<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 October 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
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: 34
<PAGE> 2
FORM 10-QSB
Securities and Exchange Commission
Washington, D.C. 20549
SEQUESTER HOLDINGS, INCORPORATED
(formerly KCD HOLDINGS INCORPORATED)
Index
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at F-3
October 31, 1996 (unaudited) and January 31, 1996
Consolidated Statements of Operations for F-4
the three months and the nine months
ended October 31, 1996 (unaudited) and 1995
(unaudited)
Consolidated Statement of Stockholders' Investment F-5
for the nine months ended October 31, 1996 (unaudited)
Consolidated Statement of Cash Flows F-6
for the nine months ended October 31, 1996 (unaudited)
and 1995 (unaudited)
Notes to Consolidated Financial Statements F-7
Item 2. Management's Discussion and Analysis or Plan of 21
Operation.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Changes in Securities 33
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 34
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEQUESTER HOLDINGS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31, 1996 JANUARY 31, 1996
---------------- ----------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 548,725 $ 48,279
Accounts receivable, net 268,515 381,098
Accounts receivable - other 14,430 115,065
Inventory 2,254,295 864,547
Other 11,673 9,720
----------- -----------
Total current assets 3,097,638 1,418,709
----------- -----------
PROPERTY AND EQUIPMENT, net 146,915 184,357
----------- -----------
OTHER ASSETS:
Deposits 14,338 3,938
Intangibles, net 2,139 2,333
----------- -----------
Total other assets 16,477 6,271
----------- -----------
Total assets $ 3,261,030 $ 1,609,337
=========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 1,156,721 $ 836,484
Accrued expenses 173,976 224,011
Accrued advertising 150,000 173,417
Commissions payable 31,663 31,948
Royalties payable - 150,515
Collateralized note payable-related party - 621,018
Loans from stockholders 422,628 696,579
----------- -----------
Total current liabilities 1,934,988 2,733,972
----------- -----------
Commitments and contingencies (see Notes)
STOCKHOLDERS' INVESTMENT (DEFICIT)
Common stock, par value $.002 per share; 25,000,000 shares 29,214 33,204
authorized; issued and outstanding 14,606,874 as of October 31, 1996
and 16,602,000 as of January 31, 1996
Additional paid in capital 9,397,287 8,365,580
Accumulated deficit (6,723,778) (6,005,308)
Prepaid advertising and consulting fees (1,376,681) (3,518,111)
----------- -----------
Total stockholders' investment (deficit) 1,326,042 (1,124,635)
----------- -----------
Total liabilities and stockholders' investment (deficit) $ 3,261,030 $ 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 AND NINE MONTHS ENDED OCTOBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
------THREE MONTHS ENDED---------- ------------NINE MONTHS ENDED------
OCTOBER 31, 1996 OCTOBER 31, 1995 OCTOBER 31, 1996 OCTOBER 31, 1995
---------------- ---------------- ---------------- ----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Revenues $ 953,511 $ 990,345 $ 2,525,872 $ 5,110,546
Cost of Goods Sold 362,094 261,423 1,055,591 1,239,028
------------ ------------ ------------ ------------
Gross Profit 591,417 728,922 1,470,281 3,871,518
------------ ------------ ------------ ------------
Operating Expenses:
Advertising 605,952 87,192 863,459 2,136,194
Selling and marketing 284,855 191,958 726,160 1,815,331
General and administrative 395,198 436,267 1,374,115 1,189,802
Royalties - 92,868 - 432,858
------------ ------------ ------------ ------------
1,286,005 808,285 2,963,734 5,574,185
------------ ------------ ------------ ------------
Loss from Operations (694,588) (79,363) (1,493,453) (1,702,667)
------------ ------------ ------------ ------------
Non - Operating Income (Expense)
Interest expense (12,089) (103,342) (70,001) (267,124)
Interest income - 23,788 - 35,257
Litigation Settlements, net 151,245 - 916,727 -
Payments to Officer and Stockholder - - (70,143) -
------------ ------------ ------------ ------------
139,156 (79,554) 776,583 (231,867)
