SEQUESTER HOLDINGS INC/NV, 10KSB40, 2000-08-01

SEQUESTER HOLDINGS INC/NV
10KSB40, 2000-08-01
MANAGEMENT SERVICES

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<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB

(Mark One)

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)

For the fiscal years ended JANUARY 31, 1999 and 2000

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED)

For the transition period from___________to __________

Commission file number 33-06827LA

SEQUESTER HOLDINGS, INCORPORATED
----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)

NEVADA 95-4532103
------ ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

23852 PACIFIC COAST HIGHWAY, #434, MALIBU, CALIFORNIA 90265
------------------------------------------------------------
(Address of principal executive offices)

(310) 317-0779
------------------------------
(Registrant's telephone number)

Securities registered under Section 12(b) of the Exchange Act: NONE.

Securities registered under Section 12(g) of the Exchange Act: NONE.

Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 [ ] No [X]

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

For the fiscal year ended January 31, 1999, the Registrant's revenues were
approximately $238,882. As of January 31, 1999, the aggregate market value
of Registrant's voting stock held by non-affiliates was approximately
$1,390,256. As of January 31, 1999, the Registrant had 6,442,732 shares of
common stock outstanding.

For the fiscal year ended January 31, 2000, the Registrant's revenues were
approximately $146,779. As of January 31, 2000, the aggregate market value
of Registrant's voting stock held by non-affiliates was approximately
$1,877,674. As of January 31, 2000, the Registrant had 6,517,732 shares of
common stock outstanding.

Documents Incorporated by Reference: NONE

Transitional Small Business Disclosure Format: Yes [ ] No [X]

<PAGE> 2

PART I

ITEM 1. DESCRIPTION OF BUSINESS.

Business Development

SeQuester Holdings, Incorporated (the "Company"), formerly KCD Holdings
Incorporated, was incorporated in the State of Nevada on February 13, 1986. The
Company's principal offices are located at 23852 Pacific Coast Highway, #434,
Malibu, California 90265.

On July 30, 1994, the sole director of the Company consented, subject to
shareholder approval, (i) to authorize the execution of the Plan and Agreement
of Reorganization (the "Plan") by and between KCD Incorporated, a California
corporation ("KCD"), and the Company; (ii) to amend the Articles of
Incorporation to change the name of the Company from Commonwealth Associates,
Inc. to KCD Holdings Incorporated; and (iii) to authorize the sale and issuance
of not more than 100,000 shares of stock in cancellation of indebtedness.

At a special meeting of the Company's shareholders held on October 5, 1994,
the shareholders (i) ratified the action of the Board of Directors in entering
into the Plan with KCD; (ii) adopted the resolution of the Board of Directors
amending the Articles of Incorporation to change the name of the Company to KCD
Holdings Incorporated; and (iii) elected a new Board of Directors. Pursuant to
the Plan, as amended, the Company exchanged 14,000,000 shares of its common
stock for 100% of the outstanding shares of KCD, making KCD a wholly owned
subsidiary.

On July 5, 1996, KCD Incorporated changed its name to SeQuester
Incorporated ("SeQuester"). On March 12, 1997, KCD Holdings Incorporated changed
its name to SeQuester Holdings, Incorporated.

On May 5, 2000 SeQuester incorporated a wholly-owned subsidiary, Diet
123.com. Inc., as a Nevada corporation.

Business Description

The Company is engaged in marketing and distributing a line of diet aid
products, including a specially formulated dietary supplement sold under the
name "SeQuester(R) 1" and a Phytosterol dietary supplement which inhibits
dietary cholesterol absorption sold under the name "PhytoQuest(TM)". These
products are collectively referred to herein as the Company's "SeQuester
products".

Principal Product

SeQuester(R)1

SeQuester(R) 1 is a dietary supplement marketed as part of a plan to aid in
weight loss (the "SeQuester Plan"). The SeQuester Plan consists of three
components: a recommended low-calorie, low-fat diet; an exercise regimen; and
the SeQuester(R) 1 dietary supplement itself.

The SeQuester(R) 1 dietary supplement contains a combination of soluble and
insoluble fibers. Dietary fiber has been shown in published studies to reduce
feelings of hunger and contribute to weight loss, although no specific weight
loss claims are made for the SeQuester(R) 1 dietary supplement except as part of
the SeQuester Plan. In clinical studies sponsored by the Company at the
University of California at Los Angeles, subjects who followed a diet and
exercise plan similar to the SeQuester Plan experienced meaningful weight loss,
although no weight loss effect was shown for the SeQuester dietary supplement
alone.

Additional Product

PhytoQuest(TM)

During the 1997 fiscal year, the Company introduced PhytoQuest(TM), a
phytosterol dietary supplement which inhibits dietary cholesterol absorption.

2
<PAGE> 3

Trademarks

The Company's trademark, SeQuester(R), was registered on May 28, 1996. The
Company filed trademark applications for ChromaQuest(TM) and PhytoQuest(TM) in
February 1997. The Company will continue the ongoing process of application and
expects final approval of its trademark applications. However, if these
approvals are not ultimately received, this could adversely impact the Company's
exclusive rights to the product names and market identity.

Manufacturing

SeQuester(R) 1 is manufactured for the Company by a West Coast manufacturer
in its own facility. The Company places purchase orders for SeQuester(R) 1
tablets on an as needed basis and the manufacturer delivers the finished tablets
in bulk to the Company's packagers. The Company's manufacturer of SeQuester(R) 1
is generally able to deliver purchase orders in their entirety within five to
seven weeks, with partial delivery commencing within three weeks from when the
purchase order is placed.

In April 1996, the Company entered into a five year supply agreement with a
major manufacturer to produce all of the Company's SeQuester(R) 1 product
requirements for resale within the United States and Canada. This agreement also
provides exclusive rights for the Company to sell the SeQuester(R) 1 product to
retail stores and certain wholesalers.

The Company believes that its current manufacturers have sufficient
capacity to satisfy its purchase orders for product during the foreseeable
future. Additional manufacturers have been identified by the Company in the
event additional capacity is required, or the Company experiences any unforeseen
problems with its current manufacturers.

The boxes and package inserts are prepared and printed for the Company and
delivered to the packagers for inclusion in all the Company's SeQuester(R)
products.

The Company has no current plans to manufacture SeQuester(R) products
itself and intends to rely on outside manufacturers who the Company believes
have the capacity to fill all of its order requirements.

Advertising and Marketing

The Company believes that SeQuester(R) 1 is a technologically unique
product in comparison with existing dietary supplements and that the addition of
PhytoQuest(TM) to the Company's product line will greatly increase
SeQuester's(R) brand recognition. However, in order to more aggressively compete
in the weight loss industry, the Company believes that it is essential to
educate the consumer concerning the SeQuester Plan and the SeQuester(R) 1
technology and distinguish SeQuester(R) 1 from existing diet aid products, as
well as familiarize the public with all SeQuester(R) products. To this end, the
Company has determined that, based upon test market data, print, radio and
television media most effectively market its SeQuester(R) products. The Company
is attempting to develop an E-commerce internet strategy and presence through
its subsidiary Diet 123.com.Inc.

The Company has advertised its SeQuester(R) products in regional newspapers
and marketed its products in magazines, national network radio and television
programs, as well as cable television and the internet.

Significant Customers

The Company earned substantially all of its revenue for the fiscal years
ended January 31, 1999 and 2000 from the sale of its SeQuester(R) products
directly to consumers.

There are currently no sales made outside the United States.

Insurance

Although the Company considers its SeQuester products to be safe, it may be
subject to product liability claims from persons injured through their use. The
Company currently does not maintain insurance coverage for such claims or
Directors and Officers liability coverage.

<PAGE> 4

Government Regulation

Food and Drug Administration.

