<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 year ended JANUARY 31, 1998

    [ ]      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)


<TABLE>
<CAPTION>
            NEVADA                                        95-4532103
            ------                                        ----------
<S>                                                 <C>
(State or other jurisdiction of                     (IRS Employer Identification No.)
 incorporation or organization)
</TABLE>

        31125 VIA COLINAS, SUITE 904, WESTLAKE VILLAGE, CALIFORNIA 91362
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                    (Address of principal executive offices)

                                 (818) 707-0301
                                 --------------
                         (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  X   No
    ---     ---

         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, 1998, the Registrant's revenues
         were approximately $732,000.

         As of April 10, 1998, the aggregate market value of Registrant's voting
         stock held by non-affiliates was approximately $1,194,000.

         As of April 10, 1998, the Registrant had 2,838,207 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 31125 Via Colinas, Suite 904,
Westlake Village, California, 91362.

         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.

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" as well as an appetite suppressant sold under the name
"SeQuester(R) 2," a Chromium dietary supplement with L-Carnitine, sold under the
name "ChromaQuest(TM)" and a Phytosterol dietary supplement which inhibits
dietary cholesterol absorption sold under the name "PhytoQuest(TM)",
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 Products

         During the 1996 fiscal year, the Company introduced two new products,
SeQuester(R) 2 and ChromaQuest(TM), which were developed to complement
SeQuester(R) 1 and increase the Company's product line and name recognition.
SeQuester(R) 2 is an appetite suppressant which functions to decrease feelings
of hunger, and ChromaQuest(TM) is a Chromium dietary supplement with
L-Carnitine. These products are marketed as a dietary supplement program.


                                       2
<PAGE>   3

         SeQuester(R) 2

         SeQuester(R) 2 is a scientifically balanced formula that aids in the
reduction of appetite. Phenylpropanolamine Hydrochloride, the active agent in
the formula, has been found by the FDA to be a safe and effective
over-the-counter drug for appetite reduction and thus weight control. The main
mechanism of action for Phenylpropanolamine Hydrochloride is to function as a
sympathomimetic agent. Thus, it functions to control weight and curb appetite.

         ChromaQuest(TM)

         ChromaQuest(TM) is a scientifically balanced formula that contains
various synergistic factors. One of the ingredients, Chromium, has been shown to
regulate blood sugar levels. Additionally in the formula, L-Carnitine has been
suggested to increase the Basal Metabolic Rate which, in effect, increases
lipogenesis (fat metabolism). Additional ingredients are included in
ChromaQuest(TM) to synergistically affect vitamin requirements as well as other
metabolic functions.

         PhytoQuest(TM)

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

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 within the next 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.

Manufacturing

         SeQuester(R) 1 is manufactured for the Company by a West Coast
Manufacturer in their 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.

         SeQuester(R) 2 is manufactured for the Company by licensed drug
manufacturers on the West Coast. They manufacture in their own facilities. The
Company places purchase orders for SeQuester(R) 2 tablets on an as needed basis
and the manufacturers deliver the finished tablets in bulk to the Company's
packagers. The Company's manufacturers of SeQuester(R) 2 are generally able to
deliver purchase orders in their entirety within seven to eight weeks, with
partial delivery commencing within six weeks from when the purchase order is
placed.

         ChromaQuest(TM) and PhytoQuest(TM) are manufactured by the same West
Coast manufacturer the Company uses for SeQuester(R) 1 and are produced in the
same time frame as SeQuester(R) 1.

         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.


                                       3
<PAGE>   4

         In April 1996, the Company entered into a five year packaging agreement
with an East Coast packager which covers a significant portion of the Company's
packaging requirements. When SeQuester(R) tablets and the packaging and insert
material has been delivered, the packager packs the tablets into blister cards.
The blister cards, containing the tablets and the package inserts, are then
placed into a tamper proof box. One box is intended to be a one month supply.
Six packaged boxes of SeQuester(R) are then shrink wrapped together and six of
these shrink wrapped packages are packed into a case which is then placed on a
pallet to be delivered to the Company's East Coast warehouse for East Coast
distribution.

         The West Coast packager follows the same procedures as the East Coast
packager with the pallets delivered to the Company's warehouse in Westlake
Village, California. The Company processes orders and thereafter ships the
product from its warehouses via trucking lines, UPS, RPS and other selected
carriers.
Freight is prepaid by the Company and averages 2% of the invoice total.

         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
SeQuester(R) 2, ChromaQuest(TM) and 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 provides a cooperative advertising allowance which
approximates 10% of the invoice price to its customers upon proof of
performance. Retailers typically use this allowance for the advertising and
marketing of its SeQuester(R) products through various media, including direct
mailings, coupon books, inserts and print.

         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.

         The Company markets its SeQuester(R) products to wholesalers and
retailers through direct sales to wholesalers and through commissioned brokers
to drug and food chain retailers and mass merchandisers. The Company has
approximately 10 brokers who market SeQuester(R) products throughout the United
States. The Company has placed SeQuester(R) products on the shelves of over
35,000 retail store locations nationally in major drug and food chain retailers,
including Walgreen(TM), Eckerd Drug(TM), Sav-On/Osco Drug(TM), Drug
Emporium(TM), CVS Drug(TM), Rite-Aid(TM), Revco(TM), Payless Drug(TM),
Fedco(TM), Lucky(TM), Ralphs(TM), Longs(TM), Vons(TM), and Albertsons(TM).

         In addition to the aforementioned drug and food chain retailers,
SeQuester(R) products are available in K-Mart(TM), Wal-Mart(TM), and Target(TM).

Significant Customers

         The Company earned substantially all of its revenue for the fiscal
years ended January 31, 1997 and 1998, from the sale of its SeQuester(R)
products to major drug and food chain wholesalers and retailers.

         Major customers accounting for 52.0% of gross revenues for the fiscal
year ended January 31, 1998 include Wal-Mart Stores 13.1%, Walgreens 7.9%, Rite
Aid Corp. 6.5%, Target Stores 5.6%, Eckerd Drug 5.4%, K-Mart Corp. 3.2%, Mark
Stevens (CVS, Inc.) 3.0%, Bergen Brunswig 2.7%, American Drug Stores 2.5%, and
McKesson Drug Company 2.1%. Major customers accounting for 52.3% of revenues for
the fiscal year ended January 31, 1997 include Wal-Mart Stores 26.1%, K-Mart
Corp. 13.7% and American Drug Stores 12.5%. A loss of one or more of these
customers could have a material impact on sales. There are no assurances that
the Company will maintain its existing customer base or that it will acquire new
customers.

         There are currently no sales made outside the United States.


                                       4
<PAGE>   5

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. Accordingly, the Company is currently insured and intends to maintain
product liability insurance. This policy covers products and operations for an
aggregate of $1,000,000 with a $1,000,000 limit per occurrence. The Company
relies on the underlying coverage of its manufacturers for excess coverage, and
the Company also carries insurance coverage for general commercial liability in
the aggregate of $1,000,000 with a $1,000,000 limit per occurrence. This policy
provides coverage for personal property of $62,400, EDP property of $30,000 and
inventory of $398,900 located at 31125 Via Colinas, Suite 904, Westlake Village,
CA 91362. This policy also covers inventory located at the East Coast packager
for $1,000,000. The Company currently does not maintain Directors and Officers
liability coverage.

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, ChromaQuest(TM) 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. SeQuester(R) 2 is an FDA approved
over-the-counter drug formulation for appetite control to aid weight reduction,
containing Phenylpropanolamine Hydrochloride. 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 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 and imposes joint and several
liability for the $150,000 payment to the FTC between the Company and Ms.
Richards. The Company has pledged and transferred to an escrow account $125,000
in cash and has issued a security agreement which covers $25,000 of inventory to
secure the payment of the indebtedness to the FTC. The balance due to the FTC
was $41,672 at January 31, 1998. The Company, Mr. Holcomb and Ms. Richards 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 future
regulation will affect the manufacture of its SeQuester(R) products.


                                       5
<PAGE>   6

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.

         The Company believes that it can compete against even its largest
competitors on the basis of the uniqueness of its SeQuester(R) products and as a
result of its potential to increase its product lines. The Company estimates
that there are in excess of 100 diet aid products on the market which fall into
various categories. There are "Appetite Suppressants," which are
Phenyl-propanolamine based products such as Dexatrim(TM) and Accutrim(TM);
"Thermogenics(TM)," which are Chromium Picolinate based products such as Chroma
Slim(TM), and the so called "fat burning" products; "Diuretics" which aid in
water weight reduction, with products such as Diurex(TM) and Aqua-ban(TM). The
Company believes that its SeQuester(R) products are unique, however, there can
be no assurance that SeQuester(R) products will retain their unique position in
the marketplace. With the anticipated addition of new products and existing
product lines, the Company can increase its name recognition and better provide
for its customer's dietary needs, thereby improving its market position.
However, the diet industry is highly competitive and there can be no assurance
that the Company's anticipated additional products can effectively compete with
similar existing products that currently have greater name recognition.

Employees

         The Company has 6 employees, of which 3 are full-time and 3 are
part-time. The full time employees were engaged in management, marketing,
administrative and support activities. None of the Company's employees are
subject to a collective bargaining agreement and the Company believes its
relations with its employees are good.

         The Company also enlists the services of approximately 10 independent
contractors who work as sales brokers to solicit sales of SeQuester(R) products.
The sales brokers are paid a 5% commission on the gross sales amounts.


ITEM 2.  DESCRIPTION OF PROPERTY.

         The Company's principal place of business is located at 31125 Via
Colinas, Suite 904, Westlake Village, California 91362. The Company currently
leases office and business property on a month-to-month basis. The premises
measure approximately 1,700 square feet and are leased for general office and
administrative purposes.
The base monthly rent on the premises is $1,390.

         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 which
approximates 5,000 square feet for $4,167 per month.


ITEM 3.  LEGAL PROCEEDINGS.

