<PAGE>
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
Commission File Number 0-13304
CHANTAL PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2276346
(State or other jurisdiction of) (I.R.S. Employer
incorporation or organization Identification No.)
250 West 57th Street, Suite 2232, New York, New York 10017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 333-2465
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (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 of Common Stock, $.01 par value, outstanding as of
November 14, 1997 was 25,161,354.
- -------------------------------------------------------------------------------
<PAGE>
CHANTAL PHARMACEUTICAL CORPORATION
INDEX TO FORM 10-Q
PART I: FINANCIAL INFORMATION (UNAUDITED) PAGE NUMBER
- ------------------------------------------------------ -----------
Item 1--Financial Statements
Consolidated Balance Sheets as of September 30, 1997
and June 30, 1997.......................................... 3
Consolidated Statements of Operations for the three months
ended September 30, 1997 and September 30, 1996............ 4
Consolidated Statements of Cash Flows for the three months
ended September 30, 1997 and September 30, 1996............ 5
Notes to Consolidated Financial Statements................... 6
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of Operations..... 9
Part II: Other Information
Item 1--Legal Proceedings.................................... 11
Item 4--Submission of Matters to a Vote of Security Holders.. 11
Item 5--Other Information.................................... 11
Item 6--Exhibits and Reports on Form 8-K..................... 11
Signatures.................................................... 12
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
CHANTAL PHARMACEUTICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PROFORMA
SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
ASSETS 1997 1997 1997
- ------ ----------------- ------------- -----------
( UNAUDITED ) (Note 4)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents.......................................... $ 120,644 $ 150,587
Short-term investment.............................................. 23,883 23,883
Accounts receivable, trade, net.................................... 618,133 796,762
Inventory, net..................................................... 2,631,684 2,904,723
Prepaid expenses and other current assets.......................... 330,591 203,248
------------ ------------- -------------
Total current assets............................................. 3,724,935 4,079,203
Long-term inventory.................................................. 2,784,359 2,832,822
Property and equipment, net of accumulated depreciation.............. 705,239 783,014
License rights, net of accumulated amortization of $190,664 and $0... 5,609,336 5,800,000
Patents and trademarks, net of accumulated amortization of
$68,918 and $67,194................................................ 48,196 49,920
Prepaid royalties, net of accumulated amortization of
$218,203 and $196,969............ 631,172 652,406
Deposits and other assets............................................ 569,797 684,272
Organization cost, net of accumulated amortization of
$94,170 and $86,322................................................. 62,780 70,628
------------ ------------- -------------
TOTAL ASSETS...................................................... $14,135,814 $14,952,265
------------ ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.................................................... $5,622,508 $ 5,438,600
Accrued liabilities................................................. 2,533,107 2,294,013
Royalties payable................................................... 652,668 652,668
Current portion of long-term capital lease obligation............... 44,200 47,653
Short-term note payable to distributor.............................. 265,000 183,000
Related party note payable.......................................... 346,079 --
Short-term borrowings............................................... 76,579 41,465
------------ ------------- -------------
Total current liabilities......................................... 9,540,141 8,657,399
Long term liabilities
Capital lease obligation, less current portion...................... 276,134 289,014
Convertible Debentures.............................................. 3,356,667 1,873,334 5,250,000
------------ ------------- -------------
Total liabilities................................................. 13,172,942 11,689,609 14,196,413
Commitments and contingencies
Minority interest................................................... 844,121 910,615
Stockholders' equity
Preferred stock, $.10 par value; 1,000,000 shares authorized;
500,000 Preferred Series C shares issued and outstanding
Liquidation preference of $500,000................................. 50,000 50,000
Common stock, $.01 par value; 50,000,000 shares authorized;
21,120,843 and 18,190,516 shares issued and outstanding at
September 30, 1997 and June 30, 1997............................... 211,208 250,793 181,905
Additional paid-in capital-preferred stock.......................... 2,204,000 2,204,000
Additional paid-in capital-- common stock........................... 54,068,890 55,512,638 52,204,860
Accumulated deficit................................................. (56,415,347) (54,795,528)
------------ ------------- -------------
Total stockholders' equity........................................ 118,751 1,602,084 (154,763)
------------ ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................ $14,135,814 $ 14,135,814 $ 14,952,265
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
See accompanying notes.
