<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended July 31, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from________________to_______________
Commission file number:33-06827-LA
KCD HOLDINGS INCORPORATED
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 95-4029439
- ------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization number) identification number)
2835 Townsgate Road, Suite 110, Westlake Village, CA 91361
- ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (805) 494-6687
not applicable
-----------------------------------------------------------------------------
(former, name, address, and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the Registrant's classes of
common equity, as of the latest practicable date.
<TABLE>
<CAPTION>
Outstanding at
Class of Common Stock August 31, 1996
--------------------- ---------------
<S> <C>
$.002 par value 14,142,599
</TABLE>
Transitional Small Business Disclosure Format Yes [ ] No [X]
Number of sequentially numbered pages in the document: 29
<PAGE> 2
FORM 10-QSB
Securities and Exchange Commission
Washington, D.C. 20549
KCD HOLDINGS INCORPORATED
Index
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at F-3
January 31, 1996 and July 31, 1996 (unaudited)
Consolidated Statements of Operations for the three F-4
months and the six months ended July 31, 1995 (unaudited)
and 1996 (unaudited)
Consolidated Statement of Stockholders' Investment F-5
for the six months ended July 31, 1996 (unaudited)
Consolidated Statement of Cash Flows F-6
for the six months ended July 31, 1995 (unaudited)
and 1996 (unaudited)
Notes to Consolidated Financial Statements F-7
Item 2. Management's Discussion and Analysis or Plan of 17
Operation.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KCD HOLDINGS INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JULY 31, 1996 JANUARY 31, 1996
------------- ----------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $592,836 $48,279
Accounts receivable, net 511,879 381,098
Accounts receivable - other, net 57,000 115,065
Inventory 779,635 864,547
Other 2,504 9,720
--------------- ----------------
Total current assets 1,943,854 1,418,709
--------------- ----------------
PROPERTY AND EQUIPMENT, net 159,397 184,357
--------------- ----------------
OTHER ASSETS:
Deposits 135,235 3,938
Intangibles, net 2,204 2,333
--------------- ----------------
Total other assets 137,439 6,271
--------------- ----------------
Total assets $2,240,690 $1,609,337
=============== ================
LIABILITIES AND STOCKHOLDERS' INVESTMENT (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $369,894 $836,484
Accrued expenses 113,783 224,011
Accrued advertising 103,322 173,417
Commissions payable 49,858 31,948
Royalties payable 150,515 150,515
Collateralized note payable-related party 334,501 621,018
Loans from stockholders 562,130 696,579
--------------- ----------------
Total current liabilities 1,684,003 2,733,972
--------------- ----------------
Commitments and contingencies (see Notes)
STOCKHOLDERS' INVESTMENT (DEFICIT)
Common stock, par value $.002 per share; 25,000,000 shares 27,727 33,204
authorized; issued and outstanding 13,863,094 as of July 31, 1996
and 16,602,000 as of January 31, 1996
Additional paid in capital 7,868,248 8,365,580
Accumulated deficit (6,058,346) (6,005,308)
Prepaid advertising and consulting fees (1,280,942) (3,518,111)
--------------- ----------------
Total stockholders' investment (deficit) 556,687 (1,124,635)
--------------- ----------------
Total liabilities and stockholders' investment (deficit) $2,240,690 $1,609,337
=============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 4
KCD HOLDINGS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JULY 31, 1996 AND 1995
<TABLE>
<CAPTION>
--------Three Months Ended------- ---------Six Months Ened---------
JULY 31, 1996 JULY 31, 1995 JULY 31, 1996 JULY 31, 1995
-------------- --------------- -------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Revenues $456,102 $3,231,260 $1,572,361 $4,120,201
Cost of Goods Sold 387,281 757,995 693,497 977,605
-------------- -------------- -------------- ---------------
Gross Profit 68,821 2,473,265 878,864 3,142,596
-------------- -------------- -------------- ---------------
Operating Expenses:
Advertising 220,988 1,230,233 257,507 2,049,002
Selling and marketing 243,695 1,210,975 406,305 1,623,373
General and administrative 434,018 364,505 903,917 753,535
Royalties - 204,948 - 339,990
-------------- -------------- -------------- ---------------
898,701 3,010,661 1,567,729 4,765,900
-------------- -------------- -------------- ---------------
Profit (Loss) from Operations (829,880) (537,396) (688,865) (1,623,304)
-------------- -------------- -------------- ---------------
Non - Operating Income (Expense)
Interest expense (26,303) (98,656) (57,912) (163,782)
Interest income - 9,399 - 11,469
-------------- -------------- -------------- ---------------
(26,303) (89,257) (57,912) (152,313)
Litigation Settlements, net - - 765,482 -
Payments to Officer and Stockholder - - (70,143) -
-------------- -------------- -------------- ---------------
Income (Loss) before Income Taxes (856,183) (626,653) (51,438) (1,775,617)
Provision for Income Taxes - - 1,600 1,600
-------------- -------------- -------------- ---------------
Net Profit (Loss) ($856,183) ($626,653) ($53,038) ($1,777,217)
============== ============== ============== ===============
Weighted average shares of
Common Stock Outstanding: 13,511,170 15,881,973 14,762,189 15,933,423
============== ============== ============== ===============
Net Profit (Loss) per share: ($0.06) ($0.04) ($0.01) ($0.11)
============== ============== ============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 5
KCD HOLDINGS INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT (DEFICIT)
FOR THE SIX MONTHS ENDED JULY 31, 1996
<TABLE>
<CAPTION>
Common Stock
------------ Additional Accumulated Equity Stockholder's
Number of shares Par value Paid In Capital Deficit Reductions Investment (Deficit)
---------------- --------- --------------- ------------ ------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
Balance January 31, 1996 16,602,000 $33,204 $8,365,580 ($6,005,308) ($3,518,111) ($1,124,635)
Common stock retired,
advertising settlement (640,000) (1,280) (1,918,720) - - (1,920,000)
Common stock retired,
consulting services (155,200) (310) (1,047,290) - - (1,047,600)
Common stock retired,
satisfaction of loan (3,800,000) (7,600) - - - (7,600)
Issuance of common stock
for other services 46,000 92 14,908 - - 15,000
Issuance of common stock
in private placements 1,200,000 2,400 1,662,600 - - 1,665,000
Net profit for three months
ended April 30, 1996 - - - 803,145 - 803,145
Reduction in prepaid
advertising and consulting
fees - - - - 2,478,880 2,478,880
Balance April 30, 1996 ---------- ------- ---------- ----------- ----------- -----------
(Unaudited) 13,252,800 26,506 7,077,078 (5,202,163) (1,039,231) 862,190
Issuance of common stock
for consulting services 300,000 600 299,400 300,000
Issuance of common stock
to commission sales brokers 35,000 70 17,430 17,500
Issuance of common stock
in litigation settlement 40,000 80 59,920 60,000
Issuance of common stock
in private placements 235,294 471 414,420 414,891
Net loss for three months (856,183) (856,183)
ended July 31, 1996
Increase in prepaid advertising
and consulting fees (241,711) (241,711)
Balance July 31, 1996 ---------- ------- ---------- ----------- ---------- -----------
(Unaudited) 13,863,094 $27,727 $7,868,248 ($6,058,346) (1,280,942) $556,687
========== ======= ========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 6
KCD HOLDINGS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited) (Unaudited)
<S> <C> <C>
Net Profit (Loss) ($53,038) ($1,777,217)
Adjustments to reconcile Net Profit (Loss)
to Cash used in operating activities:
Depreciation and amortization 119,419 22,660
Stock issued for advertising and other services 32,500 2,858,990
Litigation settlements - stock (retirement) / issuance (479,762) -
------------- -------------
(380,881) 1,104,433
------------- -------------
(Increase) / decrease in current assets:
Accounts receivable, net (130,781) (565,992)
Inventory 84,912 (124,952)
Other current assets 65,281 (148,101)
Increase / (decrease) in current liabilities:
Accounts payable (466,590) (27,419)
Accrued expenses (110,228) 30,930
Accrued advertising (70,095) 85,742
Commissions payable 17,910 (80,413)
Royalties payable - (266,444)
------------- -------------
(609,591) (1,096,649)
------------- -------------
Net cash provided by (used in) operating activities (990,472) 7,784
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan receivable-officer and stockholder - (1,118,801)
Purchase of property and equipment (57,355)
Deposits (131,296) (3,938)
------------- -------------
Net cash used in investing activities (131,296) (1,180,094)
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of common stock (7,600) -
Proceeds from sale of common stock 2,094,891 482,500
Note payable (286,517) 205,300
Loans from stockholders (134,449) 614,586
------------- -------------
Net cash provided by financing activities 1,666,325 1,302,386
NET INCREASE IN CASH 544,557 130,076
CASH, BEGINNING BALANCE 48,279 9,088
------------- -------------
CASH, ENDING BALANCE $592,836 $139,164
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 7
KCD HOLDINGS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1996 AND JULY 31, 1996
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
KCD Holdings Incorporated (the "Company") is a Nevada corporation which was
incorporated in February 1986. The Company is a holding company which operates
primarily through its wholly-owned subsidiary, SeQuester Incorporated
("SeQuester"), formerly KCD Incorporated, which was incorporated in November
1993. The Company is a distributor and marketer of technically advanced health
products. The Company currently markets dietary aid products under the name
SeQuester(R). These products are sold to national drug and food chain
retailers, wholesalers and mass merchandisers throughout the United States
using several of the nations largest food brokerage firms.