         The advertising and promotion of the Company's products is subject to
regulation by the FTC under the 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 Clark M. Holcomb, a former officer and
director of the Company and Bonnie L. Richards, a former officer and director of
the Company, to maintain adequate substantiation for the future advertising
claims and imposes joint and several liability for the $150,000 payment to the
FTC between the Company and Ms. Richards. The Company has pledged and
transferred to an escrow account $125,000 in cash and has issued a security
agreement which covers $25,000 of inventory to secure the payment of the
indebtedness to the FTC. The balance due to the FTC was $41,672 at January 31,
1998. The Company, Mr. Holcomb and Ms. Richards 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.


                                       6
<PAGE>   7

         In April 1996, the Company settled certain advertising litigation
resulting in a gain of $845,482 and settled certain litigation, resulting in a
loss of $80,000, regarding a former sales broker in order to avoid the costs
inherent in defending the action. In August 1996, the Company settled certain
litigation regarding a license agreement and royalties with Effective Health
Inc., a wholly-owned subsidiary of Interactive Medical Technologies Ltd., which
resulted in a net gain of $151,245. In December 1996, the Company approved a
proposed administrative consent order with the FTC regarding alleged
unsubstantiated advertising claims which requires the Company to pay an
aggregate of $150,000 to the FTC. In February 1997, the Company settled certain
other disputed and doubtful claims for the sum of $24,000 to avoid further
litigation costs inherent in defending the action. 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.

         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. The Company is
currently negotiating a settlement of this action.

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., 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. The Company continues to believe that the remaining
allegations contained in the amended complaint are without merit. The Company
intends to pursue a reasonable settlement in order to avoid the costs inherent
in continued litigation.

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 Incorporated. Management of the
Company believes that the lawsuit is meritorious but is unable to determine the
outcome at this time.


                                       7
<PAGE>   8

         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, 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.


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

         During the fourth quarter of the 1997-98 fiscal year, the Company
submitted one matter to a vote of security holders through the solicitation of
proxies as follows: 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, at its discretion, may determine.




                                       8
<PAGE>   9

                                     PART II


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

         The Company's Common Stock is quoted on the OTC Bulletin Board under
the symbol "SQST" (formerly "KCDH"). A limited trading market has developed for
the Company's Common Stock. The high and low bid prices for the Common Stock, as
reported by the National Quotation Bureau, Inc., 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.


<TABLE>
<CAPTION>
                  Quarter Ended                     Bid Prices
                  -------------                     ----------
                                               High              Low
                                               ----              ---
                  <S>                        <C>               <C>
                  April 30, 1996             5.3125            1.0000
                  July 31, 1996              5.1250            3.6250
                  October 31, 1996           4.4375            2.5000
                  January 31, 1997           2.6875            1.0625

                  April 30, 1997             1.5625             .1900
                  July 31, 1997               .3100             .0950
                  October 31, 1997            .2500             .0600
                  January 31, 1998            .3200             .0430
</TABLE>

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

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

         On April 10, 1998, there were approximately 600 shareholders of record
of the Company's Common Stock. On April 10, 1998, the closing bid and ask prices
for the Common Stock reported by the Reuters Limited were $0.4063 and $0.4350
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, in order to provide for the growth of the Company.
Consequently, no cash dividend or any other dividend is 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 needed to declare a cash dividend or that the Company will have
legally available funds to pay dividends.

         The Company presently has outstanding 398,850 "A" Public Warrants,
488,600 "B" Public Warrants and 488,600 "C" Public Warrants that are
exercisable, subject to an effective registration statement with the Securities
and Exchange Commission, at the following prices through the following
expiration dates:

<TABLE>
         <S>                        <C>              <C>
         A Warrants                 $0.25            June 30, 1998
         B Warrants                 $0.38            June 30, 1998
         C Warrants                 $0.50            June 30, 1998
</TABLE>

         The Warrant prices have not been restated for the reverse stock split
dated February 25, 1998.

Transfer and Warrant Agent:

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


                                       9
<PAGE>   10

Changes in Securities - During the fourth quarter of the 1997-98 fiscal year

         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 certained registration rights.

         The Company relied upon the exemptions from registration contained in
Sections 4(2) and 4(6) of the 1933 Act, 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.  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.

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


                                       10
<PAGE>   11

         Market research indicates that there is a substantial market for
dietary supplements that are natural, drug-free products. SeQuester(R) 1 and
ChromaQuest(TM) do not contain any diuretics, stimulants, or drugs. SeQuester(R)
2, an appetite suppressant, does not contain any caffeine, diuretic, or sodium.
SeQuester(R) 2 is an FDA approved over-the-counter drug formulation for appetite
control to aid weight reduction, containing Phenylpropanolamine Hydrochloride.
PhytoQuest(TM) contains plant sterols. All of the ingredients comprising the
SeQuester(R) 1 product are included in published Food and Drug Administration
guidelines for ingredients generally recognized as safe ("GRAS").
ChromaQuest(TM), consists of a synergistic combination of 5 different sources of
Chromium, as well as Amino Acids, Vitamin C and Potassium. Chromium is an
essential trace mineral which is necessary for proper carbohydrate metabolism.
The Company believes that there is a tremendous possibility to assume the lead
in this market, well ahead of any other participants who may attempt to enter
the market.

Results of Operations

         The Company commenced operations for the marketing and distribution of
its SeQuester(R) products in the first calendar months of 1994. Certain costs
and necessary expenditures were incurred that will have delayed results on
sales, such as sales travel calls and re-visits to wholesalers, brokers and
retailers across the nation, as well as a national media advertising campaign.
It is now clear that the results of these efforts have brought the Company's
SeQuester(R) products to national attention.


For the twelve month period ended January 31, 1998 compared to the twelve month
period ended January 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 ChromaQuest(TM) 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, 1998 were $1,517,666 compared to $4,144,295 for the twelve months
ended January 31, 1997, or a 63% decrease. Gross Revenues have been reduced for
a variety of discounts to provide Net Revenues of $732,388 for the twelve months
ended January 31, 1998 and $2,845,590 for the twelve months ended January 31,
1997 or a 74% decrease.

         The significant decrease in Gross Revenues is attributed to a decrease
in sales and an increase in the rate of returns. The decrease in sales is due to
a lack of adequate financing to continue the Company's advertising campaign. The
increase in the rate of refunds and returns resulted primarily from (i) return
of dated products which had remained unsold by retailers and which could not be
resold, (ii) disposal by retailers of unsaleable products and (iii) an increase
in the reserve recorded for estimated sales returns.


<TABLE>
<CAPTION>
                                                               Twelve Months Ended
                                                               -------------------
                                                         January 31, 1998           January 31, 1997
                                                     -----------------------    --------------------
                                                     $                   %      $                %
<S>                                                  <C>                 <C>    <C>              <C>
Gross Revenues                                       1,517,666           100    4,144,295        100
                                                     ---------           ---    ---------        ---

Discounts:
         Refunds and Returns                           675,071            44      698,743         17
         Introductory and Promotional                   53,770             4      224,685          5
         Co-op Advertising                              33,923             2      292,355          7
         Other                                          22,514             2       82,922          2
                                                     ---------           ---    ---------        ---
         Total Discounts                               785,278            52    1,298,705         31
                                                     ---------           ---    ---------        ---
         Net Revenues                                  732,388            48    2,845,590         69
                                                     =========           ===    =========        ===
</TABLE>

         Gross Profits are comprised of Net Revenues less direct costs of
products, packaging and services. The Cost of Sales of the dietary products for
the twelve month period ended January 31, 1998 was $758,631 or 104% of Net
Revenues which provided a Gross (Loss) of ($26,243) or (4%) of Net Revenues. For
the twelve month period ended January 31, 1997, the Cost of Sales was $1,104,520
or 39% of Net Revenues, which provided a Gross Profit of $1,741,070 or 61% of
Net Revenues. The decrease in the Gross Profit percentage resulted from an
increase in the rate of returns and an increase in the allowance for
obsolescence. The increase in the rate of refunds and returns resulted primarily
from (i) return of dated products which had remained unsold by


                                       11
<PAGE>   12

retailers and which could not be resold and (ii) disposal by retailers of
unsaleable products. In addition, the Company increased its allowance for
obsolescence and expensed deteriorated products both of which were charged to
cost of goods sold during the fiscal year ended January 31, 1998. The allowance
for obsolescence is maintained at an amount management deems adequate to cover
unsaleable inventory. In determining the allowance to be maintained, management
evaluates many factors including alternate uses and a specific review for items
no longer saleable.


<TABLE>
<CAPTION>
                                                     Twelve Months Ended

                                              January 31, 1998             January 31, 1997
                                            --------------------          -------------------
                                            $                %            $               %
         <S>                                 <C>             <C>          <C>             <C>
         Net Revenues                        732,388         100          2,845,590       100
         Cost of Goods Sold                  758,631         104          1,104,520        39
                                            --------         ---          ---------       ---
         Gross (Loss) Profit                ( 26,243)        ( 4)         1,741,070        61
                                            ========         ===          =========       ===
</TABLE>


         Advertising expenses consist of a multi-media advertising campaign
which included newspaper and radio, signage and other displays. Selling and
marketing expenses consist of sales commissions and salaries, coupon redemption,
warehouse, freight, supplies and travel expenses. General and administrative
expenses consist of salaries and benefits for 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 $317,828 for the twelve
months ended January 31, 1998 from $1,479,124 for the twelve months ended
January 31, 1997. Advertising expenses for the twelve months ended January 31,
1998 included testing of TV spot commercials in selected markets and 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.

         Selling and Marketing expenses decreased to $641,212 for the twelve
months ended January 31, 1998 from $893,884 for the twelve months ended January
31, 1997. The Company experienced decreases in sales commissions and freight due
to a reduction in sales and decreases in office, salaries and travel expenses
during the twelve months ended January 31, 1998. The decreases were partially
offset by increases in coupon expense and consulting fees. Selling and Marketing
expenses are expected to continue to decrease during the remainder of 1998.

         General and Administrative expenses decreased to $1,213,258 for the
twelve months ended January 31, 1998 from $1,812,517 for the twelve months ended
January 31, 1997. The Company experienced decreases in legal fees, salaries,
travel, insurance and office expenses, which were partially offset by increases
in bad debt expense, shareholder expense and consulting fees. General and
Administrative expenses are expected to continue to decrease during the
remainder of 1998.

