<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSBA
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended April 30, 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
SEQUESTER HOLDINGS, INCORPORATED
----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 95-4532103
- ------------------------------ --------------------
(State or other jurisdiction of (formerly 95-4029439)
incorporation or organization number) (I.R.S. employer
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
KCD HOLDINGS INCORPORATED
----------------------------------------------------------------------------
(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 May 31, 1997
--------------------- ------------
<S> <C>
$.002 par value 18,167,411
</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
SEQUESTER HOLDINGS, INCORPORATED
(formerly KCD HOLDINGS INCORPORATED)
Index
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at F-3
April 30, 1996 (unaudited) and January 31, 1996
Consolidated Statements of Operations for the three F-4
months ended April 30, 1996 (unaudited) and 1995
(unaudited)
Consolidated Statement of Stockholders' Investment (Deficit) F-5
for the three months ended April 30, 1996 (unaudited)
Consolidated Statement of Cash Flows F-6
for the three months ended April 30, 1996 (unaudited)
and 1995 (unaudited)
Notes to Consolidated Financial Statements F-7
Item 2. Management's Discussion and Analysis or Plan of 21
Operations.
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
SEQUESTER HOLDINGS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
APRIL 30, 1996 JANUARY 31, 1996
-------------- -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,547,323 $ 48,279
Accounts receivable, net 735,224 381,098
Accounts receivable - other 115,065 115,065
Inventory 644,519 864,547
Other 1,508 9,720
----------- -----------
Total current assets 3,043,639 1,418,709
----------- -----------
PROPERTY AND EQUIPMENT, net 171,878 184,357
----------- -----------
OTHER ASSETS:
Deposits 3,938 3,938
Intangibles, net 2,269 2,333
----------- -----------
Total other assets 6,207 6,271
----------- -----------
Total assets $ 3,221,724 $ 1,609,337
=========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 392,005 $ 836,484
Accrued expenses 263,978 224,011
Accrued advertising 144,978 173,417
Commissions payable 132,081 31,948
Royalties payable 150,515 150,515
Collateralized note payable-related party 635,250 621,018
Loans from stockholders 713,227 696,579
----------- -----------
Total current liabilities 2,432,034 2,733,972
----------- -----------
Commitments and contingencies (see Notes)
STOCKHOLDERS' INVESTMENT (DEFICIT)
Common stock, par value $.002 per share; 25,000,000 shares 26,506 33,204
authorized; issued and outstanding 13,252,800 as of April 30, 1996
and 16,602,000 as of January 31, 1996
Additional paid in capital 7,077,078 8,365,580
Accumulated deficit (5,274,663) (6,005,308)
Prepaid advertising and consulting fees (1,039,231) (3,518,111)
----------- -----------
Total stockholders' investment (deficit) 789,690 (1,124,635)
----------- -----------
Total liabilities and stockholders' investment (deficit) $ 3,221,724 $ 1,609,337
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE> 4
SEQUESTER HOLDINGS, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Net Revenues $1,116,259 $ 888,941
Cost of Goods Sold 306,216 219,610
---------- ----------
Gross Profit 810,043 669,331
---------- ----------
Operating Expenses:
Advertising 36,519 818,769
Selling and marketing 197,610 412,398
General and administrative 507,399 389,030
Royalties - 135,042
---------- ----------
741,528 1,755,239
---------- ----------
Profit (Loss) from Operations 68,515 (1,085,908)
---------- ----------
Non-Operating Income(Expense)
Interest expense (31,609) (65,126)
Interest income - 2,070
Litigation Settlements, net 765,482 -
Payments to Officer and Stockholder (70,143) -
---------- ----------
663,730 (63,056)
Profit (Loss) before Income Taxes 732,245 (1,148,964)
Provision for Income Taxes 1,600 1,600
---------- -----------
Net Profit (Loss) $ 730,645 ($1,150,564)
========== ===========
Weighted Average Shares of
Common Stock Outstanding: 16,041,009 15,986,607
========== ===========
Net Profit (Loss) per share: $0.05 ($0.07)
========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE> 5
SEQUESTER HOLDINGS, INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT (DEFICIT)
FOR THE THREE MONTHS ENDED APRIL 30, 1996
<TABLE>
<CAPTION>
Common Stock Total
--------------------------- 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) - 1,380,238 (539,762)
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 - - - 730,645 - 730,645
Amortization of prepaid
advertising and consulting
fees - - - - 51,042 51,042
=========== ========= =========== =========== =========== ===========
Balance April 30, 1996
(Unaudited) 13,252,800 26,506 7,077,078 (5,274,663) (1,039,231) 789,690
=========== ========= =========== =========== =========== ===========
</TABLE>
The acompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE> 6