In October 1994, in connection with the issuance of 14,100,000 shares of its
common stock, $0.002 par value, 100,000 shares to the stockholders of the
Company and 14,000,000 shares to the stockholders of SeQuester, the Company
acquired 100% of the ownership of SeQuester, as a reverse merger. The merger
was accounted for in a manner similar to a pooling-of-interests. SeQuester,
which is engaged in the business of marketing and distributing dietary aids,
commenced its operations in February 1994. For financial reporting purposes,
the operations of SeQuester have been included in the accompanying consolidated
financial statements since that date.
The accompanying consolidated financial statements of the Company and its
subsidiary have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-QSB. Certain notes and other information have been condensed or omitted
from the interim financial statements presented in this report. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, the financial statements reflect all adjustments
considered necessary for a fair presentation. The results of operations for the
six months ended July 31, 1996 are not necessarily indicative of the results to
be expected for the full year. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on
Form 10-KSB for the year ended January 31, 1996 as filed with the Securities
and Exchange Commission. All significant intercompany balances and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported and disclosed in the financial statements and
related notes. Actual results could differ from those estimates.
Certain reclassifications were made to the 1995 consolidated financial
statements to conform with the 1996 consolidated financial statement
presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue Recognition -- The Company recognizes revenue from
wholesalers, distributors and retailers at the time of shipment, net of sales
returns and allowances.
F-7
<PAGE> 8
KCD HOLDINGS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1996 AND JULY 31, 1996
Significant customers accounting for 57% of revenues for the six months ended
July 31, 1996 include American Drug Stores 19%, Wal-Mart Stores 18%, Revco D.S.
Inc. 12% and Eckerd Drug 8%. Major customers accounting for 50% of revenues
for the six months ended July 31, 1995 include McKesson Drug Company 12%,
Wal-Mart Stores 10%, Mark Stevens (CVS Inc.) 8%, K-Mart Corp. 7%, American Drug
Stores 7% and Thrift Drug 6%. No significant customers have been lost during
the period since commencement of operations to date.
(b) Fair Value of Financial Instruments and Credit Risk -- The carrying
value of cash, notes and loans from stockholders, approximates their fair
values.
(c) Allowance for Doubtful Accounts -- In determining the allowance to be
maintained, management evaluates many factors including industry and historical
loss experience. The allowance for doubtful accounts is maintained at an
amount management deems adequate to cover estimated losses. The allowance for
doubtful accounts at January 31, 1996 was $52,163 and at July 31, 1996 was
$56,872 for trade receivables and $58,065 for other receivables.
(d) Prepaid Advertising -- The Company expenses advertising costs as
incurred.
(e) Inventory -- Inventory is valued at the lower of cost or market value.
Cost is determined using the first-in, first-out method. Inventory consisted
of:
<TABLE>
<CAPTION>
July 31, 1996 January 31, 1996
------------- ----------------
<S> <C> <C>
Product Units $ 593,009 $ 704,741
Packaging and Product Displays 177,826 153,578
Shipping Supplies 8,800 6,228
--------- ---------
$ 779,635 $ 864,547
========= =========
</TABLE>
(f) Property and Equipment -- The Company records property and equipment
at cost and depreciates it over the useful life of the asset using the
straight-line method of depreciation. Renewals and betterments are capitalized
while repairs and maintenance are charged to expense. Estimated useful lives
are as follows:
Product Tooling 2 years
Machinery and Equipment 5-10 years
Furniture and Fixtures 5-10 years
Computer Equipment 5 years
Leasehold Improvements 5-10 years
(g) Income Taxes -- Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases at enacted rates when such amounts are expected to be
realized or settled.
F-8
<PAGE> 9
KCD HOLDINGS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1996 AND JULY 31, 1996
(h) Income (Loss) Per Common Share -- Income (Loss) per common share is
based on the weighted average number of common shares outstanding. Common
share equivalents have not been considered in determining the weighted average
number of shares outstanding as their effect would either be antidilutive or
result in no material dilution of earnings per share.
(i) Risks and Uncertainties -- In the normal course of business, the
Company is subject to certain risks and uncertainties as follows:
- The Company's primary source of revenue has been from a single
product, SeQuester(R)1; however, the Company introduced two
new dietary aid products in December 1995 (SeQuester(R)2 and
SeQuester(R)3) and intends to introduce additional products in
1996.
- The Company has a significant deficit and has incurred
substantial losses from operations for the period from
inception through July 31, 1996.
- The marketing of the Company's products are subject to the
rules and regulations of the Federal Trade Commission.
- The Company provides its product on unsecured credit to most
of its customers, the majority of which are national retail
outlets.
(j) Variable Stock Purchase Agreements -- The Company has various
agreements with certain key employees and an independent contractor which
provide options to purchase common stock. Under these agreements, the Company
has the right to repurchase (at the original purchase price) any shares
purchased. The Company retains this repurchase right for a period of two years
from the date of purchase. The Company will likely be required to recognize
significant compensation expense, based upon the then fair market value of the
shares, at the expiration of the repurchase period. The foregoing non-cash
compensation expense could have a material adverse impact on the Company's
statement of operations for the period during which the Company's repurchase
rights expire.