------------ ------------ ------------ ------------
Loss before Income Taxes (555,432) (158,917) (716,870) (1,934,534)
Provision for Income Taxes - - 1,600 1,600
------------ ------------ ------------ ------------
Net Loss ($555,432) ($158,917) ($718,470) ($1,936,134)
============ ============ ============ ============
Weighted average shares of
Common Stock Outstanding: 14,210,878 16,095,544 14,577,077 15,933,423
============ ============ ============ ============
Net Loss per share: ($0.04) ($0.01) ($0.05) ($0.12)
============ ============ ============ ============
</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 NINE MONTHS ENDED OCTOBER 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) - 1,380,238 (539,762)
Issuance of common stock
in litigation settlement 40,000 80 59,920 - - 60,000
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 cash, consulting and
other services 540,047 1,080 834,815 - (735,000) 100,895
Issuance of common stock
in private placements 1,895,027 3,790 2,853,232 - - 2,857,022
Issuance of common stock
for satisfaction of debt 125,000 250 249,750 - - 250,000
Net loss for nine months
ended October 31, 1996 - - - (718,470) - (718,470)
Amortization of prepaid
advertising and consulting
fees - - - - 448,592 448,592
----------- -------- ----------- ----------- ----------- -----------
Balance October 31, 1996 14,606,874 29,214 9,397,287 (6,723,778) (1,376,681) 1,326,042
(Unaudited) =========== ======== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE> 6
SEQUESTER HOLDINGS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($718,470) ($1,936,134)
Adjustments to reconcile Net Loss to net cash used in
operating activities:
Depreciation and amortization 486,228 38,544
Stock issued for advertising and other services 85,595 2,947,336
Litigation settlements (479,762) -
----------- -----------
(626,409) 1,049,746
----------- -----------
(Increase) / decrease in current assets:
Accounts receivable, net 213,218 23,657
Inventory (1,389,748) (465,425)
Other current assets (1,953) (1,936,139)
Increase / (decrease) in current liabilities:
Accounts payable 320,237 (5,403)
Accrued expenses (50,035) (113,120)
Accrued advertising (23,417) 98,562
Commissions payable (285) -
Royalties payable (150,515) (326,796)
----------- -----------
(1,082,498) (2,724,664)
----------- -----------
Net cash used in operating activities (1,708,907) (1,674,918)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment - (151,742)
Deposits (10,400) (33,938)
----------- -----------
Net cash used in investing activities (10,400) (185,680)
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of common stock (7,600) -
Proceeds from sale of common stock 2,872,322 1,007,500
Note payable (371,018) 295,454
Loans from stockholders (273,951) 606,368
----------- -----------
Net cash provided by financing activities 2,219,753 1,909,322
NET INCREASE IN CASH 500,446 48,724
CASH, BEGINNING BALANCE 48,279 9,088
----------- -----------
CASH, ENDING BALANCE $ 548,725 $ 57,812
=========== ===========
</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
OCTOBER 31, 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>
OCTOBER 31, 1996 OCTOBER 31, 1996 NET
AS AMENDED AS REPORTED CHANGE (A)
---------------- ---------------- ----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 548,725 $ 548,725 $ -
Accounts receivable, net 268,515 268,515 -
Accounts receivable - other 14,430 14,430 -
Inventory 2,254,295 2,254,295 -
Other 11,673 11,673 -
----------- ----------- --------
Total current assets 3,097,638 3,097,638 -
----------- ----------- --------
PROPERTY AND EQUIPMENT, net 146,915 146,915 -
----------- ----------- --------
OTHER ASSETS:
Deposits 14,338 14,338 -
Intangibles, net 2,139 2,139 -
----------- ----------- --------
Total other assets 16,477 16,477 -
----------- ----------- --------
Total assets $ 3,261,030 $ 3,261,030 $ -
=========== =========== ========
CURRENT LIABILITIES:
Accounts payable $ 1,156,721 $ 1,156,721 $ -
Accrued expenses 173,976 173,976 -
Accrued advertising 150,000 150,000 -
Commissions payable 31,663 31,663 -
Royalties payable - - -
Collateralized note payable-related party - - -
Loans from stockholders 422,628 422,628 -