3
<PAGE>
CHANTAL PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended September 30, 1997 and September 30, 1996
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Revenues:
Product sales, net................................................................ $ 902,201 $ 1,829,006
License fees and other income..................................................... 17,379 80,630
------------- -------------
Total revenues.................................................................. 919,580 1,909,636
Costs of goods sold............................................................... 459,176 328,163
------------- -------------
Gross profit........................................................................ 460,404 1,581,473
Marketing and other expenses related to cosmetic line............................. 725,675 1,874,509
General and administrative........................................................ 1,078,033 1,625,014
Amortization of license rights.................................................... 211,897 229,723
Research and development.......................................................... 8,956 2,344
------------- -------------
Loss from operations................................................................ (1,564,157) (2,150,117)
Other income (expense):
Interest income................................................................... 1,435 1,382
Interest expense:................................................................. (123,591) (26,933)
------------- -------------
Loss before minority interest..................................................... (1,686,313) (2,175,668)
Minority interest............................................................... 66,494 120,569
------------- -------------
Net loss............................................................................ $ (1,619,819) $ (2,055,099)
------------- -------------
------------- -------------
Net loss per share.................................................................. $ (.09) $ (0.11)
------------- -------------
------------- -------------
Weighted average shares outstanding................................................. 18,385,871 18,190,516
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
4
<PAGE>
CHANTAL PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended September 30, 1997 and September 30, 1996
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
<S> <C> <C>
1997 1996
------------- -------------
Cash flows from operating activities:
Net loss.......................................................................... $ (1,619,819) $ (2,055,099)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization................................................... 418,426 304,686
Allowance for sales return..................................................... 1,009,962 --
Minority interest............................................................... (66,494) (120,569)
Changes in operating assets and liabilities:
Accounts receivable, trade.................................................... (831,333) 422,847
Inventory..................................................................... 321,502 (180,321)
Prepaid expenses.............................................................. (127,343) (324,934)
Other assets.................................................................. -- 1,588
Accounts payable and accrued liabilities...................................... 423,002 1,459,934
------------- -------------
Net cash used in operating activities............................................... (472,097) (491,868)
------------- -------------
Cash flows from investing activities:
Additions to property and equipment............................................... (4,706) (12,576)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of short-term debt/notes payable from distributor.......... 167,851 559,917
Payments on short-term borrowings................................................. (50,737) (67,037)
Payments on capital lease obligation.............................................. (16,333) (16,038)
Proceeds from issuance of related party note payable.............................. 346,079 --
------------- -------------
Net cash provided by financing activities........................................... 446,860 476,842
------------- -------------
Net increase (decrease) in cash and cash equivalents................................ (29,943) (27,602)
Cash and cash equivalents:
At beginning of period............................................................ 150,587 305,668
------------- -------------
At end of period.................................................................. $ 120,644 $ 278,066
------------- -------------
------------- -------------
</TABLE>
Supplemental non-cash flow information: See Note 3
See accompanying notes.
5
<PAGE>
CHANTAL PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - GENERAL
The accompanying consolidated financial statements of Chantal Pharmaceutical
Corporation (the "Company") have been prepared without audit pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position of the Company as of
September 30, 1997 and the results of its operations for the three months
ended September 30, 1997 and 1996 and the cash flows for the three months
ended September 30, 1997 and 1996 have been included. The results of
operations for the interim periods are not necessarily indicative of the
results which may be realized for the full year. For further information,
refer to the consolidated financial statements and footnotes thereto included
in the Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1997.
