<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-QSB

              [X] Quarterly Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                  For the quarterly period ended April 30, 1997

                                       OR

              [ ] Transition Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

         For the transition period from________________to_______________

                       Commission file number:33-06827-LA

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


         Nevada                                              95-4532103
------------------------                                     ----------
(State or other jurisdiction of                           (I.R.S. employer
 incorporation or organization number)                  identification number)

2835 Townsgate Road, Suite 110, Westlake Village, CA                 91361
--------------------------------------------------------------------------
(Address of principal executive offices)                         (Zip Code)

       Registrant's telephone number, including area code: (805) 494-6687

                                 not applicable
  -----------------------------------------------------------------------------
  (former, name, address, and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.   Yes  X      No 
                                         ---        ---

State the number of shares outstanding of each of the Registrant's classes of
common equity, as of the latest practicable date.

                                                     Outstanding at
         Class of Common Stock                       May 31, 1997
         ---------------------                       ------------
         $.002 par value                             18,167,411

Transitional Small Business Disclosure Format        Yes      No X
                                                        ---     ---

            Number of sequentially numbered pages in the document: 29


<PAGE>   2
                                   FORM 10-QSB
                       Securities and Exchange Commission
                             Washington, D.C. 20549

                        SEQUESTER HOLDINGS, INCORPORATED
                      (formerly KCD HOLDINGS INCORPORATED)

                                      Index

<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION                                                          Page
                                                                                        ----
<S>                                                                                     <C>
         Item 1. Financial Statements

                  Consolidated Balance Sheets at                                        F-3
                  April 30, 1997 (unaudited) and January 31, 1997

                  Consolidated Statements of Operations for the three                   F-4
                  months ended April 30, 1997 (unaudited) and 1996
                  (unaudited)

                  Consolidated Statement of Stockholders' Investment (Deficit)          F-5
                  for the three months ended April 30, 1997 (unaudited)

                  Consolidated Statement of Cash Flows                                  F-6
                  for the three months ended April 30, 1997 (unaudited)
                  and 1996 (unaudited)

                  Notes to Consolidated Financial Statements                            F-7

         Item 2.  Management's Discussion and Analysis or Plan of                       20
                   Operations.

PART II. - OTHER INFORMATION

         Item 1.  Legal Proceedings                                                     28

         Item 2.  Changes in Securities                                                 28

         Item 6.  Exhibits and Reports on Form 8-K                                      28

Signatures                                                                              29
</TABLE>



<PAGE>   3
PART I. FINANCIAL INFORMATION
    ITEM  1. FINANCIAL STATEMENTS


                        SEQUESTER HOLDINGS, INCORPORATED

                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                     ASSETS
                                                                                     APRIL 30, 1997      ANUARY 31, 1997
                                                                                     --------------      ---------------
                                                                                      (Unaudited)
    CURRENT ASSETS:
    <S>                                                                              <C>                 <C>    
         Cash                                                                             204,549              409,117
         Accounts receivable, net                                                         234,921              195,337
         Accounts receivable - other                                                       18,291               11,767
         Inventory                                                                      2,058,273            2,148,390
         Other                                                                              2,672                7,173
                                                                                     -------------       --------------
              Total current assets                                                      2,518,706            2,771,784
                                                                                     -------------       --------------
    PROPERTY AND EQUIPMENT, net                                                            84,948              101,256
                                                                                     -------------       --------------

    OTHER ASSETS:
         Deposits                                                                           4,888                4,888
         Intangibles, net                                                                   2,009                2,074
                                                                                     -------------       --------------
            Total other assets                                                              6,897                6,962
                                                                                     -------------       --------------
               Total assets                                                          $  2,610,551        $   2,880,002
                                                                                     =============       ==============


                             LIABILITIES AND STOCKHOLDERS' INVESTMENT (DEFICIT)

    CURRENT LIABILITIES:
         Accounts payable                                                            $  1,084,517        $   1,086,183
         Accrued expenses                                                                 372,973              300,420
         Accrued advertising                                                              112,408              225,849
         Commissions payable                                                               39,184               37,544
         FTC payable                                                                      125,000              125,000
         Loans from stockholders                                                          344,888              356,999
                                                                                     -------------       --------------
               Total current liabilities                                                2,078,970            2,131,995
                                                                                     -------------       --------------

        Commitments and contingencies (see Notes)