For purposes of regulation by the Food and Drug Administration ("FDA")
under the Food, Drug, and Cosmetic Act ("FDCA"), certain of the Company's
products are considered to be dietary supplements, and certain of the Company's
products are considered to be over-the- counter ("OTC") drugs. The manufacture,
distribution, marketing, storage, record-keeping, and labeling, as well as other
specified items relating to dietary supplements and OTC drugs, are subject to
comprehensive FDA regulation. Among the restrictions applicable to dietary
supplement products are that all labeling claims must be truthful and
substantiated and may not include any claims that the product diagnoses, treats,
cures, or prevents any disease. For OTC drugs such as those marketed by the
Company, ingredients and labeling claims must be in conformity with specific
product monographs contained in FDA regulations. Although the Company believes
that its SeQuester(R) products currently comply with applicable laws and
regulations administered by the FDA in these respective areas, FDA enforcement
policy is still evolving, particularly with respect to dietary supplements.
There can be no assurance that the FDA will not take enforcement action against
one or more of the Company's products on labeling or other grounds. Such
enforcement action could have serious negative implications for the Company.

FDA approval is required before any new drug can be marketed. SeQuester(R)
1 and PhytoQuest(TM) are dietary supplements and therefore are not subject to
FDA approval as drugs, provided that, in the course of marketing or advertising
such products, the Company does not make claims of a medicinal or therapeutic
nature. The Company believes that it is currently in substantial compliance with
all applicable material FDA regulations.

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) 1 product were 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 was given final approval by the FTC on June
16, 1997, and required the Company to pay $150,000 to the FTC and maintain
adequate substantiation for future advertising claims. The payment was paid in
full prior to January 31, 1999. The consent order also requires the Company to
maintain adequate substantiation for future advertising claims. The Company and
two of its former officers and directors will be subject to substantial monetary
penalties in the event of non- compliance with the consent order. Such
penalties, if imposed, could have a material adverse effect on the Company.

Environmental Compliance.

The Company's SeQuester(R) products are not subject to material
environmental regulation at this time and the Company does not anticipate that
future regulation will affect the manufacture of its SeQuester(R) products.

Competition

The Company operates within a highly competitive environment. The Company
competes primarily on the basis of the uniqueness of its products, quality,
technological content, service and reliability as perceived by the user, and to
a lesser extent, on the basis of price. The Company competes, or will compete,
either directly or indirectly, with other companies involved in the diet and
weight loss industry. Many of the Company's present and potential competitors
have substantially greater financial resources, larger research and development
budgets and staff, greater sales volume and larger sales forces than the
Company.

Employees

The Company has two employees, one full-time and one part-time. The full
time employee is engaged in management, marketing, administrative and support
activities. None of the Company's employees is subject to a collective
bargaining agreement and the Company believes its relations with its employees
are good.

<PAGE> 5

ITEM 2. DESCRIPTION OF PROPERTY.

The Company's principal place of business is located at 23852 Pacific Coast
Highway, #434, Malibu, California 90265 where the Company currently leases
office and business property on a month-to-month basis.

The Company also leases warehouse space on a month to month basis in Pine
Brook, New Jersey at the facilities of its East Coast packager.

The Company has no long term lease for either its office or warehouse
facilities.

ITEM 3. LEGAL PROCEEDINGS.

The Company is currently involved in the following legal actions. In the
opinion of the management, the Company has adequate legal defenses with respect
to these actions, as noted below:

McKesson Corporation vs. SeQuester Incorporated, et al.

In July 1998, McKesson Corporation filed an action against the Company in
the Superior Court of California for the County of Ventura. The complaint
alleges causes of action for breach of contract, account stated and open book
account. The complaint is based on the alleged failure of the Company to issue
credits the unsaleable product which has either been returned or destroyed.
Plaintiff has alleged damages in the amount of $304,404 plus interest and
attorney's fees. The Company was unable to settle and allowed McKesson to file a
judgement for the original amount of $304,404 entered on June 30, 1999. The
Company is continuing to attempt a settlement in this matter.

Except as otherwise 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 January 31,
2000.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Subsequent to the year-ended January 31, 2000, the Company donated bulk of
its inventory to a charitable organization. The original cost of the inventory
was $868,877. An allowance for obsolescence of $868,877 has been provided
against this inventory in the financial statements.

During the fourth quarter of each of the fiscal years ended January 31,
1999 and January 31, 2000 no matter was submitted to a vote of security holders.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Until March, 2000 the Company's Common Stock was quoted on the OTC Bulletin
Board under the symbol "SQES" (formerly "KCDH", "SQTR", "SQST", "KCDH"). A
limited trading market exists for the Common Stock. The high and low bid prices
for the Common Stock, are indicated for the periods described below. Such prices
are interdealer prices without retail mark-ups, mark-downs, or commissions and
may not necessarily represent actual transactions.

QUARTER ENDED Bid Prices
------------- ---------------
High Low
---- ---
<S> <C> <C>
April 30, 1998 8.75 1.25
July 31, 1998 4.40 1.625
October 31, 1998 4.10 1.50
January 31, 1999 4.10 1.50
April 30, 1999 2.00 1.40
July 31, 1999 1.75 1.25
October 31, 1999 2.20 1.00
January 31, 2000 3.40 0.50
</TABLE>

<PAGE> 6

On February 25, 1998, the Company effected a reverse split of its common
stock in the ratio of one new share for ten old shares.

On March 21, 2000 the Company effected a reverse split of its common stock
in the ratio of one new share for ten old shares.

The Bid Prices listed above have not been restated for the reverse stock
splits.

On January 31, 2000, there were approximately 600 shareholders of record of
the Company's Common Stock. On January 31, 2000, the closing bid and ask prices
for the Common Stock reported by the Reuters Limited were $0.20 and $0.34
respectively.

To date, the Company has not declared or paid any cash dividends with
respect to its Common Stock. The current policy of the Board of Directors is to
retain earnings, if any, to provide for the growth of the Company. Consequently,
no dividends are expected to be paid on the Common Stock in the foreseeable
future. Furthermore, there can be no assurance that the future operations of the
Company will generate the revenues and cash flow sufficient to declare a cash
dividend or that the Company will have legally available funds to pay dividends.

The Transfer Agent for the Company is Jersey Transfer & Trust Company,
located in Verona, New Jersey.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS 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. 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. 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.

<PAGE> 7

Market leaders in the weight reduction industry include Dexatrim(TM) and
Accutrim(TM), with several additional smaller product marketers.

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 twelve month period ended January 31, 2000 compared to the twelve
month period ended January 31, 1999:

Revenues are derived from sales of the dietary fat sequestrant product and,
commencing in October 1996, from PhytoQuest(TM), a dietary supplement designed
to reduce cholesterol from the food you eat. Gross Revenues for the twelve
months ended January 31, 2000 were $146,779 compared to $238,882 for the twelve
months ended January 31, 1999.

<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
----------------------------------
JANUARY 31, 2000 JANUARY 31, 1999
---------------- ----------------
<S> <C> <C>
Gross Revenues $147,177 $574,063
-------- --------
Discounts:
Refunds and Returns 398 291,190
Introductory and Promotional -- 8,896
Co-op Advertising -- 35,095
Other -- --
-------- --------
Total Discounts 398 335,181
-------- --------
Net Revenues 146,779 238,882
======== ========

</TABLE>

TWELVE MONTHS ENDED
----------------------------------
JANUARY 31, 2000 JANUARY 31, 1999
---------------- ----------------
<S> <C> <C>
Net Revenues $ 146,779 $ 238,882
Cost of Goods Sold 28,000 373,879
--------- ---------
Gross (Loss) Profit 118,779 (134,996)
========= =========
</TABLE>

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 twelve month period ended January 31, 2000 of $359,877
was incurred principally as a result of (i) a decrease in sales, and (ii) an
increase in the allowance for inventory obsolescence and expense for
deteriorated products. The net loss for the twelve month period ended January
31, 1999 of $2,431,049 was the result of merchandise returned by distributors
and other customers.