Revenue is recognized upon shipment to Stanson Marketing, Inc. ("Stanson"),
the Company's U.S. distributor, with respect to products which were not
distributed on an autoship basis, and revenue is recognized with respect to
products distributed on an autoship basis upon sale by Stanson to its
customers. On November 21, 1995, the Company, exercising its June 29, 1995
Distribution Agreement contractual right, notified Stanson that all future
sales of Ethocyn products by Stanson were to be autoship. Accordingly, the
Company considers all products shipped to Stanson after November 21, 1995 as
being subject to distribution on an autoship basis. This revenue recognition
policy complies with FASB 48 "Revenue Recognition when Right of Return
Exists". In September 1997, the Company, in addition to sales through
Stanson, commenced selling, with the consent of Stanson, directly to certain
retailers.
Principles of consolidation
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and its 90% owned subsidiary, Chantal Skin Care
Corporation ("Chantal Skin Care"). All significant intercompany accounts and
transactions have been eliminated.
Net loss per share
The computation of net loss per share for the three month period ended
September 30, 1997 and 1996 are based on the weighted average number of
common and common equivalent shares outstanding. When dilutive, stock
options, warrants and convertible Preferred Stock are included as share
equivalents using the treasury stock method. Primary and fully diluted
earnings per share are the same for each of the periods presented.
NOTE 2 - LITIGATION
The Company and Chantal Burnison are defendants in an action titled Marksman
Partners, L.P., on behalf of itself and all others similarly situated vs
Chantal Pharmaceutical Corporation and Chantal Burnison, filed on February 7,
1996 in the United States District Court, Central District of California,
Western Division, Case No. 96-0872. This action is a securities class action
on behalf of all persons who purchased or otherwise acquired the common stock
of the Company between July 10, 1995 and January 5, 1996, inclusive.
The Marksman Partners action is based on a contention that the Company's
accounting for sales revenue, because of the nature of its distribution
agreement with Stanson Marketing, Inc. overstated its revenues for fiscal
(June 30) 1995 and for the September 30, 1995 quarter ($3 million and $10
million, respectively), which , the action claims, violated generally
accepted accounting principles and the Federal securities laws. The complaint
notes that Chantal Burnison sold 300,000 shares during the class period (The
sales were actually made by CBD Pharmaceutical Corporation from approximate
holdings of 1.3 million shares.) The complaint appears to rely on details of
the contractual relationship with the distributor to contend that the
6
<PAGE>
revenues should not have been booked by the Company based on shipped orders
from the distributor, since among other reasons, plaintiffs allege that
Stanson, during the relevant time period, had the right to require the
Company to purchase Stanson on a formula dependent on its income from the
Company's products' sales, and the Company did not have a substantial history
of selling through the distributor and the distribution system. The action
seeks monetary damages in an unspecified amount. An amount sought on the
basis stated in the complaint would be substantially in excess of the
Company's current net worth.
The Company believes its financial reports were correctly presented under
generally accepted accounting principles. A motion to dismiss the Marksman
Partners action was denied, and pre-trial discovery in the Marksman Partners
action has commenced. The Company is defending itself against the claims
asserted in the litigation.
In addition, a derivative action based on many of the same contentions as
made in Marksman has been filed against the Company and Chantal Burnison.
The action, entitled Baruch Singer and Dorothea E. Wakefield vs. Chantal
Burnison, defendant, and Chantal Pharmaceutical Corporation, nominal
defendant, was filed in the Superior Court of the State of California, the
County of Los Angeles, case No. BC 147327. In June 1997, the plaintiffs
amended the complaint to assert a claim against the Company's former
auditors, Coopers & Lybrand LLP, for negligence and professional malpractice
arising out of Coopers & Lybrand's audit of the Company's fiscal year 1995
financial statements which are the subject of both the Marksman and Singer
actions. Coopers & Lybrand's motion to dismiss the case was denied.