SEQUESTER HOLDINGS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited) (Unaudited)
<S> <C> <C>
Net Profit (Loss) $ 730,645 ($1,150,564)
Adjustments to reconcile Net Profit (Loss) to net cash used in
operating activities:
Depreciation and amortization 63,585 11,331
Stock issued for advertising and other services 15,000 135,000
Litigation settlement (539,762) -
----------- -----------
269,468 (1,004,233)
----------- -----------
(Increase) / decrease in assets:
Accounts receivable, net (354,126) (343,756)
Inventory 220,028 (17,190)
Deposits - (3,938)
Other current assets 8,212 (26,468)
Increase / (decrease) in liabilities:
Accounts payable (444,479) 634,745
Accrued expenses 39,967 115,310
Accrued advertising (28,439) 646,291
Commissions payable 100,133 (39,548)
Royalties payable - 45,042
----------- -----------
(458,704) 1,010,488
----------- -----------
Net cash provided by (used in) operating activities (189,236) 6,255
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan receivable-officer and stockholder - (604,626)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of common stock (7,600) -
Proceeds from sale of common stock 1,665,000 -
Collateralized note payable-related party 14,232 -
Loans from stockholders 16,648 594,030
----------- -----------
Net cash provided by financing activities 1,688,280 594,030
NET INCREASE IN CASH 1,499,044 (4,341)
CASH, BEGINNING BALANCE 48,279 9,088
----------- -----------
CASH, ENDING BALANCE $ 1,547,323 $ 4,747
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE> 7
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1996 and January 31, 1996
1. RECONCILIATION
The Company's previously filed Form 10-QSB included preliminary information and
certain other estimates. Based on subsequent information the Company prepared
the following reconciliation to amend the balances. The accompanying financial
statements, notes thereto and management's discussion and analysis or plan of
operations have been amended to incorporate these changes and current
developements through the date of this Form 10-QSBA.
AMENDED BALANCE SHEET
<TABLE>
<CAPTION>
APRIL 30, 1996 APRIL 30, 1996 NET
AS AMENDED AS REPORTED CHANGE (a)
-------------- -------------- ---------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 1,547,323 $ 1,547,323 $ -
Accounts receivable, net 735,224 735,224 -
Accounts receivable - other 115,065 115,065 -
Inventory 644,519 644,519 -
Other 1,508 1,508 -
----------- ----------- --------
Total current assets 3,043,639 3,043,639 -
----------- ----------- --------
PROPERTY AND EQUIPMENT, net 171,878 171,878 -
----------- ----------- --------
OTHER ASSETS:
Deposits 3,938 3,938 -
Intangibles, net 2,269 2,269 -
----------- ----------- --------
Total other assets 6,207 6,207 -
----------- ----------- --------
Total assets $ 3,221,724 $ 3,221,724 -
=========== =========== ========
CURRENT LIABILITIES:
Accounts payable $ 392,005 $ 392,005 -
Accrued expenses 263,978 226,478 37,500
Accrued advertising 144,978 144,978 -
Commissions payable 132,081 97,081 35,000
Royalties payable 150,515 150,515 -
Collateralized note payable-related party 635,250 635,250 -
Loans from stockholders 713,227 713,227 -
----------- ----------- --------
Total current liabilities 2,432,034 2,359,534 72,500
----------- ----------- --------
Commitments and contingencies (see Notes)
STOCKHOLDERS' INVESTMENT (DEFICIT)
Common stock, par value $.002 per share; 25,000,000 shares 26,506 26,506 -
authorized; issued and outstanding 13,252,800 as of April 30,
1996
Additional paid in capital 7,077,078 7,077,078 -
Accumulated deficit (5,274,663) (5,202,163) (72,500)
Prepaid advertising and consulting fees (1,039,231) (1,039,231) -
----------- ----------- --------
Total stockholders' investment 789,690 862,190 (72,500)
----------- ----------- --------
Total liabilities and stockholders' investment $ 3,221,724 $ 3,221,724 -
=========== =========== ========
</TABLE>
F-7
<PAGE> 8
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1996 and January 31, 1996
AMENDED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
APRIL 30, 1996 APRIL 30, 1996 NET
AS AMENDED AS REPORTED CHANGE (a)
-------------- -------------- ---------
<S> <C> <C> <C>
Net Revenues $ 1,116,259 $ 1,116,259 $ -
Cost of Goods Sold 306,216 306,216 -
------------ ------------ --------
Gross Profit 810,043 810,043 -
------------ ------------ --------
Operating Expenses:
Advertising 36,519 36,519 -
Selling and marketing 197,610 162,610 35,000
General and administrative 507,399 469,899 37,500
Royalties - - -
------------ ------------ --------
741,528 669,028 72,500
------------ ------------ --------
Profit from Operations 68,515 141,015 (72,500)
------------ ------------ --------
Non-Operating Income(Expense)
Interest expense (31,609) (31,609) -
Interest income - - -
Litigation Settlements, net 765,482 765,482 -
Payments to Officer and Stockholder (70,143) (70,143) -
------------ ------------ --------
663,730 663,730 -
Profit before Income Taxes 732,245 804,745 (72,500)
Provision for Income Taxes 1,600 1,600 -