(k) Impact of Adoption of Recently Issued Accounting Standards -- In
October 1995, the Financial Accounting Standards Board issued "SFAS" No. 123,
"Accounting For Stock-based Compensation." The effective date of this
statement is for fiscal years beginning after December 15, 1995. The statement
will require the Company either to adopt SFAS No. 123 and recognize an expense
for stock compensation in the financial statements or continue accounting under
Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued to
Employees" with additional pro forma footnote disclosure regarding the impact
on net earnings and net earnings per share had the Company adopted SFAS No.
123. The impact of adopting SFAS No. 123 to the Company has not yet been
determined.
F-9
<PAGE> 10
KCD HOLDINGS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1996 AND JULY 31, 1996
3. REVENUES
In the normal course of business during the six month periods ended July 31,
1996 and 1995, the Company granted its customers a variety of discounts. The
discounts granted were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Gross Revenues $ 2,066,439 $ 4,849,102
------------ ------------
Discounts:
Refunds and Returns $ 131,779 $ 30,706
Introductory and Promotional 120,633 350,759
Co-op Advertising 202,137 268,105
Other 39,529 79,331
------------ ------------
Total Discounts $ 494,078 $ 728,901
------------ ------------
Net Revenues $ 1,572,361 $ 4,120,201
============ ============
</TABLE>
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
July 31, 1996 January 31, 1996
------------- ----------------
<S> <C> <C>
Product Tooling $ 43,900 $ 43,900
Machinery and Equipment 79,280 79,280
Furniture and Fixtures 6,231 6,231
Computer Equipment 31,198 31,198
Leasehold Improvements 54,291 54,291
--------- ---------
214,900 214,900
Less: Accumulated Depreciation ( 55,503) ( 30,543)
--------- ---------
$ 159,397 $ 184,357
========= =========
</TABLE>
5. LOAN RECEIVABLE FROM OFFICER AND STOCKHOLDER
On February 1, 1995 the Company agreed to loan Clark Holcomb, the President of
the Company at that time, up to the principal amount of $2,000,000 with
interest payable at the rate of 8% per annum on the unpaid balance. The loan
was payable on demand upon sixty days prior notice. In consideration for the
loan, Mr. Holcomb agreed and acted to retire 2,000,000 shares of the Company's
common stock owned by him and further agreed to personally guarantee and
collateralize future borrowings by the Company up to the principal balance of
the loan. No salary was paid or accrued for Mr. Holcomb for the twelve months
ended January 31, 1996. As of January 31, 1996, the balance of principal and
interest receivable on this loan of $2,145,964 was determined to be
uncollectible and was expensed during the twelve months ended January 31, 1996.
In April 1996, Mr. Holcomb retired 3,800,000 shares of Company common stock
F-10
<PAGE> 11
KCD HOLDINGS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1996 AND JULY 31, 1996
personally owned by him in satisfaction of the Company's outstanding loan
receivable from him which was $2,223,638 at that date. An additional $70,143
was expensed during the six months ended July 31, 1996.
6. LOANS PAYABLE TO STOCKHOLDERS AND COLLATERALIZED PROMISSORY NOTE
(a) On July 31, 1996, the Company owed stockholders the amount of $562,130
including principal and interest. These loans are interest bearing, at a rate
of 9%, and have varying repayment terms over a one year period, principally for
the purpose of providing the Company with working capital.
(b) On October 17, 1995, the Company executed a promissory note for the
sum of $750,000, or the aggregate unpaid principal amount of advances up to the
sum of $750,000, with interest payable at 10% per annum on the outstanding
balance with a stockholder. The note, principal plus interest, is payable
based upon 50% of net collections from product sales with any remaining balance
due in full on or before October 17, 1996. The note is subject to a security
agreement which covers all of the accounts receivable, contract rights and
inventory of the Company. As of July 31, 1996, the balance of principal and
interest outstanding of this note was $334,501.
7. INCOME TAXES
No provision was made for Federal income tax since the Company has significant
net operating loss carryforwards. Through January 31, 1996, the Company
incurred net operating losses for tax purposes of approximately $4,941,000.
Differences between financial statement and tax losses consist primarily of
amortization, payments to an officer and stockholder, allowance for doubtful
accounts, certain interest expenses and termination of sub-chapter S status for
a subsidiary in connection with a merger in October, 1994. The net operating
loss carryforwards may be used to reduce taxable income through the year 2010.
The availability of the Company's net operating loss carryforwards are subject
to limitation if there is a 50% or more positive change in the ownership of the
Company's stock. During the taxable year ended January 31, 1995, the Company
incurred a 50% or more change in ownership. Therefore, the availability of
approximately $591,000 of the Company's net operating loss carryforwards may be
limited. Net operating loss carryforwards for the State of California are
approximately $1,318,000 and are generally available for use to reduce taxable
income through the year 2000. The provision for income taxes consists of the
California state minimum tax imposed on corporations.
Significant components of the Company's net deferred tax assets, as of January
31, 1996 are as follows:
F-11
<PAGE> 12
KCD HOLDINGS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1996 AND JULY 31, 1996
<TABLE>
<S> <C>
Litigation Accrual $ 24,000
Allowance for Doubtful Accounts 8,400
Net Operating Loss carry-forward 1,895,000
-----------
Gross Deferred Tax Assets 1,927,400
Valuation Allowance (1,927,400)
----------
Net Deferred Tax Asset $ -
==========
</TABLE>
The Company's valuation allowance of $1,927,400, as of January 31, 1996, is
based on the Company's evaluation of the future realization of the deferred tax
assets.
8. CONTRACTS AND AGREEMENTS
(a) Advertising Agreement -- In May 1995, the Company entered into a one
year agreement with Premiere Radio Networks ("Premiere") for bartered
advertising in the amount of $1,000,000. As consideration for this
advertising, the Company issued 200,000 shares of restricted common stock to
Premiere. As of July 31, 1996, $530,187 of unused advertising is currently
available in connection with this agreement.
(b) Supply and Packaging Agreements -- In April 1996, the Company entered
into a five year supply agreement with a major manufacturer to provide dietary
supplements for resale within the United States and Canada. This agreement
also provides for exclusive rights to sell products to certain retail stores
and wholesalers. In addition, in April 1996, the Company entered into a five
year packaging agreement which covers a significant portion of the Company's
packaging requirements.
9. STOCKHOLDERS' INVESTMENT
(a) Common Stock -- During the three months ended April 30, 1996, the
Company (i) retired 640,000 shares of common stock in connection with
settlement of certain advertising litigation (ii), retired 155,200 shares of
common stock in connection with termination of a consulting agreement and (iii)
retired 3,800,000 shares of common stock in satisfaction of the Company's
outstanding loan from Clark Holcomb. During the three months ended April 30,
1996, the Company issued 1,200,000 shares of common stock in a private
placement and issued 46,000 shares of common stock for other services.
During the three months ended July 31, 1996, the Company issued (i) 35,000
shares of common stock to commission sales brokers (ii) 40,000 shares of common
stock in settlement of litigation and (iii) 235,294 shares of common stock in a
private placement. In August 1996, an additional 4,505 shares of common stock
were issued to commission sales brokers.
F-12
<PAGE> 13
KCD HOLDINGS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1996 AND JULY 31, 1996
In June 1996, the Company entered into a financing agreement pursuant to which
the Company agreed to issue a maximum of 1,000,000 shares of common stock
offered at a price per share equal to the lesser of (i) 50% below the closing
bid price of the Company's common stock or (ii) $2.00 per share. A finder's
fee of 10% is payable in connection with any transactions consummated under
this agreement.