In October, 1996, the Company completed the sale of $5.25 million principal
amount of 8% convertible debentures due December 31, 1998. The debentures
were sold to investors qualifying as "non U.S. persons" in an offering
completed under Regulation S. The debentures were convertible into shares of
common stock of the Company as to one-third of the principal amount of each
debenture after forty five (45) days from the date of issuance, an additional
one-third after seventy-five (75) days from the date of issuance and the
balance after ninety (90) days from the date of issuance. The conversion
price is the lesser of $3.91 or 80% of the average closing bid price of the
Company's common stock for the five business days immediately preceding the
conversion date.
Certain investors have commenced action against the Company relating to this
offering. The Company has honored all conversions tendered by investors to
date, and settled all pending litigation arising out of this offering, except
for the settlement of approximately $16,000 of liquidated damages and an as
yet unspecified amount of attorneys fees and costs awarded to one investor.
7
<PAGE>
NOTE 3 - CONVERTIBLE DEBENTURES
In September 1997, the Company issued an aggregate of 2,930,327
shares of its Common Stock upon conversion of $1,893,333 principal amount, an
average of $.65 per share, of its 8% convertible debentures. (See Note 2)
NOTE 4 - SUBSEQUENT EVENTS
In October and November 1997, the Company issued an aggregate of 3,958,451
shares of its Common Stock upon conversion of $1,483,333 principal amount, an
average of $.37 per share, of its 8% convertible debentures (see Note 2).
Had such conversion been affected at September 30, 1997, the Company would
have had Stockholder's Equity of $1,602,084. The proforma column appearing
on the Consolidated Balance Sheet gives effect at September 30, 1997 to the
referenced conversion.
8
<PAGE>
CHANTAL PHARMACEUTICAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Under the Company's revenue recognition policy adopted with respect to the
fiscal year ended June 30, 1996, relating to sales by the Company to its U.S.
distributor, Stanson Marketing, Inc. ("Stanson"), revenue is recognized upon
shipment to Stanson with respect to products which were not distributed on an
autoship basis, and revenue is recognized with respect to products
distributed on an autoship basis upon sale by Stanson to its customers. The
Company considers all products shipped to Stanson after November 21, 1995 as
being subject to distribution on an autoship basis. This revenue recognition
policy complies with FASB 48 "Revenue Recognition when Right of Return
Exists". In September 1997, the Company, in addition to sales through
Stanson, commenced selling, with the consent of Stanson, directly to certain
retailers.
Accordingly, for the three months ended September 30, 1996 and
1997 revenue from Stanson consisted of products to be distributed on an
auto-ship basis and were recognized upon sale by Stanson to its customers.
Revenues are primarily comprised of the Company's sales of Ethocyn-based
Chantal skin care products. Net revenues for the three months ended
September 30, 1997 decreased to $919,580 from $1,909,636 for the three months
ended September 30, 1996. Revenue for the quarter ended September 30, 1997
includes approximately $932,000 established as an allowance against accounts
receivable from Stanson that are beyond the agreed upon payment terms
corresponding to a portion of the accounts receivable owed to Stanson by its
customers. Revenue, before the allowance, were approximately $1,851,000. The
Company also considered recent cash receipts collected in estimating the
reserve. However, the amount the Company ultimately collects could differ
materially from the amount estimated.
Cost of goods sold as a percentage of revenues from product sales during the
three months ended September 30, 1997 was 50% of revenues as compared with
17% of revenues for the three months ended September 30, 1996. The increase
in cost of goods sold as a percentage of revenues is primarily due to sales
reserves, as described above, of approximately $932,000 which negatively
effected cost of sales as a percentage of revenue and a change in product mix.
Marketing and other expenses related to cosmetic sales decreased 61% to
$725,675 in the three months ended September 30, 1997 compared to $1,874,509
in the three months ended September 30, 1996. These expenses resulted from
the marketing and promoting of the Ethocyn-based skin care products and
decreased from the prior period primarily due to decrease in Ethocyn product
advertising expenditures of approximately $515,000 and decrease in
promotional expenditure of approximately $508,000 as compared to the prior
year period.