         Interest expense decreased to $5,142 for the twelve months ended
January 31, 1998 from $78,394 for the twelve months ended January 31, 1997.
Interest expense for the twelve months ended January 31, 1998 reflects reduced
principal balances on short term loans from stockholders, which were converted
to equity as of March 31, 1997.

         In April 1996, the Company settled certain advertising litigation
resulting in a gain of $845,482 and settled certain litigation, resulting in a
loss of $80,000, regarding a former sales broker in order to avoid the costs
inherent in defending the action. In August 1996, the Company settled certain
litigation regarding a license agreement and royalties with Effective Health
Inc., a wholly-owned subsidiary of Interactive Medical Technologies Ltd., which
resulted in a net gain of $151,245. In December 1996, the Company approved a
proposed administrative consent order with the FTC regarding alleged
unsubstantiated advertising claims which requires the Company to pay $150,000 to
the FTC. In February 1997, the Company settled certain other disputed and
doubtful claims for the sum of $24,000 to avoid further litigation costs
inherent in defending the action. 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.


                                       12
<PAGE>   13

         In April 1996, Clark Holcomb resigned as a Director and President of
the Company and retired 3,800,000 shares of Company common stock personally
owned by him in satisfaction of the Company's outstanding loan receivable from
him in the amount of $2,223,707. As of January 31, 1996, the balance of
principal and interest receivable on this loan was $2,145,964 which was expensed
for the twelve months ended January 31, 1996. An additional $70,143 was expensed
during the twelve months ended January 31, 1997.

         Interest income of $5,941 for the twelve months ended January 31, 1998
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 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 significant net operating loss carryforwards.

         The net loss for the twelve month period ended January 31, 1998 of
$2,440,692 was incurred principally as a result of (i) a decrease in sales and
an increase in the rate of returns, (ii) an increase in the allowance for
inventory obsolescence and expense for deteriorated products and (iii) the
write-off of the balance of prepaid consulting fees subsequent to a litigation
settlement. The net loss for the twelve month period ended January 31, 1997 of
$1,852,365 was the result of gains on settlement of certain litigation matters
which were offset by a loss from operations.

         Net loss per common share was $1.34 for the twelve months ended January
31, 1998 and $1.27 for the twelve months ended January 31, 1997 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, 1998 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, 1997 compared to the twelve month
period ended January 31, 1996:

         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 ChromaQuest(TM) 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, 1997 were $4,144,295 compared to $7,017,442 for the twelve months
ended January 31, 1996, or a 41% decrease. Gross Revenues have been reduced for
a variety of discounts to provide Net Revenues of $2,845,590 for the twelve
months ended January 31, 1997 and $5,861,232 for the twelve months ended January
31, 1996 or a 51% decrease.

         The significant decrease in Gross Revenues resulted from a hold on the
Company's marketing campaign pending (i) preparation of advertising materials
which could be utilized upon completion of clinical trials for the SeQuester(R)
1 product (ii) the settlement of certain advertising litigation and (iii)
adequate financing. During April 1996, the pending advertising litigation was
settled and the initial phase of financing was completed. Clinical trials for
the SeQuester(R) 1 product were completed during the third quarter of 1996.

         Newspaper advertising commenced in major markets in July 1996 and was
supported by radio advertising which commenced in August 1996. In February 1997,
the Company commenced a television campaign. The decrease in Net Revenues
resulted from a decrease in sales and an increase in refunds and returns.






                                       13
<PAGE>   14


<TABLE>
<CAPTION>
                                                          Twelve Months Ended

                                                    January 31, 1997           January 31, 1996
                                                -----------------------    --------------------
                                                $                   %      $                %
<S>                                             <C>                 <C>    <C>              <C>
Gross Revenues                                  4,144,295           100    7,017,442        100
                                                ---------           ---    ---------        ---

Discounts:
         Refunds and Returns                      698,743            17      212,398          3
         Introductory and Promotional             224,685             5      470,067          6
         Co-op Advertising                        292,355             7      352,787          5
         Other                                     82,922             2      120,958          2
                                                ---------           ---    ---------        ---
         Total Discounts                        1,298,705            31    1,156,210         16
                                                ---------           ---    ---------        ---
         Net Revenues                           2,845,590            69    5,861,232         84
                                                =========           ===    =========        ===
</TABLE>


         The increase in refunds and returns resulted primarily from (i) return
of dated products which had remained unsold by retailers and which could not be
resold, (ii) disposal by retailers of unsaleable products and (iii) a reserve
recorded for estimated sales returns.

         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 twelve month period ended January 31, 1997 was $1,104,520 or 39% of Net
Revenues which provided a Gross Profit of $1,741,070 or 61% of Net Revenues. For
the twelve month period ended January 31, 1996, the Cost of Sales was $1,422,088
or 24% of Net Revenues, which provided a Gross Profit of $4,439,144 or 76% of
Net Revenues. The decrease in the Gross Profit percentage resulted primarily
from an increase in returns and the continuation of fixed co-op advertising
costs. In addition, the Company recorded an allowance for obsolescence of
$121,535 which was charged to cost of goods sold during the twelve months ended
January 31, 1997.

<TABLE>
<CAPTION>
                                                                 Twelve Months Ended
                                                                 -------------------
                                                  January 31, 1997                January 31, 1996
                                            ---------------------------         --------------------
                                            $                      %            $                     %
         <S>                                <C>                    <C>          <C>              <C>
         Net Revenues                       2,845,590              100          5,861,232        100
         Cost of Goods Sold                 1,104,520               39          1,422,088         24
                                            ---------              ---          ---------        ---
         Gross Profit                       1,741,070               61          4,439,144         76
                                            =========              ===          =========        ===
</TABLE>


         Advertising expenses consist of a multi-media advertising campaign
which included newspaper and radio, signage and other displays. Selling and
marketing expenses consist of sales commissions and salaries, coupon redemption,
warehouse, freight, supplies and travel expenses. General and administrative
expenses consist of salaries and benefits for 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 $1,479,124 for the
twelve months ended January 31, 1997 from $3,128,885 for the twelve months ended
January 31, 1996. The Company placed a hold on its marketing campaign through
June 1996 pending (i) preparation of advertising materials which could be
utilized upon completion of clinical trials for the SeQuester(R) 1 product (ii)
the settlement of certain advertising litigation and (iii) adequate financing.
The Company also experienced difficulties in obtaining financing to maintain
adequate inventory levels of SeQuester(R) 2 and ChromaQuest(TM). Inventory
financing became available beginning in April 1996 and inventory buildups to
adequate levels occurred by August of 1996. Newspaper advertising commenced in
major markets in July 1996 and was supported by radio advertising which
commenced in August 1996. Pending advertising litigation was settled in April
1996. A significant portion of the 1996 expense was paid by issuance of
restricted shares of Company common stock. In April 1996, the Company reached a
settlement of the advertising litigation which resulted in a gain of $845,482.


                                       14
<PAGE>   15

         Selling and Marketing expenses decreased to $893,884 for the twelve
months ended January 31, 1997 from $1,009,150 for the twelve months ended
January 31, 1996. The Company experienced decreases in sales commissions due to
reduced sales volumes and a reduction in rates for the current period and
decreases in coupon redemption, freight and travel expenses. The decreases were
partially offset by increases in salaries, consulting fees, marketing supplies
and rent expense.

         General and Administrative expenses increased to $1,812,517 for the
twelve months ended January 31, 1997 from $1,774,143 for the twelve months ended
January 31, 1996. The Company experienced increases in legal and accounting
fees, consulting fees, insurance, bad debt expense and shareholder expenses
offset by decreases in salaries, travel expenses, office expenses and interest
in connection with accounts receivable financing.

         No royalty expense was incurred for the twelve months ended January 31,
1997 compared with $522,858 for the twelve months ended January 31, 1996.
Royalties had been due under the terms of a license agreement which was
terminated in March 1996.

         Interest expense decreased to $78,394 for the twelve months ended
January 31, 1997 from $275,487 for the twelve months ended January 31, 1996.
Interest expense for the twelve months ended January 31, 1997 reflects a reduced
rate of interest and reduced principal balances on short term loans from
stockholders, which decreased from $1,317,597 as of January 31, 1996 to $356,999
as of January 31, 1997. Interest expense for the twelve months ended January 31,
1996 included interest on then outstanding balances due for royalties and
inventory.

         Interest income for the twelve months ended January 31, 1996 was
$101,310 which resulted from interest accrued, at 8% per annum, on the loan
receivable from Clark Holcomb.

         In April 1996, the Company settled certain advertising litigation
resulting in a gain of $845,482 and settled certain litigation, resulting in a
loss of $80,000, regarding a former sales broker in order to avoid the costs
inherent in defending the action. In August 1996, the Company settled certain
litigation regarding a license agreement and royalties with Effective Health
Inc., a wholly-owned subsidiary of Interactive Medical Technologies Ltd., which
resulted in a net gain of $151,245. In December 1996, the Company approved a
proposed administrative consent order with the FTC regarding alleged
unsubstantiated advertising claims which requires the Company to pay $150,000 to
the FTC. In February 1997, the Company settled certain other disputed and
doubtful claims for the sum of $24,000 to avoid further litigation costs
inherent in defending the action.

         In April 1996, Clark Holcomb resigned as a Director and President of
the Company and retired 3,800,000 shares of Company common stock personally
owned by him in satisfaction of the Company's outstanding loan receivable from
him in the amount of $2,223,707. As of January 31, 1996, the balance of
principal and interest receivable on this loan was $2,145,964 which was expensed
for the twelve months ended January 31, 1996. An additional $70,143 was expensed
during the twelve months ended January 31, 1997.

         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, 1997 of
$1,852,365 was the result of gains on settlement of certain litigation matters
which were offset by a loss from operations. The net loss for the twelve month
period ended January 31, 1996 of $4,317,833 was incurred principally as a result
of the significant expenditures made by the Company for its (i) multi-media
advertising campaign and initial introduction of the SeQuester(R) products to
major retail pharmacy and mass merchandiser chains and (ii) the stockholder loan
to Mr. Holcomb which was expensed.

         Net loss per common share was $1.27 for the twelve months ended January
31, 1997 and $2.69 for the twelve months ended January 31, 1996 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.


