1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended October 31, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from________________to_______________
Commission file number:33-06827-LA
SEQUESTER HOLDINGS, INCORPORATED
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(Exact name of small business issuer as specified in its charter)
Nevada 95-4532103
------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization number) identification number)
31125 Via Colinas, Suite 904, Westlake Village, CA 91362
- -------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 707-0301
not applicable
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(former, name, address, and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the Registrant's classes of
common equity, as of the latest practicable date.
Outstanding at
Class of Common Stock December 15, 1998
--------------------- -----------------
$.002 par value 6,442,732
Transitional Small Business Disclosure Format Yes [ ] No [X]
Number of sequentially numbered pages in the document: 28
2
FORM 10-QSB
Securities and Exchange Commission
Washington, D.C. 20549
SEQUESTER HOLDINGS, INCORPORATED
Index
PART 1. - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets at F-3
October 31, 1998 (unaudited) and January 31, 1998
Consolidated Statements of Operations for the three F-4
months and the nine months ended October 31, 1998 (unaudited) and
1997 (unaudited)
Consolidated Statement of Stockholders' Investment (Deficit) F-5
for the nine months ended October 31, 1998 (unaudited)
Consolidated Statement of Cash Flows F-6
for the nine months ended October 31, 1998 (unaudited)
and 1997 (unaudited)
Notes to Consolidated Financial Statements F-7
Item 2. Management's Discussion and Analysis of 18
Operations.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEQUESTER HOLDINGS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
OCTOBER 31, 1998 JANUARY 31, 1998
---------------- ----------------
(Unaudited)
CURRENT ASSETS:
Cash (including restricted cash of $32,559 as of January 31, 1998) $ 7,087 $ 75,020
Accounts receivable, net 175,767 169,862
Inventory, net 859,910 1,110,809
------------ ------------
Total current assets 1,042,764 1,355,691
------------ ------------
PROPERTY AND EQUIPMENT, net 11,682 50,370
------------ ------------
OTHER ASSETS:
Deposits 1,391 1,391
Intangibles, net 1,620 1,815
------------ ------------
Total other assets 3,011 3,206
------------ ------------
Total assets $ 1,057,457 $ 1,409,267
============ ============
LIABILITIES AND STOCKHOLDERS' INVESTMENT (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 631,908 $ 626,998
Accrued expenses 274,773 385,010
Customer credit balances 398,155 207,912
Commissions payable 50,507 49,774
Loan from stockholder 10,000 --
FTC payable -- 41,672
------------ ------------
Total current liabilities 1,365,343 1,311,366
------------ ------------
Commitments and contingencies (see Notes)
STOCKHOLDERS' INVESTMENT (DEFICIT):
Convertible Preferred stock, par value $1,000 per share; 5000 shares
authorized; issued and outstanding 220 shares of series A as of
October 31, 1998 and 350 shares of series A as of January 31, 1998 220,000 350,000
Common stock, par value $.002 per share; 25,000,000 shares
authorized; issued and outstanding 6,442,732 shares as of
October 31, 1998 and 22,846,109 shares as of January 31, 1998 12,885 45,692
Additional paid in capital 10,794,113 10,508,670
Accumulated deficit (11,200,880) (10,298,365)
Prepaid advertising and consulting fees (134,004) (508,096)
------------ ------------
Total stockholders' investment (deficit) (307,886) 97,901
------------ ------------
Total liabilities and stockholders' investment (deficit) $ 1,057,457 $ 1,409,267
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
4
SEQUESTER HOLDINGS, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 1998 AND 1997
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------- --------------------------------------
OCTOBER 31, 1998 OCTOBER 31, 1997 OCTOBER 31, 1998 OCTOBER 31, 1997
---------------- ---------------- ---------------- ----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net Revenues $ 122,374 $ 156,725 $ 312,838 $ 708,741
Cost of Goods Sold 25,411 421,703 251,975 645,485
----------- ----------- ----------- -----------
Gross (Loss) Profit 96,963 (264,978) 60,863 63,256
----------- ----------- ----------- -----------
Operating Expenses:
Advertising 24,460 -- 98,054 317,828
Selling and marketing 7,091 174,541 100,384 532,594
General and administrative 276,498 323,921 720,232 937,324
----------- ----------- ----------- -----------
308,049 498,462 918,670 1,787,746
----------- ----------- ----------- -----------
Loss from Operations (211,086) (763,440) (857,807) (1,724,490)
----------- ----------- ----------- -----------
Non - Operating Income (Expense)
Litigation settlements (41,706) (241,150) (42,300) (241,150)
Interest expense (814) -- (1,408) (5,142)
Interest income -- -- -- 5,055
----------- ----------- ----------- -----------
(42,520) (241,150) (43,708) (241,237)
----------- ----------- ----------- -----------
Loss before Income Taxes (253,606) (1,004,590) (901,515) (1,965,727)
Provision for Income Taxes -- -- 1,000 1,800
----------- ----------- ----------- -----------
Net Loss $ (253,606) $(1,004,590) $ (902,515) $(1,967,527)
=========== =========== =========== ===========
Weighted average shares of
Common Stock Outstanding 3,625,884 1,927,502 2,829,629 1,727,972
=========== =========== =========== ===========
Basic Net Loss per Share* $ (0.07) $ (0.52) $ (0.32) $ (1.14)
=========== =========== =========== ===========
* 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.