General and administrative expenses decreased 34% to $1,078,033 for the three
months ended September 30, 1997 compared to $1,625,014 for the three months
ended September 30, 1996. This is primarily due to a decrease in legal
professional services of approximately $564,000 as compared to the prior year
period.
Interest expense increased for the three months ended September 30, 1997 as
compared with the three months ended September 30, 1996 primarily due to the
addition of $5.25 million of 8% convertible debentures in October 1996.
There is no income tax benefit for the three months ended September 30, 1997.
The deferred tax assets as of September 30, 1997, has a 100% valuation
allowance as management cannot determine if it is more likely than not that
the deferred tax assets will be realized.
LIQUIDITY AND CAPITAL RESOURCES
The Company is experiencing a severe cash flow shortage. The Company is
dependent on cash generated by telemarketing sales and payments by Stanson
Marketing, Inc., the Company's U.S. distributor, from its collection of
accounts receivable relating to Chantal's Skin Care products. Both
telemarketing sales and sales at retail are highly dependent on advertising,
and the Company's ability to fund broad based advertising has been limited by
the lack of available cash. The Company has been funding advertising on a
limited basis, including most recently on the "Imus in the Morning" radio
show syndicated throughout the country, and believes that the response to
this advertising has been excellent, and consistent with retail product sell
through results from prior advertising.
Management has been concentrating its efforts on achieving a termination
agreement with Stanson and to negotiating with the holders of convertible
debentures issued October 1996 under Regulation S to complete the conversion
of all outstanding debentures. One of the obstacles to concluding an
agreement with Stanson has been a determination of the number of shares to be
outstanding based on the conversion of the convertible debentures. Management
believes that the Company will be able to complete a termination agreement
with Stanson in the near future on terms more favorable to the Company than
previously announced. Pending such termination agreement, the Company has
been distributing, with Stanson's consent, its products directly to certain
retailers and expects that substantially all revenues for the three months
ending December 31, 1997 will reflect direct sales by the Company to the
retail market. This, in turn, is expected to generate future cash flow to
fund the Company's operations, including increased advertising.
A major drain on the Company's cash has also been for professional fees
relating to the litigation, including class action law suits. The Company is
exploring the possibility of settling the class action law suit, although no
assurance can be given that a settlement on terms acceptable to the Company
can be reached.
The Company used net cash flows in operations of $472,097 for the three
months ended September 30, 1997 principally due to the net loss of $1,619,819
offset by a decrease in inventory of $321,502, an increase in accounts
payable and accrued expenses of $423,002 and depreciation and amortization
expense of $418,426.
During the three months ended September 30, 1997, the Company received
$167,851 in proceeds from the issuance of short term debt and notes payable
to Stanson Marketing and $346,079 in proceeds from loans made by Ms.
Burnison, Chairman of the Board and Chief Executive Officer of the Company,
during the quarter.
For fiscal 1998, the Company will continue to generate cash through its
telemarketing sales, collection of existing accounts receivable and sales in
the U.S. and foreign markets. Management also plans to continually monitor and
9
<PAGE>
make changes to overhead costs as needed. The Company is also seeking
additional financing to help fund future operations.
Management views the first fiscal quarter as a transition period from the
distribution of products through Stanson to becoming a fully integrated
marketing company. During this quarter, limited sales were made by Stanson
while the Company was also limited in its ability to implement distribution
directly to retailers pending termination of the Stanson Agreement. In
October, the Company shipped in excess of $1,520,000 of products directly to
retailers. The customer base and distribution outlets have begun to be
expanded through the recent addition of well known personalities, as Company
spokepeople, new products and lowered product pricing. The Company has
reached tentative agreement with retail chain operators under which the
Company expects its product will be distributed into an additional 7,500
locations. Distribution into these new retail locations is expected to
commence as the Company's advertising campaign proceeds. Additionally Polly
Bergen, a director and Chief Operating Officer of the Company and a
nationally recognized television and Emmy award winning actress is being
featured as the flagship Ethocyn celebrity spokeperson on The Home Shopping
Network. The Company is also planning to distribute the Ethocyn-based skin
care products via direct response on page print and through the airing of an
infomercial which will expand the current distribution channel.
