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, 1997.
[ ] 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 .
----- -----
The number of shares outstanding of the registrant's Common Stock as of October
31, 1997, was 3,594,535.
Transitional Small Business Disclosure Format. Yes No X .
----- -----
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALIFORNIA CULINARY ACADEMY, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
(Unaudited) (Note 1) (Unaudited)
September 30, June 30, September 30,
1997 1997 1996
------------- ----------- -------------
Current Assets:
Cash and cash equivalents $1,880 $2,308 $3,383
Accounts receivable, net of allowance of $363, 360 and 280 3,849 2,847 2,993
Inventories 269 341 214
Prepaid expenses and other assets 434 343 259
Deferred tax asset 224 188 114
------------- ----------- -------------
Total Current Assets 6,656 6,027 6,963
------------- ----------- -------------
Property and equipment, net 5,035 4,965 4,681
Intangible assets, net 387 419 513
Other assets 261 215 576
------------- ----------- -------------
TOTAL ASSETS $12,339 $11,626 $12,733
------------- ----------- -------------
------------- ----------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $397 $680 $626
Accrued liabilities 642 508 286
Deferred revenue 3,942 3,212 3,833
Student prepayments 658 356 339
Current portion of term loans 47 50 814
Current portion of capital lease obligations 67 67 67
Other current liabilities 14 88 11
------------- ----------- -------------
Total Current Liabilities 5,767 4,961 5,976
------------- ----------- -------------
Notes payable 81
Capital lease obligations 131 148 199
Other non-current liabilities 428
Covertible Preferred stock, no par value, 5,000,000 shares authorized,
96,300; 254,500 and 254,500 shares issued and outstanding 370 953 988
Common stock, no par value, 20,000,000 shares authorized,
3,568,500; 3,393,900 and 3,212,800 shares issued and outstanding 10,331 9,649 9,112
Accumulated deficit (4,260) (4,085) (4,051)
------------- ----------- -------------
Total Shareholders' Equity 6,441 6,517 6,049
------------- ----------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $12,339 $11,626 $12,733
------------- ----------- -------------
------------- ----------- -------------
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
2
CALIFORNIA CULINARY ACADEMY, INC.
STATEMENTS OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
Three Months Ended
September 30,
--------------------------
1997 1996
----------- -----------
Revenues:
Culinary arts education $3,282 $3,010
Restaurants & catering 556 379
Retail, media and other 96 140
----------- -----------
Total revenues 3,934 3,529
Cost of sales
Food & beverage 425 371
Program supplies 244 176
Scholarships & grants 53 46
Merchandise & other 116 109
----------- -----------
838 702
----------- -----------
Gross Margin 3,096 2,827
Operating expenses
Occupancy 444 445
Repairs & maintenance 97 95
Telephone, security & other 90 97
Depreciation & amortization 269 266
Compensation & benefits 1,621 1,331
Outside services 204 122
Advertising & promotion 186 148
Legal & other 399 240
----------- -----------
3,310 2,744
Interest income (expense) 17 (6)
----------- -----------
Income (loss) before provision for income taxes (197) 77
Income tax provision (benefit) (36) 31
----------- -----------
Net income (loss) $(161) $46
----------- -----------
----------- -----------
Net income (loss) per share $(0.05) $0.01
----------- -----------
----------- -----------
Weighted average common shares and equivalents 3,525,000 3,228,700
----------- -----------
----------- -----------
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
3
CALIFORNIA CULINARY ACADEMY, INC.
STATEMENTS OF CASH FLOWS
FOR THE QUARTER ENDED SEPTEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
(Unaudited)
Three Months Ended September 30,
--------------------------------
1997 1996
-------------- --------------
Cash flows from operating activities:
Net income (loss) $(161) $46
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 269 266
Tax provision (36) 31
Provision for losses on accounts receivable 27
Deferred rent (45) (1)
Stock issued for services 31
Loss on disposal of property 1
Changes in assets and liabilities:
Accounts receivable (1,028) (206)
Inventories 71 (6)
Prepaid expenses and other assets (92) (120)
Accounts payable (282) (123)
Accrued and other liabilities 443 (98)
Deferred revenues 731 37
-------------- --------------
Net cash used in operating activities (72) (173)
-------------- --------------
Cash flows from investing activities:
Acquisition of property and equipment (307) (798)
Decrease in long-term investments 646
-------------- --------------
Net cash used in investing activities (307) (152)
-------------- --------------
Cash flows from financing activities:
Borrowings under term loan agreements 157
Principal payments on term loan agreements (3) (77)
Principal payments on capital lease obligations (17) (25)
Proceeds from exercise of stock options and warrants 33 1,087
Repurchase of common stock (717)
Payment of Preferred Stock dividends (62)
-------------- --------------
Net cash provided by (used in) financing activities (49) 425
-------------- --------------
Net increase (decrease) in cash and cash equivalents (428) 100
Cash and cash equivalents, beginning of period 2,308 3,283
-------------- --------------
Cash and cash equivalents, end of period $1,880 $3,383
-------------- --------------
-------------- --------------
4
CALIFORNIA CULINARY ACADEMY, INC.
STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash paid for:
For the Three Months Ended
--------------------------
September 30,
-------------
1997 1996
------------- -------------
Interest $0 $81,000
Income taxes 1,000 1,000
Supplemental disclosure of non-cash investing and financing activities:
The Academy issued 254,541 shares of Series A Preferred Stock upon conversion of
$1,400,000 of Convertible Subordinated Debt for the three months ended September
30, 1996.
The Academy issued a promissory note of approximately $157,000 for the
repurchase of Common Stock for the three months ended September 30, 1996.
5
CALIFORNIA CULINARY ACADEMY, INC.
CONDENSED NOTES TO 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, 1997, and the interim results of operations and
cash flows for the three months ended September 30, 1997 and September 30,
1996. The balance sheet at June 30, 1997, 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, 1997. 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, 1997.
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 -- INCOME TAXES
As of September 30, 1997 the Academy has federal and California net operating
loss carryforwards, for tax return purposes, of approximately $1,779,000 and
$356,000, respectively, which are available to offset future taxable income, if
any. The federal net operating losses begin expiring in 2005 through 2011.
California net operating loss carryforwards begin expiring in 2001 through 2002.
NOTE 3 -- NET INCOME PER SHARE
Net income per share is based on the weighted average number of shares
outstanding during each of the respective periods, including the dilutive effect
of stock options, warrants and any other common stock equivalents using the
treasury stock method.
NOTE 4 -- 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 bearing an interest rate of
6
8.75%. As of September 30, 1997, the outstanding balance of these notes was
approximately $38,000. Interest is to be paid monthly on the notes until
January 1, 1998, when the note is due.
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, the
entire issue of 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 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 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 will convert
automatically if the closing price of the Common Stock equals or exceeds $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
and paid in July 1997. A total of 6,300 shares of Series A Preferred Stock and
$35,000 in cash was distributed in connection with this penalty.
During the three months ended September 30, 1997, certain Series A Preferred
Stock shareholders elected to convert approximately 164,500 shares into Common
Stock.
NOTE 6 -- MASTER LEASE AGREEMENT
On July 21, 1997 the Academy entered into a master lease agreement for a 68
room hotel in San Francisco. This lease commenced on September 1, 1997 and
expires August 31, 2012, and requires initial monthly payments of $27,083
with a step rent clause increasing payments to 33,333 by the end of the
lease. The master lease also requires payment of a pro-rata share of common
area maintenance.
7
NOTE 7 -- NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". The Company is
required to adopt SFAS No. 128 in the second quarter of fiscal 1998 and will
restate at that time earnings per share (EPS) data for prior periods to conform
with SFAS No. 128. Earlier application is not permitted.
SFAS No. 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income available to common shareholders by the weighted
average number of shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted in to common stock.
Pro-forma amounts for basic and diluted EPS assuming SFAS No. 128 had been in
effect for the quarter and year-to-date periods are as follows:
FOR THE QUARTER ENDED
SEPTEMBER 30,
1997 1996
----------- ------------
Basic $(0.05) $0.01
Diluted $(0.05) $0.01
8
NOTE 8 -- SUBSEQUENT EVENT
On October 3, 1997 the Academy purchased for approximately $1,900,000 a 70
room residential hotel adjacent to the Academy's main campus in San Francisco
to provide student housing. In connection with this purchase, the Academy
issued a promissory note of $1,200,000 with principal and interest payments
due monthly. The initial monthly payment of $10,434 will commence on December
1, 1997. The note bears interst at a variable rate based on the LIBOR index
rate plus 4.15% (9.75% as of October 3, 1997) and mature on November 1, 2007.