In June 1996, 235,294 shares were issued with the balance of this financing
currently scheduled to be completed by October 15, 1996. Upon completion of
this financing, the Company agreed to issue, to the placement agent, 300,000
warrants to purchase common stock at the offering price. These warrants will
have a five year life and contain certain registration rights.
In addition, upon completion of the financing, the Company agreed to enter into
certain investment relationship agreements for a one year period which provide
for aggregate payments of $4,000 per month and the issuance of an aggregate of
200,000 warrants to purchase common stock at the offering price. These
warrants will have a five year life and contain certain registration rights.
In February 1996, the Company amended and restated its Consulting Agreement and
Stock Plan with a consultant, dated February 15, 1995 to extend the term of
such agreement for an additional three (3) year period and, in June 1996,
issued an additional 300,000 shares of Company common stock, to such
consultant.
The Company has employment agreements with officers under which it is obligated
to issue up to an aggregate of 1,750,000 shares of Company common stock at a
purchase price of par value through June 1999. The shares are subject to
repurchase by the Company at par value for a period of two years from date of
purchase.
In connection with an agreement with an independent contractor to provide
certain advertising, design and marketing services, the Company also entered
into a common stock purchase agreement. Under the terms of the stock purchase
agreement, the Company is obligated to issue up to an aggregate of 250,000
shares of Company common stock at a purchase price of par value through August
1998. In August 1996, the Company issued 150,000 shares under this agreement.
The shares are subject to repurchase by the Company at par value for a period
of two years from date of purchase.
(b) Warrants -- The outstanding public warrants of the Company at July
31, 1996 are as follows:
<TABLE>
<CAPTION>
Warrant Class Amount Outstanding Exercise Price
------------- ------------------ --------------
<S> <C> <C>
A 398,850 $0.50
B 488,600 0.75
C 488,600 1.00
-------
1,376,050
=========
</TABLE>
F-13
<PAGE> 14
KCD HOLDINGS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1996 AND JULY 31, 1996
In May 1996, the Company extended the date within which the outstanding
warrants could be exercised to June 30, 1997. Exercise of these warrants is
subject to an effective registration statement with the Securities and Exchange
Commission. No warrants were exercised during the twelve months ended January
31, 1996 or the six months ended July 31, 1996.
The Company has an additional 300,000 warrants outstanding to purchase common
stock at $2.50 per share. These warrants have a five year life and contain
certain registration rights.
10. LITIGATION
The Company is involved in several legal actions. In the opinion of the
management, the Company has adequate legal defenses with respect to these
actions, as noted below:
Charles McClendon vs. Clark M. Holcomb and KCD
Charles McClendon ("McClendon") filed a complaint on October 12, 1995 in the
Superior Court of the State of California for the County of Los Angeles against
Clark M. Holcomb and SeQuester alleging breach of contract, fraud, fraudulent
misrepresentation, violation of California Corporate Securities Law, money had
and received and account stated. McClendon alleged that Holcomb fraudulently
breached a contract by and between McClendon and Holcomb pursuant to which
Holcomb agreed to sell shares of Interactive Medical Technologies Ltd. ("IMT")
stock to McClendon. Plaintiff named SeQuester as the alter-ego of Holcomb.
McClendon is seeking damages in a sum in excess of $50,000 as well as
attorneys' fees, exemplary and punitive damages. It is the Company's position
that it has no obligation or liability to McClendon in connection with this
matter. The Company has filed an answer denying the allegations in the
complaint and intends to vigorously defend this action.
Federal Trade Commission
In August 1995, the Seattle Regional Office of the Federal Trade Commission
("FTC") advised the Company that the staff believes that the Company's fat
sequestrant product, which currently is marketed under the name
"SeQuester(R)1", has been improperly represented in advertising claims, and
that the sequestrant product, when previously marketed by a prior licensor
under the name "Lipitrol", also was improperly represented in advertising
claims. The FTC staff has indicated that it is prepared to recommend that a
complaint be filed against a prior licensor, the Company and certain
individuals in connection with the foregoing. The Company presently is
discussing this matter with the FTC staff with the objective of settling the
matter. There is no assurance that a settlement will be reached or as to the
impact on the Company of any settlement, although it is presently believed that
any settlement may impact the advertising claims utilized in the marketing of
the sequestrant product until new clinical trials are completed and no
assurance can be made that any such settlement will not have a material adverse
effect on the Company.
F-14
<PAGE> 15
KCD HOLDINGS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1996 AND JULY 31, 1996
KCD vs. Performance Financial Services, Inc. and Fed Funds, Incorporated
In January 1996, the Company filed a suit against Fed Funds, Incorporated and
Performance Financial Services, Inc. in the United States District Court for
the Eastern District of Virginia for unlawful conversion of Company funds held
under a factoring agreement in the amount of $136,608 plus compensatory damages
for interest and profits as well as punitive damages.
This action was settled, in July 1996, with respect to Fed Funds, Incorporated
resulting in a cash payment to be received by the Company, in the amount of
$57,000. The Company is continuing to pursue this action against Performance
Financial Services, Inc. A trial date has currently been scheduled for
September 1996.
EHI vs. KCD
In March 1996, Effective Health Inc. ("EHI"), a wholly-owned subsidiary of IMT,
filed an action against KCD in Los Angeles County Superior Court. This action
alleges causes of action against SeQuester for breach of the First Amended
License Agreement ("Amended License Agreement") by and between EHI and
SeQuester, declaratory relief and permanent injunction. The action is based
upon the alleged failure of SeQuester to pay royalties due pursuant to the
Amended License Agreement and use of advertising claims in connection with the
sale of the licensed products which were in excess of those which EHI
authorized SeQuester to make. SeQuester has denied all of the allegations in
the complaint and, in April 1996, filed an answer and cross-complaint. The
cross-complaint is based on the Company's belief that the patent for the
licensed product under the Amended License Agreement does not appear to
infringe any of the Company's products, as set forth in the Company's letter to
IMT and EHI, dated February 29, 1996, which demanded repayment of approximately
$828,980 in royalties and licensing fees previously paid and the return of
100,000 shares of the Company's common stock issued to IMT thereunder. This
cross-complaint names EHI and IMT, as well as Dr. Shell and William Pelzer as
former officers of IMT and alleges breach of contract, breach of good faith and
fair dealing, negligence, intentional misrepresentation, negligent
misrepresentation, conversion, securities fraud, rescission, accounting and
constructive trust. The Company has requested, injunctive relief, damages and
return of all Company stock issued and monies paid to cross-defendants under
the Amended License Agreement. The Company is currently negotiating a
settlement of these actions.