                                       15
<PAGE>   16

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, 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 January 31, 1998 of $10,298,365 including
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 during the twelve months ended
January 31, 1998 and 1997 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.

         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 has reduced its administrative expenses and anticipates
additional distribution methods for its SeQuester(R) products during the
remainder of 1998. The Company introduced an appetite suppressant and a chromium
based dietary supplement in December, 1995 and a phytosterol based dietary
supplement in October 1996.

         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.


                                       16
<PAGE>   17

         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 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, 1998, an aggregate of 400 shares of outstanding
preferred stock were converted into 4,825,142 shares of Company common stock.


                                       17
<PAGE>   18

         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.

         As of January 31, 1998, the Company's working capital position
decreased to $44,325 from $639,789 at January 31, 1997. Decreases in current
assets include decreases in cash of $334,097, accounts receivable, net of
$213,176, inventory, net of $1,037,581 and other assets of $7,173. Changes in
current liabilities include decreases in accounts payable of $459,185, FTC
payable of $83,328 and accrued advertising of $225,849 offset by increases in
accrued expenses, net of $84,590, commissions payable of $12,230 and customer
credit balances of $31,978. Notes payable and loans from stockholders decreased
$356,999. Current assets decreased a net of $1,592,027 and current liabilities
decreased a net of $996,563 for the twelve months ended January 31, 1998. The
net loss for the twelve months ended January 31, 1998 of $2,440,692 was reduced
by non-cash charges for (i) depreciation and amortization of $641,470, (ii)
issuance of stock of $25,624 in connection with settlement of litigation, (iii)
issuance of stock of $41,437 for other expenses and (iv) reduction of prepaid
consulting fees of $471,150 subsequent to a litigation settlement, to reconcile
to net cash used in operating activities.

         Other non-cash items used in adjusting operating activities include
provision for bad debt of $117,180 (accounts receivable), provision for obsolete
inventory of $21,476 (inventory), inventory reduction for deteriorated products
of $625,256 (inventory) and provision for refunds and returns of $167,785
(accrued expenses).

         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 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.




                                       18
<PAGE>   19

ITEM 7.  FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
         Financial Statements:                                                                   Page
         ---------------------                                                                   ----
<S>                                                                                              <C>
                  Report of Independent Certified Public Accountants                             F-2

                  Consolidated Balance Sheets at
                  January 31, 1998 and January 31, 1997                                          F-3

                  Consolidated Statements of Operations for the
                  twelve months ended January 31, 1998 and 1997                                  F-4

                  Consolidated Statement of  Stockholders' Investment
                  for the twelve months ended January 31, 1998 and 1997                          F-5

                  Consolidated Statements of Cash Flows
                  for the twelve months ended January 31, 1998 and 1997                          F-6

                  Notes to Consolidated Financial Statements                                     F-7
</TABLE>


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

None


                                       19
<PAGE>   20

                                    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.                   52       President, Principal               1997
         31125 Via Colinas, Suite 904                Accounting Officer and
         Westlake Village, CA 91362                  Director

         Stephen R. Miller, M.D.            55       Director                           1996
         3000 East County Road, 400 North
         Muncie, IN  47303
</TABLE>

Control Person

         Clark M. Holcomb
         31125 Via Colinas, Suite 904
         Westlake Village, CA 91362

         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 1998, 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.

Clark M. Holcomb: From 1990 until November 1993, Mr. Holcomb was both a
commercial/industrial real estate broker with Lee & Associates, Inc., City of
Industry, California and a principal in the Holcomb Group, a privately held firm
which consulted with emerging growth companies. In 1993, Mr. Holcomb founded
SeQuester Incorporated, the Company's wholly owned subsidiary. From October 7,
1994 through April 12, 1996, Mr. Holcomb served as the President, Chairman of
the Board and Director of the Company. Effective April 12, 1996, Mr. Holcomb
resigned as an Officer and Director of the Company. Mr. Holcomb is subject to a
pending Federal Trade Commission Consent Order described under Item 3. "Legal
Proceedings." Mr. Holcomb is also subject to a Securities and Exchange
Commission Consent Decree requiring an effective registration statement under
Section 5 of the Securities Act of 1933 and compliance with Section 15 of the
Securities Exchange Act of 1934 in connection with any future offer or sale of
securities. In September 1996, Mr. Holcomb filed for protection under Chapter 11
of the United States Bankruptcy Code.



                                       20
<PAGE>   21

ITEM 10.  EXECUTIVE COMPENSATION.

         The following table sets forth compensation paid by the Company for the
three prior fiscal years ended January 31, 1998
 to all its executive officers.



                           SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                                   ANNUAL COMPENSATION                      LONG TERM COMPENSATION
                                        ------------------------------------------     ---------------------------------
                                                                                              AWARDS
                                                                                       ----------------------    PAYOUTS
                                                                                                     Under-      -------   All Other
                                                                                      Restricted     lying        LTIP     Compen-
Name and Current                                                      Other Annual      Stock        Options/    Payouts   sation
Principal Positions                     Year      Salary     Bonus    Compensation     Award(s)($)   SARs(#)       ($)       ($)
-------------------                     ----     -------     -----   -------------    ------------   --------    -------   -------
<S>                                     <C>      <C>       <C>       <C>              <C>            <C>         <C>       <C>

Steven K. Karsh                         1998           -          -        -               -            -            -        -
President and Principal Accounting      1997           -          -        -               -            -            -        -
  Officer                               1996           -          -        -               -            -            -        -

Wellington A. Ewen                      1998    $ 57,125          -        -               -           (3)           -        -
(former) President and Chief Financial  1997      86,875          -        -               -           (3)           -        -
  Officer                               1996      24,375          -        -               -           (3)           -        -

Bonnie L. Richards                      1998    $ 47,011          -  $ 3,469(1)            -           (3)           -        -
(former) Vice President and Secretary   1997      96,883          -    6,000(1)            -           (3)           -        -
                                        1996     104,423   $  7,500    9,556(1)            -           (3)           -        -

Denise van Daalen Wetters               1998    $ 54,659          -        -               -           (4)           -        -
(former) Chief Administrative Officer   1997      81,623          -        -               -           (4)           -        -
                                        1996      69,000          -  $ 5,833(2)            -           (4)           -        -

Clark M. Holcomb                        1998    $ 87,964          -  $ 6,889(5)            -            -            -        -
(former) Chairman of the Board,         1997      99,673          -   11,815(5)            -            -            -        -
President and Chief Executive Officer   1996    (5)               -   25,488(5)            -            -            -        -
</TABLE>

(1) Other annual compensation for Bonnie L. Richards consists of an automobile
allowance.

(2) Other annual compensation for Denise van Daalen Wetters consists of an
automobile allowance (from August 1995 through January 1996), which was
eliminated in February 1996.

(3) Includes 500,000 stock options. Refer to stock compensation plan described
below.

(4) Includes 250,000 stock options. Refer to stock compensation plan described
below.

(5) Other annual compensation for Clark M. Holcomb consists of an automobile
allowance. No salary was paid during the fiscal year ended January 31, 1996.



                                       21
<PAGE>   22

         In April 1996, Clark Holcomb resigned as a Director and President of
the Company and retired 3,800,000 shares of Company common stock personally
owned by him in further satisfaction of the Company's outstanding loan
receivable from him in the amount of $2,223,707. As of January 31, 1996, the
balance of principal and interest receivable on this loan was $2,145,964 which
was expensed for the twelve months ended January 31, 1996. An additional $70,143
was expensed during the twelve months ended January 31, 1997.

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 January 31, 1998. During October 1997, 500,000 previously
issued options terminated.

         The Company offers group health insurance and other medical benefits to
all its full-time employees. The Company has not adopted a retirement, pension
or profit sharing plan. However, such plans may be adopted by the Company in the
future upon authorization and approval by the Board of Directors.

         Directors received no compensation for their services as such for the
three fiscal years ended January 31, 1998. 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 year ended January 31,
1996. During the fiscal year ended January 31, 1997, $2,565 of such expenses
were reimbursed. No such expenses were reported or reimbursements provided for
the fiscal year ended January 31, 1998.




                                       22
<PAGE>   23

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 April 10, 1998 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.

<TABLE>
<CAPTION>
         Name and Address                              Number of Shares         Percentage
         of Beneficial Owner                         Beneficially  Owned        of Class(1)
         -------------------                         -------------------        -----------
         <S>                                         <C>                        <C>
         Clark M. Holcomb                                  527,000                  19%
         31125 Via Colinas, Suite 904
         Westlake Village, CA 91362

         Stephen R. Miller, M.D.                                   -0-               0%
         3000 East County Road, 400 North
         Muncie, IN  47303

         Steven Karsh                                              -0-               0%
         25312 Malibu Road
         Malibu, CA  90265

         Directors and Officers as                                 -0-               0%
         a Group
</TABLE>


(1) Included for the purposes of this calculation are 2,838,207 shares of Common
Stock outstanding as of April 10, 1998.




                                       23
<PAGE>   24

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         On February 1, 1995 the Company agreed to loan Clark Holcomb, the
President of the Company at that time, up to the principal amount of $2,000,000,
from the Company's cash flow from operations, with interest payable at the rate
of 8% per annum on the unpaid balance. The loan was payable on demand upon sixty
days prior notice. In consideration for the loan, Mr. Holcomb agreed and acted
to retire 2,000,000 shares of the Company's common stock owned by him and
further agreed to personally guarantee and collateralize certain advertising
agreements and future borrowings by the Company up to the principal balance of
the loan. No salary was paid or accrued for Mr. Holcomb for the twelve months
ended January 31, 1996. As of January 31, 1996, the balance of principal and
interest receivable on this loan was $2,145,964 was determined to be
uncollectible and was expensed during the twelve months ended January 31, 1996.
In April 1996, Clark Holcomb resigned as a Director and President of the Company
and retired 3,800,000 shares of Company common stock personally owned by him in
further satisfaction of the Company's outstanding loan receivable from him which
was $2,223,707 at that date.