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
5
SEQUESTER HOLDINGS, INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT (DEFICIT)
FOR THE NINE MONTHS ENDED OCTOBER 31, 1998
Preferred Stock Common Stock
--------------------------- -------------------------- Additional
Number of Par Number of Par Paid In Accumulated Equity
shares value shares value Capital Deficit Reductions
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance January 31, 1998 350 $ 350,000 22,846,109 $ 45,692 $ 10,508,670 $(10,298,365) $(508,096)
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 -- --
Issuance of common
stock in litigation
settlements -- -- 420,000 840 41,460 -- --
Issuance of common
stock for consulting
and legal fees -- -- 680,000 1,360 42,715 -- --
Amortization of prepaid
advertising and consulting
fees -- -- -- -- -- -- 374,092
Net loss for the nine months
ended October 31, 1998 -- -- -- -- -- $ (902,515) --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance October 31, 1998 220 $ 220,000 6,442,732 $ 12,885 $ 10,794,113 $(11,200,880) $(134,004)
(unaudited) ============ ============ ============ ============ ============ ============ ============
Stockholders'
Investment
------------
Balance January 31, 1998 $ 97,901
Reverse stock split --
Conversion of preferred
stock --
Conversion of debt to
common stock 36,261
Issuance of common
stock in litigation
settlements 42,300
Issuance of common
stock for consulting
and legal fees 44,075
Amortization of prepaid
advertising and consulting
fees 374,092
Net loss for the nine months
ended October 31, 1998 (902,515)
------------
Balance October 31, 1998 $(307,886)
(unaudited) ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
6
SEQUESTER HOLDINGS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 AND 1997
1998 1997
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (902,515) ($1,967,527)
Adjustments to reconcile Net Loss to net cash used in operating
activities:
Reduction of prepaid consulting fees -- 471,150
Depreciation and amortization 412,975 478,716
Stock issued for advertising and other expenses 55,336 60,375
Litigation settlements 42,300 25,624
----------- -----------
(391,904) (931,662)
----------- -----------
(Increase) / decrease in current assets:
Accounts receivable, net (5,905) (60,142)
Inventory 250,899 575,101
Other current assets -- 6,000
Increase / (decrease) in current liabilities:
Accounts payable 4,910 (61,475)
Accrued expenses (110,237) (6,928)
Accrued advertising -- (125,849)
Customer credit balances 190,243 --
Commissions payable 733 8,621
FTC payable (41,672) (52,080)
----------- -----------
288,971 283,248
----------- -----------
Net cash used in operating activities (102,933) (648,414)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of common stock -- (300)
Proceeds from sale of preferred stock -- 318,750
Loans from stockholders 35,000 2,101
----------- -----------
Net cash provided by financing activities 35,000 320,551
NET (DECREASE) IN CASH (67,933) (328,303)
CASH, BEGINNING BALANCE 75,020 409,117
----------- -----------
CASH, ENDING BALANCE $ 7,087 $ 80,814
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
7
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND JANUARY 31, 1998
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
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) 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. The Company's products are
also sold through mail order programs.
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, SeQuester(R) 3 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. The
preceding products are collectively known as the SeQuester(R) brand products.
The Company has developed access to major domestic retail, pharmacy and mass
merchandiser chains in the United States. The Company is currently evaluating
all of its marketing and distribution programs and commenced advertising for its
mail order program in the second quarter of the current fiscal year.
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.
F-7
8
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND JANUARY 31, 1998
Certain reclassifications were made to the 1997 consolidated financial statement
presentation to conform with the 1998 consolidated financial statement
presentation.