    STOCKHOLDERS' INVESTMENT (DEFICIT)
         Convertible Preferred stock, par value $1,000 per share; 5000 shares             560,000              375,000
            authorized; issued and outstanding 560 series A as of April 30, 1997
            and 375 as of January 31, 1997
         Common stock, par value  $.002 per share; 25,000,000 shares                       32,816               29,247
             authorized; issued and outstanding 16,408,163 as of April 30,1997
             and 14,623,725 as of January 31, 1997
         Additional paid in capital                                                     9,809,009            9,341,004
         Accumulated deficit                                                           (8,558,159)          (7,857,673)
         Prepaid advertising and consulting fees                                       (1,312,085)          (1,139,571)
                                                                                     -------------       --------------
               Total stockholders' investment (deficit)                                   531,581              748,007
                                                                                     -------------       --------------
                   Total liabilities and stockholders' investment (deficit)          $  2,610,551        $   2,880,002
                                                                                     =============       ==============
</TABLE>


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

                                      F-3

<PAGE>   4



<TABLE>
<CAPTION>
                                                               1997                  1996
                                                          ---------------        --------------
                                                           (Unaudited)            (Unaudited)

             <S>                                          <C>                    <C>       
             Net Revenues                                       $260,675            $1,116,259
             Cost of Goods Sold                                   96,429               306,216
                                                          ---------------        --------------
             Gross Profit                                        164,246               810,043
                                                          ---------------        --------------

             Operating Expenses:
                Advertising                                      317,828                36,519
                Selling and  marketing                           193,965               197,610
                General and administrative                       349,696               507,399
                                                          ---------------        --------------
                                                                 861,489               741,528

             Profit (Loss) from Operations                      (697,243)               68,515
                                                          ---------------        --------------

             Non - Operating Income (Expense)
                Interest expense                                  (5,142)              (31,609)
                Interest income                                    3,699                    --
                Litigation Settlements, net                           --               765,482
                Payments to Officer and Stockholder                   --               (70,143)
                                                          ---------------        --------------
                                                                  (1,443)              663,730

             Income (Loss) before Income Taxes                  (698,686)              732,245

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

             Net Profit (Loss)                                 ($700,486)             $730,645
                                                          ===============        ==============

             Weighted Average Shares of
                 Common Stock Outstanding:                    15,228,541            16,041,009
                                                          ===============        ==============


             Net Profit (Loss) per share:                         ($0.05)                $0.05
                                                          ===============        ==============
</TABLE>


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


                                      F-4

<PAGE>   5
                        SEQUESTER HOLDINGS, INCORPORATED

          CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT (DEFICIT)

                   FOR THE THREE MONTHS ENDED APRIL 30, 1997


<TABLE>
<CAPTION>
                                    Preferred Stock                 Common Stock
                                    ---------------                 ------------          Additional
                             Number of shares  Par value   Number of shares   Par value  Paid In Capital
                             ----------------  ----------  ----------------  ----------  ---------------

<S>                          <C>               <C>         <C>              <C>          <C>        
Balance January 31, 1997              375      $375,000       14,623,725    $    29,247    $ 9,341,004

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

Conversion of preferred
   stock                             (190)     (190,000)         914,438         1,829         188,171

Issuance of common stock
   for consulting services             --            --        1,000,000         2,000         310,500

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

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

Net loss for three months
   ended April 30, 1997                --            --               --            --              --

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

Balance April 30, 1997       ------------    ----------    -------------   -----------   -------------
(Unaudited)                           560       560,000       16,408,163        32,816       9,809,009
                             ============    ==========    =============   ===========   =============


<CAPTION>
                                 Total                            Stockholder's
                               Accumulated        Equity           Investment
                                Deficit         Reductions         (Deficit)
                              ------------      ----------        -------------
<S>                             <C>            <C>                <C>          
Balance January 31, 1997        $(7,857,673)   $  (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               --         (312,500)                --

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

Issuance of common stock
   in litigation settlement              --               --              25,624

Net loss for three months
   ended April 30, 1997             (700,486)             --            (700,486)

Amortization of prepaid
   advertising and consulting
   fees                                  --          139,986             139,986

Balance April 30, 1997       --------------   --------------     ---------------
(Unaudited)                      (8,558,159)      (1,312,085)            531,581
                             ==============   ==============     ===============
</TABLE>