KCD Holdings, Incorporated vs. Peter D. Bistrian and Horowitz, Cutler & Beam
In December 1995, the Company entered into a Management Consulting Agreement
("Consulting Agreement") with Peter D. Bistrian Consulting, Inc. ("PBC") for
management and marketing consulting services. As compensation for the
foregoing consulting services PBC received 225,000 shares of the Company's
common stock (the "Consulting Shares"). The Company acted to register the
offer and sale of the Consulting Shares on Form S-8 which was filed in January
1996. In January
F-15
<PAGE> 16
KCD HOLDINGS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1996 AND JULY 31, 1996
1996, the Company terminated the Consulting Agreement as a result of PBC's use
of the Company's confidential information for PBC's own benefit. The Company
requested in such notice of termination that PBC immediately return the
Consulting Shares for cancellation and that PBC immediately cease and desist
from trading in the Company's securities. Notwithstanding the Company's notice
it appears that PBC subsequently acted to sell a substantial portion of the
Consulting Shares in the open market and in violation of a lock-up agreement
prohibiting the sale of the Consulting Shares. In an attempt to resolve this
matter in an expeditious manner and to secure the Consulting Shares for
cancellation, the Company entered into a conditional settlement agreement,
contingent upon the return to the Company of all of the Consulting Shares,
which required PBC to deliver the Consulting Shares to an escrow account
maintained by the law firm of Horowitz, Cutler & Beam ("HC&B") for delivery to
the Company. In February 1996, HC&B delivered 155,200 of the 225,000
Consulting Shares to the Company. In May of 1996, the Company filed a
Complaint in the Superior Court of the State of California for the County of
Los Angeles against Peter D. Bistrian Consulting, Inc.; Peter D Bistrian;
Horowitz, Cutler & Beam; M. Richard Cutler; Gateway Financial Group, Inc.; and
Lisa Paige for breach of written contract; legal malpractice; intentional
misrepresentation; negligent misrepresentation; securities fraud; conversion;
constructive fraud; breach of fiduciary duty; insider trading; breach of
covenant of good faith and fair dealing; and violation of the racketeer
influenced and corrupt organizations act.
Except as otherwise specifically indicated above, management believes that the
Company does not have any material liability for any lawsuits, settlements,
judgments or fees of defense counsel which have not been paid or accrued as of
July 31, 1996.
As there is no assurance that the Company will prevail in any of the foregoing
lawsuits, the Company may incur substantial expense in connection with this
litigation. Any unfavorable settlement or judgment against the Company, in
which the Company is a defendant, could have a material adverse effect upon the
financial condition and operational results of the Company.
11. SUBSEQUENT EVENT
In August 1996, the Company entered into a stock purchase agreement with a
current stockholder wherein the Company issued 125,000 shares of common stock
in satisfaction of $250,000 of the principal balance of a certain secured
promissory note dated October 17, 1995 due to that stockholder. In connection
with this transaction, the Company entered into a put option agreement wherein
that stockholder has the right, upon his election, to sell to the Company a
total of 125,000 shares of Company common stock at $2.00 per share at any time
between October 17, 1996 and April 17, 1997.
F-16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
KCD Holdings Incorporated, formerly Commonwealth Associates, Inc., was
incorporated in the state of Nevada on February 13, 1986 ("the Company"). The
Company's activities from inception until 1993 consisted primarily of reviewing
possible business opportunities and acquisitions, and maintaining the business
entity. The Company had no operational activities from the fiscal years 1989
through 1993 and all expenses incurred were solely related to maintaining the
entity and reviewing potential business opportunities.
In October 1994, the Company entered into a Plan and Agreement of
Reorganization and acquired 100% of the issued and outstanding equity shares of
SeQuester Incorporated ("SeQuester"), formerly KCD Incorporated, which had
commenced operations in 1994. SeQuester became a wholly owned subsidiary of the
Company. The Company's activities through 1995 have consisted primarily of the
development, and marketing of its fat sequestrant product, SeQuester(R) 1.
The Company introduced an appetite suppressant (SeQuester(R) 2) and a
chromium based dietary supplement (SeQuester(R) 3) in addition to its fat
sequestrant product (SeQuester(R) 1) in December 1995. Additionally, the
Company plans to introduce its fourth product, PhytoQuest(TM), in September
1996. It is composed of phytosterols, which in recent research shows potential
to inhibit the gastrointestinal absorption of cholesterol. Additional new
health products are scheduled for introduction in late 1996, all under the
trademark SeQuester(R). To date, the Company has developed access to major
domestic retail, pharmacy and mass merchandiser chains in the United States.
The weight loss industry represents an estimated 1 billion dollars in
revenues. Millions of Americans begin diets every year and buy diet
supplements.
The primary target for the Company's SeQuester(R) product line appears
to be relatively sophisticated females, 24 to 49 years old with a history of
weight loss efforts. These women are interested in products that are natural,
sensible and effective in aiding their struggle to lose unwanted weight. They
understand that reduced caloric intake is part of any effective weight loss
plan and they are inclined to use the product as directed.
Market leaders in the weight reduction industry include Dexatrim(TM)
and Acutrim(TM), with several additional smaller product marketers. However,
there are no other products available in wide spread distribution that
accomplish weight loss through the sequestration of dietary fat.
SeQuester(R) 1 and 3 do not contain any diuretics, stimulants, or
drugs. SeQuester(R) 2, an appetite suppressant, does not contain any caffeine,
diuretic, or sodium. SeQuester(R) 2 is an FDA approved over-the-counter drug
formulation for appetite control to aid weight reduction, containing
Phenylpropanolamine Hydrochloride. Market research indicates that there is a
substantial market for dietary supplements that are natural, drug-free
products. All of the ingredients comprising the fat sequestrant product are
included in a published Food and Drug Administration guidelines for food
additives generally recognized as safe ("GRAS"). Therefore, the Company
believes that there is a
17
<PAGE> 18
tremendous possibility to assume the lead in the fat sequestrant market, well
ahead of any other participants who may attempt to enter the market.
SeQuester(R) 3, now called ChromaQuest(TM), consists of a synergistic
combination of 5 different sources of Chromium, as well as Amino Acids, Vitamin
C and Potassium. Chromium is an essential trace mineral which is necessary for
proper carbohydrate metabolism.
Results of Operations
The Company commenced operations for the marketing and distribution of
SeQuester(R) in the first calendar months of 1994. Certain costs and necessary
expenditures were incurred that have delayed results on sales, such as sales
travel calls and re-visits to wholesalers, brokers and retailers across the
nation, as well as a national media advertising campaign. It is now clear that
the effects of these efforts have brought the SeQuester(R) products to national
attention.
For the three month period ended July 31, 1996 compared to the three month
period ended July 31, 1995:
Revenues are derived from sales of the dietary fat sequestrant
product, an appetite suppressant and a chromium based dietary supplement all
under the name SeQuester(R). Gross Revenues for the three months ended July
31, 1996 decreased to $825,697 from $3,673,928 for the three months ended July
31, 1995 or a 78% decrease.
Gross Revenues have been reduced for a variety of discounts to provide
Net Revenues of $456,102 for the three months ended July 31, 1996 and
$3,231,260 for the three months ended July 31, 1995 or an 86% decrease.
The significant decrease in Gross Revenues resulted from a hold on the
Company's marketing campaign pending (i) completion of clinical trials for the
SeQuester(R) 1 product (ii) the settlement of certain advertising litigation
and (iii) adequate financing. The Company also experienced difficulties in
maintaining adequate inventory levels of the SeQuester(R) 2 and SeQuester(R) 3
products. During April 1996, the pending advertising litigation was settled
and the initial phase of financing was completed. Clinical trials for the
SeQuester(R) 1 product have been extended through the third quarter of 1996.
The Company is currently rebuilding its marketing campaign. Newspaper
advertising commenced in major markets in July 1996 and was supported by radio
advertising which commenced in August 1996. Significant increases in Gross
Revenues are forecasted for the remainder of 1996.