------------ ------------ --------
Net Profit $ 730,645 $ 803,145 (72,500)
============ ============ ========
Weighted Average Shares of
Common Stock Outstanding: 16,041,009 16,041,009 -
============ ============ ========
Net Profit per share: $ 0.05 $ 0.05 -
============ ============ ========
</TABLE>
F-8
<PAGE> 9
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1996 and January 31, 1996
<TABLE>
<CAPTION>
AMENDED STATEMENT OF CASH FLOWS
APRIL 30, 1996 APRIL 30, 1996 NET
AS AMENDED AS REPORTED CHANGE (a)
-------------- -------------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Profit $ 730,645 $ 803,145 ($72,500)
Adjustments to reconcile Net Profit to net cash used in operating
activities:
Depreciation and amortization 63,585 63,585 -
Stock issued for advertising and other services 15,000 15,000 -
Litigation settlement (539,762) (539,762) -
----------- ----------- --------
269,468 341,968 (72,500)
----------- ----------- --------
(Increase) / decrease in assets:
Accounts receivable, net (354,126) (354,126) -
Inventory 220,028 220,028 -
Other current assets 8,212 8,212 -
Increase / (decrease) in liabilities: -
Accounts payable (444,479) (444,479) -
Accrued expenses 39,967 2,467 37,500
Accrued advertising (28,439) (28,439) -
Commissions payable 100,133 65,133 35,000
Royalties payable - - -
----------- ----------- --------
(458,704) (531,204) 72,500
----------- ----------- --------
Net cash used in operating activities (189,236) (189,236) -
----------- ----------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of common stock (7,600) (7,600) -
Proceeds from sale of common stock 1,665,000 1,665,000 -
Collateralized note payable-related party 14,232 14,232 -
Loans from stockholders 16,648 16,648 -
----------- ----------- --------
Net cash provided by financing activities 1,688,280 1,688,280 -
NET INCREASE IN CASH 1,499,044 1,499,044 -
CASH, BEGINNING BALANCE 48,279 48,279 -
----------- ----------- --------
CASH, ENDING BALANCE $ 1,547,323 $ 1,547,323 $ -
=========== =========== ========
</TABLE>
(a) The net change resulted from adjustments to the fair market value assigned
to Company common stock which was issued to a consultant for services and to
commission sales brokers.
F-9
<PAGE> 10
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996 AND JANUARY 31, 1996
2. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
SeQuester Holdings, Incorporated ("the Company"), formerly KCD Holdings
Incorporated, was incorporated in the state of Nevada on February 13, 1986. 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 only nominal net assets and 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.
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 names SeQuester(R),
ChromaQuest(TM) and PhytoQuest(TM). These products are sold to national drug and
food chain retailers, wholesalers and mass merchandisers throughout the United
States using several of the nation's 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, which consisted of 100,000 shares to the
stockholders of the Company for cancellation of indebtedness then outstanding
and 14,000,000 shares to the stockholders of SeQuester when unrestricted shares
were trading at approximately $1.00 per share, the Company acquired 100% of the
ownership of SeQuester, as a reverse merger. The stock exchange was recorded as
a recapitalization of SeQuester using the Company's historical cost. 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 Company's activities through 1995 consisted primarily of the development and
marketing of its dietary supplement product, SeQuester(R) 1. The Company
introduced an appetite suppressant, SeQuester(R) 2 and a chromium based dietary
supplement, ChromaQuest(TM) in addition to SeQuester(R) 1 in December 1995.
Additionally, the Company introduced its fourth product, PhytoQuest(TM), in
October 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 fiscal 1998, 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 preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Certain reclassifications were made to the 1995 consolidated financial statement
presentation to conform with the 1996 consolidated financial statement
presentation.
F-10
<PAGE> 11
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996 AND JANUARY 31, 1996
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 three
months ended April 30, 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 Reports on
Form 10-KSB for the years ended January 31, 1997 and 1996 as filed with the
Securities and Exchange Commission. All significant intercompany balances and
transactions have been eliminated in consolidation.
3. 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.
(b) Fair Value of Financial Instruments and Credit Risk -- The carrying value of
cash, receivables and payables approximates their fair values due to the
relatively short maturity of these instruments.
Significant customers accounting for 54% of revenues for the three months ended
April 30, 1996 include American Drug Stores 27%, Eckerd Drug 15% and Revco D.S.