----------- ----------- --------
Total current liabilities 1,934,988 1,934,988 -
----------- ----------- --------
Commitments and contingencies (see Notes)
STOCKHOLDERS' INVESTMENT (DEFICIT)
Common stock, par value $.002 per share; 29,214 29,214 -
25,000,000 shares authorized; issued and
outstanding 14,606,874 as of October 31, 1996
Additional paid in capital 9,397,287 8,912,287 485,000
Accumulated deficit (6,723,778) (6,576,278) (147,500)
Prepaid advertising and consulting fees (1,376,681) (1,039,181) (337,500)
----------- ----------- --------
Total stockholders' investment 1,326,042 1,326,042 -
----------- ----------- --------
Total liabilities and stockholders' investment $ 3,261,030 $ 3,261,030 $ -
=========== =========== ========
</TABLE>
F-7
<PAGE> 8
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND JANUARY 31, 1996
AMENDED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
--------THREE MONTHS ENDED-------- ---------NINE MONTHS ENDED-----------
OCTOBER 31, 1996 OCTOBER 31, 1996 NET OCTOBER 31, 1996 OCTOBER 31, 1996 NET
AS AMENDED AS REPORTED CHANGE (A) AS AMENDED AS REPORTED CHANGE(A)
---------------- -------------- ---------- ---------------- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues $ 953,511 $ 953,511 $ - $ 2,525,872 $ 2,525,872 $ -
Cost of Goods Sold 362,094 362,094 - 1,055,591 1,055,591 -
------------ ------------ ---------- ------------ ------------ --------
Gross Profit 591,417 591,417 - 1,470,281 1,470,281 -
------------ ------------ ---------- ------------ ------------ --------
Operating Expenses:
Advertising 605,952 605,952 - 863,459 863,459 -
Selling and marketing 284,855 284,855 - 726,160 691,160 35,000
General and administrative 395,198 357,698 37,500 1,374,115 1,261,615 112,500
Royalties - - - - - -
------------ ------------ ---------- ------------ ------------ --------
1,286,005 1,248,505 37,500 2,963,734 2,816,234 147,500
------------ ------------ ---------- ------------ ------------ --------
Loss from Operations (694,588) (657,088) (37,500) (1,493,453) (1,345,953) (147,500)
------------ ------------ ---------- ------------ ------------ --------
Non - Operating Income (Expense)
Interest expense (12,089) (12,089) - (70,001) (70,001) -
Interest income - - - - - -
Litigation Settlements, net 151,245 151,245 - 916,727 916,727 -
Payments to Officer and Stockholder - - - (70,143) (70,143) -
------------ ------------ ---------- ------------ ------------ --------
139,156 139,156 - 776,583 776,583 -
------------ ------------ ---------- ------------ ------------ --------
Loss before Income Taxes (555,432) (517,932) (37,500) (716,870) (569,370) (147,500)
Provision for Income Taxes - - 1,600 1,600 -
------------ ------------ ---------- ------------ ------------ --------
Net Loss ($555,432) ($517,932) (37,500) ($718,470) ($570,970) (147,500)
============ ============ ========== ============ ============ ========
Weighted average shares of
Common Stock Outstanding: 14,210,878 14,210,878 - 14,577,077 14,577,077 -
============ ============ ========== ============ ============ ========
Net Loss per share: ($0.04) ($0.04) $0.00 ($0.05) ($0.04) ($0.01)
============ ============ ========== ============ ============ ========
</TABLE>
F-8
<PAGE> 9
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND JANUARY 31, 1996
AMENDED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
OCTOBER 31, 1996 OCTOBER 31, 1996 NET
AS AMENDED AS REPORTED CHANGE (A)
---------------- ---------------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($718,470) ($570,970) ($147,500)
Adjustments to reconcile Net Loss to net cash used in operating
activities:
Depreciation and amortization 486,228 373,728 112,500
Stock issued for advertising and other services 85,595 50,595 35,000
Litigation settlements (479,762) (479,762) -
----------- ----------- -----------
(626,409) (626,409) -
----------- ----------- -----------
(Increase) / decrease in current assets:
Accounts receivable, net 213,218 213,218 -
Inventory (1,389,748) (1,389,748) -
Other current assets (1,953) (1,953) -
Increase / (decrease) in current liabilities: -
Accounts payable 320,237 320,237 -
Accrued expenses (50,035) (50,035) -
Accrued advertising (23,417) (23,417) -