Net loss per common share was $0.55 for the twelve months ended January 31,
2000 and $6.25 for the twelve months ended January 31, 1999 based on the
weighted average shares of common stock outstanding. The net loss per common
share has been restated to retroactively effect a reverse stock split in the
ratio of one share for ten shares.

The Company believes that net losses for the period from inception through
January 31, 2000 are consistent with the initial development of the Company, its
major advertising campaign and its introduction of the SeQuester(R) products.

For the twelve month period ended January 31, 2000 compared to the twelve
month period ended January 31, 1999:

<PAGE> 8
Revenues are derived from sales of the dietary fat sequestrant product and
from PhytoQuest(TM), a dietary supplement designed to reduce cholesterol from
the food you eat. Gross Revenues for the twelve months ended January 31, 2000
were $147,177 compared to $574,063 for the twelve months ended January 31,1999.
Gross Revenues have been reduced for a variety of discounts to provide Net
Revenues of $146,779 for the twelve months ended January 31, 2000 and $238,882
for the twelve months ended January 31, 1999.

The significant decrease in Gross Revenues resulted from a hold on the
Company's marketing campaign and a change in sales direct to consumers.

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, 2000, revenues from operations
have been insufficient to satisfy operating expenses, product development and
legal costs. The Company, therefore has been dependent on the private placement
of securities and loans from private investors and stockholders.

The Company faces continuing significant business risks, including but not
limited to, its ability to maintain vendor and supplier relationships by making
timely payments when due. The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.

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 January 31, 2000 of $13,089,291 including net
losses of $359,877and $2,431,049during the fiscal years ended January 31, 2000
and 1999, respectively.

Management devoted considerable effort during the twelve months ended
January 31, 2000 and 1999 and towards (i) obtaining additional equity financing
(ii) settlement of remaining litigation matters (iii) reduction of salaries and
general and administrative expenses (iv) reduction of inventories (v) management
of accounts payable and (vi) evaluation of its distribution and marketing
methods.

Management has reduced its administrative expenses and anticipates
additional distribution methods for its SeQuester(R) products during the
remainder of 2000.

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.

In May 1996, the Company issued 40,000 shares of restricted 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 August 1996, the
Company issued 150,000 shares of common stock under the terms of a consulting
agreement for advertising, design and marketing services, and a stock purchase
agreement. In April 1997, the stock purchase agreement was canceled and
previously issued shares thereunder were returned to the Company and retired.

During the twelve months ended January 31, 1997, the Company issued an
aggregate of 44,047 shares of restricted common stock to commission sales
brokers and 62,851 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

<PAGE> 9
common stock or (ii) $2.00 per share. During the period June 1996 through
January 31, 1997, 695,027 shares were issued for net proceeds of $1,192,022.

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 agreement wherein that stockholder has the right, upon his election, to
sell to the Company a total of 125,000 shares of Company common stock at $2.00
per share at any time between October 17, 1996 and April 17, 1997. The put
option agreement expired on April 17, 1997.

In January 1997, the Company authorized issuance of a series of 5,000
shares of Convertible Preferred Stock and designated an initial issuance of 750
shares of Series A Convertible Preferred Stock with a par value of $1,000 per
share. Upon any liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, the holders of Series A Shares shall be entitled,
before any distribution or payment is made upon any shares of common stock or
any preferred stock junior in rank to the Series A Shares, to be paid an amount
per share equal to the liquidation value (the "Liquidation Value"). The per
share Liquidation Value of the Series A Shares on any date is equal to the sum
of the following: (i) $1,000, plus (ii) an amount equal to any accrued and
unpaid dividends from the issuance date. In January 1997, the Company sold 375
shares and in February 1997 sold an additional 375 shares to two accredited
investors receiving gross proceeds of $750,000. The Company paid placement and
finder's fees aggregating 15% of the gross proceeds in connection with this
financing.

The Series A Shares are convertible into the Company's common stock, in
phases following the date of issuance (the "Closing Date"). The Series A Shares
are entitled to a 6% cumulative dividend payable in common stock at the time of
conversion and all of the Series A Shares are subject to a mandatory 12 month
conversion feature. One-third of the Series A Shares are convertible into common
stock at any time 45 days after the Closing Date; an additional one-third
(two-thirds cumulatively) are convertible into common stock at any time 60 days
after the Closing Date; and an additional one-third (the entire amount
cumulatively) are convertible into common stock at any time 75 days after the
Closing Date. The number of common shares issuable upon conversion of the Series
A Shares equals the par value of the Series A Shares plus accrued dividends
through the date of conversion divided by the lessor of (i) 70% of the "Market
Price" (the 5 day average closing bid for the common stock for the 5 business
days immediately preceding the conversion date); or (ii) 100% of the 5 day
average closing bid for the common stock for the 5 business days immediately
preceding the Closing Date. Provided, that, for any conversions of the Series A
Shares occurring after the 89th day following the Closing Date the conversion
rate will be the lessor of (i) 65% of the Market Price; or (ii) 100% of the 5
day average closing bid for the common stock for the 5 business days immediately
preceding the Closing Date.

In August 1997, the Company entered into an agreement with the convertible
preferred stockholders to (i) delay conversion of the remaining 460 outstanding
series A preferred shares through November 30, 1997 and (ii) offer to sell to
the Company the remaining 460 outstanding series A preferred shares at par value
at any time through November 30, 1997. As consideration for this agreement, the
Company issued an aggregate of 300,000 shares of restricted common stock to such
preferred stockholders.

Through January 31, 2000, an aggregate of 530 shares of outstanding
preferred stock were converted into 5,330,876 shares of Company common stock.

In March 1997, the Company entered into an agreement with certain
stockholders to convert the outstanding principal balance of their loans as of
March 31, 1997, which was $343,600, to 1,047,242 restricted common shares of
Company stock. The principal balance of such loans was 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.

In August 1997, the Company restated its Consulting Agreement and Stock
Plan with a consultant, dated February 1, 1996 to extend the term of such
agreement for a three-year period commencing August 1, 1997 and issued 1,000,000
shares of registered Company common stock to such consultant.

In December 1997, the stockholders of the Company approved amendments to
the Company's Articles of Incorporation to provide for a reverse stock split of
the Company's common stock in the ratio up to one share for ten shares as the
Board of Directors, in its discretion, may determine.

In August 1998, the Company issued 200,000 shares in payment of settlement
of Geotermica lawsuit, 220,000 shares for settlement of Krigman lawsuit and
30,000 shares in payment of legal services. All of these shares are subject to
Rule 144 restrictions.

<PAGE> 10

In August 1998, the Company issued 30,000 shares of restricted common stock
in exchange for legal and consulting services. The Company is also contingently
liable to issue up to an additional 36,000 shares of restricted common stock in
connection with a settlement agreement. The Company has claims which partially
offset this obligation. In March 2000, the Company issued 25,000 restricted
common stock as compensation to an employee and 50,000 restricted common stock
in exchange for debt cancellation.

In October of 1998, the Company issued 650,000 shares to Steven Karsh and
2,500,000 to Nina Leslie Maier for cancellation of debt to Karsh and partial
payment of secured loan to Maier. These shares are subject to Rule 144.

In March 1999, the Company issued 25,000 shares of common stock as
compensation to an employee and 50,000 shares in exchange of debt cancellation
for $.10 per share due to the restrictive nature of those shares. These shares
are subject to Rule 144 restrictions.

In March 2000, the Company issued 150,000 shares of common stock in payment
of debt to a supplier.

In March of 2000, Steven Karsh purchased 1,500,000 shares pre-split from
Nina Leslie Maier leaving Ms. Maier with 1,000,000 shares pre-split.

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 loan from stockholder represents amounts due to Steven Karsh, President
of the Company, consisting of $414,117 and $197,000 as of January 31, 2000 and
1999, respectively. The loan is unsecured, interest free and due on demand.

The Company does not believe that general inflation would have a material
effect on its operations.

Included in this Item 6. "Management's Discussion and Analysis 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, the effectiveness of advertising and revised
distribution and marketing methods) 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.