In conjunction with the expansion in the retail market, the Company has begun
an electronic media advertising campaign which are broadcasting the
geographical regions with the major retail distribution. These advertisments
feature celebrity individuals who uses the Chantal Ethocyn products on only
one-half of their face in 30 and 60 second spots. The Company is in
negotiations with potential financing which will support this advertising
campaign.
In the international market, pursuant to a sublicensing agreement, Michilan
International distributes the Ethocyn-based skin care products in China, Hong
Kong, Macao and Taiwan. The first shipment under this agreement was made in
December 1996. In addition, the Company, in cooperation with its Master
Distributor, is in negotiations for distribution by other potential
sublicensees for other territories in the Pacific Rim. Recent devaluation of
currencies in certain Pacific Rim countries have delayed the scheduled launch
in those countries. In Europe, the Company is test marketing for product
positioning and pricing. The European market launch programs include
physician product endorsement, print and selected direct response in England
and physician, cosmetician directed print and television direct response on
the continent. David Hasselhoff, the executive producer and star of the
number one worldwide "Baywatch" and "Baywatch Nights" television series, is
the celebrity spokesperson for the Company's Ethocyn-based skin care products
in the Pacific Rim and Europe. He will be featured in television and print
advertisements as well as participate in promotional tours and appearances.
The Company is currently extending its skin care product line with the
addition of the Ethocyn Safe Sun Treatment and plans to include additional
sun care products, super moisturizing night and neck creams and a men's
line. The men's line is planned for initial launch in Europe with an
endorsement from David Hasselhoff.
The independent certified public accountants have expressed in their opinion
on the June 30, 1997 financial statements that the Company has suffered
recurring losses from operations and has a working capital deficiency that
raises substantial doubt about its ability to continue as a going concern.
The Company believes the collection of existing accounts receivable and sales
in the U.S. and foreign markets (through retail, The Home Shopping Network,
direct response), together with additional funds being negotiated will
enable it to meet its cash requirements through fiscal 1998. There can be no
assurance that the Company will be successful in securing these additional
funds and generating sufficient cash flows from operations to meet its
marketing and distribution plans.
In addition, the Company expects to continue to develop certain of its
compounds to pharmaceutical market approvals, both U.S. and foreign. In this
regard, the Company may be required to obtain additional funds to complete
the research, development and expanded commercialization of such products.
Such funds are expected to be obtained from one or more of the following
sources: (i) sales of Ethocyn-based cosmetics products (ii) amounts to be
received pursuant to the Company's license agreements, including royalties
from anticipated sales of Ethocyn-based and Cyoctol-based products; (iii)
strategic alliances with other companies, including joint venture, joint
development or license agreements; and (iv) additional equity or debt
offerings. However, there can be no assurance that the Company will be
successful in obtaining additional funds from any of the foregoing sources.
The Company, at this time, does not have any material commitments for capital
expenditures.
10
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 2 to financial statements.
Item 4. Submission of matters to a vote of security holders.