Commissions payable (285) (285) -
Royalties payable (150,515) (150,515) -
----------- ----------- -----------
(1,082,498) (1,082,498) -
----------- ----------- -----------
Net cash used in operating activities (1,708,907) (1,708,907) -
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits (10,400) (10,400) -
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of common stock (7,600) (7,600) -
Proceeds from sale of common stock 2,872,322 2,872,322 -
Note payable (371,018) (371,018) -
Loans from stockholders (273,951) (273,951) -
----------- ----------- -----------
Net cash provided by financing activities 2,219,753 2,219,753 -
NET INCREASE IN CASH 500,446 500,446 -
CASH, BEGINNING BALANCE 48,279 48,279 -
----------- ----------- -----------
CASH, ENDING BALANCE $ 548,725 $ 548,725 $ -
=========== =========== ===========
</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
OCTOBER 31, 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, 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 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 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 statement
presentation to conform with the 1996 consolidated financial statement
presentation.
F-10
<PAGE> 11
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 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 nine months
ended October 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 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.
Significant customers accounting for 56.7% of revenues for the nine months ended
October 31, 1996 include Wal-Mart Stores 29.1%, Kmart 16% and American Drug
Stores 11.6%. Major customers accounting for 50% of revenues for the nine months
ended October 31, 1995 include Wal-Mart Stores 15%, McKesson Drug Company 10%,
Kmart Corp. 7.7%, Mark Stevens (CVS Inc.) 6%, Thrift Drug 5%, Target 3.3% and
Walgreen 3%.
(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.
(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 October 31, 1996 was $29,835 and at January 31, 1996 was $52,163.
(d) 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:
F-11
<PAGE> 12
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND JANUARY 31, 1996
<TABLE>
<CAPTION>
October 31, 1996 January 31, 1996
---------------- ----------------
<S> <C> <C>
Product Units $2,121,724 $ 704,741
Packaging and Product Displays 184,945 153,578
Shipping Supplies 10,426 6,228
---------- ----------
2,317,095 864,547
Less: Allowance for Obsolescence (62,800) -
---------- ----------
$2,254,295 $ 864,547
========== ==========
</TABLE>
The allowance for obsolescence is maintained at an amount management deems
adequate to cover unsaleable inventory. In determining the allowance to be
maintained, management evaluates many factors including alternate uses and a
specific review for items no longer saleable.
(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
SeQuester(R) 3) and introduced a fourth product, PhytoQuest(TM)in
October 1996.
- The Company has a significant deficit and has incurred substantial
losses from operations for the period from inception through October
31, 1996.
F-12
<PAGE> 13
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND JANUARY 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) 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 nine month periods ended October 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 $3,477,124 $6,115,019
---------- ----------
Discounts:
Refunds and Returns $ 441,509 $ 136,877
Introductory and Promotional 172,675 419,330
Co-op Advertising 268,305 331,598
Other 68,763 116,668
---------- ----------
Total Discounts $ 951,252 $1,004,473
---------- ----------
Net Revenues $2,525,872 $5,110,546
========== ==========
</TABLE>
F-13
<PAGE> 14
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND JANUARY 31, 1996
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
October 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 (67,985) (30,543)
-------- ---------
$146,915 $ 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 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 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
nine months ended October 31, 1996.