Inc. 12%. Major customers accounting for 51% of revenues for the three months
ended April 30, 1995 include Wal-Mart Stores 33%, K-Mart Corp. 10% and Mark
Stevens (CVS Inc.) 8%.
(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 April 30, 1996 and at January 31, 1996 was $52,163.
(d) Advertising -- The Company expenses advertising costs as incurred.
F-11
<PAGE> 12
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996 AND JANUARY 31, 1996
(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>
April 30, 1996 January 31, 1996
-------------- ----------------
<S> <C> <C>
Product Units $494,146 $704,741
Packaging and Product Displays 145,685 153,578
Shipping Supplies 4,688 6,228
-------- --------
$644,519 $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 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.
(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 ChromaQuest(TM)) and
introduced a fourth product, PhytoQuest(TM) in October 1996.
F-12
<PAGE> 13
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996 AND JANUARY 31, 1996
- The Company has a significant accumulated deficit and has incurred
substantial losses from operations for the period from inception through
January 31, 1996.
- The marketing of the Company's products is 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) The Company accounts for stock-based employee compensation as prescribed by
APB Opinion 25, and has adopted the disclosure provisions of FAS 123. FAS 123
requires pro forma disclosures of net income and earnings per share as if the
fair value based method of accounting for stock-based awards had been applied.
The adoption of FAS 123 disclosure provisions has no effect on either the
Company's balance sheet or its results of operations.
4. REVENUES
In the normal course of business during the three month periods ended April 30,
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 $1,240,742 $1,175,173
---------- ----------
Discounts:
Refunds and Returns $ 13,882 $ 20,778
Introductory and Promotional 41,613 155,277
Co-op Advertising 49,299 98,409
Other 19,689 11,768
---------- ----------
Total Discounts $ 124,483 $ 286,232
---------- ----------
Net Revenues $1,116,259 $ 888,941
========== ==========
</TABLE>
F-13
<PAGE> 14
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996 AND JANUARY 31, 1996
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
April 30, 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 (43,022) (30,543)
--------- ---------
$ 171,878 $ 184,357
========= =========
</TABLE>
6. 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, from the
Company's cash flow from operations, 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 certain advertising agreements
and 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 personally owned by him
in further satisfaction of the Company's outstanding loan receivable from him
which was $2,223,707 at that date. An additional $70,143 was expensed during the
three months ended April 30, 1996.
7. LOANS PAYABLE TO STOCKHOLDERS AND COLLATERALIZED PROMISSORY NOTE
(a) On April 30, 1996, the Company owed stockholders the amount of $713,227
including principal and interest. These loans are interest bearing, at a rate of
9% per annum, and have varying repayment terms, all of which mature on May 1,
1997, principally for the purpose of providing the Company with working capital.
These notes are subject to a security agreement which covers all of the accounts
receivable of the Company.
In March 1997, the Company entered into an agreement with these stockholders to
convert the outstanding principal balance of such loans as of March 31, 1997 to
approximately 1,047,242 restricted common shares of Company stock. The principal
balance of such loans will be converted at a price 25% below the closing bid
price of the Company's common stock as of March 31, 1997
F-14
<PAGE> 15
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996 AND JANUARY 31, 1996
(approximately $0.328). These restricted shares were issued in May 1997 and
contain certain registration rights.
(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 Company issued 25,000 shares of restricted common stock as
consideration for the note and expensed $62,500 as interest. The note, principal
plus interest, was 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
was subject to a security agreement which covered all of the accounts
receivable, contract rights and inventory of the Company. In August 1996, the
balance of principal and interest outstanding of this note was satisfied. In
August 1996, the Company entered into a stock purchase agreement with the same
stockholder wherein the Company issued 125,000 shares of restricted common stock
in satisfaction of $250,000 of the principal balance of the 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 had 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. The put option agreement expired on April
17, 1997. As of April 30, 1996, the balance of principal and interest
outstanding of this note was $635,250.
8. 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,
allowance for doubtful accounts, 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 2011. Net
operating loss carryforwards for the State of California are approximately
$2,318,000 and are generally available to reduce taxable income through the year
2001. Net operating loss carryforwards for the State of New Jersey are
approximately $327,000 and are generally available to reduce taxable income
through 2003. 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 two taxable years ended January 31,
1996, the Company incurred a 50% or more change in ownership. Therefore, the
availability of the Company's net operating loss carryforwards may be limited.
The provision for income taxes consists of the California and New Jersey state
minimum taxes imposed on corporations.
The gross deferred tax asset balance as of January 31, 1996 was approximately
$1,946,000. A 100% valuation reserve has been established against the deferred
tax assets, as the utilization of the loss carryforwards cannot reasonably be
assured.
F-15
<PAGE> 16
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996 AND JANUARY 31, 1996
9. 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 April 30,
1996, $530,187 of unused advertising was 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 exclusive rights for the Company 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.