18
<PAGE> 19
<TABLE>
<CAPTION>
Three Months Ended
------------------
July 31, 1996 July 31, 1995
------------- -------------
<S> <C> <C>
Gross Revenues $825,697 $ 3,673,928
-------- --------------
Discounts:
Refunds and Returns $ 117,897 $ 9,927
Introductory and Promotional 79,020 195,482
Co-op Advertising 152,838 169,696
Other 19,840 67,563
----------- --------------
Total Discounts $ 369,595 $ 442,668
----------- --------------
Net Revenues $ 456,102 $ 3,231,260
=========== ==============
</TABLE>
Gross Profits are comprised of Net Revenues less direct costs of
products, packaging and services. The Cost of Sales of the dietary products
for the three month period ended July 31, 1996 was $387,281 or 85% of Net
Revenues which provided a Gross Profit of $68,821 or 15% of Net Revenues. For
the three month period ended July 31, 1995 the Cost of Sales was $757,995 or
23% of Net Revenues, which provided a Gross Profit for the same three month
period of the previous year of $2,473,265 or 77% of Net Revenues. The decrease
in Gross Profit percent resulted primarily from continuation of fixed co-op
advertising costs and an increase in returns. Increases in Gross Revenues,
forecasted for the second half of 1996, should improve Gross Profit
percentages.
<TABLE>
<CAPTION>
Three Months Ended
------------------
July 31, 1996 July 31, 1995
------------- -------------
$ % $ %
- - - -
<S> <C> <C> <C> <C>
Net Revenues 456,102 100 3,231,260 100
Cost of Goods Sold 387,281 85 757,995 23
------- -- --------- --
Gross Profit 68,821 15 2,473,265 77
====== == ========= ==
</TABLE>
Advertising expenses consist of a multi-media advertising campaign
which included TV and radio, signage and other displays. Selling and marketing
expenses consist of sales commissions and salaries, coupon redemption,
warehouse, freight, supplies and travel expenses. General and administrative
expenses consist of salaries and benefits of officers and staff, accounting,
legal and other professionals, rent and occupancy costs, factoring commissions
and fees, bad debt expense, travel expenses and other administrative costs.
Advertising expense decreased to $220,988 for the three months ended
July 31, 1996 from $1,230,233 for the same three months of 1995. The Company
placed a hold on its marketing campaign through June 1996 pending (i)
preparation of advertising materials which could be utilized pending completion
of clinical trials for the SeQuester(R) 1 product (ii) the settlement of
certain advertising litigation and (iii) adequate financing. The Company also
experienced difficulties in
19
<PAGE> 20
maintaining adequate inventory levels of the SeQuester(R) 2 and SeQuester(R) 3
products. Inventory financing became available in April 1996 and inventory
buildups to adequate levels occurred by August of 1996. Newspaper advertising
commenced in major markets in July 1996 and was supported by radio advertising
which commenced in August 1996. Pending advertising litigation was settled in
April 1996. A significant portion of the 1995 expense was paid by issuance of
restricted shares of Company common stock. The Company is currently evaluating
all of its marketing programs and anticipates significant advertising expenses
during the second half of 1996.
Selling and Marketing expenses decreased to $243,695 for the three
months ended July 31, 1996 from $1,210,975 for the same three months of 1995.
The Company experienced decreases in sales commissions due to reduced sales
volumes and a reduction in rates for the 1996 period and decreases in coupon
redemption, freight and travel expenses. The decreases were partially offset
by increases in salaries and consulting fees. Selling and marketing expenses
are expected to increase during the second half of 1996.
General and Administrative expenses increased to $434,018 for the
three months ended July 31, 1996 from $364,505 for the same three months of
1995. The Company experienced increases in consulting fees and bad debt
expense offset by decreases in factoring fees and commissions in connection
with accounts receivable financing.
No royalty expense was incurred for the three months ended July 31,
1996 compared with $204,948 for the same three months of 1995. Royalties had
been due under the terms of a license agreement which was terminated in March
1996. No royalty expenses are anticipated for the remainder of 1996.
Interest expense decreased to $26,303 for the three months ended July
31, 1996 from $98,656 for the same three months of 1995. Interest expense for
the 1996 period reflects a reduced rate of interest and reduced principal
balances on short term loans from stockholders.
Interest income for the three months ended July 31, 1995 was $9,399
which resulted from interest accrued on a loan receivable from Clark Holcomb.
The net loss for the three month period ended July 31, 1996 of
$856,183 was the result of reduced sales combined with a continuation of fixed
co-op advertising costs and an increase in returns. The net loss for the three
month period ended July 31, 1995 of $626,653 was incurred principally as a
result of the significant expenditures made by the Company for its multi-media
advertising campaign and initial introduction of the SeQuester(R) products to
major retail pharmacy and mass merchandiser chains.
Net (loss) per common share was ($0.06) for the three months ended
July 31, 1996 and ($0.04) for the three months ended July 31, 1995 based on the
weighted average shares of common stock outstanding.
20
<PAGE> 21
For the six month period ended July 31, 1996 compared to the six month period
ended July 31, 1995:
Revenues are derived from sales of the dietary fat sequestrant product, an
appetite suppressant and a chromium based dietary supplement product all under
the name SeQuester(R). Gross revenues for the first six months ended July 31,
1996 were $2,066,439 vs. $4,849,102 for the six months ended July 31, 1995.
Gross Revenues have been reduced for a variety of discounts to provide Net
Revenues of $1,572,361 for the six months ended July 31, 1996 and $4,120,201
for the six months ended July 31, 1995 or a 62% decrease.
The significant decrease in Gross Revenues resulted from a hold on the
Company's marketing campaign pending (i) preparation of advertising materials
which could be utilized pending completion of clinical trials for the
SeQuester(R) 1 product (ii) the settlement of certain advertising litigation
and (iii) adequate financing. The Company also experienced difficulties in
maintaining adequate inventory levels of the SeQuester(R) 2 and SeQuester(R) 3
products. During April 1996, the pending advertising litigation was settled
and the initial phase of financing was completed. Clinical trials for the
SeQuester(R) 1 product have been extended through the third quarter of 1996.
The Company is currently rebuilding its marketing campaign. Newspaper
advertising commenced in major markets in July 1996 and was supported by radio
advertising which commenced in August 1996. Significant increases in Gross
Revenues are forecasted for the remainder of 1996.
<TABLE>
<CAPTION>
Six Months Ended
----------------
July 31, 1996 July 31, 1995
------------- -------------
<S> <C> <C>
Gross Revenues $2,066,439 $4,849,102
---------- ----------
Discounts:
Refunds and Returns $ 131,779 $ 30,706
Introductory and Promotional 120,633 350,759
Co-op Advertising 202,137 268,105
Other 39,529 79,331
---------- ----------
Total Discounts $ 494,078 $ 728,901
---------- ----------
Net Revenues $1,572,361 $4,120,201
========== ==========
</TABLE>
Gross profits are comprised of Net Revenues less direct costs of products,
packaging and services. The Cost of Sales of the dietary product for the six
month period ended July 31, 1996 was $693,497 or 44% of Net Revenues which
provided a Gross Profit of $878,864 or 56% of Net Revenues. For the six month
period ended July 31, 1995, the Cost of Sales was $977,605 or 24% of Net
Revenues, which provided a Gross Profit for the first six month period of the
previous year of $3,142,596 or 76% of Net Revenues. The decrease in Gross
Profit percent resulted primarily from continuation of
21
<PAGE> 22
fixed co-op advertising costs and an increase in returns. Increases in Gross
Revenues, forecasted for the second half of 1996, should improve Gross Profit
percentages.