7. LOANS PAYABLE TO STOCKHOLDERS AND COLLATERALIZED PROMISSORY NOTE
(a) On October 31, 1996, the Company owed stockholders the amount of $422,628
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. 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 (approximately $0.328).
These restricted shares were issued in May 1997 and contain certain registration
rights.
F-14
<PAGE> 15
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND JANUARY 31, 1996
(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 October 31, 1996, the balance of principal and interest
outstanding of this note has been satisfied.
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 can not reasonably be
assured.
F-15
<PAGE> 16
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND JANUARY 31, 1996
9. CONTRACTS AND AGREEMENTS
(a) Advertising Agreement -- In May 1995, the Company entered into an
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 October 31,
1996, $316,387 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
(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.
F-16
<PAGE> 17
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND JANUARY 31, 1996
During the three months ended April 30, 1996, the Company issued 46,000 shares
of restricted common stock for other services
In June 1996, the Company entered into a stock purchase 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. During the
period June 1996 through October 31, 1996, 695,027 shares were issued for net
proceeds of $1,192,022. Upon completion of this agreement, 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 this agreement, 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.
During the three months ended July 31, 1996, the Company issued (i) 35,000
shares of common stock to commission sales brokers and (ii) 40,000 shares of
common stock in settlement of litigation.
In connection with an agreement with a consultant 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 was 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 were subject to repurchase by the Company at par value for a period
of two years from date of purchase. In April 1997, this common stock agreement
was canceled and the previously issued shares thereunder were returned to the
Company and retired.
In October and August 1996, the Company issued an additional 9,047 shares of
restricted common stock to commission sales brokers.
(b) Public 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>
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 nine months ended
October 31, 1996 or the twelve months ended January 31, 1996.
F-17
<PAGE> 18
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 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.
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.
F-18
<PAGE> 19
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND JANUARY 31, 1996
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 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.
F-19
<PAGE> 20
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND JANUARY 31, 1996
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 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.
F-20
<PAGE> 21
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND JANUARY 31, 1996
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
October 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.
F-21
<PAGE> 22
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, 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) 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 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.
22
<PAGE> 23
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
SeQuester(R) 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 effects of these efforts have brought the SeQuester(R) products to
national attention.
For the three month period ended October 31, 1996 compared to the three month
period ended October 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) and, commencing in October 1996, from PhytoQuest(TM), a
dietary supplement designed to reduce cholesterol from the food you eat. Gross
Revenues for the three months ended October 31, 1996 increased to $1,410,685
from $1,265,917 for the three months ended October 31, 1995 or an 11% increase.
Gross Revenues have been reduced for a variety of discounts to provide Net
Revenues of $953,511 for the three months ended October 31, 1996 and $990,345
for the three months ended October 31, 1995 or a 4% decrease.
The increase in Gross Revenues resulted from commencement of the
Company's new marketing campaign and from initial sales of PhytoQuest(TM). The
decrease in Net Revenues resulted from an increase in refunds and returns.