10. STOCKHOLDERS' INVESTMENT (DEFICIT)
(a) Common Stock -- In January 1996, the Company issued 225,000 shares of common
stock for management consulting services to be provided over a twenty-four month
period. The Company recorded $1,518,750 (the value of the shares) as prepaid
consulting fees which was offset to equity. In January 1996, these services were
terminated and 155,200 of the shares issued were returned to the Company and
retired. Prepaid consulting fees were reduced by $1,047,600 (the value of the
shares retired). The balance of the issued shares of 69,800 are in litigation.
During the twelve months ended January 31, 1996, the Company issued 1,267,500
shares of restricted common stock as consideration for $4,135,000 of
advertising. In April 1996, in connection with a settlement agreement, 640,000
of the shares issued were retired and prepaid advertising was reduced by
$1,380,238.
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.
In April 1996, the Company retired 3,800,000 shares of common stock, at par
value, in satisfaction of the Company's outstanding loan to Clark Holcomb.
In April 1996, the Company issued 1,200,000 shares of common stock for net
proceeds of $1,665,000 in a private placement. Upon completion of this
transaction, 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.
During the three months ended April 30, 1996, the Company issued 46,000 shares
of restricted common stock for other services
F-16
<PAGE> 17
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996 AND JANUARY 31, 1996
(b) Public Warrants -- The outstanding public warrants of the Company at April
30, 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>
In May 1996, the Company extended the date within which the outstanding warrants
of the Company 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 three months ended April 30, 1996 or the twelve months ended January 31,
1996.
11. 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 ("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. In February 1997, the Company settled these disputed and doubtful claims
for the sum of $24,000 to avoid further litigation costs inherent in defending
the action, which was dismissed with prejudice.
F-17
<PAGE> 18
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996 AND JANUARY 31, 1996
Federal Trade Commission
The advertising and promotion of the Company's products is subject to regulation
by the Federal Trade Commission ("FTC") under the Federal Trade Commission Act
("FTCA"). Among other requirements, the FTC requires that all claims made in
advertising be truthful and substantiated in accordance with standards that have
been developed by the FTC. The Company's advertising claims for its SeQuester(R)
products were recently the subject of inquiry by the Seattle Regional Office of
the FTC which alleged that previous claims for the SeQuester(R) 1 product were
false and/or unsubstantiated in violation of the FTCA. On December 18, 1996, the
Company's Board of Directors approved a proposed administrative consent order
which, if accepted by the FTC, would require the Company to pay $150,000 to the
FTC and maintain adequate substantiation for future advertising claims. The
proposed consent order would also require Clark M. Holcomb, a former officer and
director of the Company and Bonnie L. Richards, a current officer and director
of the Company, to maintain adequate substantiation for the future advertising
claims and would impose joint and several liability for the $150,000 payment to
the FTC between the Company and Ms. Richards. The proposed consent order will
not become final until it is approved by the FTC after being published for
notice and comment. In the event the proposed consent order is not approved, the
Company intends to resume settlement discussions with the FTC. Once the proposed
order becomes final, the Company, Mr. Holcomb and Ms. Richards will be subject
to substantial monetary penalties in the event of non-compliance. Such
penalties, if imposed, could have a material adverse effect on the Company.
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
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 which was 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
PBC; Peter D. Bistrian; HC&B; M. Richard Cutler; Gateway Financial Group, Inc.
("GFG"); and Lisa Paige for breach of written contract; legal malpractice;
intentional misrepresentation; negligent
F-18
<PAGE> 19
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996 AND JANUARY 31, 1996
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 racketeering influenced and corrupt organizations
act. The Company reached a settlement with defendants PBC; Peter D. Bistrian;
HC&B and M. Richard Cutler in which certain of the foregoing defendants would
pay the Company the sum of $225,000 to settle this action with respect to all
named defendants, exclusive of GFG. The settlement is contingent upon, amongst
other things, the execution of a release by Peter Bistrian in favor of HC&B and
M. Richard Cutler, and a determination of good faith settlement by the court. On
May 12, 1997 defendant GFG filed a cross-complaint against the Company, the
Company's former President and other parties for equitable indemnity; partial
indemnity and declaratory relief. The Company believes that the allegations
contained in the cross-complaint are without merit and intends to respond to the
cross-complaint accordingly.