The accompanying consolidated financial statements of the Company and its
subsidiary have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-QSB. Certain notes and other information have been condensed or omitted from
the interim financial statements presented in this report. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the financial statements reflect all adjustments considered
necessary for a fair presentation. The results of operations for the nine months
ended October 31, 1998 are not necessarily indicative of the results to be
expected for the full year. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-KSB for the year ended January 31, 1998 as filed with the Securities and
Exchange Commission. All significant intercompany balances and transactions have
been eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue Recognition -- The Company recognizes revenue from wholesalers,
distributors and retailers at the time of shipment, net of sales returns and
allowances. The Company maintains a reserve for returns which management
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
October 31, 1998 and $375,000 at January 31, 1998.
Significant customers accounting for 54% of revenues for the nine months ended
October 31, 1998 include Wal-Mart Stores 40% and American Drug Stores 14%. In
addition, approximately 11% of revenues were mail order sales.
The Company also had a one-time sale of $54,000 to Pan Chiao Hsin Hospital which
has been deemed to be of doubtful collection and has not been included in the
above percentages.
Significant customers accounting for 57% of revenues for the nine months ended
October 31, 1997 include Wal-Mart Stores 17%, Walgreens 13%, Rite Aid Corp. 10%,
Eckerd Drug 9%, and Target Stores 8%.
(b) Fair Value of Financial Instruments and Credit Risk -- The carrying value of
cash, receivables and payables approximates their fair values due to the
relatively short maturity of these instruments.
(c) Allowance for Doubtful Accounts -- In determining the allowance to be
maintained, management evaluates many factors including industry and historical
loss experience. The allowance for doubtful accounts is maintained at an amount
management deems adequate to cover estimated
F-8
9
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND JANUARY 31, 1998
losses. The allowance for doubtful accounts was $425,000 at October 31, 1998 and
$225,000 at January 31, 1998.
(d) Advertising -- The Company expenses advertising costs as incurred.
(e) Inventory -- Inventory is valued at the lower of cost or market value. Cost
is determined using the first-in, first-out method. Inventory consisted of:
October 31, 1998 January 31, 1998
---------------- ----------------
Product Units $ 976,663 $ 1,047,824
Packaging and Product Displays 195,278 195,277
Shipping Supplies 10,662 10,719
----------- -----------
1,182,603 1,253,820
Less Allowance for Obsolescence (322,693) (143,011)
----------- -----------
$ 859,910 $ 1,110,809
=========== ===========
The allowance for obsolescence is maintained at an amount management deems
adequate to cover unsaleable inventory. In determining the allowance to be
maintained, management evaluates many factors including alternate uses and a
specific review for items no longer saleable.
(f) Property and Equipment -- The Company records property and equipment at cost
and depreciates it over the useful life of the asset using the straight-line
method of depreciation. Renewals and betterments are capitalized while repairs
and maintenance are charged to expense. Leasehold improvements are amortized
over their expected useful life, or the term of the lease, whichever is shorter.
Estimated useful lives are as follows:
Machinery and Equipment 5-10 years
Furniture and Fixtures 5 years
Computer Equipment 5 years
(g) Income Taxes -- Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases at enacted rates when such amounts are expected to be
realized or settled.
(h) Loss Per Common Share -- Loss per common share is based on the weighted
average number of common shares outstanding. Potentially dilutive securities
have not been considered in determining the weighted average number of shares
outstanding as their effect would either be antidilutive or result in no
material dilution of earnings per share. 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-9
10
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND JANUARY 31, 1998
(i) Risks and Uncertainties -- In the normal course of business, the Company is
subject to certain risks and uncertainties as follows:
- The Company's primary source of revenue has been from a single product,
SeQuester(R) 1; however, the Company introduced two new dietary aid products in
December 1995 (SeQuester(R) 2 and SeQuester(R) 3) and introduced a fourth
product, PhytoQuest(TM) in October 1996.
- The Company has a significant accumulated deficit and has incurred
substantial losses from operations for the period from inception through October
31, 1998.
- The marketing of the Company's products is subject to the rules and
regulations of the Federal Trade Commission.
- The Company provides its product on unsecured credit to most of its
customers, the majority of which are national retail outlets.
(j) The Company accounts for stock-based employee compensation as prescribed by
APB Opinion 25, and has adopted the disclosure provisions of FAS 123. FAS 123
requires pro forma disclosures of net income and earnings per share as if the
fair value based method of accounting for stock-based awards had been applied.