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


                                      F-5

<PAGE>   6
                        SEQUESTER HOLDINGS, INCORPORATED

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

               FOR THE THREE MONTHS ENDED APRIL 30, 1997 AND 1996


<TABLE>
<CAPTION>
                                                                          1997                   1996
                                                                    -----------------       ---------------
    CASH FLOWS FROM OPERATING ACTIVITIES:                             (Unaudited)            (Unaudited)
    <S>                                                             <C>                     <C>
             Net Profit (Loss)                                             ($700,486)             $730,645

             Adjustments to reconcile Net Profit (Loss)
             to net cash used in operating activities:
                 Depreciation and amortization                               156,359                63,585
                 Stock issued for other services                                  --                15,000
                 Litigation settlements                                       25,624              (539,762)
                                                                    -----------------       ---------------
                                                                            (518,503)              269,468
                                                                    -----------------       ---------------


                 (Increase) / decrease in assets:
                      Accounts receivable, net                               (46,108)             (354,126)
                      Inventory                                               90,117               220,028
                      Other current assets                                     4,501                 8,212
                  Increase / (decrease) in liabilities:
                      Accounts payable                                        (1,666)             (444,479)
                      Accrued expenses                                       147,124                39,967
                      Accrued advertising                                   (188,012)              (28,439)
                      Commissions payable                                      1,640               100,133
                                                                    -----------------       ---------------
                                                                               7,596              (458,704)
                                                                    -----------------       ---------------

             Net cash used in operating activities                          (510,907)             (189,236)
                                                                    -----------------       ---------------

    CASH FLOWS FROM FINANCING ACTIVITIES:

             Retirement of common stock                                         (300)               (7,600)
             Proceeds from sale of common stock                                   --             1,665,000
             Proceeds from sale of preferred stock                           318,750                    --
             Collateralized note payable-related party                            --                14,232
             Loans from stockholders                                         (12,111)               16,648
                                                                    -----------------       ---------------
             Net cash provided by financing activities                       306,339             1,688,280

    NET INCREASE (DECREASE) IN CASH                                         (204,568)            1,499,044

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

    CASH,  ENDING BALANCE                                                   $204,549            $1,547,323
                                                                    =================       ===============
</TABLE>


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


                                      F-6

<PAGE>   7
                        SEQUESTER HOLDINGS, INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      APRIL 30, 1997 AND JANUARY 31, 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. To date,
the Company has developed access to major domestic retail, pharmacy and mass
merchandiser chains in the United States.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

Certain reclassifications were made to the 1996 consolidated financial statement
presentation to conform with the 1997 consolidated financial statement
presentation.

                                      F-7

<PAGE>   8
                        SEQUESTER HOLDINGS, INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      APRIL 30, 1997 AND JANUARY 31, 1997


The accompanying consolidated financial statements of the Company and its
subsidiary have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-QSB. Certain notes and other information have been condensed or omitted from
the interim financial statements presented in this report. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the financial statements reflect all adjustments considered
necessary for a fair presentation. The results of operations for the three
months ended April 30, 1997 are not necessarily indicative of the results to be
expected for the full year. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-KSB for the year ended January 31, 1997 as filed with the Securities and
Exchange Commission. All significant intercompany balances and transactions have
been eliminated in consolidation.


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Revenue Recognition -- The Company recognizes revenue from wholesalers,
distributors and retailers at the time of shipment, net of sales returns and
allowances. The Company maintains a reserve for returns which management
considers adequate to cover estimated losses. In determining the reserve to be
maintained, management evaluates many factors including items which may be
resold and historical loss experience. The reserve for returns was $300,550 at
April 30, 1997 and $207,215 at January 31, 1997.

Significant customers accounting for 55% of revenues for the three months ended
April 30, 1997 include Walgreens 17%, Kmart Corp. 12%, Target Stores 10%,
Wal-Mart Stores 9% and Rite Aid Corp. 7%.

Significant customers accounting for 54% of revenues for the three months ended
April 30, 1996 include American Drug Stores 27%, Eckerd Drug 15% and Revco D.S.
Inc. 12%.

(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 was $47,820 at April 30, 1997 and January 31, 1997.

(d)      Advertising -- The Company expenses advertising costs as incurred.