23
<PAGE> 24
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.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------
October 31, 1996 October 31, 1995
------------------- ------------------
$ % $ %
<S> <C> <C> <C> <C>
Gross Revenues 1,410,685 100 1,265,917 100
--------- --- --------- ---
Discounts:
Refunds and Returns 309,730 22 114,295 9
Introductory and Promotional 52,042 3 68,571 6
Co-op Advertising 66,168 5 63,492 5
Other 29,234 2 29,214 2
--------- --- --------- ---
Total Discounts 457,174 32 275,572 22
--------- --- --------- ---
Net Revenues 953,511 68 990,345 78
========= === ========= ===
</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 October 31, 1996 was $362,094 or 38% of Net
Revenues which provided a Gross Profit of $591,417 or 62% of Net Revenues. For
the three month period ended October 31, 1995, the Cost of Sales was $261,423 or
26% of Net Revenues, which provided a Gross Profit for the same three month
period of the previous year of $728,922 or 74% of Net Revenues. The decrease in
Gross Profit percent resulted primarily from continuation of fixed co-op
advertising costs and an increase in refunds and returns. The increase in
refunds and returns resulted primarily from (i) return of dated products which
had remained unsold by retailers and which could not be resold and (ii) disposal
by retailers of unsaleable products. In addition, the Company recorded an
allowance for obsolescence of $62,800 which was charged to cost of goods sold
during the three months ended October 31, 1996. The allowance for obsolescence
is maintained at an amount management deems adequate to cover unsaleable
inventory. In determining the allowance to be maintained, management evaluates
many factors including alternate uses and a specific review for items no longer
saleable.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
October 31, 1996 October 31, 1995
----------------- ----------------
$ % $ %
<S> <C> <C> <C> <C>
Net Revenues 953,511 100 990,345 100
Cost of Goods Sold 362,094 38 261,423 26
------- --- ------- ---
Gross Profit 591,417 62 728,922 74
======= === ======= ===
</TABLE>
Advertising expenses consist of a multi-media advertising campaign which
included newspaper, radio and other displays. Selling and marketing expenses
consist of sales commissions
24
<PAGE> 25
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 increased to $605,952 for the three months ended
October 31, 1996 from $87,192 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 maintaining adequate inventory levels of the
SeQuester(R) 2 and SeQuester(R) 3 products. Inventory financing became available
beginning 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. The Company is currently
evaluating all of its marketing programs and anticipates significant advertising
expenses during the fourth quarter of the fiscal year.
Selling and Marketing expenses increased to $284,855 for the three
months ended October 31, 1996 from $191,958 for the same three months of 1995.
The Company experienced decreases in coupon expense and sales commissions due to
a reduction in rates for the 1996 period. The decreases were offset by increases
in salaries, consulting fees and travel expenses. Selling and marketing expenses
are expected to continue to increase during the fourth quarter of the fiscal
year.
General and Administrative expenses decreased to $395,198 for the three
months ended October 31, 1996 from $436,267 for the same three months of 1995.
The Company experienced increases in legal and consulting fees offset by
decreases in salaries, travel expenses, factoring fees and interest in
connection with accounts receivable financing.
No royalty expense was incurred for the three months ended October 31,
1996 compared with $92,868 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 the fiscal year.
Interest expense decreased to $12,089 for the three months ended October
31, 1996 from $103,342 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 which decreased to $422,628 at
October 31, 1996 from $896,631 at July 31, 1996.
Interest income for the three months ended October 31, 1995 was $23,788
which resulted from interest accrued, at 8% per annum, on a loan receivable from
Clark Holcomb.
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.
25
<PAGE> 26
The net loss for the three month period ended October 31, 1996 of
$555,432 was the result of increased advertising, selling and marketing
expenditures which were partially offset by a reduction in general and
administrative costs combined with a continuation of fixed co-op advertising
costs and an increase in returns. The net loss for the three month period ended
October 31, 1995 of $158,917 was incurred principally as a result of the
significant expenditures made by the Company for its initial introduction of the
SeQuester(R) products to major retail pharmacy and mass merchandiser chains.
Net loss per common share was $0.04 for the three months ended October
31, 1996 and $0.01 for the three months ended October 31, 1995 based on the
weighted average shares of common stock outstanding.
For the nine month period ended October 31, 1996 compared to the nine month
period ended October 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) and, commencing October 1996, from PhytoQuest(TM), a
dietary supplement designed to reduce cholesterol from the food you eat. Gross
revenues for the first nine months ended October 31, 1996 were $3,477,124 vs.
$6,115,019 for the nine months ended October 31, 1995, or a 43% decrease. Gross
Revenues have been reduced for a variety of discounts to provide Net Revenues of
$2,525,872 for the nine months ended October 31, 1996 and $5,110,546 for the
nine months ended October 31, 1995 or a 51% 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. 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 were 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. The decrease in Net Revenues
resulted from a decrease in sales and an increase in refunds and returns.