         On October 17, 1995, the Company executed a promissory note for the sum
of $750,000, or the aggregate unpaid principal amount of advances up to the sum
of $750,000, with interest payable at 10% per annum on the outstanding balance
with Trevor Phillips (a stockholder). The Company issued 25,000 shares of
restricted common stock to Trevor Phillips as consideration for the note and
expensed $62,500 as interest. The note, principal plus interest, was payable
based upon 50% of net collections from product sales with any remaining balance
due in full on or before October 17, 1996. The note was subject to a security
agreement which covered all of the accounts receivable, contract rights and
inventory of the Company. In August 1996, the balance of principal and interest
outstanding of this note was satisfied. In August 1996, the Company entered into
a stock purchase agreement with Trevor Phillips wherein the Company issued
125,000 shares of restricted common stock in satisfaction of $250,000 of the
principal balance of the secured promissory note dated October 17, 1995 due to
Trevor Phillips. In connection with this transaction, the Company entered into a
put option agreement wherein Trevor Phillips 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, (amended in March 1997) the Company entered into an
agreement with Mike Ditka to render services as a performer in television
commercials endorsing Company products and to provide other marketing services
for a one-year period. In consideration for his services, Mr. Ditka received (i)
a cash payment of $75,000 in January 1997 and (ii) 1,000,000 in shares of the
Company's restricted common stock in March 1997.


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

(a)   Exhibits

<TABLE>
<CAPTION>
         Exhibit Number    Title of Exhibit
         --------------    ----------------
         <S>               <C>
             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)

             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)
</TABLE>


                                       24
<PAGE>   25

<TABLE>
<CAPTION>
         <S>               <C>
             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)
</TABLE>


                                       25
<PAGE>   26

<TABLE>
<CAPTION>
         <S>               <C>
             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)
</TABLE>


(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.

(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 did not file any reports on Form 8-K during the last fiscal
quarter of the period covered by this report.




                                       26
<PAGE>   27

                                   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 May 12, 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.


<TABLE>
<CAPTION>
         Signature                                            Title                                        Date
         ---------                                            -----                                        ----
<S>                                         <C>                                                     <C>
/s/ Steven K. Karsh                         President, Principal Accounting Officer,                May 12, 1998
---------------------------------
Steven K. Karsh                             and Director


/s/ Stephen R. Miller, M.D.                 Director                                                May 12, 1998
---------------------------------
Stephen R. Miller, M.D.
</TABLE>





                                       27
<PAGE>   28

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
         <S>                                                                <C>
         Report of Independent Certified Public Accountants                 F-2

         Consolidated Balance Sheets at
         January 31, 1998 and January 31, 1997                              F-3

         Consolidated Statements of Operations for the
         twelve months ended January 31, 1998 and 1997                      F-4

         Consolidated Statement of  Stockholders' Investment
         for the twelve months ended January 31, 1998 and 1997              F-5

         Consolidated Statements of Cash Flows
         for the twelve months ended January 31, 1998 and 1997              F-6

         Notes to Consolidated Financial Statements                         F-7
</TABLE>










                                      F-1

<PAGE>   29

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Board of Directors
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, 1998, and 1997, and the related consolidated statements of
operations, stockholders' investment, and cash flows for the twelve month
periods then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 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, 1998 and 1997,
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 financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company's revenues have declined substantially and the Company incurred net
losses of $2,440,692 and $1,852,365 during the twelve month periods ended
January 31, 1998 and 1997, respectively. These factors, among others, as
discussed in Note 3 to the 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 financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.



GRANT THORNTON


Los Angeles, California
March 27, 1998



                                      F-2

<PAGE>   30

                        SEQUESTER HOLDINGS, INCORPORATED

                           CONSOLIDATED BALANCE SHEETS


                                   ASSETS
<TABLE>
<CAPTION>
                                                                                    JANUARY 31, 1998     JANUARY 31, 1997
                                                                                    ----------------     ----------------
<S>                                                                                   <C>                   <C>        
     CURRENT ASSETS:
          Cash (including restricted cash of $32,559 as of January 31, 1998)          $    75,020           $   409,117
          Accounts receivable, net                                                        169,862               371,271
          Accounts receivable - other, net                                                      -                 5,650
          Due from officers and employees                                                       -                 6,117
          Inventory                                                                     1,110,809             2,148,390
          Other                                                                                 -                 7,173
                                                                                      -----------           -----------
               Total current assets                                                     1,355,691             2,947,718
                                                                                      -----------           -----------

     PROPERTY AND EQUIPMENT, net                                                           50,370               101,256
                                                                                      -----------           -----------

     OTHER ASSETS:
          Deposits                                                                          1,391                 4,888
          Intangibles, net                                                                  1,815                 2,074
                                                                                      -----------           -----------
             Total other assets                                                             3,206                 6,962
                                                                                      -----------           -----------
                Total assets                                                          $ 1,4090,267          $ 3,055,936
                                                                                      ============          ===========


                    LIABILITIES AND STOCKHOLDERS' INVESTMENT

     CURRENT LIABILITIES:
          Accounts payable                                                            $   626,998           $ 1,086,183
          Accrued expenses                                                                385,010               300,420
          Accrued advertising                                                                   -               225,849
          Customer credit balances                                                        207,912               175,934
          Commissions payable                                                              49,774                37,544
          FTC payable                                                                      41,672               125,000
          Loans from stockholders                                                               -               356,999
                                                                                      -----------           -----------
                Total current liabilities                                               1,311,366             2,307,929
                                                                                      -----------           -----------

         Commitments and contingencies (see Notes)

     STOCKHOLDERS' INVESTMENT:
          Convertible Preferred stock, par value $1,000 per share; 5000 shares
             authorized; issued and outstanding 350 shares of series A as of
             January 31, 1998 and 375 shares of series A as of January 31, 1997           350,000               375,000
          Common stock, par value  $.002 per share; 25,000,000 shares
              authorized; issued and outstanding 22,846,109 shares as of
              January 31, 1998 and 14,623,725 shares as of January 31, 1997                45,692                29,247
          Additional paid in capital                                                   10,508,670             9,341,004
          Accumulated deficit                                                         (10,298,365)           (7,857,673)
          Prepaid advertising and consulting fees                                        (508,096)           (1,139,571)
                                                                                      -----------           -----------
                Total stockholders' investment                                             97,901               748,007
                                                                                      -----------           -----------
                    Total liabilities and stockholders' investment                    $ 1,409,267           $ 3,055,936
                                                                                      ===========           ===========
</TABLE>




                                      F-3
<PAGE>   31

                        SEQUESTER HOLDINGS, INCORPORATED

                      CONSOLIDATED STATEMENTS OF OPERATIONS

              FOR THE TWELVE MONTHS ENDED JANUARY 31, 1998 AND 1997


<TABLE>
<CAPTION>
                                                            1998                 1997
                                                        -----------          -----------
<S>                                                     <C>                  <C>         
         Net Revenues                                    $  732,388           $2,845,590
         Cost of Goods Sold                                 758,631            1,104,520
                                                        -----------          -----------

         Gross (Loss) Profit                                (26,243)           1,741,070
                                                        -----------          -----------

         Operating Expenses:
            Advertising                                     317,828            1,479,124
            Selling and  marketing                          641,212              893,884
            General and administrative                    1,213,258            1,812,517
                                                        -----------          -----------
                                                          2,172,298            4,185,525
                                                        -----------          -----------

         Loss from Operations                            (2,198,541)          (2,444,455)
                                                        -----------          -----------

         Non - Operating Income (Expense):
            Interest expense                                 (5,142)             (78,394)
            Interest income                                   5,941                    -
            Litigation settlements, net                    (241,150)             742,227
            Payments to officer and stockholder                   -              (70,143)
                                                        -----------          -----------
                                                           (240,351)             593,690


                                                        -----------          -----------
         Loss before Income Taxes                        (2,438,892)          (1,850,765)

         Provision for Income Taxes                           1,800                1,600
                                                        -----------          -----------


         Net Loss                                       ($2,440,692)         ($1,852,365)
                                                        ===========          ===========

         Weighted average shares of
             common stock outstanding                     1,825,815            1,458,788
                                                        ===========          ===========

         Basic Net Loss per Share*                           ($1.34)              ($1.27)
                                                        ===========          ===========
</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-4

<PAGE>   32

                        SEQUESTER HOLDINGS, INCORPORATED

               CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT

              FOR THE TWELVE MONTHS ENDED JANUARY 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                         Preferred Stock                     Common Stock
                                         ---------------                     ------------           Additional      Accumulated '
                                 Number of shares   Par value   Number of shares    Par value     Paid In Capital     Deficit   
                                 ----------------   ---------   ----------------    -----------   ---------------   ----------- -
<S>                              <C>                <C>         <C>                 <C>           <C>               <C>         
Balance January 31, 1996                       -         $ -         16,602,000        $33,204     $ 8,365,580      ($6,005,306)

Common stock retired,
   advertising settlement                      -           -           (640,000)        (1,280)     (1,918,720)               - 

Issuance of common stock
   in litigation settlement                    -           -             40,000             80          59,920                - 

Common stock retired,
   consulting services                         -           -           (155,200)          (310)     (1,047,290)               - 

Common stock retired,
   satisfaction of loan                        -           -         (3,800,000)        (7,600)              -                - 

Issuance of common stock
   for cash, consulting and
   other services                              -           -            556,898          1,113         834,782                - 

Issuance of common stock
   in private placements                       -           -          1,895,027          3,790       2,853,232                - 

Issuance of common stock
   for satisfaction of debt                    -           -            125,000            250         249,750                - 

Issuance of convertible
   preferred stock in
   private placement                         375     375,000                  -              -         (56,250)               - 

Net loss for twelve months
   ended January 31, 1997                      -           -                  -              -               -       (1,852,365)

Amortization of prepaid
   advertising and consulting
   fees                                        -           -                  -              -               -                - 

                                 ----------------   ---------    ---------------    -----------   ------------      ----------- 
Balance January 31, 1997                     375     375,000         14,623,725         29,247       9,341,004       (7,857,673)

Issuance of convertible
   preferred stock in
   private placement                         375     375,000                  -              -         (56,250)               - 

Conversion of preferred
   stock                                    (400)   (400,000)         4,825,142          9,650         390,350                - 

Issuance of common stock
   for consulting services                     -           -          2,000,000          4,000         426,000                - 

Common stock retired,
   consulting services                         -           -           (150,000)          (300)              -                - 