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 located on pages 2 through 9.
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. The 30-week B&P
Program enrolls classes on a five week cycle typically ranging in size from 15
to 20 students with five classes enrolled as of September 30, 1997. The College
of Food programs commenced October 14, 1996 at the Academy's prototype facility
in Salinas, California. As of September 30, 1997, approximately 45 students are
enrolled in the Basic Professional Culinary Skills program in Salinas. The
College of Food enrolls students every three to four weeks. Weekend
professional programs are currently offered every eight or fourteen weeks. As
of September 30, 1997, the Academy has 44 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 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 related to both educational
services and retail restaurant operations.
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 program as students complete course work required for graduation.
9
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. In October 1997, the Academy purchased for approximately
$1,900,000 a hotel building in San Francisco, across the street from its main
campus, which it intends to use for student housing. Management believes
available student housing will 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 College of Food at Salinas, 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, 1997, 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 a net loss of $999,000 for the year ended
June 30, 1996 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'
10
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,
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 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
The Academy has a net loss of $161,000 of $(0.05) per share for the quarter
ended September 30, 1997, compared to net income of $46,000 or $0.01 per share
for the quarter ended September 30, 1996.
Total revenues increased 11.5% for the quarter ended September 30, 1997 to
$3,934,000 from $3,529,000 from the same period in the prior year. Total
revenues from culinary arts education increased 14.1% for the quarter ended
September 30, 1997 to $3,282,000 from $3,010,000 from the same period in the
prior year.
Total student count as of September 30, 1997 increased 8.8% to 656 students in
the AOS, B&P and College of Food programs compare to 603 student as of September
30, 1996. The increase is primarily attributed to the introduction of the
College of Food programs as well as changes in the frequency of class starts in
the AOS and B&P programs.
Restaurant, retail, media and other revenues were $652,000, or 16.7% of total
revenues for the quarter ended September 30, 1997 compared to $519,000, or 14.7%
for the same period in the prior year. Revenue for the quarter ended September
30, 1996 included approximately $150,000 from a royalty fee for the use of the
Academy's trademark, logo and certain content in computer CD-ROM products.
Cost of sales were $838,000 or 21.3% or total revenues for the quarter ended
September 30, 1997 as compared to $702,000 or 19.9% of total revenues for the
same period in the prior year. The increase is primarily attributed to an
increase in food and beverage costs consumed in culinary education and increase
restaurant sales; and increased program fees due to increased enrollments.
Operating expenses were $3,310,000 or 84.1% of total revenues for the quarter
ended September 30, 1997 compared to $2,744,000 or 77.8% of total revenues for
the same period in the prior year. The increase is primarily attributed to
expenditures for compensation and benefits, board
11
of directors fees which were not incurred in the prior year, legal expenditures
and advertising and promotion costs.
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 through cash flow provided by
operations.
At September 30, 1997, the Academy's principal sources of liquidity included
cash and cash equivalents of $1,880,000 and net accounts receivable of
$3,849,000 compared to $2,308,000 and $2,847,000 as of June 30, 1997,
respectively. The decrease in cash and cash equivalents is due primarily to
the Academy's using cash and cash flow from operations to fund capital
expenditures. The increase in net accounts receivable is due primarily to
increase enrollments. The Academy has long-term obligations of $131,000 and
working capital of $889,000 at September 30, 1997 compared to $148,000 and
$1,066,000 as of June 30, 1997, respectively.
As of September 30, 1997, the Academy had no outstanding loans with banks.
Other term loans aggregate in the amount of $47,000. As of June 30, 1997, the
Academy had no outstanding term loans with banks and $50,000 in other term
loans.
12
PART II
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
(a.) EXHIBITS
EXHIBIT NO. DESCRIPTION
------------- ---------------------------------------------------
10.34 Lease Agreement with Leslie Hotel Partners, LLC
11.0 Statement re: Computation of Earnings per Share
27.0 Financial Data Schedule
(b.) REPORTS ON FORM 8-K None
13
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 19, 1997 By: /s/ Robert A. Stoffregen
------------------------------------
Robert A. Stoffregen
Executive Vice President and
Chief Financial Officer
(Principal Accounting and Financial
Officer)
14