KCD vs. Performance Financial Services, Inc. and Fed Funds, Incorporated
In January 1996, the Company filed a suit against Fed Funds, Incorporated
("FedFunds") and Performance Financial Services, Inc. ("Performance") 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 resulting in a
cash payment received by the Company, in the amount of $57,000. In October 1996,
the Company was awarded a judgment of $500,000 against Performance. No value was
recorded for this award as Performance was insolvent and all amounts owed were
deemed to be uncollectible. Recorded remaining balances due from Performance of
$58,065 were written off during the nine months ended October 31, 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
F-19
<PAGE> 20
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996 AND JANUARY 31, 1996
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. In October 1996, EHI dismissed its complaint, with
prejudice, and the Company dismissed its cross-complaint, with prejudice, in
accordance with the terms of a Settlement Agreement and Mutual Release (the
"Settlement Agreement") resolving the foregoing actions. The terms of the
Settlement Agreement provide that: (i) EHI will retain all royalties and license
fees previously paid by the Company, with all accounts and obligations between
KCD and EHI and its parent Interactive Medical Technologies, Ltd. ("IMT") deemed
paid in full; (ii) IMT will retain the 100,000 shares of the Company's stock
previously issued to it; (iii) to the extent EHI or IMT has any intellectual
property rights or patent interests relative to any fat sequestrant product, the
Company is granted an exclusive worldwide perpetual royalty free license to such
rights; (iv) the parties agree not to interfere in any manner with the other
parties' relationships with manufacturers, marketers or vendors; and (v) the
parties agreed to mutual general releases.
David J. Krizman vs. KCD Incorporated, et. al.
In April 1997, David Krizman, individually and as attorney in fact, sued the
Company and the Company's former President, Clark M. Holcomb, in the United
States Bankruptcy Court for the Central District of California. The Complaint
alleges that the Company breached a written contract by failing to transfer
shares of the Company's common stock owned by Mr. Holcomb to the plaintiff. It
is the Company's position that it has no obligation or liability to plaintiff in
connection with this matter other than to facilitate the transfer of the shares
in the ordinary course of business in compliance with applicable securities laws
and orders applicable to Mr. Holcomb. The Company intends to respond to the
Complaint accordingly and to vigorously defend this action.
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 August 1996, the Company settled certain litigation
regarding a license agreement and royalties with Effective Health Inc., a
wholly-owned subsidiary of Interactive Medical Technologies Ltd., which resulted
in a net gain of $151,245. In December 1996, the Company approved a proposed
administrative consent order with the FTC regarding alleged unsubstantiated
advertising claims which would require the Company to pay $150,000 to the FTC.
In February 1997, the Company settled certain other disputed and doubtful claims
for the sum of $24,000 to avoid further litigation costs inherent in defending
the action.
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
April 30, 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.
F-20
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
General
SeQuester Holdings, Incorporated ("the Company"), formerly KCD Holdings
Incorporated, was incorporated in the state of Nevada on February 13, 1986. 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 only nominal net assets and 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.
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 names SeQuester(R),
ChromaQuest(TM) and PhytoQuest(TM). These products are sold to national drug and
food chain retailers, wholesalers and mass merchandisers throughout the United
States using several of the nation's largest food brokerage firms.
In October 1994, the Company acquired 100% of the ownership of
SeQuester in a reverse merger by issuing 14,100,000 shares of its common stock,
$0.002 par value, which consisted of 100,000 shares to the stockholders of the
Company for cancellation of indebtedness then outstanding and 14,000,000 shares
to the stockholders of SeQuester when unrestricted shares were trading at
approximately $1.00 per share. The stock exchange was recorded as a
recapitalization of SeQuester using the Company's historical cost. SeQuester,
which is engaged in the business of marketing and distributing dietary aids,
commenced its operations in February 1994.
The Company's activities through 1995 consisted primarily of the
development and marketing of its dietary supplement product, SeQuester(R) 1. In
December 1995, the Company introduced an appetite suppressant (SeQuester(R) 2)
and a chromium based dietary supplement (ChromaQuest(TM)) in addition to
SeQuester(R) 1. Additionally, the Company introduced its fourth product,
PhytoQuest(TM), in October 1996. It is composed of phytosterols, which in recent
research shows potential to inhibit the gastrointestinal absorption of
cholesterol. Additional new health and beauty aid category products are
scheduled for introduction in 1997, 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) products 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 fat. They understand
that reduced caloric intake is part of any effective weight loss plan and they
are inclined to use the product as directed.
21
<PAGE> 22
Market leaders in the weight reduction industry include Dexatrim(TM)
and Accutrim(TM), with several additional smaller product marketers.
Market research indicates that there is a substantial market for
dietary supplements that are natural, drug-free products. SeQuester(R) 1 and
ChromaQuest(TM) 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.
PhytoQuest(TM) contains plant sterols. All of the ingredients comprising the
SeQuester(R) 1 product are included in published Food and Drug Administration
guidelines for ingredients generally recognized as safe ("GRAS").
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.
The Company believes that there is a tremendous possibility to assume the lead
in this market, well ahead of any other participants who may attempt to enter
the market.
Results of Operations
The Company commenced operations for the marketing and distribution of
its SeQuester(R) products in the first calendar months of 1994. Certain costs
and necessary expenditures were incurred that will 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 results of these efforts have brought the Company's
SeQuester(R) products to national attention.