Issuance of common stock
   in litigation settlement                    -           -             20,000             40          25,584                - 

Conversion of debt to
   common stock                                -           -          1,047,242          2,095         341,505                - 

Issuance of common stock
   for preferred stock option                  -           -            300,000            600          18,337                - 

Issuance of common stock
   under subscription agreement
   dated October 26, 1994                      -           -            180,000            360          22,140                - 

Amortization of prepaid
   advertising and consulting
   fees                                        -           -                  -              -               -                - 

Reduction of prepaid consulting
   fees - litigation settlement                -           -                  -              -               -                - 

Net loss for twelve months
   ended January 31, 1998                      -           -                  -              -               -       (2,440,692)


                                 ===============    ========     ==============     ==========    ============      =========== 
Balance January 31, 1998                     350    $350,000         22,846,109        $45,692     $10,508,670     ($10,298,365)
                                 ===============    ========     ==============     ==========    ============      =========== 



<CAPTION>

                                      Equity           Stockholders'
                                    Reductions          Investment
                                    ----------         -------------
<S>                                <C>                 <C>
Balance January 31, 1996           ($3,518,111)        ($1,124,635)

Common stock retired,
   advertising settlement            1,380,238            (539,762)

Issuance of common stock
   in litigation settlement                  -              60,000

Common stock retired,
   consulting services               1,047,600                   -

Common stock retired,
   satisfaction of loan                      -              (7,600)

Issuance of common stock
   for cash, consulting and
   other services                     (735,000)            100,895

Issuance of common stock
   in private placements                     -           2,857,022

Issuance of common stock
   for satisfaction of debt                  -             250,000

Issuance of convertible
   preferred stock in
   private placement                         -             318,750

Net loss for twelve months
   ended January 31, 1997                    -          (1,852,365)

Amortization of prepaid
   advertising and consulting
   fees                                685,702             685,702

                                    ----------             -------
Balance January 31, 1997            (1,139,571)            748,007

Issuance of convertible
   preferred stock in
   private placement                         -             318,750

Conversion of preferred
   stock                                     -                   -

Issuance of common stock
   for consulting services            (430,000)                  -

Common stock retired,
   consulting services                       -                (300)

Issuance of common stock
   in litigation settlement                  -              25,624

Conversion of debt to
   common stock                              -             343,600

Issuance of common stock
   for preferred stock option                -              18,937

Issuance of common stock
   under subscription agreement
   dated October 26, 1994                    -              22,500

Amortization of prepaid
   advertising and consulting
   fees                                590,325             590,325

Reduction of prepaid consulting
   fees - litigation settlement        471,150             471,150

Net loss for twelve months
   ended January 31, 1998                    -          (2,440,692)


                                    ==========         ============
Balance January 31, 1998             ($508,096)            $97,901
                                    ==========         ============
</TABLE>




                                      F-5
<PAGE>   33

                        SEQUESTER HOLDINGS, INCORPORATED

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

              FOR THE TWELVE MONTHS ENDED JANUARY 31, 1998 AND 1997


<TABLE>
<CAPTION>
                                                                                                19998              1997
                                                                                            -------------      -------------
     CASH FLOWS FROM OPERATING ACTIVITIES:

<S>                                                                                           <C>                <C>         
                 Net Loss                                                                     ($2,440,692)       ($1,852,365)

                 Adjustments to reconcile Net Loss to net cash used in operating
                 activities:
                     Depreciation and amortization                                                641,470            769,062
                     Reduction of prepaid consulting fees                                         471,150                  -
                     Stock issued for advertising and other expenses                               41,437             85,595
                     Litigation settlements                                                        25,624           (479,762)
                     Provision for bad debts                                                      117,180             (4,343)
                     Provision for obsolete inventory                                              21,476            121,535
                     Inventory reduction for deteriorated products                                625,256                  -
                     Provision for refunds and returns                                            167,785            207,215
                                                                                            --------------     --------------
                                                                                                 (329,314)        (1,153,063)
                                                                                            --------------     --------------


                     (Increase) / decrease in current assets:
                          Accounts receivable                                                      95,996            117,468
                          Inventory                                                               390,849         (1,405,378)
                          Other current assets                                                      7,173              2,547
                          Deposits                                                                  3,497               (950)
                      Increase / (decrease) in current liabilities:
                          Accounts payable                                                       (459,185)           249,699
                          Accrued expenses                                                        (83,195)          (130,806)
                          Accrued advertising                                                    (225,849)            52,432
                          Royalties payable                                                             -           (150,515)
                          Customer credit balances                                                 31,978            175,934
                          Commissions payable                                                      12,230              5,596
                          FTC payable                                                             (83,328)           125,000
                                                                                            --------------     --------------
                                                                                                 (309,834)          (958,973)
                                                                                            --------------     --------------
                 Net cash used in operating activities                                           (639,148)        (2,112,036)
                                                                                            --------------     --------------




     CASH FLOWS FROM FINANCING ACTIVITIES:

                 Retirement of common stock                                                          (300)            (7,600)
                 Proceeds from sale of common stock                                                     -          2,872,322
                 Proceeds from sale of preferred stock                                            318,750            318,750
                 Note payable                                                                           -           (371,018)
                 Loans from stockholders, net                                                     (13,399)          (339,580)
                                                                                            --------------     --------------
                 Net cash provided by financing activities                                        305,051          2,472,874

     NET (DECREASE) INCREASE IN CASH                                                             (330,600)           359,888

     CASH,  BEGINNING BALANCE                                                                     409,117             48,279
                                                                                            --------------     --------------

     CASH,  ENDING BALANCE                                                                        $78,517           $408,167
                                                                                            ==============     ==============
</TABLE>




                                      F-6
<PAGE>   34

                        SEQUESTER HOLDINGS, INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            JANUARY 31, 1998 AND 1997


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),
ChromaQuest(TM) and PhytoQuest(TM). These products are sold to national drug and
food chain retailers, wholesalers and mass merchandisers throughout the United
States using several of the nation's largest food brokerage firms.

In October 1994, in connection with the issuance of 14,100,000 shares of its
common stock, $0.002 par value, which consisted of 100,000 shares to the
stockholders of the Company for cancellation of indebtedness then outstanding
and 14,000,000 shares to the stockholders of SeQuester when unrestricted shares
were trading at approximately $1.00 per share, the Company acquired 100% of the
ownership of SeQuester, as a reverse merger. The stock exchange was recorded as
a recapitalization of SeQuester using the Company's historical cost. SeQuester,
which is engaged in the business of marketing and distributing dietary aids,
commenced its operations in February 1994. For financial reporting purposes, the
operations of SeQuester have been included in the accompanying consolidated
financial statements since that date.

The Company's activities through 1995 consisted primarily of the development and
marketing of its dietary supplement product, SeQuester(R) 1. The Company
introduced an appetite suppressant, SeQuester(R) 2 and a chromium based dietary
supplement, ChromaQuest(TM) in addition to SeQuester(R) 1 in December 1995.
Additionally, the Company introduced its fourth product, PhytoQuest(TM), in
October 1996. It is composed of phytosterols, which in recent research shows
potential to inhibit the gastrointestinal absorption of cholesterol. 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 intercompany balances and transactions have been
eliminated in consolidation.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect 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 1997 consolidated financial statement
presentation to conform with the 1998 consolidated financial statement
presentation.


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Revenue Recognition -- The Company recognizes revenue from wholesalers,
distributors and retailers at the time of shipment, net of sales returns and
allowances. 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 $375,000 at
January 31, 1998 and $207,215 at January 31, 1997. 


                                      F-7
<PAGE>   35

Significant customers accounting for 52.0% of gross revenues for the fiscal year
ended January 31, 1998 include Wal-Mart Stores 13.1%, Walgreens 7.9%, Rite Aid
Corp. 6.5%, Target Stores 5.6%, Eckerd Drug 5.4%, K-Mart Corp. 3.2%, Mark
Stevens (CVS, Inc.) 3.0%, Bergen Brunswig 2.7%, American Drug Stores 2.5%, and
McKesson Drug Company 2.1%. Significant customers accounting for 52.3% of
revenues for the fiscal year ended January 31, 1997 include Wal-Mart Stores
26.1%, K-Mart Corp. 13.7% and American Drug Stores 12.5%.

(b) Fair Value of Financial Instruments and Credit Risk -- The carrying value of
cash, receivables and payables approximates their fair values due to the
relatively short maturity of these instruments.

(c) Allowance for Doubtful Accounts -- In determining the allowance to be
maintained, management evaluates many factors including industry and historical
loss experience. The allowance for doubtful accounts is maintained at an amount
management deems adequate to cover estimated losses. The allowance for doubtful
accounts at January 31, 1998 and 1997 was $225,000 and $47,820 for trade
receivables.

(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:

<TABLE>
<CAPTION>
                                                 January 31, 1998     January 31, 1997
                                                 ----------------     ----------------
<S>                                                <C>                  <C>        
         Product Units                             $ 1,047,824          $ 2,030,635
         Packaging and Product Displays                195,277              212,035
         Shipping Supplies                              10,719               10,666
         Consignment                                         -               16,589
                                                  ------------          -----------
                                                     1,253,820            2,269,925
         Less Allowance for Obsolescence          (    143,011)        (    121,535)
                                                  ------------         ------------
                                                  $  1,110,809          $ 2,148,390
                                                  ============          ===========
</TABLE>

The allowance for obsolescence is maintained at an amount management deems
adequate to cover unsaleable inventory. In determining the allowance to be
maintained, management evaluates many factors including alternate uses and a
specific review for items no longer saleable.

(f) Property and Equipment -- The Company records property and equipment at cost
and depreciates it over the useful life of the asset using the straight-line
method of depreciation. Renewals and betterments are capitalized while repairs
and maintenance are charged to expense. Leasehold improvements are amortized
over their expected useful life, or the term of the lease, whichever is shorter.
Estimated useful lives are as follows:

<TABLE>
<CAPTION>
           <S>                                         <C>
           Product Tooling                             2 years
           Machinery and Equipment                     5-10 years
           Furniture and Fixtures                      5 years
           Computer Equipment                          5 years
</TABLE>

(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-8
<PAGE>   36

(i) Risks and Uncertainties -- In the normal course of business, the Company is
subject to certain risks and uncertainties as follows:

       - The Company's primary source of revenue has been from a single product,
SeQuester(R) 1; however, the Company introduced two new dietary aid products in
December 1995 (SeQuester(R) 2 and ChromaQuest(TM)) and introduced a fourth
product, PhytoQuest(TM) in October 1996.