The adoption of FAS 123 disclosure provisions has no effect on either the
Company's balance sheet or its results of operations.
3. REALIZATION OF ASSETS
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 October
31, 1998 of $11,200,880 including a net loss of $902,515 for the nine months
ended October 31, 1998 and net losses of $2,440,692 and $1,852,365 during the
fiscal years ended January 31, 1998 and 1997, respectively. The continuing
losses have adversely affected the liquidity of the Company. Losses are expected
to continue for the immediate future. 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.
F-10
11
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND JANUARY 31, 1998
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,
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 mail order programs. 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 remainder of the
fiscal year.
4. REVENUES
In the normal course of business during the nine month periods ended October 31,
1998 and 1997, the Company granted its customers a variety of discounts. The
discounts granted were as follows:
1998 1997
---------- ----------
Gross Revenues $ 525,055 $1,423,358
---------- ----------
Discounts:
Refunds and Returns $ 160,286 $ 627,092
Introductory and Promotional 12,196 34,697
Co-op Advertising 35,095 35,607
Other 4,640 17,221
---------- ----------
Total Discounts $ 212,217 $ 714,617
---------- ----------
Net Revenues $ 312,838 $ 708,741
========== ==========
5. CUSTOMER CREDIT BALANCES
Customer credit balances consist of pending customer claims for co-op
advertising, refunds and returns and other discounts.
F-11
12
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND JANUARY 31, 1998
6. PROPERTY AND EQUIPMENT
October 31, 1998 January 31, 1998
---------------- ----------------
Product Tooling $ 43,900 $ 43,900
Machinery and Equipment 79,280 79,280
Computer Equipment 31,198 31,198
--------- ---------
154,378 154,378
Less Accumulated Depreciation (142,696) (104,008)
--------- ---------
$ 11,682 $ 50,370
========= =========
7. LOANS PAYABLE TO STOCKHOLDERS AND COLLATERALIZED PROMISSORY NOTE
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 December 1997, the Company reached an
agreement with these stockholders to waive their registration rights and release
a lien on accounts receivable in exchange for an additional 523,621 shares of
restricted common shares of Company stock which were issued in April 1998
(reduced to 52,365 shares to effect a reverse stock split).
In May 1998, the Company entered into a loan agreement with a stockholder for a
loan of $25,000 with interest at the rate of 9.5% per annum. Full payment of the
principal and interest on this loan was due on July 1, 1998 or that loan would
be convertible to common stock at $0.01 per share. This loan was collateralized
by substantially all of the assets of the Company. In October 1998, this loan
was converted into 2,500,000 restricted shares of Company common stock.
8. INCOME TAXES
No provision was made for Federal income tax since the Company has significant
net operating loss carryforwards. Through January 31, 1998, the Company incurred
net operating losses for tax purposes of approximately $8,864,000. 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 2012. Net
operating loss carryforwards for the State of California are approximately
$3,664,000 and are generally available to reduce taxable income through the year
2002. Net operating loss carryforwards for the State of New Jersey are
approximately $1,434,000 and are generally available to reduce taxable income
through 2004. 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.
F-12
13
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND JANUARY 31, 1998
Therefore, the availability of the Company's net operating loss carryforwards is
limited. The provision for income taxes consists of the California and New
Jersey state minimum taxes imposed on corporations.
The gross deferred tax asset balance as of January 31, 1998 was approximately
$3,593,000. A 100% valuation allowance has been established against the deferred
tax assets, as the utilization of the loss carryforwards 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 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 employees 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 October 31, 1998. During October 1997, 500,000 previously issued options
terminated, leaving a balance of 1,000,000 options outstanding at October 31,
1998.
(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, 1997 and
issued 1,000,000 shares of registered Company common stock to such consultant.
(d) Leases -- The Company leases its office and business facilities in Westlake
Village, California on a month-to-month basis. The Company also leases warehouse
space on a month to month basis in Pine Brook, New Jersey. Rent expense incurred
under all of these lease agreements is approximately $5,500 per month.
F-13
14
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND JANUARY 31, 1998
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 as the Board of Directors, in its discretion, may determine. Such reverse
split became effective in the ratio of one share for ten shares during February
1998. 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.
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.
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 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
F-14
15
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND JANUARY 31, 1998
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 October 31, 1998, an aggregate of 530 shares of outstanding preferred
stock were converted into 988,248 shares of Company common stock.