For the three month period ended April 30, 1996 compared to the three month
period ended April 30, 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 April 30, 1996
increased to $1,240,742 from $1,175,173 for the three months ended April 30,
1995.
Gross Revenues have been reduced for a variety of discounts to provide
Net Revenues of $1,116,259 for the three months ended April 30, 1996 and
$888,941 for the three months ended April 30, 1995 or a 26% increase. The
increase is attributed to a concerted marketing campaign in calendar year 1995,
introduction of new SeQuester(R) products in December 1995 and a significant
increase in the number of retail outlets carrying the SeQuester(R) products.
22
<PAGE> 23
<TABLE>
<CAPTION>
Three Months Ended
------------------
April 30, 1996 April 30, 1995
-------------- --------------
<S> <C> <C> <C> <C>
$ % $ %
- - - -
Gross Revenues 1,240,742 100 1,175,173 100
--------- --- --------- ---
Discounts:
Refunds and Returns 13,882 1 20,778 2
Introductory and Promotional 41,613 3 155,277 13
Co-op Advertising 49,299 4 98,409 8
Other 19,689 2 11,768 1
--------- --- --------- ---
Total Discounts 124,483 10 286,232 24
--------- --- --------- ---
Net Revenues 1,116,259 90 888,941 76
========= === ========= ===
</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 April 30, 1996 was $302,216 or 27% of Net Revenues
which provided a Gross Profit of $810,043 or 73% of Net Revenues. For the three
month period ended April 30, 1995, the Cost of Sales was $219,610 or 25% of Net
Revenues, which provided a Gross Profit for the first three month period of the
previous year of $669,331 or 75% of Net Revenues. The decrease in Gross Profit
percent resulted from an increase in revenues from the new SeQuester(R) products
which have a slightly lower gross profit margin.
<TABLE>
<CAPTION>
Three Months Ended
------------------
April 30, 1996 April 30, 1995
-------------- --------------
<S> <C> <C> <C> <C>
$ % $ %
- - - -
Net Revenues 1,116,259 100 888,941 100
Cost of Goods Sold 306,216 27 219,610 25
--------- --- ------- ---
Gross Profit 810,043 73 669,331 75
========= === ======= ===
</TABLE>
Advertising expenses consist of a multi-media advertising campaign
which included magazines, 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 $36,519 for the three months ended
April 30, 1996 from $818,769 for the three months of 1995 as the Company placed
its marketing campaign on hold, pending (i) completion of clinical trials (ii)
the settlement of certain advertising litigation and (iii) adequate financing. A
significant portion of the 1995 expense was paid by issuance of restricted
23
<PAGE> 24
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. Financing
become available beginning in April 1996. The Company is currently evaluating
its marketing programs and anticipates a new advertising campaign commencing in
the second quarter of 1996.
Selling and Marketing expenses decreased to $197,610 for the three
months ended April 30, 1996 from $412,398 for the three 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 and travel expenses.
General and Administrative expenses increased to $507,399 for the three
months ended April 30, 1996 from $389,030 for the same three months of 1995. The
Company experienced increases in consulting, legal and accounting fees offset by
decreases in factoring fees and commissions in connection with accounts
receivable financing.
No royalty expense was incurred for the three months ended April 30,
1996 compared with $135,042 for the same three months of 1995. Royalties had
been due under the terms of a license agreement which was terminated in March
1996.
Interest expense decreased to $31,609 for the three months ended April
30, 1996 from $65,126 for the three months of 1995. Interest expense for the
1996 period reflects a reduced rate of interest 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 further satisfaction of the Company's outstanding loan
receivable from him in the amount of $2,223,707. As of January 31, 1996, the
balance of principal and 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 three months ended April 30, 1996.
The provision for income taxes is the minimum for the State of
California Franchise taxes. No provision was made for Federal income tax since
the Company has significant net operating loss carryforwards.
The net profit for the three month period ended April 30, 1996 of
$730,645 was the result of profit from operations and a net gain from settlement
of litigation. The net loss for the three month period ended April 30, 1995 of
$1,150,564 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.
24
<PAGE> 25
Net profit (loss) per common share was $0.05 for the three months ended
April 30, 1996 and ($0.07) for the three months ended April 30, 1995 based on
the weighted average shares of common stock outstanding.
The Company believes that net losses for the period from inception
through January 31, 1996 are consistent with the initial development of the
Company, the major advertising campaign and its introduction of the SeQuester(R)
products.
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 January 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 a net profit of $730,645 during the three months ended April 30, 1996
and incurred net losses from inception to January 31, 1996 of $6,005,308. As of
April 30, 1996, the Company's accumulated deficit was $5,274,663. The management
of the Company intends to continue to pursue various means of obtaining
additional working capital and long term equity.