       - The Company has a significant accumulated deficit and has incurred
substantial losses from operations for the period from inception through January
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 January
31, 1998 of $10,298,365 including 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.

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, 1998 and 1997, 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. In addition, during the fiscal year
ended January 31, 1998, the Company sold additional shares of preferred stock
and exchanged debt and services for equity; however, there are no assurances
that private capital will continue to be available.

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.


                                      F-9
<PAGE>   37

4.       REVENUES

In the normal course of business during the twelve month periods ended January
31, 1998 and 1997, the Company granted its customers a variety of discounts. The
discounts granted were as follows:

<TABLE>
<CAPTION>
                                                        1998                  1997
                                                        ----                  ----
         <S>                                        <C>                    <C>
         Gross Revenues                             $  1,517,666           $  4,144,295
                                                    ============           ============
         <S>                                        <C>                    <C>
         Discounts:
                  Refunds and Returns                    675,071                698,743
                  Introductory and Promotional            53,770                224,685
                  Co-op Advertising                       33,923                292,355
                  Other                                   22,514                 82,922
                                                    ------------           ------------
                  Total Discounts                        785,278              1,298,705
                                                    ------------           ============
                  Net Revenues                      $    732,388           $  2,845,590
                                                    ============           ============
</TABLE>


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

<TABLE>
<CAPTION>
                                                           1998           1997
                                                           ----           ----
<S>                                                  <C>                  <C>   
         Product Tooling                             $  43,900            43,900
         Machinery and Equipment                        79,280            79,280
         Furniture and Fixtures                              -             6,231
         Computer Equipment                             31,198            31,198

         Leasehold Improvements                              -            54,291
                                                     ---------           ------
                                                       154,378           214,900
         Less Accumulated Depreciation                (104,008)         (113,644)
                                                     ---------          --------
                                                     $  50,370         $ 101,256
                                                     =========         =========
</TABLE>


7.       LOAN RECEIVABLE FROM OFFICER AND STOCKHOLDER

On February 1, 1995 the Company agreed to loan Clark Holcomb, the President of
the Company at that time, up to the principal amount of $2,000,000, from the
Company's cash flow from operations, with interest payable at the rate of 8% per
annum on the unpaid balance. The loan was payable on demand upon sixty days
prior notice. In consideration for the loan, Mr. Holcomb agreed and acted to
retire 2,000,000 shares of the Company's common stock owned by him and further
agreed to personally guarantee and collateralize certain advertising agreements
and future borrowings by the Company up to the principal balance of the loan. No
salary was paid or accrued for Mr. Holcomb for the twelve months ended January
31, 1996. As of January 31, 1996, the balance of principal and interest
receivable on this loan of $2,145,964 was determined to be uncollectible and was
expensed during the twelve months ended January 31, 1996. In April 1996, Mr.
Holcomb retired 3,800,000 shares of Company common stock personally owned by him
in further satisfaction of the Company's outstanding loan receivable from him
which was $2,223,707 at that date. An additional $70,143 was expensed during the
twelve months ended January 31, 1997.


                                      F-10
<PAGE>   38

8.       LOANS PAYABLE TO STOCKHOLDERS AND COLLATERALIZED PROMISSORY NOTE

(a) 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.

(b) On October 17, 1995, the Company executed a promissory note for the sum of
$750,000, or the aggregate unpaid principal amount of advances up to the sum of
$750,000, with interest payable at 10% per annum on the outstanding balance with
a stockholder. The Company issued 25,000 shares of restricted common stock as
consideration for the note and expensed $62,500 as interest. The note, principal
plus interest, was payable based upon 50% of net collections from product sales
with any remaining balance due in full on or before October 17, 1996. The note
was subject to a security agreement which covered all of the accounts
receivable, contract rights and inventory of the Company. In August 1996, the
balance of principal and interest outstanding of this note was satisfied. In
August 1996, the Company entered into a stock purchase agreement with the same
stockholder wherein the Company issued 125,000 shares of restricted common stock
in satisfaction of $250,000 of the principal balance of the secured promissory
note dated October 17, 1995 due to that stockholder. In connection with this
transaction, the Company entered into a put option agreement wherein that
stockholder 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.


9.       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 $8,866,000. 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
$5,160,000 and are generally available to reduce taxable income through the year
2002. Net operating loss carryforwards for the State of New Jersey are
approximately $621,000 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. 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
$3,644,000. A 100% valuation allowance has been established against the deferred
tax assets, as the utilization of the loss carryforwards can not reasonably be
assured.


10.      CONTRACTS AND AGREEMENTS

(a) Advertising Agreement -- In May 1995, the Company entered into an agreement
with Premiere Radio Networks ("Premiere") for bartered advertising in the amount
of $1,000,000. As consideration for this advertising, the Company issued 200,000
shares of restricted common stock to Premiere. As of January 31, 1998, $96,254
of unused advertising is currently available in connection with this agreement.

(b) Supply and Packaging Agreements -- In April 1996, the Company entered into a
five year supply agreement with a major manufacturer to provide dietary
supplements for resale within the United States and Canada. This


                                      F-11
<PAGE>   39

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.

(c) 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 January 31, 1998. During October 1997, 500,000 previously issued options
terminated, leaving a balance of 1,000,000 options outstanding at January 31,
1998.

(d) Other Agreements -- In January 1997 (amended in March 1997), the Company
entered into an agreement with Mike Ditka to render services as a performer in
television commercials endorsing Company products and to provide other marketing
services for a one-year period. In consideration for his services, Mr. Ditka
received (i) a cash payment of $75,000 in January 1997 and (ii) 1,000,000 in
shares of the Company's restricted common stock in March 1997.

(e) 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.

(f) 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 $6,700 per month.


11.      STOCKHOLDERS' INVESTMENT

(a) Common Stock -- In February 1996, the Company amended and restated its
Consulting Agreement and Stock Plan with a consultant, dated February 15, 1995
to extend the term of such agreement for an additional three (3) year period
and, in June 1996, issued an additional 300,000 shares of Company common stock,
to such consultant.

In April 1996, the Company retired 3,800,000 shares of common stock, at par
value, in satisfaction of the Company's outstanding loan to Clark Holcomb.

In April 1996, the Company issued 1,200,000 shares of common stock for net
proceeds of $1,665,000 in a private placement. Upon completion of this
transaction, the Company issued to the placement agent 300,000 warrants to
purchase additional shares of common stock at $2.50 per share. These warrants
have a five year life and contain certain registration rights.

In June 1996, the Company entered into a stock purchase agreement pursuant to
which the Company agreed to issue a maximum of 1,000,000 shares of common stock
offered at a price per share equal to the lesser of (i) 50% below the closing
bid price of the Company's common stock or (ii) $2.00 per share. During the
period June 1996 through January 31, 1997, 695,027 shares were issued for net
proceeds of $1,192,022. Upon completion of this agreement, the Company agreed to
issue, to the placement agent, 300,000 warrants to purchase common stock at the
offering price. These warrants will have a five year life and contain certain
registration rights. In addition, upon completion of this agreement, the Company
agreed to enter into certain investment relationship agreements for a one year
period which


                                      F-12
<PAGE>   40

provide for aggregate payments of $4,000 per month and the issuance of an
aggregate of 200,000 warrants to purchase common stock at the offering price.
These warrants will have a five year life and contain certain registration
rights.

In connection with an agreement with a consultant to provide certain
advertising, design and marketing services, the Company also entered into a
common stock purchase agreement. Under the terms of the stock purchase
agreement, the Company was obligated to issue up to an aggregate of 250,000
shares of Company common stock at a purchase price of par value through August
1998. In August 1996, the Company issued 150,000 shares under this agreement.
The shares were subject to repurchase by the Company at par value for a period
of two years from date of purchase. In April 1997, this common stock agreement
was canceled and the previously issued shares thereunder were returned to the
Company and retired.

In August 1996, the Company entered into a stock purchase agreement with a
stockholder wherein the Company issued 125,000 shares of restricted common stock
in satisfaction of $250,000 of the principal balance of the secured promissory
note dated October 17, 1995 due to that stockholder. In connection with this
transaction, the Company entered into a put option agreement wherein that
stockholder 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.

During the twelve months ended January 31, 1997, the Company issued (i) 44,047
shares of restricted common stock to commission sales brokers (ii) 40,000 shares
of restricted common stock in settlement of litigation and (iii) 62,851 shares
of restricted common stock for other services.

In February 1997, the Company issued 20,000 shares of common stock and paid
$11,858 in cash in settlement of fees due to a former attorney.

In October 1997, the Company issued an additional 180,000 shares of common stock
pursuant to a Subscription Agreement dated October 26, 1994.

The Company is also contingently liable to issue up to an additional 360,000
shares of restricted common stock in connection with a settlement agreement. The
Company has claims which partially offset this obligation.

In December 1997, the stockholders of the Company approved amendments to the
Company's Articles of Incorporation to provide for a reverse stock split
effective February 25, 1998 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.

(b) Warrants -- The public warrants outstanding were issued as part of a 250,000
unit offering in August 1987. Each unit was offered at $0.75 and consisted of
one share of common stock, four "A" warrants, four "B" warrants, and four "C"
warrants.

In May 1996, the Company extended the date within which the outstanding warrants
of the Company could be exercised to June 30, 1997. In May 1997, the Company
extended the date within which the outstanding warrants of the Company could be
exercised to June 30, 1998 and reduced the exercise price. Exercise of the
extended warrants is subject to an effective registration statement with the
Securities and Exchange Commission. The outstanding warrants of the Company at
January 31, 1998 are as follows:

<TABLE>
<CAPTION>
         Warrant Class            Amount Outstanding           Exercise Price
         -------------            ------------------           --------------
         <S>                      <C>                          <C>
                  A                    398,850                  $  0.25
                  B                    488,600                     0.38
                  C                    488,600                     0.50
                                       -------
                                     1,376,050
</TABLE>

No warrants were exercised during the twelve months ended January 31, 1998 and
1997.