ITEM 7. FINANCIAL STATEMENTS

The following financial statements are filed as part of this Form 10-KSB

FINANCIAL STATEMENTS:
---------------------

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets at
January 31, 2000 and January 31, 1999 F-3
Consolidated Statements of Operations for the
twelve months ended January 31, 2000 and 1999 F-4
Consolidated Statement of Stockholders' Investment
for the twelve months ended January 31, 2000 and 1999 F-5
Consolidated Statements of Cash Flows
for the twelve months ended January 31, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-7

</TABLE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH THE ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

On April 4, 2000, the Company engaged Kabani & Co., Inc., Certified Public
Accountants ("Kabani") to audit the financial statements of the Company. At no
time prior to such date had the Company consulted Kabani regarding any
accounting matters. Management believes that a smaller accounting firm would be
more cost effective and more readily accessible for consultation.

There was no disagreement with the prior accounting firm, Grant Thornton,
and the severance was amicable.

<PAGE> 11

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.

Officers and Directors

The Officers and Directors of the Company are:

<TABLE>
<CAPTION>
Officer and/or
NAMES AND ADDRESSES Age Position Director Since
------------------- ---- -------- --------------
<S> <C> <C> <C>
Steven K. Karsh 54 President, Principal 1997
23852 Pacific Coast Highway Accounting Officer and
Malibu, CA 90265 Director

Stephen R. Miller, M.D. 57 Director 1996
3000 East County Road, 400 North
Muncie, IN 47303

</TABLE>

All directors hold office until the next annual meeting of stockholders,
and until they or their successors have been elected and qualified. Officers
serve at the discretion of the Board of Directors.

Steven K. Karsh: During the five year period prior to 2000, Mr. Karsh was a
real estate executive including sales, investing and leasing both residential
and commercial properties. His prior work experience also includes
re-organizations and turnarounds for wholesale, retail and mass-merchandising
corporations. Mr. Karsh became the President and a Director of the Company in
October 1997. He is a graduate of Hunter College in New York, New York and
Brooklyn College of Law, also in New York.

Stephen R. Miller, M.D.: Stephen Miller, M.D. was an emergency room staff
physician at Ball Memorial Hospital and a Director of Emergency Physicians
Delaware County, Indiana during the period 1971-1994. Since 1995, Stephen Miller
has been the owner and operator of the Immediate Care Center in Muncie, Indiana.
He has a B.S. degree from De Pauw University and an M.S. and M.D. from Indiana
University.

No director holds a directorship in any other public company.

ITEM 10. EXECUTIVE COMPENSATION.

The following table sets forth compensation paid by the Company for the
three prior fiscal years ended January 31, 2000 to all its executive officers.

SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------------------- -----------------------------------
AWARDS PAYOUTS
----------------------- ----------
Restricted Underlying LTIP All Other
Name and Current Other Annual Stock Options/ Payouts Compensation
Principal Positions Year Salary Bonus Compensation Award(s)($) SARs(#) ($) ($)
------------------- ---- ------ ----- ------------ ----------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steven K. Karsh 2000 -- -- -- -- -- -- --
President and Principal Accounting 1999 -- -- -- -- -- -- --
Officer 1998 -- -- -- -- -- -- --

</TABLE>

<PAGE> 12

Directors received no compensation for their services as such for the three
fiscal years ended January 31, 2000. The Company does not currently intend to
pay directors any cash compensation for services, but will reimburse them for
out-of-pocket expenses they may incur on behalf of the Company. No such expenses
were reported or reimbursements provided for the fiscal years ended January 31,
1998, 1999 and 2000.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The table below sets forth certain information regarding the beneficial
ownership of the Company's common stock as of January 31, 2000 based on
information available to the Company by (i) each person who is known by the
Company to own more than 5% of the outstanding common stock; (ii) each of the
Company's directors; (iii) each of the Named Executive Officers; and (iv) all
officers and directors of the Company as a group.

NAME AND ADDRESS Amount and Nature of Percentage
OF BENEFICIAL OWNER Beneficial Owner of Class(1)
------------------- -------------------- -----------
<S> <C> <C>
Stephen R. Miller, M.D. -0- 0%
3000 East County Road, 400 North
Muncie, IN 47303

Steven Karsh 650,000 9.98%
25312 Malibu Road
Malibu, CA 90265

Directors and Officers as a Group 650,000 9.98%

</TABLE>

(1) Included for the purposes of this calculation are 6,517,732 shares of
Common Stock outstanding as of January 31, 2000.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The Company has signed an agreement with the President of the Company to
receive consulting services. The agreement is effective from October 1, 1997 and
runs for five years. The annual compensation for the consulting services is
$180,000. Per the agreement, any amount outstanding under the agreement can be
exchanged for common stock of the Company at $.10 per share, at the option of
the President of the Company.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

EXHIBIT
NUMBER Title of Exhibit
------ ----------------
3.1 Articles of Incorporation of the Company, as amended(1)

3.2 Certificate of Amendment to the Articles of Incorporation(6)

3.3 Bylaws of the Company, as amended(1)

4.1 Warrant Agreement and Form of Warrant Applicable to the A, B,
and C Warrants(1)

10.1 First Amended License Agreement dated May 10, 1995(2)

<PAGE> 13

Exhibit
Number Title of Exhibit
------ ----------------

10.2 Agreement for National Network Radio Advertising, dated May 26, 1995,
by and between the Company and Premiere Radio Networks, Inc.(3)

10.3 Consulting Agreement and Stock Plan, dated February 1, 1996, by and
between the Company and Hy Ochberg(5) 10.4 Indemnification Agreement,
dated May 29, 1996, by and between the Company and Wellington Ewen(6)

10.5 Indemnification Agreement, dated May 29, 1996, by and between the
Company and Dr. Stephen Miller(6) 10.6 Agreement Containing Consent
Order, dated December 18, 1996, by and between the Company and the
Federal Trade Commission(6)

10.7 SeQuester Holdings Incorporated 1997 Stock Plan(6)

10.8 Agreement for Retirement of KCD Holdings Option Shares, dated
September 12, 1996, by and between the Company and Denise van Daalen
Wetters(6)

10.9 Agreement for Retirement of KCD Holdings Option Shares, dated
September 12, 1996, by and between the Company and Wellington Ewen(6)

10.10 Amendment to Employment Agreement, dated March 26, 1997, by and
between the Company and Denise van Daalen Wetters(6)

10.11 Amendment to Employment Agreement, dated March 26, 1997, by and
between the Company and Wellington Ewen(6)

10.12 Letter Agreement for Conversion of Outstanding Debt, dated March 24,
1997, by and between the Company and Pelle Leather, Ltd.; Growth
Science Ventures, Inc.; L.E. International Ltd.; Phillip Dascher;
Joseph Tischler; Gerald Epstein; and Stuart Needleman(6)

10.13 Consulting Services Agreement, dated March 24, 1997, by and between
the Company and Mike Ditka(6)

10.14 Consulting Services Agreement, dated April 15, 1997, by and between
the Company and Gerald Hatto(6)

10.15 Termination Agreement, dated April 15, 1997, by and between the
Company and Gerald Hatto(6)

10.16 Stock Option Grant Agreement, dated March 26, 1997, by and between the
Company and Wellington Ewen(6)

10.17 Stock Option Grant Agreement, dated March 26, 1997, by and between the
Company and Denise van Daalen Wetters(6)

10.18 Stock Option Grant Agreement, dated March 26, 1997, by and between the
Company and Gerald Hatto(6)

10.19 Amendment to Stock Option Grant Agreement, dated April 15, 1997, by
and between the Company and Bonnie Richards(6)

10.20 Regulation S Distribution Agreement, dated March 29, 1996, by and
between the Company and Berkshire International Finance(6)

10.21 Covenant Agreement, dated March 29, 1996, by and between the Company
and Berkshire International Finance(6)

10.22 Amendment to Regulation S Distribution Agreement, dated April 17,
1996, by and between the Company and Berkshire International
Finance(6)

10.23 Regulation S Distribution Agreement, dated June 26, 1996, by and
between the Company and Berkshire International Finance(6)

10.24 Covenant Agreement, dated June 26, 1996, by and between the Company
and Berkshire International Finance(6)

10.25 Offshore Securities Subscription Agreement(6)

10.26 Warrant Agreement dated April 15, 1997, by and between the Company and
Berkshire International Finance(6)

(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-18, which was declared effective by the Commission on August 7,
1987, and incorporated herein by this reference.