11. LITIGATION
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:
David J. Krizman vs. KCD Incorporated, et. al.
In April 1997, David Krizman, individually and as attorney in fact, sued the
Company and the Company's former President, Clark M. Holcomb, in the United
States Bankruptcy Court for the Central District of California. The Complaint
alleges that the Company breached a written contract by failing to transfer
shares of the Company's common stock owned by Mr. Holcomb to the plaintiff. It
is the Company's position that it has no obligation or liability to plaintiff in
connection with this matter other than to facilitate the transfer of the shares
in the ordinary course of business in compliance with applicable securities laws
and orders applicable to Mr. Holcomb.
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
F-15
16
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND JANUARY 31, 1998
Technologies, Ltd., concerning the Company's obligations 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 the 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
for unsaleable product which has either been returned or destroyed. Plaintiff
has alleged damages in the amount of $304,404 plus interest and attorneys' 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.
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 October 31, 1998.
F-16
17
SEQUESTER HOLDINGS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND JANUARY 31, 1998
As there is no assurance that the Company will prevail in any of the foregoing
lawsuits, the Company may incur substantial expense in connection with this
litigation. Any unfavorable settlement or judgment against the Company, in which
the Company is a defendant, could have a material adverse effect upon the
financial condition and operational results of the Company.
F-17
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS.
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) 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. The Company's products are
also sold through mail order programs.
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 (SeQuester(R) 3) 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. The Company
has developed access to major domestic retail, pharmacy and mass merchandiser
chains in the United States. The Company is currently evaluating all of its
marketing and distribution programs and commenced advertising for its mail order
programs in the second quarter of the current fiscal year.
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.
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19
Market leaders in the weight reduction industry include Dexatrim(TM)
and Accutrim(TM), with several additional smaller product marketers.
Market research indicates that there is a substantial market for
dietary supplements that are natural, drug-free products. SeQuester(R) 1 and
SeQuester(R) 3 do not contain any diuretics, stimulants, or drugs. SeQuester(R)
2, an appetite suppressant, does not contain any caffeine, diuretic, or sodium.
SeQuester(R) 2 is an FDA approved over-the-counter drug formulation for appetite
control to aid weight reduction, containing Phenylpropanolamine Hydrochloride.
PhytoQuest(TM) contains plant sterols. All of the ingredients comprising the
SeQuester(R) 1 product are included in published Food and Drug Administration
guidelines for ingredients generally recognized as safe ("GRAS"). SeQuester(R)
3, consists of Chromium with L-Carnitine. Chromium is an essential trace mineral
which is necessary for proper carbohydrate metabolism.
Results of Operations
For the three month period ended October 31, 1998 compared to the three month
period ended October 31, 1997:
Revenues are derived from sales of the dietary fat sequestrant
product and an appetite suppressant under the name SeQuester(R), a chromium
based dietary supplement product sold under the name SeQuester(R) 3, and from
PhytoQuest(TM), a dietary supplement designed to reduce cholesterol from the
food you eat. Gross Revenues for the three months ended October 31, 1998 were
$277,783 compared to $344,675 for the three months ended October 31, 1997, or a
20% decrease. Gross Revenues have been reduced for a variety of discounts to
provide Net Revenues of $122,374 for the three months ended October 31, 1998 and
$156,725 for the three months ended October 31, 1997 or a 22% decrease. The
decrease is attributed to a decrease in sales volume and continued returns.
The decrease in Gross Revenues is attributed to a decrease in sales
to national drug and food chain retailers as the Company redirects its efforts
towards mail order revenues and a lack of adequate financing to continue the
Company's advertising campaign.
19
20
Three Months Ended
------------------
October 31, 1998 October 31, 1997
----------------------- -----------------------
$ % $ %
------- ------- ------- -------
Gross Revenues 277,783 100 344,675 100
------- ------- ------- -------
Discounts:
Refunds and Returns 117,857 42 167,167 49
Introductory and Promotional 5,836 2 6,871 2
Co-op Advertising 30,000 11 10,000 3
Other 1,716 1 3,912 1
------- ------- ------- -------
Total Discounts 155,409 56 187,950 55
------- ------- ------- -------
Net Revenues 122,374 44 156,725 45
======= ======= ======= =======
Gross Profits are comprised of Net Revenues less direct costs of
products, packaging and services. The Cost of Sales of the dietary products for
the three month period ended October 31, 1998 was $25,411 or 21% of Net Revenues
which provided a Gross Profit of $96,963 or 79% of Net Revenues. For the three
month period ended October 31, 1997, the Cost of Sales was $421,703 or 269% of
Net Revenues, which provided a Gross (Loss) of ($264,978) or (169%) of Net
Revenues. The increase in Gross Profit resulted from no change in the allowance
for inventory obsolescence. The Company recorded an increase in the allowance
for obsolescence of $289,732 which was charged to cost of goods sold during the
three months ended October 31, 1997.