26
<PAGE> 27
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------------
October 31, 1996 October 31, 1995
----------------- -----------------
$ % $ %
<S> <C> <C> <C> <C>
Gross Revenues 3,477,124 100 6,115,019 100
--------- --- --------- ---
Discounts:
Refunds and Returns 441,509 12 136,877 2
Introductory and Promotional 172,675 5 419,330 7
Co-op Advertising 268,305 8 331,598 5
Other 68,763 2 116,668 2
--------- --- --------- ---
Total Discounts 951,252 27 1,004,473 16
--------- --- --------- ---
Net Revenues 2,525,872 73 5,110,546 84
========= === ========= ===
</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 nine month period ended October 31, 1996 was $1,055,591 or 42% of Net
Revenues which provided a Gross Profit of $1,470,281 or 58% of Net Revenues. For
the nine month period ended October 31, 1995, the Cost of Sales was $1,239,028
or 24% of Net Revenues, which provided a Gross Profit for the first nine month
period of the previous year of $3,871,518 or 76% of Net Revenues. The decrease
in Gross Profit percent resulted primarily from continuation of fixed co-op
advertising costs and an increase in returns. The increase in refunds and
returns resulted primarily from (i) return of dated products which had remained
unsold by retailers and which could not be resold and (ii) disposal by retailers
of unsaleable products. In addition, the Company recorded an allowance for
obsolescence of $62,800 which was charged to cost of goods sold during the nine
months ended October 31,1996. The allowance for obsolescence is maintained at an
amount management deems adequate to cover unsaleable inventory. In determining
the allowance to be maintained, management evaluates many factors including
alternate uses and a specific review for items no longer saleable.
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------------
October 31, 1996 October 31, 1995
------------------ ------------------
$ % $ %
<S> <C> <C> <C> <C>
Net Revenues 2,525,872 100 5,110,546 100
Cost of Goods Sold 1,055,591 42 1,239,028 24
--------- --- --------- ---
Gross Profit 1,470,281 58 3,871,518 76
========= === ========= ===
</TABLE>
Advertising expenses consist of a multi-media advertising campaign which
included newspaper 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 $863,459 for the nine
months ended October 31, 1996 from $2,136,194 for the first nine months of 1995.
The Company placed a hold on its
27
<PAGE> 28
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 beginning 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 fourth
quarter of the fiscal year.
Selling and Marketing expenses decreased significantly to $726,160 for
the nine months ended October 31, 1996 from $1,815,331 for the first nine 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, consulting fees, marketing supplies and rent
expense. Selling and marketing expenses are expected to increase during the
fourth quarter of the fiscal year.
General and Administrative expenses increased to $1,374,115 for the nine
months ended October 31, 1996 from $1,189,802 for the same nine months of 1995.
The Company experienced increases in legal and accounting fees, consulting fees,
bad debt expense, salaries, rent, insurance and depreciation offset by decreases
in travel expenses, factoring fees and interest in connection with accounts
receivable financing.
No royalty expense was incurred for the nine months ended October 31,
1996 compared with $432,858 for the same nine 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 the fiscal year.
Interest expense decreased to $70,001 for the nine months ended October
31, 1996 from $267,124 for the same nine 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 which decreased to $422,628 at
October 31, 1996 from $1,317,597 at January 31, 1996.
Interest income for the nine months ended October 31, 1995 was $35,257
which resulted from interest accrued, at 8% per annum, on the loan receivable
from Clark Holcomb.
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.
28
<PAGE> 29
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 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.
The provision for income taxes is the minimum for the States of New
Jersey and 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 nine month period ended October 31, 1996 of
$718,470 was the result of gains on settlement of certain litigation matters
which were offset by a loss from operations. The net loss for the nine month
period ended October 31, 1995 of $1,936,134 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 ($0.05) for the nine months ended
October 31, 1996 and ($0.12) for the nine months ended October 31, 1995 based on
the weighted average shares of common stock outstanding.
The Company believes that net losses for the period from inception
through October 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 October 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 October 31, 1996 of $6,723,778 including a
net loss of $718,470 during the nine months ended October 31, 1996.
29
<PAGE> 30
Management devoted considerable effort during the first three quarters
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.