(2) Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB, filed with the Commission on May 14, 1995, and incorporated herein
by this reference.

(3) Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB, filed with the Commission on May 10, 1996, and incorporated herein
by this reference.

<PAGE> 14

(4) Previously filed as an exhibit to the Company's Registration Statement on
Form S-8, which was filed with the Commission on January 2, 1996, and
incorporated herein by this reference.

(5) Previously filed as an exhibit to the Company's Registration Statement on
Form S-8, which was filed with the Commission on June 28, 1996, and
incorporated herein by this reference.

(6) Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB, filed with the Commission on April 30, 1997, and incorporated
herein by this reference.

(b) Reports on Form 8-K:

The Company filed a Form 8-K giving notice that Grant Thornton had been
terminated as the accounting firm of record. An additional Form 8-K was filed on
April 19, 2000 giving notice that on April 4, 2000, the Company engaged Kabani &
Co., Inc., Certified Public Accountants. On the same Form 8-K notice was given
that effective March 10, 2000, the Company effected a one for ten reverse split
of its outstanding shares of common stock. Fractional shares resulting from the
reverse split will not be issued but will be rounded up to a whole number.

<PAGE> 15

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
(Registrant)

Dated: July 31, 2000 By: /s/ Steven K. Karsh
-------------------------------
Steven K. Karsh
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.

SIGNATURE Title Date
--------- ----- -----
<S> <C> <C>
/s/ Steven K. Karsh President, Principal Accounting Officer, July 31, 2000
----------------------------- and Director
Steven K. Karsh

/s/ Stephen R. Miller, M.D. Director July 31, 2000
-----------------------------
Stephen R. Miller, M.D.

</TABLE>

<PAGE> 16

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Sequester Holdings, Incorporated:

We have audited the accompanying consolidated balance sheets of Sequester
Holdings, Incorporated (a Nevada corporation) and subsidiary (the "Company") as
of January 31, 2000, and 1999 and the related consolidated statements of
operations, stockholders' deficit and cash flows for the twelve month periods
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Sequester Holdings, Incorporated and subsidiary as of January 31, 2000 and 1999,
and the consolidated results of their operations and their consolidated cash
flows for the twelve month periods then ended in conformity with generally
accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company's revenues have declined substantially and the
company incurred net losses of $359,877 and $2,231,049 during the twelve month
periods ended January 31, 2000 and 1999, respectively. The company's total
liabilities exceed its total assets by $1,854,793 at January 31, 2000. These
factors, among others, as discussed in Note 3 to the consolidated financial
statements, raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 3. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

CERTIFIED PUBLIC ACCOUNTANTS

Fountain Valley, California
June 14, 2000

F-1

<PAGE> 17

SEQUESTER HOLDINGS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2000 AND 1999
<TABLE>
<CAPTION>

JANUARY 31, JANUARY 31,
ASSETS 2000 1999
------ ------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash & cash equivalents $ 4,570 $ 8,199
Accounts receivable, net 225,608 225,608
Inventory 157,298 180,705
------------ ------------
Total current assets 387,476 414,512

PROPERTY AND EQUIPMENTS, NET 5,899 9,939
OTHER ASSETS:
Prepaid consulting fees -- 66,277
Deposits 1,394 1,394
Intangibles, net 1,426 1,620
------------ ------------
Total other assets 2,820 69,291
------------ ------------
$ 396,195 $ 493,742
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------

CURRENT LIABILITIES:
Accounts payable $ 582,330 $ 585,581
Accrued expenses 342,107 301,143
Returns pending 260,000 260,000
Customer credit balances 852,434 852,434
Loans from stockholders 414,117 197,000
------------ ------------
Total current liabilities 2,450,988 2,196,158

COMMITMENTS AND CONTINGENCIES (SEE NOTES)
STOCKHOLDERS' DEFICIT:
Common stock, par value $.002 per share; 25,000,000 13,035 12,885
shares authorized; issued and outstanding 6,517,732
shares as of January 31, 2000 and 6,442,732 shares
as of January 31, 1999
Convertible Preferred stock, par value $1,000 per share; 220,000 220,000
5000 shares authorized; issued and outstanding 220 of
series A as of January 31, 2000 and 1999
Additional paid in capital 10,801,463 10,794,113
Accumulated deficit (13,089,291) (12,729,414)
------------ ------------
Total stockholders' deficit (2,054,793) (1,702,416)
------------ ------------
Total liabilities and stockholders' deficit $ 396,195 $ 493,742
============ ============

</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements

F-2

<PAGE> 18

SEQUESTER HOLDINGS, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE TWELVE MONTHS ENDED JANUARY 31, 2000 AND 1999
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
2000 1999
----------- -----------
<S> <C> <C>
NET REVENUE $ 146,779 $ 238,882
COST OF GOODS SOLD 28,000 373,878
----------- -----------
GROSS PROFIT (LOSS) 118,779 (134,996)
Operating expenses:
General and administrative 477,856 1,243,566
Allowance for inventory obsolescence -- 725,866
----------- -----------
LOSS FROM OPERATIONS (359,077) (2,104,428)
Non- operating income (expense):
Litigation settlement (241,706)
Interest expenses -- (86,474)
Miscellaneous income -- 2,359
----------- -----------
Total non-operating income (expenses) -- (325,821)
----------- -----------
LOSS BEFORE INCOME TAXES (359,077) (2,430,249)

Provision for income taxes 800 800
----------- -----------
NET LOSS $ (359,877) $(2,431,049)
=========== ===========
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING, BASIC & DILUTED 650,951 388,741
=========== ===========
BASIC & DILUTED NET INCOME (LOSS) PER SHARE* $ (0.55) $ (6.25)
=========== ===========

</TABLE>

* The basic net loss per share has been restated to retroactively effect a
reverse stock split in the ratio of one share for ten shares.

F-3

<PAGE> 19

SEQUESTER HOLDINGS, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE TWELVE MONTHS ENDED JANUARY 31, 2000 AND 1999

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------------------- -------------------------- PREPAID
NUMBER OF PAR NUMBER OF PAR ADDITIONAL ACCUMULATED ADVERTISING STOCKHOLDERS'
SHARES VALUE SHARES VALUE PAID IN CAPITAL DEFICIT & CONSULTING EQUITY (DEFICIT)
-------- --------- ------------ --------- ---------------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance
January 31, 1998 350 $ 350,000 22,846,109 $ 45,692 $ 10,508,670 $(10,298,365) $(508,096) $ 97,901

Reverse stock split -- -- (20,561,476) (41,123) 41,123 -- -- --

Conversion of
preferred stock (130) (130,000) 505,734 1,011 128,989 -- -- --

Conversion of debt to
common stock -- -- 2,552,365 5,105 31,156 -- -- 36,261

Issuance of common
stock in litigation
settlements -- -- 420,000 840 41,460 -- -- 42,300

Issuance of common
stock for consulting
and legal fees -- -- 680,000 1,360 42,715 -- -- 44,075

Amortization of
prepaid advertising
and consultiing fees -- -- -- -- -- -- 508,096 508,096

Net loss for the
year ended
Jan. 31, 1999 -- -- -- -- -- (2,431,049) -- (2,431,049)
--- --------- --------- -------- ------------ ------------ --------- ------------
Balance
January 31, 1999 220 $ 220,000 6,442,732 $ 12,885 $ 10,794,113 $(12,729,414) $ -- $ (1,702,416)
=== ========= ========= ======== ============ ============ ========= ============