(e)      Inventory -- Inventory is valued at the lower of cost or market value.
Cost is determined using the first-in, first-out method. Inventory consisted of:


                                      F-8



<PAGE>   9
                        SEQUESTER HOLDINGS, INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      APRIL 30, 1997 AND JANUARY 31, 1997


<TABLE>
<CAPTION>
                                   April 30, 1997   January 31, 1997
                                   --------------   ----------------
<S>                                  <C>              <C>        
Product Units                        $ 1,955,429      $ 2,030,635
Packaging and Product Displays           213,957          212,035
Shipping Supplies                          9,979           10,666
Consignment                                  443           16,589
                                     -----------      -----------
                                       2,179,808        2,269,925
Less: Allowance for Obsolescence        (121,535)        (121,535)
                                     -----------      -----------
                                     $ 2,058,273      $ 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>
          <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. Common share equivalents have not
been considered in determining the weighted average number of shares outstanding
as their effect would either be antidilutive or result in no material dilution
of earnings per share.

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

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


                                      F-9

<PAGE>   10
                        SEQUESTER HOLDINGS, INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      APRIL 30, 1997 AND JANUARY 31, 1997


       - The Company has a significant accumulated deficit and has incurred
substantial losses from operations for the period from inception through April
30, 1997.

      - 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 has incurred net losses from
inception to April 30, 1997 of $8,558,159 including a loss of $700,486 for the
three months ended April 30, 1997 and net losses of $1,852,365 and $4,317,833
during the fiscal years ended January 31, 1997 and 1996, 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 three months ended April 30, 1997 and the fiscal year ended January
31, 1997, towards (i) obtaining additional equity financing (ii) settlement of
remaining litigation matters and (iii) reduction of salaries and general and
administrative expenses. In addition, subsequent to January 31, 1997, the
Company sold additional shares of preferred stock and exchanged debt for equity,
however, there are no assurances that private capital will continue to be
available.

                                      F-10

<PAGE>   11
                        SEQUESTER HOLDINGS, INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      APRIL 30, 1997 AND JANUARY 31, 1997


4.  REVENUES

In the normal course of business during the three month periods ended April 30,
1997 and 1996, the Company granted its customers a variety of discounts. The
discounts granted were as follows:

<TABLE>
<CAPTION>
                                                   1997             1996
                                                   ----             ----
<S>                                             <C>              <C>       
Gross Revenues                                  $  572,141       $1,240,742
                                                ----------       ----------

Discounts:
         Refunds and Returns                    $  260,892       $   13,882
         Introductory and Promotional               19,109           41,613
         Co-op Advertising                          23,589           49,299
         Other                                       7,876           19,689
                                                ----------       ----------
         Total Discounts                        $  311,466       $  124,483
                                                ----------       ----------
         Net Revenues                           $  260,675       $1,116,259
                                                ==========       ==========
</TABLE>

5.  PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                       April 30, 1997     January 31, 1997
                                       --------------     ----------------
<S>                                      <C>                 <C>      
     Product Tooling                     $  43,900           $  43,900
     Machinery and Equipment                79,280              79,280
     Furniture and Fixtures                  6,231               6,231
     Computer Equipment                     31,198              31,198
     Leasehold Improvements                 54,291              54,291
                                         ---------           ---------
                                           214,900             214,900
     Less:  Accumulated Depreciation      (129,952)           (113,644)
                                         ---------           ---------
                                         $  84,948           $ 101,256
                                         =========           =========
</TABLE>


6.  LOAN RECEIVABLE FROM OFFICER AND STOCKHOLDER

On February 1, 1995 the Company agreed to loan Clark Holcomb, the President of
the Company at that time, up to the principal amount of $2,000,000, from the
Company's cash flow from operations, with interest payable at the rate of 8% per
annum on the unpaid balance. The loan was payable on demand upon sixty days
prior notice. In consideration for the loan, Mr. Holcomb agreed and acted to
retire 2,000,000 shares of the Company's common stock owned by him and further
agreed to personally guarantee and collateralize certain advertising agreements
and future borrowings by the Company up to the principal balance of the loan. No
salary was paid or accrued for Mr. Holcomb for the twelve months ended January
31, 1996. As of January 31, 1996, the balance of principal and interest
receivable on this loan of

                                      F-11

<PAGE>   12
                        SEQUESTER HOLDINGS, INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      APRIL 30, 1997 AND JANUARY 31, 1997


$2,145,964 was determined to be uncollectible and was expensed during the twelve
months ended January 31, 1996. In April 1996, Mr. Holcomb retired 3,800,000
shares of Company common stock personally owned by him in further satisfaction
of the Company's outstanding loan receivable from him which was $2,223,707 at
that date. An additional $70,143 was expensed during the three months ended
April 30, 1996.