Three Months Ended
------------------
October 31, 1998 October 31, 1997
------------------------- --------------------------
$ % $ %
-------- -------- -------- --------
Net Revenues 122,374 100 156,725 100
Cost of Goods Sold 25,411 21 421,703 269
-------- -------- -------- --------
Gross Profit 96,963 79 (264,978) (169)
======== ======== ======== ========
Advertising expenses consist of a multi-media advertising campaign
which included magazines, TV and radio, signage and other displays. Selling and
Marketing expenses consist of sales commissions and salaries, coupon redemption,
warehouse, freight, supplies and travel expenses. General and administrative
expenses consist of salaries and benefits of officers and staff, accounting,
legal and other professionals, rent and occupancy costs, bad debt expense,
travel expenses and other administrative costs.
Advertising expense was $24,460 for the three months ended October
31, 1998 vs. no advertising for the three months ended October 31, 1997.
Advertising expenses for the three months ended October 31, 1998 included
testing of radio spot commercials in selected markets via utilization of prepaid
radio barter advertising. Lack of adequate financing curtailed continuance of
the TV
20
21
scheduling during this period. The Company is currently evaluating all of its
marketing and distribution programs and commenced advertising for its mail order
programs in the second quarter of the current fiscal year.
Selling and Marketing expenses decreased significantly to $7,091 for
the three months ended October 31, 1998 from $174,541 for the three months ended
October 31, 1997. The Company experienced decreases in sales commissions and
freight due to a reduction in sales and decreases in office expense, salaries
and consulting fees during the three months ended October 31, 1998.
General and Administrative expenses decreased to $276,498 for the
three months ended October 31, 1998 from $323,921 for the three months ended
October 31, 1997. The Company experienced decreases in legal and accounting
fees, salaries, insurance, shareholder expense and office expenses, which were
partially offset by increases in the allowance for doubtful accounts during the
three months ended October 31, 1998.
In August and October 1998, the Company issued an aggregate of
420,000 shares of restricted common stock in settlement of certain litigation
matters and expensed $42,300 as the fair value of the stock issued.
In September 1997, the Company completed settlement of certain
litigation resulting from a management consulting agreement and related matters
for the aggregate cash payment of $230,000 to the Company. The balance of
prepaid consulting fees of $241,150 remaining after the settlement was recorded
as a loss.
Interest expense of $814 for the three months ended October 31, 1998
resulted from a short-term loan from a stockholder. There was no interest
expense for the three months ended October 31, 1997.
The net loss for the three month period ended October 31, 1998 of
$253,606 was incurred principally as a result of a decrease in sales, continued
returns and an increase in the allowance for doubtful accounts. The net loss for
the three month period ended October 31, 1997 of $1,004,590 was incurred
principally as a result of (i) a decrease in sales and an increase in returns,
(ii) an increase in the allowance for inventory obsolescence and (iii) the
write-off of the balance of prepaid consulting fees subsequent to a litigation
settlement.
The basic net loss per common share was $0.07 for the three months
ended October 31, 1998 and $0.52 for the three months ended October 31, 1997
based on the weighted average shares of common stock outstanding. The basic net
loss per common share has been restated to retroactively effect a reverse stock
split in the ratio of one share for ten shares.
For the nine month period ended October 31, 1998 compared to the nine month
period ended October 31, 1997:
Revenues are derived from sales of the dietary fat sequestrant
product and an appetite suppressant under the name SeQuester(R), a chromium
based dietary supplement product sold under
21
22
the name SeQuester(R) 3, and from PhytoQuest(TM), a dietary supplement designed
to reduce cholesterol from the food you eat. Gross revenues for the first nine
months ended October 31, 1998 were $525,055 vs. $1,423,358 for the nine months
ended October 31, 1997 or a 63% decrease.
Gross Revenues have been reduced for a variety of discounts to
provide Net Revenues of $312,838 for the nine months ended October 31, 1998 and
$708,741 for the nine months ended October 31, 1997 or a 56% decrease. The
decrease is attributed to a decrease in sales volume and continued returns.