<TABLE>
<CAPTION>
Six Months Ended
----------------
July 31, 1996 July 31, 1995
------------- -------------
$ % $ %
- - - -
<S> <C> <C> <C> <C>
Net Revenues 1,572,361 100 4,120,201 100
Cost of Goods Sold 693,497 44 977,605 24
------- -- ---------- --
Gross Profit 878,864 56 3,142,596 76
======= == ========= ==
</TABLE>
Advertising expenses consist of a multi-media advertising campaign
which included TV and radio, signage and other displays. Selling and marketing
expenses consist of sales commissions and salaries, coupon redemption,
warehouse, freight, supplies and travel expenses. General and administrative
expenses consist of salaries and benefits of officers and staff, accounting,
legal and other professionals, rent and occupancy costs, factoring commissions
and fees, bad debt expense, travel expenses and other administrative costs.
Advertising expense decreased significantly to $257,507 for the six
months ended July 31, 1996 from $2,049,002 for the first six months of 1995.
The Company placed a hold on its marketing campaign through June 1996 pending
(i) preparation of advertising materials which could be utilized pending
completion of clinical trials for the SeQuester(R) 1 product (ii) the
settlement of certain advertising litigation and (iii) adequate financing. The
Company also experienced difficulties in maintaining adequate inventory levels
of the SeQuester(R) 2 and SeQuester(R) 3 products. Inventory financing became
available in April 1996 and inventory buildups to adequate levels occurred by
August of 1996. Newspaper advertising commenced in major markets in July 1996
and was supported by radio advertising which commenced in August 1996. Pending
advertising litigation was settled in April 1996. A significant portion of the
1995 expense was paid by issuance of restricted shares of Company common stock.
In April 1996, the Company reached a settlement of the advertising litigation
which resulted in a gain of $845,482. The Company is currently evaluating all
of its marketing programs and anticipates significant advertising expenses
during the second quarter of 1996.
Selling and Marketing expenses decreased significantly to $406,305 for
the six months ended July 31, 1996 from $1,623,373 for the first six months of
1995. The Company experienced decreases in sales commissions due to a
reduction in rates for the 1996 period and decreases in coupon redemption,
freight and travel expenses. The decreases were partially offset by increases
in salaries, consulting fees and rent expense. Selling and marketing expenses
are expected to increase during the second half of 1996.
General and Administrative expenses increased to $903,917 for the six
months ended July 31, 1996 from $753,535 for the same six months of 1995. The
Company experienced increases in legal
22
<PAGE> 23
and accounting fees, consulting fees, bad debt expense, salaries, rent,
insurance and depreciation offset by decreases in factoring fees and
commissions in connection with accounts receivable financing.
No royalty expense was incurred for the six months ended July 31, 1996
compared with $339,990 for the same six months of 1995. Royalties had been due
under the terms of a license agreement which was terminated in March 1996. No
royalty expenses are anticipated for the remainder of 1996.
Interest expense decreased to $57,912 for the six months ended July
31, 1996 from $163,782 for the same six months of 1995. Interest expense for
the 1996 period reflects a reduced rate of interest and reduced principal
balances on short term loans from stockholders.
In April 1996, the Company settled certain advertising litigation
resulting in a gain of $845,482 and settled certain litigation, resulting in a
loss of $80,000, regarding a former sales broker in order to avoid the costs
inherent in defending the action.
In April 1996, Clark Holcomb resigned as a Director and President of
the Company and retired 3,800,000 shares of Company common stock personally
owned by him in satisfaction of the Company's outstanding loan receivable from
him in the amount of $2,223,638. As of January 31, 1996, the balance of
principal interest receivable on this loan was $2,145,964 which was expensed
for the twelve months ended January 31, 1996. An additional $70,143 was
expensed during the six months ended July 31, 1996.
Interest income for the six months ended July 31, 1995 was $11,469
which resulted from interest accrued on the loan receivable from Clark Holcomb.
The provision for income taxes is the minimum for State of California
Franchise taxes. No provision was made for Federal income tax since the
Company has significant net operating loss carryforwards.
The net loss for the six month period ended July 31, 1996 of $53,038
was the result of a gain on settlement of certain advertising litigation which
was offset by a loss from operations. The net loss for the six month period
ended July 31, 1995 of $1,777,217 was incurred principally as a result of the
significant expenditures made by the Company for its multi-media advertising
campaign and initial introduction of the SeQuester(R) products to major retail
pharmacy and mass merchandiser chains.
Net (loss) per common share was ($0.01) for the six months ended July
31, 1996 and ($0.11) for the six months ended July 31, 1995 based on the
weighted average shares of common stock outstanding.
The Company believes that net losses for the period from inception
through July 31, 1996 are consistent with the initial development of the
Company, the major advertising campaign and its introduction of the
SeQuester(R) products. The Company believes that the significant expenditures
planned for the advertising campaign for the second half of 1996 will result in
future revenues which
23
<PAGE> 24
should enable the Company to achieve profitable operations for the twelve
months ended January 31, 1997.
Liquidity and Capital Resources
Since inception, the Company has received capital for operations and
development from private investors in the Company's securities, issuance of
private party debt, loans from stockholders and financing from factors as well
as revenues from operations. Through July 31, 1996, revenues from operations
have been insufficient to satisfy operating expenses, product development and
legal costs. The Company, therefore has been dependent on private placement of
securities and loans from private investors and stockholders.
There are no assurances that private capital will continue to be
available or that revenues from operations will increase to meet the Company's
cash needs, particularly as these needs relate to funding manufacturing costs
and advertising campaigns and the development of new products which the Company
believes represents its most significant long-term growth opportunities.
As shown in the accompanying financial statements, the Company has
incurred net losses from inception to July 31, 1996 of $6,058,346 including a
net loss of $53,038 during the six months ended July 31, 1996.
Management devoted considerable effort during the first half of 1996
towards (i) obtaining additional equity financing (ii) settlement of remaining
litigation matters (iii) building adequate product inventories and (iiii)
rebuilding its marketing campaign and customer/broker relationships. Newspaper
advertising commenced in major markets in July 1996 and was supported by radio
advertising commencing in August 1996.
Management anticipates growth of revenues from its SeQuester(R)
products during the remainder of 1996. The Company introduced an appetite
suppressant and a chromium based dietary supplement in December, 1995.
Additional new health products are scheduled for introduction in the second
half of 1996 all under the trademark SeQuester(R).
For the fiscal year ended January 31, 1994, the Company had 545,500
shares issued and outstanding. During the year ended January 31, 1995 in the
acquisition of 100% of the outstanding common stock of SeQuester, the Company
issued 14,100,000 shares of its common stock, $0.002 par value, 100,000 shares
to the stockholders of the Company and 14,000,000 shares to the stockholders of
SeQuester. The Company also issued 1,181,500 additional shares of common stock
at various prices during the year ended January 31, 1995.
During the twelve months ended January 31, 1996, the Company issued an
aggregate of 1,267,500 shares of restricted Company stock as consideration for
approximately $4,135,000 of advertising. In April 1996, the Company reached a
settlement of certain advertising litigation which resulted in return and
retirement of 640,000 of these previously issued shares.
24
<PAGE> 25
In May 1995, the Company issued 275,000 shares of common stock to a
consultant for services and cash consideration of $55,000.
The Company retired 2,000,000 shares of common stock previously held
by an officer and stockholder of the Company as partial consideration for a
loan by the Company to that officer.
In May 1995, the Company issued 100,000 shares of restricted common
stock to IMT as consideration for past due royalties and interest in the amount
of $217,243.