7.  LOANS PAYABLE TO STOCKHOLDERS AND COLLATERALIZED PROMISSORY NOTE

(a)      On April 30, 1997, the Company owed stockholders $344,888 including
principal and interest. These loans are interest bearing, at a rate of 9% per
annum, and have varying repayment terms, all of which mature on May 1, 1997,
principally for the purpose of providing the Company with working capital. These
notes are subject to a security agreement which covers all of the accounts
receivable of the Company.

In March 1997, the Company entered into an agreement with these stockholders to
convert the outstanding principal balance of such loans as of March 31, 1997 to
approximately 1,047,242 restricted common shares of Company stock. The principal
balance of such loans will be converted at a price 25% below the closing bid
price of the Company's common stock as of March 31, 1997 (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.


8.  INCOME TAXES

No provision was made for Federal income tax since the Company has significant
net operating loss carryforwards. Through January 31, 1997, the Company incurred
net operating losses for tax purposes of approximately $6,650,000. Differences
between financial statement and tax losses

                                      F-12

<PAGE>   13
                        SEQUESTER HOLDINGS, INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      APRIL 30, 1997 AND JANUARY 31, 1997


consist primarily of amortization, allowance for doubtful accounts, and
termination of sub-chapter S status for a subsidiary in connection with a merger
in October, 1994. The net operating loss carryforwards may be used to reduce
taxable income through the year 2011. Net operating loss carryforwards for the
State of California are approximately $3,110,000 and are generally available to
reduce taxable income through the year 2001. Net operating loss carryforwards
for the State of New Jersey are approximately $455,000 and are generally
available to reduce taxable income through 2003. The availability of the
Company's net operating loss carryforwards are subject to limitation if there is
a 50% or more positive change in the ownership of the Company's stock. During
the three taxable years ended January 31, 1997, the Company incurred a 50% or
more change in ownership. Therefore, the availability of the Company's net
operating loss carryforwards may be limited. The provision for income taxes
consists of the California and New Jersey state minimum taxes imposed on
corporations.

The gross deferred tax asset balance as of January 31, 1997 was approximately
$2,678,000. A 100% valuation reserve has been established against the deferred
tax assets, as the utilization of the loss carryforwards can not reasonably be
assured.


9.  CONTRACTS AND AGREEMENTS

(a)      Advertising Agreement -- In May 1995, the Company entered into an
agreement with Premiere Radio Networks ("Premiere") for bartered advertising in
the amount of $1,000,000. As consideration for this advertising, the Company
issued 200,000 shares of restricted common stock to Premiere. As of April 30,
1997, $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 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)      Employment Agreements -- The Company has entered into Employment
Agreements with its officers and key executives.

The Company entered into an Employment Agreement with Bonnie Richards, effective
July 1, 1995 whereby Ms. Richards was engaged as the Vice President of the
Company. Ms. Richards receives an annual base salary equal to $100,000.
Effective October 15, 1995, the Company entered into an Employment agreement
with Wellington Ewen. Mr. Ewen was engaged as the Company's Chief Financial
Officer at an annual salary of $90,000.

Clark M. Holcomb is employed by the Company as the Director of Sales and
Marketing, effective March 25, 1996. Mr. Holcomb is entitled to an annual base
salary of $100,000; a sales incentive

                                      F-13

<PAGE>   14
                        SEQUESTER HOLDINGS, INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      APRIL 30, 1997 AND JANUARY 31, 1997


equal to 2% of net sales over the prior base quarter; provided that, the Company
has net income during the subject quarter; and an equity incentive equal to the
sales incentive, and subject to the same conditions, based on the average bid
price during the subject quarter.

(d)      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 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 through April 30, 1997.

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 10 years from date of grant.

(e)      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.


10.      STOCKHOLDERS' INVESTMENT (DEFICIT)

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

During the twelve months ended January 31, 1996, the Company issued 1,267,500
shares of restricted common stock as consideration for $4,135,000 of
advertising. In April 1996, in connection with a settlement agreement, 640,000
of the shares issued were retired and prepaid advertising was reduced by
$1,380,238. During the three months ended April 30, 1997, $48,483 of such
advertising was utilized by the Company with a balance of prepaid advertising of
$96,254 as of April 30, 1997. During the twelve months ended January 31, 1997
and 1996, $423,260 and $2,186,165 of such advertising has been utilized by the
Company.

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.