Issuance of common
stock for consulting
and legal fees -- -- 25,000 50 2,450 -- -- 2,500

Conversion of debt to
common stock -- -- 50,000 100 4,900 -- -- 5,000

Net loss for the
year ended
Jan. 31, 2000 -- -- -- -- -- (359,877) -- (359,877)
--- --------- --------- -------- ------------ ------------ --------- ------------
Balance
January 31, 2000 220 $ 220,000 6,517,732 $ 13,035 $ 10,801,463 $(13,089,291) $ -- $ (2,054,793)
=== ========= ========= ======== ============ ============ ========= ============

</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements

F-4

<PAGE> 20

SEQUESTER HOLDINGS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWELVE MONTHS ENDED JANUARY 31, 2000 AND 1999

<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (359,877) $(2,431,049)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 4,234 40,626
Reduction of prepaid consulting fees -- 441,819
Stock issued for advertising and other expenses 2,500 65,625
Litigation settlements 5,000 57,011
Provision for obsolete inventory -- 725,866
(Increase) / decrease in current assets:
Accounts receivable -- (55,746)
Inventory 23,407 204,238
Prepaid consulting fees 66,277 --
Increase / (decrease) in current liabilities:
Accounts payable (3,251) (41,417)
Accrued expenses 40,964 (83,870)
Returns pending payable -- 260,000
Customer credit balances -- 644,522
Commissions payable -- (49,774)
FTC payable -- (41,672)
----------- -----------
Net cash used in operating activities (220,746) (263,821)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans from stockholders 217,117 197,000
----------- -----------
NET DECREASE IN CASH (3,629) (66,821)

CASH, BEGINNING BALANCE 8,199 75,020
----------- -----------
CASH, ENDING BALANCE $ 4,570 $ 8,199
=========== ===========

</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements

F-5

<PAGE> 21

SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999

1. 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
form 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),
ChromaQuester(TM) and PhytoQuester (TM). These products are sold to national
drug and food chain retailers, wholesalers and mass merchandisers throughout the
United States.

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, ChromaQuester(TM) in addition to SeQuester(R) 1 in December 1995.
Additionally, the Company introduced its fourth product, PhytoQuest(TM) , in
October 1996. The preceding products are collectively known as the SeQuester(R)
brand products. To date, the Company has developed access to major domestic
retail, pharmacy and mass merchandiser chains in the United States.

The accompanying consolidated financial statements of the Company and its
subsidiary have been prepared in accordance with generally accepted accounting
principles. All significant inter-company balances and transactions have been
eliminated in consolidation.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect 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 1998 consolidated financial statement
presentation to conform with the 1999 and 2000 consolidated financial statement
presentation.

F-6
<PAGE> 22

SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS

The Company considers all liquid investments with a maturity of three months or
less from the date of purchase that are readily convertible into cash to be cash
equivalents.

USE OF ESTIMATES

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 and disclosure of
contingent 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.

PROPERTY & EQUIPMENT

Property and equipment is carried at cost. Depreciation of property and
equipment is provided using the straight-line method over the estimated useful
lives of the assets. Expenditures for maintenance and repairs are charged to
expense as incurred.

INCOME TAXES

Deferred income tax assets and liabilities are computed annually for differences
between the financial statements and tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted laws
and rates applicable to the periods in which the differences are expected to
affect taxable income (loss). Valuation allowance is established when necessary
to reduce deferred tax assets to the amount expected to be realized.

BASIC AND DILUTED NET LOSS PER SHARE

Net loss per share is calculated in accordance with the Statement of financial
accounting standards No. 128 (SFAS No. 128), "Earnings per share". SFAS No. 128
superseded Accounting Principles Board Opinion No.15 (APB 15). Net loss per
share for all periods presented has been restated to reflect the adoption of
SFAS No. 128. Basic net loss per share is based upon the weighted average number
of common shares outstanding. Diluted net loss per share is based on the
assumption that all dilutive convertible shares and stock options were converted
or exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period. The net loss per common share has been restated to retroactively
effect a reverse stock split in the ratio of one share for ten shares.

F-7
<PAGE> 23

SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999

STOCK-BASED COMPENSATION

In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 prescribes accounting and reporting standards for
all stock-based compensation plans, including employee stock options, restricted
stock, employee stock purchase plans and stock appreciation rights. SFAS No. 123
requires compensation expense to be recorded (i) using the new fair value method
or (ii) using the existing accounting rules prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for stock issued to employees" (APB 25) and
related interpretations with proforma disclosure of what net income and earnings
per share would have been had the Company adopted the new fair value method. The
Company adopted this standard in 1998 and the implementation of this standard
did not have any impact on its financial statements.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of financial accounting standard No. 107, Disclosures about fair value
of financial instruments, requires that the Company disclose estimated fair
values of financial instruments. The carrying amounts reported in the statements
of financial position for current assets and current liabilities qualifying as
financial instruments are a reasonable estimate of fair value.

COMPREHENSIVE INCOME

Statement of financial accounting standards No. 130, Reporting comprehensive
income (SFAS No. 130), establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity, except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in
financial statements that are displayed with the same prominence as other
financial statements. The Company adopted this standard in 1998 and the
implementation of this standard did not have a material impact on its financial
statements.

REPORTING SEGMENTS

Statement of financial accounting standards No. 131, Disclosures about segments
of an enterprise and related information (SFAS No. 131), which superceded
statement of financial accounting standards No. 14, Financial reporting for
segments of a business enterprise, establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing

F-8
<PAGE> 24

SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999

performances. The Company adopted this standard in 1998 and the implementation
of this standard did not have a material impact on its financial statements.

PENSION AND OTHER BENEFITS

In February 1998, the Financing accounting standards board issued statement of
financial accounting standards No. 132, Employers' disclosures about pension and
other post-retirement benefits (SFAS No. 132), which standardizes the disclosure
requirements for pension and other post -retirement benefits. The Company
adopted this standard in 1998 and the implementation of this standard did not
have any impact on its financial statements.

ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE

In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (ASEC of AICPA) issued Statement of
position (SOP) No. 98-1, "Accounting for the costs of computer software
developed or obtained for internal use", effective for fiscal years beginning
after December 15, 1998. SOP N0. 98-1 requires that certain costs of computer
software developed or obtained for internal use be capitalized and amortized
over the useful life of the related software. The Company adopted this standard
in fiscal 1999 and the implementation of this standard did not have a material
impact on its financial statements.

COSTS OF START-UP ACTIVITIES

In April 1998, the ASEC of AICPA issued SOP No. 98-5, "Reporting on the costs of
start-up activities", effective for fiscal years beginning after December 15,
1998. SOP 98-5 requires the costs of start-up activities and organization costs
to be expensed as incurred. The Company adopted this standard in fiscal 1999 and
the implementation of this standard did not have a material impact on its
financial statements.

ACCOUNTING DEVELOPMENTS

In June 1998, the FASB issued SFAS No. 133, "Accounting for derivative
instruments and hedging activities", effective for fiscal years beginning after
June 15, 1999, which has been deferred to June 30, 2000 by publishing of SFAS
No. 137. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. This statement requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial condition and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative instrument depends on its intended use and the resulting
designation. The Company does not expect that the adoption of this standard will
have a material impact on its financial statements.

REVENUE RECOGNITION

The Company recognizes revenue from wholesalers, distributors and retailers at
the time of shipments, net of sales returns and allowances. The Company
maintains a reserve for returns which management

F-9
<PAGE> 25

SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999

considers adequate to cover estimated losses. In determining the reserve to be
maintained, management evaluates many factors including items which may be
resold and historical loss experience. The reserve for returns was $260,000 at
January 31, 2000 and 1999.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

In determining the allowance to be maintained, management evaluates many factors
including industry and historical loss experience. The allowance for doubtful
accounts is maintained at an amount management deems adequate to cover estimated
losses. The allowance for doubtful accounts at January 31, 2000 and 1999 was
$841,760 for trade receivables.