In January 1996, the Company issued 225,000 shares of common stock to
a consultant, for services which were subsequently terminated.
During the twelve months ended January 31, 1996, the Company issued an
aggregate of 172,500 shares of common stock for other services.
During the twelve months ended January 31, 1996, the Company completed
private placements for an aggregate of 735,000 shares of restricted common
stock for cash consideration of $952,500.
In April 1996, the Company (i) retired 640,000 shares of common stock
in connection with settlement of certain advertising litigation (ii), retired
155,200 shares of common stock in connection with the termination of a
consulting agreement and (iii) issued 46,000 shares of common stock for other
services.
In April 1996, the Company issued 1,200,000 shares of common stock for
gross proceeds of approximately $1,800,000 in a private placement. Upon
completion of this financing, the Company issued to the placement agent 300,000
warrants to purchase additional shares of common stock at $2.50 per share.
These warrants have a five year life and contain certain registration rights.
In connection with this financing, Clark Holcomb resigned as a
Director and President of the Company and agreed to manage the sales and
marketing programs on the following terms: (1) an annual base salary of
$100,000; (2) a sales incentive equal to 2% of net sales over the prior base
quarter; provided that, the Company has net income during the subject quarter;
and (3) an equity incentive equal to the sales incentive, and subject to the
same conditions, based on the average bid price during the subject quarter.
The Company will not increase the salaries of any of its officers or make any
loan to any officer, director or shareholder for a period of twelve months.
Clark Holcomb retired 3,800,000 shares of Company common stock personally owned
by him in satisfaction of the Company's outstanding loan receivable from him in
the amount of $2,223,638.
In May 1996, the Company issued 35,000 shares of common stock to
commission sales brokers and 40,000 shares of common stock in settlement of
litigation.
In June 1996, the Company issued 235,294 shares of common stock for
gross proceeds of approximately $449,000 in a private placement.
25
<PAGE> 26
In June 1996, the Company issued 300,000 shares of common stock to a
consultant for services and cash consideration of $15,000.
In June 1996, the Company entered into a financing agreement pursuant
to which the Company agreed to issue a maximum of 1,000,000 shares of common
stock offered at a price per share equal to the lesser of (i) 50% below the
closing bid price of the Company's common stock or (ii) $2.00 per share. A
broker's commission of 10% is payable in connection with any transactions
consummated under this agreement.
In June 1996, 235,294 shares were issued with the balance of this
financing currently scheduled to be completed by September 30, 1996.
In August 1996, the Company issued (i) 150,000 shares of common stock
under the terms of an independent contractor agreement for advertising, design
and marketing services and (ii) 4,505 shares of common stock to commission
sales brokers.
From February to October 1995, the Company factored a substantial
portion of its accounts receivable to accelerate cash flow for operations. An
agreement with the factor was terminated in October 1995, and the Company
executed a promissory note for the sum of $750,000, or the aggregate unpaid
principal amount of advances up to the sum of $750,000, with interest payable
at 10% per annum on the outstanding balance, with a current shareholder. The
note plus interest is payable based upon 50% of net collections from product
sales with any remaining balance due in full on or before October 17, 1996.
The note is subject to a security agreement which covers all of the accounts
receivable, contract rights and inventory of the Company. As of July 31, 1996,
the balance of principal and interest outstanding of this note was $334,501.
In August 1996, the Company entered into a stock purchase agreement with the
same stockholder wherein the Company issued 125,000 shares of common stock for
satisfaction of $250,000 of the principal balance of the secured promissory
dated October 17, 1995 due to that stockholder. In connection with this
transaction, the Company entered into a put option agreement wherein that
stockholder has the right, upon his election, to sell to the Company a total of
125,000 shares of Company common stock at $2.00 per share at any time between
October 17, 1996 and April 17, 1997.
As of July 31, 1996, the Company's working capital position increased
from a negative $1,315,263 at January 31, 1996 to a positive $259,851 at July
31, 1996. Increases in current assets include increases in cash of $544,557
and accounts receivable of $130,781, offset by a decrease in inventory of
$84,912 and a decrease in other assets of $65,281. Changes in current
liabilities include decreases in accounts payable of $466,590, accrued expenses
of $110,228 and accrued advertising of $70,095. Increases in current
liabilities include commissions payable of $17,910. Notes payable and loans
from stockholders decreased $420,966. Current assets increased a net of
$525,145 and current liabilities decreased a net of $1,049,969 for the six
month period ended July 31, 1996, primarily as a result of private placements
in April, June and July 1996. Negative cash flows from operations of $53,038
were reduced by non-cash charges for depreciation and amortization of $119,419
and issuance of common stock for advertising and other expenses of $32,500 and
were increased by retirement/issuance of stock of $479,762 in connection with
settlements of litigation.
26
<PAGE> 27
The Company currently has no firm commitments for material capital
expenditures. The Company does not anticipate that future compliance with
existing environmental and occupational safety regulations will have a
significant impact on its financial condition or future operating results.
The Company does not believe that general inflation would have a
material effect on its operations.
Included in the Notes to the Interim Financial Statements and in this
Item 2. Management's Discussion and Analysis or Plan of Operation are certain
forward-looking statements reflecting the Company's current expectations.
Although the Company believes that its expectations are based on reasonable
assumptions, there can be no assurance that the Company's financial goals or
expectations will be realized. Numerous factors (such as the availability of
capital and the effectiveness of advertising) may affect the Company's actual
results and may cause results to differ materially from those expressed in
forward-looking statements made by the Company.
27
<PAGE> 28
PART II. OTHER INFORMATION
Item 1. - Legal Proceedings:
The Company is involved in several legal actions. For a description of this
litigation and certain other pending legal matters involving the Company refer
to the Company's Form 10-QSB - Part I for the three months ended July 31, 1996
which are incorporated herein by reference.
Item 6. - Exhibits and Reports on Form 8-K:
(b) On July 8, 1996, the Company filed a report on Form 8-K which
reported under Item 5 of such form.
(27) Financial Data Schedule (included only in EDGAR filing).
28
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
KCD HOLDINGS INCORPORATED
-------------------------
(Registrant)
Dated September 12, 1996 By: /s/ Wellington A. Ewen
---------------------------------
Wellington A. Ewen
President
Pursuant to the requirements of Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Wellington A. Ewen President, Chief Financial Officer, September 12, 1996
- -------------------------- and Director
Wellington A. Ewen
/s/ Bonnie L. Richards Vice President, Secretary, and Director September 12, 1996
- ----------------------------------
Bonnie L. Richards
</TABLE>
29
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JUL-31-1996
<CASH> 592,836
<SECURITIES> 0
<RECEIVABLES> 568,751
<ALLOWANCES> 56,872
<INVENTORY> 779,635
<CURRENT-ASSETS> 1,943,854
<PP&E> 214,900
<DEPRECIATION> 55,503
<TOTAL-ASSETS> 2,240,690
<CURRENT-LIABILITIES> 1,684,003
<BONDS> 0
0
0
<COMMON> 27,727
<OTHER-SE> 528,960
<TOTAL-LIABILITY-AND-EQUITY> 2,240,690
<SALES> 1,572,361
<TOTAL-REVENUES> 1,572,361
<CGS> 693,497
<TOTAL-COSTS> 693,497
<OTHER-EXPENSES> 872,390
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,912
<INCOME-PRETAX> (51,438)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> (53,038)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (53,038)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