The significant decrease in Gross Revenues is attributed to a
decrease in sales to national drug and food chain retailers as the Company
redirects its efforts towards mail order revenues and a lack of adequate
financing to continue the Company's advertising campaign.
Nine Months Ended
-----------------
October 31, 1998 October 31, 1997
----------------------------- -----------------------------
% %
---------- ---------- ---------- ----------
Gross Revenues $ 525,055 100 $1,423,358 100
---------- ---------- ---------- ----------
Discounts:
Refunds and Returns $ 160,286 30 $ 627,092 44
Introductory and Promotional 12,196 2 34,697 2
Co-op Advertising 35,095 7 35,607 3
Other 4,640 1 17,221 1
---------- ---------- ---------- ----------
Total Discounts $ 212,217 40 $ 714,617 50
---------- ---------- ---------- ----------
Net Revenues $ 312,838 60 $ 708,741 50
========== ========== ========== ==========
Gross profits are comprised of Net Revenues less direct costs of
products, packaging and services. The Cost of Goods Sold of the dietary product
for the nine month period ended October 31, 1998 was $251,975 or 81% of Net
Revenues which provided a Gross Profit of $60,863 or 19% of Net Revenues. For
the nine month period ended October 31, 1997, the Cost of Goods Sold was
$645,485 or 91% of Net Revenues, which provided a Gross Profit for the nine
month period of the previous year of $63,256 or 9% of Net Revenues.
Nine Months Ended
-----------------
October 31, 1998 October 31, 1997
----------------------- -----------------------
$ % $ %
------- ------- ------- -------
Net Revenues 312,838 100 708,741 100
Cost of Goods Sold 251,975 81 645,485 91
------- ------- ------- -------
Gross (Loss) Profit 60,863 19 63,256 9
======= ======= ======= =======
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23
Advertising expenses consist of a multi-media advertising campaign
which includes TV and radio, signage and other displays. Selling and marketing
expenses consist of sales commissions and salaries, coupon redemption,
warehouse, freight, supplies and travel expenses. General and administrative
expenses consist of salaries and benefits of officers and staff, accounting,
legal and other professionals, rent and occupancy costs, bad debt expense,
travel expenses and other administrative costs.
Advertising expense decreased significantly to $98,054 for the nine
months ended October 31, 1998 from $317,828 for the first nine months of 1997.
Advertising expenses for the nine months ended October 31, 1997 included testing
of TV spot commercials in selected markets and utilization of prepaid radio
barter advertising. Advertising expenses for the nine months ended October 31,
1998 included testing of radio spot commercials in selected markets via
utilization of prepaid radio barter advertising. Lack of adequate financing
curtailed continuance of the TV scheduling during this period. The Company is
currently evaluating all of its marketing and distribution programs and
commenced advertising for its mail order program in the second quarter of the
current fiscal year.
Selling and Marketing expenses decreased significantly to $100,384
for the nine months ended October 31, 1998 from $532,594 for the first nine
months of 1997. The Company experienced decreases in sales commissions, coupon
expense, marketing expense and freight due to a reduction in sales and decreases
in office expense, salaries and consulting fees, travel and entertainment
expenses during the nine months ended October 31, 1998.
General and Administrative expenses decreased significantly to
$720,232 for the nine months ended October 31, 1998 from $937,324 for the same
nine months of 1997. The Company experienced decreases in legal and accounting
fees, salaries, insurance, shareholder expense and office expenses, which were
partially offset by increases in the allowance for doubtful accounts and
consulting fees during the nine months ended October 31, 1998.
In August and October 1998, the Company issued an aggregate of
420,000 shares of restricted common stock in settlement of certain litigation
matters and expensed $42,300 as the fair value of the stock issued.
In September 1997, the Company completed settlement of certain
litigation resulting from a management consulting agreement and related matters
for the aggregate cash payment of $230,000 to the Company. The balance of
prepaid consulting fees of $241,150 remaining after the settlement was recorded
as a loss.
Interest expense of $1,408 for the nine months ended October 31, 1998
resulted from a short-term loan from a stockholder. Interest expense for the
nine months ended October 31, 1997 was $5,142. Interest expense for the 1997
period reflects remaining principal balances on short term loans from
stockholders which were converted to equity as of March 31, 1997.