ADVERTISING

The Company expenses advertising costs as incurred.

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:

January 31, 2000 January 31, 1999
---------------- ----------------
<S> <C> <C>
Product Units $1,021,582 $1,049,582
Shipping supplies 4,593
---------- ----------
$1,026,175 $1,049,582
Less: allowance for Obsolescence 868,877 868,877
---------- ----------
$ 157,298 $ 180,705
========== ==========

</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.

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 ChromaQuester(TM)) and introduced a fourth
product, phytoQuest(TM) in October 1996. The Company has a significant
accumulated deficit and has incurred substantial losses from operations for the
period from inception through January 31, 2000.

The Company provides its product on unsecured credit to most of its customers,
the majority of which are national retail outlets.

F-10
<PAGE> 26

SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999

3. GOING CONCERN

The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which contemplate continuation of the
Company as a going concern. However, the Company's revenues have declined
substantially and the Company has incurred net losses from inception to January
31, 2000 of $13,089,291 including net losses of $359,877 and $2,431,049 during
the fiscal years ended January 31, 2000 and 1999, respectively. The continuing
losses have adversely affected the liquidity of the Company. Losses are expected
to continue for the immediate future. The Company's total liabilities exceed its
total assets by $2,054,793 at January 31, 2000. The Company faces continuing
significant business risks, including but not limited to, its ability to
maintain vendor and supplier relationships by making timely payments when due.

In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon continued operations of the Company, which in turn is
dependent upon the Company's ability to raise additional capital, obtain
financing and to succeed in its future operations. The financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.

Management has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with the
ability to continue as a going concern. Management devoted considerable effort
during the fiscal years ended January 31, 2000 and 1999, towards (I) obtaining
additional equity financing (ii) settlement of remaining litigation matters
(iii) reduction of salaries and general and administrative expenses (iv)
reduction of inventories (v) management of accounts payable and (vi) evaluation
of its distribution and marketing methods.

The Company has embarked on new marketing methods including general nutrition
outlets and a mail order program. In addition, the Company is actively pursuing
potential merger or acquisition candidates and strategic partners which would
enhance stockholders' investment. Management believes that the above actions
will allow the Company to continue operations through the next fiscal year.

4. REVENUE

In the normal course of business during the twelve month periods ended January
31, 2000 and 1999, the Company granted its customers a variety of discounts. The
discounts granted were as follows:

January 31, 2000 January 31, 1999
---------------- ----------------
<S> <C> <C>
Gross Revenues $147,177 $574,063
Discounts:
Refunds and Returns 398 291,190
Introductory and Promotional -- 8896
Co-Op Advertising -- 35,095
-------- --------
Total Discounts 398 335,181
-------- --------
Net Revenues $146,779 $238,882
======== ========
</TABLE>

F-11
<PAGE> 27

SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999

5. CUSTOMER CREDIT BALANCES

Customer credit balances consist of pending customer claims for co-op
advertising, refunds and returns and other discounts.

6. PROPERTY AND EQUIPMENT

January 31, 2000 January 31, 1999
---------------- ----------------
<S> <C> <C>
Machinery and Equipment $ 80,480 $ 79,280
Computer Equipment 31,198 31,198
-------- --------
111,678 110,478
Less Accum. Depreciation 105,779 100,539
-------- --------
$ 5,899 $ 9,939
======== ========

</TABLE>

7. LOAN FROM STOCKHOLDER

The loan from a stockholder is interest free, due on demand and is secured by
inventory, receivables and other assets of SeQuester Incorporated.

8. INCOME TAXES

No provision was made for Federal income tax since the Company has significant
net operating loss carryforwards. Through January 31, 2000, the Company incurred
net operating losses for tax purposes of approximately $10,285,000. 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 2016. Net
operating loss for carryforwards for the State of California are approximately
$5,085,000 and are generally available to reduce taxable income through the year
2006. Net operating loss carryforwards for the State of New Jersey are
approximately $1,434,000 and are generally available to reduce taxable income
through 2006. 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 three taxable years ended January
31, 1998, the Company incurred a 50% or more change in ownership. Therefore, the
availability of the Company's net operating loss carryforwards is limited. The
provision for income taxes consists of the state minimum tax imposed on
corporations.

The gross deferred tax asset balance as of January 31, 2000 was approximately
$4,069,000. A 100% valuation allowance has been established against the deferred
tax assets, as the utilization of the loss carrytforwards can not reasonably be
assured.

9. CONTRACTS AND AGREEMENTS

(a) 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

F-12
<PAGE> 28

SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999

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.

(b) Stock compensation Plan -- In March 1997, the Company established the 1997
stock plan ("plan") and reserved 3,000,000 shares of Company common stock
for issuance to key employee and consultants under the plan with a grant
limit per participant of 1,750,000 shares. Pursuant to the plan, the
Company granted an aggregate of 1,500,000 non-qualified stock options
during the three months ended April 30, 1997. On July 31, 1997, the Company
canceled previously issued options and granted an equal amount of options
to the same key employees and consultants at fair market value on that date
which was $0.12 per share.

The exercise price for all options granted was fair market value on the
date of grant. All such options vest on the date of grant, contain
registration rights, and terminate ten years from date of grant. No options
have been exercised through January 31, 2000. During October 1997, 500,000
previously issued options terminated, leaving a balance of 1,000,000
options outstanding at January 31, 2000 . (c) Consulting Agreement -- In
August 1997, the Company restated its consulting agreement and stock plan
with a consultant, dated February 1, 1996 to extend the term of such
agreement for a three year period commencing August 1, 1996 and issued
1,000,000 shares of registered Company common stock to such consultant.

The Company also signed an agreement with the president of the Company to
receive consulting services. The agreement is effective from October 1,
1997 and runs for five years. The annual compensation for the consulting
services is $180,000. Per the agreement, any amount outstanding under the
agreement can be exchanged for common stock of the Company at $0.10 per
share, at the option of the president of the Company.

(d) Lease - The Company leases its office and business facilities in Westlake
Village, California on month to month basis. The Company also leases
warehouse space on a month to month basis in Pine Brook, New Jersey.

10. STOCKHOLDERS' INVESTMENT

(a) Common Stock - In December 1997, the stockholders of the Company approved
amendments to the Company's Articles of Incorporation to provide for a
reverse stock split of the Company's common stock in the ratio up to one
share for ten shares. Such reverse split became effective February 25,
1998. The net loss per common share for the year ended January 31, 2000 and
1999, reflect the effect of stock split.

In October 1997, the Company issued an additional 180,000 shares of common
stock pursuant to a subscription agreement dated October 26, 1994. In
February 1998, the Company agreed to issue an additional 36,000 restricted
shares of common stock to settle certain disagreements with respect to such
agreement.

In August 1998, the Company issued 30,000 shares of restricted common stock
in exchange for legal and consulting services.

F-13
<PAGE> 29

SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999

In October 1998, the Company issued 650,000 shares of restricted common
stock to Steven Karsh for consulting services. Mr. Karsh is the President
and a Director of the Company.

The Company is also contingently liable to issue up to an additional 36,000
shares of restricted common stock in connection with a settlement
agreement. The Company has claims which partially offset this obligation.

(b) Preferred stock -- In January 1997, the Company authorized issuance of a
series of 5,000 shares of convertible preferred stock and designated an
initial issuance of 750 shares of Series A convertible Preferred Stock with
a par value of $1,000 per share. In January 1997, the Company sold 375
shares and in February 1997 sold additional 375 shares to two accredited
investors receiving gross proceeds of $750,000. The Company paid placement
and finder's fees aggregating 15% of the gross proceeds in connection with
this financing.

