------ -------- ------------
(unaudited) (Note 1) (unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $1,893 $2,533 $1,880
Accounts receivable, net of allowance 4,601 3,660 3,849
Inventories 297 227 269
Prepaid expenses and other assets 810 379 658
------------ -------- ------------
Total Current Assets 7,601 6,799 6,656
------------ -------- ------------
Property and equipment, net 4,818 4,830 5,035
Other assets 656 647 648
------------ -------- ------------
TOTAL ASSETS $13,075 $12,276 $12,339
------------ -------- ------------
------------ -------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $1,392 $1,383 $1,053
Deferred revenue 5,179 4,737 4,600
Current portion of long term debt 75 114
------------ -------- ------------
Total Current Liabilities 6,571 6,195 5,767
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Capital lease obligations 92 97 131
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TOTAL LIABILITIES 6,663 6,292 5,898
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Convertible preferred stock, no par value, 5,000,000 shares 370
authorized, 1998: 0 and 1997: 254,500 issued and outstanding
Common stock, no par value, 20,000,000 authorized, 11,351 11,351 10,331
1998: 3,814,431 and 1997: 3,568500 issued and outstanding
Note receivable from shareholder (500) (489)
Deficit (4,439) (4,878) (4,260)
------------ -------- ------------
Total Shareholders' Equity 6,412 5,984 6,441
------------ -------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $13,075 $12,276 $12,339
------------ -------- ------------
------------ -------- ------------
</TABLE>
2
See notes to consolidated financial statements
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CALIFORNIA CULINARY ACADEMY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Culinary arts education $4,126 $3,282
Restaurants & catering and other 527 652
Total revenues 4,653 3,934
Cost of sales
Food & beverage 387 425
Other cost of sales 398 413
----------- -----------
785 838
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Gross Margin 3,868 3,096
Operating expenses
Occupancy 552 444
Depreciation & amortization 269 269
Compensation & benefits 1,818 1,621
Outside services 110 204
Advertising & promotion 149 186
Legal & other 543 586
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3,441 3,310
Interest income 42 17
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Income (loss) before provision for income taxes 469 (197)
Income tax provision (benefit) 30 (36)
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Net income (loss) $439 $(161)
----------- -----------
----------- -----------
Basic earnings per share $0.12 $(0.05)
----------- -----------
----------- -----------
Diluted earnings per share $0.11 $(0.05)
----------- -----------
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</TABLE>
See notes to consolidated financial statements
3
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CALIFORNIA CULINARY ACADEMY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $439 $(161)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 269 269
Tax provision (benefit) 30 (36)
Provision for losses on accounts receivable (30) 27
Deferred rent 41 (45)
Stock issued for services 31
Changes in assets and liabilities:
Accounts receivable (941) (1,028)
Inventories (70) 71
Prepaid expenses and other assets (771) (92)
Notes receivable (11) (282)
Accounts payable and accrued and other liabilities (645) 443
Deferred revenue 919 731
------------ ------------
Net cash provided by (used in) operating activities (770) (72)
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment 135 (307)
------------ ------------
Net cash used in investing activities 135 (307)
------------ ------------
Cash flows from financing activities:
Borrowings under long term debt agreements
Principal payments on long term debt (3)
Principal payments on capital lease obligations (5) (17)
Proceeds from exercise of stock options and warrants 33
Payment of Preferred Stock dividends (62)
------------ ------------
Net cash provided by (used in) financing activities (5) (49)
------------ ------------
Net decrease in cash and cash equivalents (640) (428)
Cash and cash equivalents, beginning of period 2,533 2,308
------------ ------------
Cash and cash equivalents, end of period $1,893 $1,880
------------ ------------
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</TABLE>
See notes to consolidated financial statements
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are various legal claims and lawsuits pending by and against the
Academy that, in the opinion of management, after consultation with legal
counsel, are not expected to have in any material adverse effect on the
results of operations or financial position of the Academy.
Item 2. Changes in Securities None
Item 3. Defaults upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders None
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K None
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
as amended, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CALIFORNIA CULINARY ACADEMY, INC.
November 16, 1998 By: /s/ Charles E. White
------------------------------------
Chief Financial Officer
(Principal Financial and Accounting
Officer)
14