The Company introduced an appetite suppressant and a chromium based
dietary supplement in December, 1995 and a phytosterol based dietary supplement
in October 1996. Additional new health and beauty aid category products are
scheduled for introduction in fiscal 1998.
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.
25
<PAGE> 26
During the twelve months ended January 31, 1996, the Company issued an
aggregate of 172,500 shares of restricted 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.
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.
In April 1996, the Company retired 155,200 shares of common stock in
connection with the termination of a consulting agreement and issued 46,000
shares of restricted common stock for other services.
In April 1996, the Company issued 1,200,000 shares of common stock for
net proceeds of $1,665,000 in a private placement. Upon completion of this
transaction, 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 private placement, 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. In
addition, 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 and Clark Holcomb retired 3,800,000 shares of Company common stock
personally owned by him in further satisfaction of the Company's outstanding
loan receivable from him in the amount of $2,223,707.
From February to October 1995, the Company pledged and encumbered a
substantial portion of its accounts receivable for cash advances to accelerate
cash flow for operations. An agreement with the factor (lender) 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 was 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 was subject to a security agreement which
covers all of the accounts receivable, contract rights and inventory of the
Company. In August 1996, the balance of principal and interest outstanding of
this note was satisfied. In August 1996, the Company entered into a stock
purchase agreement with the same stockholder wherein the Company issued 125,000
shares of restricted common stock for satisfaction of $250,000 of the principal
balance of the secured promissory note dated October 17, 1995 due to that
stockholder. In connection with this transaction, the Company entered into a put
option
26
<PAGE> 27
agreement wherein that stockholder had 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. The put option
agreement expired on April 17, 1997. As of April 30, 1996, the balance of
principal and interest outstanding of this note was $635,250.
As of April 30, 1996, the Company's working capital position increased
to a positive $684,105 at April 30, 1996 from a negative $1,315,263 at January
31, 1996. Increases in current assets include increases in cash of $1,499,044
and accounts receivable of $354,126, offset by a decrease in inventory of
$220,028 and a decrease in other assets of $8,212. Changes in current
liabilities include decreases in accounts payable of $444,479 and accrued
advertising of $28,439. Increases in current liabilities include commissions
payable of $100,133, accrued expenses of $39,967, and notes payable and loans
from stockholders of $30,880. Current assets increased a net of $1,624,930 and
current liabilities decreased a net of $301,938 for the three month period ended
April 30, 1996, primarily as a result of the private placement completed in
April 1996. The net profit for the three months ended April 30, 1996 of $730,645
was increased by non-cash charges for depreciation and amortization of $63,585
and issuance of common stock for advertising and other expenses of $15,000 and
was reduced by retirement of stock of $539,762 in connection with settlement of
advertising litigation.
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 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 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 April 30, 1996
which are incorporated herein by reference.
Item 6. - Exhibits and Reports on Form 8-K:
(b) On February 21, 1996, the Company filed two reports on Form
8-K, both of which reported under Item 5 of such forms.
On April 2, 1996, the Company filed a report on Form 8-K which
reported under Item 5 of such form.
On April 17, 1996, the Company filed a report on Form 8-K
which reported under Items 6 and 7 of such form.
On April 17, 1996, the Company filed a report on Form 8-K
which reported under Items 4 and 7 of such form.
On April 23, 1996, the Company filed two reports on Form 8-K,
both of which reported under Item 5 of such forms.
(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.
SEQUESTER HOLDINGS, INCORPORATED
(formerly KCD HOLDINGS INCORPORATED)
(Registrant)
Dated June 6, 1997 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, Principal Accounting Officer, June 6, 1997
- --------------------------- and Director
Wellington A. Ewen
/s/ Bonnie L. Richards Vice President, Secretary, and Director June 6, 1997
- ---------------------------
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-QSBA
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> APR-30-1996
<CASH> 1,547,323
<SECURITIES> 0
<RECEIVABLES> 903,960
<ALLOWANCES> 52,163
<INVENTORY> 644,519
<CURRENT-ASSETS> 3,043,639
<PP&E> 214,900
<DEPRECIATION> 43,022
<TOTAL-ASSETS> 3,221,724
<CURRENT-LIABILITIES> 2,432,034
<BONDS> 0
0
0
<COMMON> 26,506
<OTHER-SE> 763,184
<TOTAL-LIABILITY-AND-EQUITY> 3,221,724
<SALES> 1,116,259
<TOTAL-REVENUES> 1,116,259
<CGS> 306,216
<TOTAL-COSTS> 306,216
<OTHER-EXPENSES> 109,407
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,609
<INCOME-PRETAX> 732,245
<INCOME-TAX> 1,600
<INCOME-CONTINUING> 730,645
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 730,645
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