The series A shares are convertible into the Company's common stock, in
phases following the date of issuance (the "closing date"). The series A
shares are entitled to a 6% cumulative divided payable in common stock at
the time of conversion and all of the Series A shares are subject to a
mandatory 12-month conversion feature. One-third of the Series A Shares are
convertible into common stock at any time 45 days after the closing date;
an additional one-third (two-third cumulatively) are convertible into
common stock at any time 60 days after the closing date; and an additional
one-third (the entire amount cumulatively) are convertible into common
stock at any time 75 days after the closing date. The number of common
shares issuable upon conversion of the series A shares equals the par value
of the series A shares plus accrued dividends through the date of
conversion divided by the lessor of (I) 70% of the "market price" (the 5
day average closing bid for the common stock for the 5 business days
immediately preceding the conversion date); or (ii) 100% of the 5 day
average closing bid for the common stock for the 5 business days
immediately preceding the closing date. Provided, that, for any conversions
of the Series A shares occurring after the 89th day following the closing
date the conversion rate will be the lessor of (I) 65% of the market price;
or (ii) 100% of the 5 day average closing bid for the common stock for the
5 business days immediately preceding the closing date.

In August 1997, the Company entered into an agreement with the convertible
preferred stockholders to (I) delay conversion of the then remaining 460
outstanding series A preferred shares through November 30, 1997 and (ii)
offer to sell to the Company the then remaining 460 outstanding series A
preferred shares at par value at any time through November 30, 1997. As
consideration for this agreement, the Company issued an aggregate of
300,000 shares of restricted common stock to such preferred stockholders.

Through January 31, 2000, an aggregate of 530 shares of outstanding
preferred stock were converted into 988,248 shares of Company common stock.

(c) In March 2000, the Company issued 25,000 restricted common stock as
compensation to an employee and 50,000 restricted common stock in exchange
for debt cancellation.

11. TRADEMARKS

The Company's trademark SeQuester(R) was registered on May 28, 1996. The Company
filed trademark applications for ChromaQuest(TM) and PhytoQuest(TM) in February
1997. The Company will continue the ongoing process of application and expects
final approval of these trademark applications within the next

F-14
<PAGE> 30

SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999

year. However, if these approvals are not ultimately received, this could
adversely impact the Company's exclusive rights to the product names and market
identity.

12. 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)
1 product 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, was given final approval by the FTC on June 16, 1997, and requires the
Company to pay $150,000 to the FTC over a twelve-month period and maintain
adequate substantiation for future advertising claims. The consent order also
requires the Company to maintain adequate substantiation for the future
advertising claims. The balance due to the FTC was satisfied in full as of July
31, 1998. The Company will be subject to substantial monetary penalties in the
event of non-compliance with the consent order. Such penalties, if imposed,
could have a material adverse effect on the Company.

13. LITIGATION

The Company was involved in the following legal actions. In the opinion of the
management, the Company has adequate legal defense with respect to these actions
and has settled these litigation, as noted below:

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
was 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.

In August 1998, the Company entered into a settlement and mutual general release
agreement of the above proceeding. The settlement agreement provides for
issuance of 220,000 restricted shares of Company common stock to the Krizman
parties with certain registration rights.

Geotermica, Ltd. Vs. SeQuester Holdings, Incorporated, et. al.

In September 1997, Geotermica, Ltd. Filed an action against the Company and its
current and former directors, as individuals, in the Superior Court of
California for the County of Los Angeles. The complaint alleges causes of action
for breach of contract; interference with contract and contractual relations;
and misrepresentation. The complaint is based upon a purported interest
Geotermica, Ltd. held in a license agreement by and between the company and
Effective Health, Inc. and the Company's alleged failure to recognize
Geotermica's purported interest therein. The Company had previously settled its
action against Effective Health, Inc. and its parent company, Interactive
Medical Technologies, Ltd.,

F-15
<PAGE> 31

SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999

concerning the Company's obligation under the license agreement, which were
deemed satisfied in full per the terms of the settlement.

In response to Geotermica's complaint, the Company filed a demurrer as to all
causes of action, and as to the current and former directors. The demurrer was
heard on October 30, 1997. The court issued its ruling on November 10, 1997,
sustaining the Company's demurrer as to the causes of action for breach of
contract and interference with contract and contractual relations in its
entirety without leave to amend. The court sustained the Company's demurrer as
to the cause of action for misrepresentation as to all parties except one former
director and the Company. On December 2, 1997, Geotermica served a motion for
reconsideration. On February 18, 1998, the court granted the motion as to the
first cause of action for breach of contract and denied it as to the second
cause of action for interference with contract and contractual relations. In
March 1998, Geotermica amended the first cause of action for breach of contract
and misrepresentation.

In October 1998, the Company entered into a settlement agreement and mutual
release of above actions. The settlement agreement provides for (i) the issuance
of an aggregate of 200,000 restricted shares of Company common stock to
Geotermica and Jackie R. See with certain registration rights and (ii) payment
of running royalties aggregating 7.2% of gross sales of the Sequester(R) 1
product sold subsequent to the date of the settlement agreement.

SeQuester Incorporated vs. Prudential Insurance Company of America

In January 1998, SeQuester Incorporated filed a lawsuit in Los Angeles Superior
Court against the Prudential Insurance Company of America, Pruco Securities
Corporation, and Patrick C. Welch. The lawsuit alleges various damages including
but not limited to alleged damages in the amount of $4 million for defendants'
unauthorized disclosure of confidential information concerning Clark M. Holcomb
which interfered with the economic relationships and prospective economic
advantage of SeQuester. In December 1998, the defendants were granted a demurrer
as to the Company. The Company is considering an appeal to this decision.

McKesson Corporation vs. SeQuester Incorporated, et. al.

In July 1998, McKesson Corporation filed an action against the Company in the
Superior court of California for the County of Ventura. The complaint alleges
causes of action for breach of contract, account stated and open book account.
The complaint is based on the alleged failure of the Company to issue credits
the unsaleable product which has either been returned or destroyed. Plaintiff
has alleged damages in the amount of $304, 404 plus interest and attorney's
fees. The Company intends to pursue a settlement of this action and has a
preliminary agreement with the plaintiff that the amount in question is a
maximum of $200,000. The Company has accrued an amount of $200,000 for the
settlement of this litigation in the financial statements.

Except as otherwise indicated above, management believes that the Company does
not have any material liability for any lawsuits, settlements, judgements or
fees of defense which have not been paid or accrued as of January 31, 2000.

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 these or
any other litigation. Any unfavorable settlement or judgement against the
Company, in which the Company is defendant, could have a material adverse effect
upon the financial condition and operational results of the Company.

F-16
<PAGE> 32

SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999

14. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS

The Company prepares its statements of cash flows using the indirect method as
defined under the Financial Accounting Standard No. 95. The Company did not pay
income tax during the year.

In December 1997, the stockholders of the Company approved amendments to the
Company's Articles of Incorporation to provide for a reverse stock split of the
Company's common stock in the ratio up to one share for ten shares. Such reverse
split became effective February 25, 1998.

In 1999, the Company converted 130 shares of outstanding preferred stock into
505,734 shares of Company common stock.

The Company did not pay any amount for tax or interest during the years ended
January 31, 2000 and 1999.

15. SUBSEQUENT EVENTS

Subsequent to the year-ended January 31, 2000, the Company donated bulk of its
inventory to a charitable organization. The original cost of the inventory was
$868,877. An allowance for obsolescence of $868,877 has been provided against
this inventory in the financial statements.

In March 2000, the Company issued 150,000 shares of common stock in payment of
debt to a supplier.

In 2000, the stockholders of the Company authorized a reverse stock split of the
Company's common stock in the ratio up to one share for ten shares. Such reverse
split became effective in the ratio of one share for ten shares during March
2000. The net loss per common share has been restated to retroactively effect a
reverse stock split in the ratio of one share for ten shares.

On May 5, 2000 SeQuester incorporated a wholly-owned subsidiary, Diet 123.com,
Inc., as a Nevada corporation.

F-17