There was no interest income for the nine months ended October 31,
1998. Interest income of $5,055 for the nine months ended October 31, 1997 is
the result of interest earned on a certificate of deposit of $100,000 which the
Company had pledged as collateral and subsequently cashed and
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24
transferred to an escrow account in accordance with the terms of a consent order
with the Federal Trade Commission.
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 net operating loss carryforwards.
The net loss for the nine month period ended October 31, 1998 of
$902,515 was incurred principally as a result of a decrease in sales, continued
returns and an increase in the allowance for doubtful accounts. The net loss for
the nine month period ended October 31, 1997 of $1,967,527 was incurred
principally as a result of (i) a decrease in sales and an increase in returns,
(ii) an increase in the allowance for inventory obsolescence and (iii) the
write-off of the balance of prepaid consulting fees subsequent to a litigation
settlement.
The basic net loss per common share was $0.32 for the nine months
ended October 31, 1998 and $1.14 for the nine months ended October 31, 1997
based on the weighted average shares of common stock outstanding. The basic net
loss per common share has been restated to retroactively effect a reverse stock
split in the ratio of one share for ten shares.
24
25
Liquidity and Capital Resources
Since inception, the Company has received capital for operations and
development from private investors in the Company's securities, issuance of
private party debt, loans from stockholders and financing from factors as well
as revenues from operations. Through October 31, 1998, 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 October 31, 1998 of $11,200,880 including
net losses of $902,515 for the nine months ended October 31, 1998 and net losses
of $2,440,692 and $1,852,365 during the fiscal years ended January 31, 1998 and
1997, respectively.
Management devoted considerable effort 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 mail order programs. 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 remainder of
the fiscal year.
As of October 31, 1998, the Company's working capital position
decreased to ($322,579) from $44,325 at January 31, 1998. Decreases in current
assets include decreases in cash of $67,933 and inventory, net of $250,899
offset by an increase in accounts receivable, net of $5,905. Changes in current
liabilities include decreases in accrued expenses, net of $110,237 and FTC
payable of $41,672 offset by increases in accounts payable of $4,910, loan
payable to a stockholder of $10,000, commissions payable of $733 and customer
credit balances of $190,243. Current assets decreased a net of $312,927 and
current liabilities increased a net of $53,977 for the nine months ended October
31, 1998. The net loss for the nine months ended October 31, 1998 of $902,515
was reduced by
25
26
non-cash charges for (i) depreciation and amortization of $412,975, (ii)
issuance of stock of $55,336 for other expenses and (iii) issuance of stock for
litigation settlements of $42,300, to reconcile to net cash used in operating
activities.
The Company currently has no firm commitments for material capital
expenditures. The Company does not anticipate that future compliance with
existing environmental and occupational safety regulations will have a
significant impact on its financial condition or future operating results.
The Company does not believe that general inflation would have a
material effect on its operations.
Included in this Item 2. "Management's Discussion and Analysis of
Operations" 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.
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PART II. OTHER INFORMATION
Item 1. - Legal Proceedings:
The Company is involved in several legal actions. For a description of this
litigation and certain other pending legal matters involving the Company refer
to the Company's Form 10-QSB - Part I for the nine months ended October 31, 1998
which are incorporated herein by reference.
Item 2. - Changes in Securities:
In August 1998, the Company issued 30,000 shares of restricted common stock in
exchange for legal and consulting services.
In August and October 1998, the Company issued an aggregate of 420,000 shares of
restricted common stock in settlement of certain litigation matters referred to
in the Company's Form 10-QSB - Part I.
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.
In May 1998, the Company entered into a loan agreement with a stockholder for a
loan of $25,000 with interest at the rate of 9.5% per annum. Full payment of the
principal and interest on this loan was due on July 1, 1998 or that loan would
be convertible to common stock at $0.01 per share. This loan was collateralized
by substantially all of the assets of the Company. In October 1998, this loan
was converted into 2,500,000 restricted shares of Company common stock.
The Company relied upon the exemptions from registration contained in Section
4(2) of the 1933 Act as amended, on the basis that the offer and sale of the
shares did not involve any public offering. All of the foregoing shares were
issued with the appropriate restrictive legend.
Item 6. - Exhibits
(a) Exhibits
Exhibit 27 - Financial Data Schedule (included only in
EDGAR filing).
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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 December 15, 1998 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/ Steven K. Karsh President, Principal Accounting Officer, December 15, 1998
- ----------------------------
Steven K. Karsh and Director
/s/ Stephen R. Miller, M.D. Director December 15, 1998
- ----------------------------
Stephen R. Miller, M.D.
28