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 products are scheduled for introduction
in 1997 all under the trademark SeQuester(R).
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.
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 (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
net proceeds of $1,665,000 in a private placement. Upon completion of this
private placement, 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.
30
<PAGE> 31
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.
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 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 stock purchase 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.
During the period June 1996 through October 31, 1996, 695,027 shares were issued
for net proceeds of $1,192,022.
In August and October 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) 9,047 shares of common stock
to commission sales brokers.
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 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 was subject to a security agreement which
covers all of the accounts receivable, contract rights and inventory of the
Company. As of October 31, 1996, the balance of principal and interest
outstanding of this note has been satisfied. 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 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.
31
<PAGE> 32
As of October 31, 1996, the Company's working capital position increased
to a positive $1,162,650 at October 31, 1996 from a negative $1,315,263 at
January 31, 1996. Increases in current assets include increases in cash of
$500,446, inventory of $1,389,748 and other assets of $1,953 offset by a
decrease in accounts receivable of $213,218. Inventory buildups continued during
the third quarter of fiscal 1997 in anticipation of promotional advertisements
which did not occur. Changes in current liabilities include decreases in accrued
expenses of $50,035, accrued advertising of $23,417, and commissions payable of
$285. Notes payable and loans from stockholders decreased $894,969. Royalties
payable decreased $150,515 as a result of a litigation settlement. Accounts
payable increased $320,237. Current assets increased a net of $1,678,929 and
current liabilities decreased a net of $798,984 for the nine month period ended
October 31, 1996, primarily as a result of private placements. The net loss for
the nine months ended October 31, 1996 of $718,470 was reduced by non-cash
charges for depreciation and amortization of $486,228 and issuance of common
stock for advertising and other services of $85,595 and was increased by
$479,762 in connection with settlements of 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 (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.
32
<PAGE> 33
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 quarterly period ended October 31,
1996 which are incorporated herein by reference.
Item 2. - Changes in Securities:
(c) In August 1996, the Company issued 150,000 shares (the "Shares")
of its $.002 par value Common Stock (the "Common Stock") to an
independent contractor pursuant to an agreement between the
Company and the independent contractor to provide certain
advertising, design and marketing services at a purchase price
of par value. The Shares are subject to repurchase by the
Company at par value for a period of two (2) years from the date
of purchase. The Company relied on the exemption from
registration contained in Section 4(2) of the Securities Act of
1933, as amended (the "1933 Act"), on the basis that the offer
and sale of the Shares did not involve any public offering. All
of the Shares issued contained the appropriate restrictive
legend.
In August and October 1996, the Company issued an aggregate of
9,047 shares of its Common Stock to two (2) of the Company's
commission sales brokers in partial satisfaction of cash sales
commissions due, at a purchase price of $2.00 per share. The
Company relied on the exemption from registration contained in
Section 4(2) of the 1933 Act on the basis that the offer and
sale of these shares did not involve any public offering. The
shares issued contained the appropriate restrictive legend.
Item 6. - Exhibits and Reports on Form 8-K:
(b) On October 31, 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).
33
<PAGE> 34
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>
34
<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>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> AUG-1-1996
<PERIOD-END> OCT-31-1996
<CASH> 548,725
<SECURITIES> 0
<RECEIVABLES> 324,453
<ALLOWANCES> 29,835
<INVENTORY> 2,254,295
<CURRENT-ASSETS> 3,097,638
<PP&E> 214,900
<DEPRECIATION> 67,985
<TOTAL-ASSETS> 3,261,030
<CURRENT-LIABILITIES> 1,934,988
<BONDS> 0
0
0
<COMMON> 29,214
<OTHER-SE> 1,296,828
<TOTAL-LIABILITY-AND-EQUITY> 3,261,030
<SALES> 2,525,872
<TOTAL-REVENUES> 2,525,872
<CGS> 1,055,591
<TOTAL-COSTS> 1,055,591
<OTHER-EXPENSES> 2,117,150
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70,001
<INCOME-PRETAX> (716,870)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> (718,470)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (718,470)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