The Company held an Annual Meeting of Stockholders on July 17, 1997. At the
meeting the following persons were elected as Directors by the following
votes:
FOR VOTE WITHHELD
--- -------------
Chantal Burnison 12,989,649 1,288,370
Polly Bergen 13,139,325 1,138,694
Sheldon Brody 13,147,159 1,130,860
Joseph Daly 13,138,468 1,139,551
Norman Estrin 13,101,868 1,176,151
George Goldstein 13,113,397 1,164,622
Robert Pinco 13,107,868 1,170,151
Gilbert D. Raker 13,145,160 1,132,859
Charles D. Strang 13,124,710 1,153,309
At a meeting a proposal to approve an amendment to the Certificate of
Incorporation to increase the number of authorized shares of Common Stock
from 20 million to 50 million was approved by a vote of 12,613,204 votes in
favor, 1,593,157 votes cast against and 71,658 votes abstaining.
Item 5. Other Information
In October, in anticipation of the completion of Stanson Termination
Agreement, the Company realized the following actions towards integration of
previous Stanson-controlled North American Ethocyn Products retail marketing
into the Company's own infrastructure and operation.
A relocation from Los Angeles to New York City of its corporate headquarters
and executive offices. Several key employees including chairman/CEO, Chantal
Burnison, Chief Operating Officer, Polly Bergen, VP Media, Kim Hunter,
International Product Administrator, Melanie Ariken, are relocating to New
York City, to join Joseph DeKama, Executive Vice President, and his marketing
staff. The Company's Chief Financial Officer, Yvette Lamprecht, left the
Company to pursue other opportunities. Ms. Lamprecht remains a consultant to
the Company in connection with certain accounting and financial statement
matters.
Charles P. Scalzo, of New York, has assumed the function of Chief Financial
Officer at the Company's new New York headquarters and executive offices. Mr.
Scalzo served for several months as a marketing operations financial
consultant to the Company prior to assuming his new CFO position. Mr. Scalzo
comes to the Company with 29 years of Financial and management experience.
Most recently, from 1989 through 1987, he served as Chief Financial Officer,
and subsequently a consultant, to a privately held cosmetic, fragrance and
skin care company owned by Gayle Hayman, co-founder of Giorgio Fragrances.
The Company has relocated its previous limited Ethocyn product warehouse,
shipping and fulfillment operations from its own Jefferson Blvd. Los Angeles
facility to one of the largest national public warehousing operations
companies in North America. With its responsibility of configuring product
SKUs to certain retail chains specifications, shipping and fulfilling
directly to retailers and wholesalers, management, upon cost and efficiency
analysis, has entered into a contract with a third party contract company which
has an IT system offering complete EDI functionality and cost effective
packing and shipping.
The Company's 3 year old skin care consultant telemarketing division will
maintain an operation facility in Los Angeles, CA with telecomputer
networking directly to the contract fulfillment and warehouse company and to
the Companys' New York City corporate and marketing headquarters.
Stanson has accommodated the Company with a 6 week "transition" information
and training program wherein retailer files, information policies and
personnel introductions are being transferred to CPC employees.
In other developments, the Company's Board of Directors has reduced in number
from 9 to 5. Resigned directors are Sheldon Brody, George Goldstein, M.D.,
Norman Estrin, Ph.D., and Gilbert Raker.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on 8-K
None
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHANTAL PHARMACEUTICAL CORPORATION
----------------------------------
(Registrant)
November 14, 1997 BY: /s/ CHANTAL BURNISON
------------------------------
CHANTAL BURNISON
Chairman of the Board
and Chief Executive Officer
/s/ CHARLES P. SCALZO
------------------------------
CHARLES P. SCALZO
(Principal Financial Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 120,644
<SECURITIES> 0
<RECEIVABLES> 618,133
<ALLOWANCES> 0
<INVENTORY> 2,631,684
<CURRENT-ASSETS> 3,724,935
<PP&E> 705,239
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,135,814
<CURRENT-LIABILITIES> 9,540,141
<BONDS> 0
0
50,000
<COMMON> 211,208
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14,135,814
<SALES> 902,201
<TOTAL-REVENUES> 919,580
<CGS> 459,176
<TOTAL-COSTS> 2,483,737
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 123,591
<INCOME-PRETAX> (1,619,819)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,619,819)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,619,819)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