                                      F-13
<PAGE>   41

The Company has an additional 300,000 warrants outstanding to purchase common
stock at $2.50 per share. These warrants have a five year life and contain
certain registration rights.

(c) 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 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, 1998, an aggregate of 400 shares of outstanding preferred
stock were converted into 4,825,142 shares of Company common stock.


12.      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 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.


13.      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


                                      F-14
<PAGE>   42

and maintain adequate substantiation for future advertising claims. The consent
order also requires the Company to maintain adequate substantiation for the
future advertising claims and imposes joint and several liability for the
$150,000 payment to the FTC between the Company and Ms. Richards. The Company
has pledged and transferred to an escrow account $125,000 in cash and has issued
a security agreement which covers $25,000 of inventory to secure the payment of
the indebtedness to the FTC. The balance due to the FTC was $41,672 at January
31, 1998. The Company, Mr. Holcomb and Ms. Richards 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.


14.      LITIGATION

In April 1996, the Company settled certain advertising litigation resulting in a
gain of $845,482 and settled certain litigation, resulting in a loss of $80,000,
regarding a former sales broker in order to avoid the costs inherent in
defending the action. In August 1996, the Company settled certain litigation
regarding a license agreement and royalties with Effective Health Inc., a
wholly-owned subsidiary of Interactive Medical Technologies Ltd., which resulted
in a net gain of $151,245. In December 1996, the Company approved a proposed
administrative consent order with the FTC regarding alleged unsubstantiated
advertising claims which requires the Company to pay an aggregate of $150,000 to
the FTC. In February 1997, the Company settled certain other disputed and
doubtful claims for the sum of $24,000 to avoid further litigation costs
inherent in defending the action. 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.

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.
The Company is currently negotiating a settlement of this action.

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., 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


                                      F-15
<PAGE>   43

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.
The Company continues to believe that the remaining allegations contained in the
amended complaint are without merit. The Company intends to pursue a reasonable
settlement in order to avoid the costs inherent in continued litigation.

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. Management of the Company believes that the lawsuit is
meritorious but is unable to determine the outcome at this time.

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, 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-16
<PAGE>   44

15.      UNAUDITED QUARTERLY RESULTS

Unaudited quarterly results of operations for each of the quarters in the twelve
months ended January 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                         Fiscal 1998 by Quarter
                                                         ----------------------
                                      First            Second          Third         Fourth          Year
                                     ------------     -----------    -----------   -----------     -----------
<S>                                  <C>              <C>            <C>            <C>           <C>        
Revenues                             $    260,675     $   291,341    $   156,725    $   23,647    $   732,388
Gross profit (loss)                       164,246         163,988                     (89,499)
                                                                       (264,978)                     (26,243)
Litigation settlements, net (a)                 -               -      (241,150)             -      (241,150)
Net loss                                (700,486)       (262,451)      (985,652)     (492,103)    (2,440,692)
Net loss per share (b)                    ($0.46)         ($0.15)        ($0.51)       ($0.24)        ($1.34)
</TABLE>

<TABLE>
<CAPTION>
                                                         Fiscal 1997 by Quarter
                                                         ----------------------
                                      First            Second          Third         Fourth          Year
                                     ------------     -----------    -----------   -----------     -----------
<S>                                   <C>            <C>             <C>           <C>                      <C>
Revenues                              $ 1,116,259    $    456,102    $   953,511   $   319,718              $
                                                                                                    2,845,590
Gross profit                              810,043
                                                           68,821        591,417       270,789      1,741,070
Litigation settlements, net (a)           765,482               -        151,245     (174,500)        742,227
Payments to officer
   and shareholder                       (70,143)               -              -             -       (70,143)
(c)                                       730,645       (893,683)      (555,432)   (1,133,895)    (1,852,365)
Net income (loss)
Net income (loss) per share (b)             $0.46         ($0.66)        ($0.39)       ($0.78)        ($1.27)
</TABLE>

(a) In April 1996, the Company settled certain advertising litigation resulting
in a gain of $845,482 and settled certain litigation, resulting in a loss of
$80,000, regarding a former sales broker in order to avoid the costs inherent in
defending the action. In August 1996, the Company settled certain litigation
regarding a license agreement and royalties with Effective Health Inc., a
wholly-owned subsidiary of Interactive Medical Technologies Ltd., which resulted
in a net gain of $151,245. In December 1996, the Company approved a proposed
administrative consent order with the FTC regarding alleged unsubstantiated
advertising claims which requires the Company to pay an aggregate of $150,000 to
the FTC. In February 1997, the Company settled certain other disputed and
doubtful claims for the sum of $24,000 to avoid further litigation costs
inherent in defending the action. 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.

(b) The net income (loss) per common share has been restated to retroactively
effect a reverse stock split in the ratio of one share for ten shares.

(c) On February 1, 1995 the Company agreed to loan Clark Holcomb, the President
of the Company at that time, up to the principal amount of $2,000,000, from the
Company's cash flow from operations, with interest payable at the rate of 8% per
annum on the unpaid balance. The loan was payable on demand upon sixty days
prior notice. In consideration for the loan, Mr. Holcomb agreed and acted to
retire 2,000,000 shares of the Company's common stock owned by him and further
agreed to personally guarantee and collateralize certain advertising agreements
and future borrowings by the Company up to the principal balance of the loan. No
salary was paid or accrued for Mr. Holcomb for the twelve months ended January
31, 1996. As of January 31, 1996, the balance of principal and interest
receivable on this loan of $2,145,964 was determined to be uncollectible and was
expensed during the twelve months ended January 31, 1996. In April 1996, Mr.
Holcomb retired 3,800,000 shares of Company common stock personally owned by him
in further satisfaction of the Company's outstanding loan receivable from him
which was $2,223,707 at that date. An additional $70,143 was expensed during the
twelve months ended January 31, 1997.



                                      F-17
<PAGE>   45

16.      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.

In January 1996, the Company issued 225,000 shares of common stock for
management consulting services to be provided over a twenty-four month period.
The Company recorded $1,518,750 (the value of the shares) as prepaid consulting
fees which was offset to equity. In February 1996, these services were
terminated and 155,200 of the shares issued were retired. Prepaid consulting
fees were reduced by $1,047,600 (the value of the shares retired). The balance
of the issued shares of 69,800 were in litigation. In September 1997, the
Company completed settlement of this litigation 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.

During the twelve months ended January 31, 1998 and 1997, the Company paid
interest of approximately $5,142 and $122,400.

During the twelve months ended January 31, 1996, the Company issued 1,267,500
shares of restricted common stock as consideration for $4,135,000 of
advertising. In April 1996, in connection with a settlement agreement, 640,000
of the shares issued were retired and prepaid advertising was reduced by
$1,380,238. During the twelve months ended January 31, 1998 and 1997, $48,483
and $423,860, respectively, of such advertising has been utilized by the Company
with a remaining balance of prepaid advertising of $96,254 as of January 31,
1998.

In February 1996, the Company amended and restated its Consulting Agreement and
Stock Plan with a consultant, to extend the term of such agreement for an
additional three (3) year period and, in June 1996, issued an additional 300,000
shares of Company common stock, to such consultant for $735,000 of services and
cash consideration of $15,000. In August 1997, the Company again restated its
Consulting Agreement and Stock Plan with such 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. Services of $281,423 and $261,842 were expensed during the twelve
months ended January 31, 1998 and 1997 respectively.

On February 1, 1995 the Company agreed to loan Clark Holcomb, the President of
the Company at that time, up to the principal amount of $2,000,000, from the
Company's cash flow from operations, with interest payable at the rate of 8% per
annum on the unpaid balance. The loan was payable on demand upon sixty days
prior notice. In consideration for the loan, Mr. Holcomb agreed and acted to
retire, at par value, 2,000,000 shares of the Company's common stock owned by
him and further agreed to personally guarantee and collateralize future
borrowings by the Company up to the principal balance of the loan. No salary was
paid or accrued for Mr. Holcomb for the twelve months ended January 31, 1996. As
of January 31, 1996, the balance of principal and interest receivable on this
loan of $2,145,964 was determined to be uncollectible and was expensed during
the twelve months ended January 31, 1996. In April 1996, Mr. Holcomb retired, at
par value, 3,800,000 shares of Company common stock personally owned by him in
further satisfaction of the Company's outstanding loan receivable from him which
was $2,223,707 at that date. An additional $70,143 was expensed during the
twelve months ended January 31, 1997.

In August 1996, the Company entered into a stock purchase agreement with a
stockholder wherein the Company issued 125,000 shares of restricted common stock
in satisfaction of $250,000 of the principal balance of the secured promissory
note dated October 17, 1995 due to that stockholder. In connection with this
transaction, the Company entered into a put option agreement wherein that
stockholder 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.


                                      F-18
<PAGE>   46

During the twelve months ended January 31, 1997, the Company issued 44,047
shares of restricted common stock to commission sales brokers and 10,000 shares
of restricted common stock to packagers. Selling and marketing was expensed
$70,595 and cost of goods sold was expensed $15,000. In February 1997, the
Company issued 20,000 shares of common stock and paid $11,858 in cash in
settlement of fees due to a former attorney and expensed $25,624 as the fair
market value of the common stock.

In August 1997, the Company issued 300,000 shares of restricted common stock
pursuant to an agreement with the convertible preferred stockholders and
expensed $18,937 as the fair market value of the common stock. In October 1997,
the Company issued an additional 180,000 shares of common stock pursuant to a
Subscription Agreement dated October 26, 1994 and expensed $22,500 as the fair
market value of the common stock.

In January 1997 (amended in March 1997), the Company entered into an agreement
with Mike Ditka to render services as a performer in television commercials
endorsing Company products and to provide other marketing services for a
one-year period. In consideration for his services, Mr. Ditka received (i) a
cash payment of $75,000 in January 1997 and (ii) 1,000,000 shares of the
Company's restricted common stock in March 1997. Services of $260,417 were
expensed during the twelve months ended January 31, 1998.

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.

17.      SUBSEQUENT EVENTS

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.