                                      F-14

<PAGE>   15
                        SEQUESTER HOLDINGS, INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      APRIL 30, 1997 AND JANUARY 31, 1997


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 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.

(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.


                                      F-15

<PAGE>   16
                        SEQUESTER HOLDINGS, INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      APRIL 30, 1997 AND JANUARY 31, 1997


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

<TABLE>
<CAPTION>
         Warrant Class            Amount Outstanding        Exercise Price
         -------------            ------------------        --------------
         <S>                      <C>                       <C>

                  A                    398,850                 $  0.50
                  B                    488,600                    0.75
                  C                    488,600                    1.00
                                     ---------
                                     1,376,050
                                     ---------
</TABLE>

No warrants were exercised during the three months ended April 30, 1997 or the
twelve months ended January 31, 1997.

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.


                                      F-16
<PAGE>   17
                        SEQUESTER HOLDINGS, INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      APRIL 30, 1997 AND JANUARY 31, 1997


During April 1997, an aggregate of 190 shares of outstanding preferred stock
were converted into 914,438 shares of Company common stock. During May 1997, an
aggregate of 100 shares of outstanding preferred stock were converted into
712,006 shares of Company common stock.


11.      LITIGATION

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


Federal Trade Commission

The advertising and promotion of the Company's products is subject to regulation
by the Federal Trade Commission ("FTC") under the Federal Trade Commission Act
("FTCA"). Among other requirements, the FTC requires that all claims made in
advertising be truthful and substantiated in accordance with standards that have
been developed by the FTC. The Company's advertising claims for its SeQuester(R)
products were recently the subject of inquiry by the Seattle Regional Office of
the FTC which alleged that previous claims for the SeQuester(R) 1 product were
false and/or unsubstantiated in violation of the FTCA. On December 18, 1996, the
Company's Board of Directors approved a proposed administrative consent order
which, if accepted by the FTC, would require the Company to pay $150,000 to the
FTC and maintain adequate substantiation for future advertising claims. The
proposed consent order would also require Clark M. Holcomb, a former officer and
director of the Company and Bonnie L. Richards, a current officer and director
of the Company, to maintain adequate substantiation for the future advertising
claims and would impose joint and several liability for the $150,000 payment to
the FTC between the Company and Ms. Richards. The proposed consent order will
not become final until it is approved by the FTC after being published for
notice and comment. In the event the proposed consent order is not approved, the
Company intends to resume settlement discussions with the FTC. Once the proposed
order becomes final, the Company, Mr. Holcomb and Ms. Richards will be subject
to substantial monetary penalties in the event of non-compliance. Such
penalties, if imposed, could have a material adverse effect on the Company.


KCD Holdings, Incorporated vs. Peter D. Bistrian and Horowitz, Cutler & Beam

In December 1995, the Company entered into a Management Consulting Agreement
("Consulting Agreement") with Peter D. Bistrian Consulting, Inc. ("PBC") for
management and marketing consulting services. As compensation for the foregoing
consulting services, PBC received 225,000 shares of the Company's common stock
(the "Consulting Shares"). The Company acted to register the offer and sale of
the Consulting Shares on Form S-8 which was filed in January 1996. In January
1996, the Company terminated the Consulting Agreement as a result of PBC's use
of the Company's confidential information for PBC's own benefit. The Company
requested in such notice of termination that PBC immediately return the
Consulting Shares for cancellation and that PBC immediately cease and desist
from trading in the Company's securities. Notwithstanding the

                                      F-17

<PAGE>   18
                        SEQUESTER HOLDINGS, INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      APRIL 30, 1997 AND JANUARY 31, 1997


Company's notice, it appears that PBC subsequently acted to sell a substantial
portion of the Consulting Shares in the open market which was in violation of a
lock-up agreement prohibiting the sale of the Consulting Shares. In an attempt
to resolve this matter in an expeditious manner, and to secure the Consulting
Shares for cancellation, the Company entered into a conditional settlement
agreement, contingent upon the return to the Company of all of the Consulting
Shares, which required PBC to deliver the Consulting Shares to an escrow account
maintained by the law firm of Horowitz, Cutler & Beam ("HC&B") for delivery to
the Company. In February 1996, HC&B delivered 155,200 of the 225,000 Consulting
Shares to the Company. In May of 1996, the Company filed a Complaint in the
Superior Court of the State of California for the County of Los Angeles against
PBC; Peter D. Bistrian; HC&B; M. Richard Cutler; Gateway Financial Group, Inc.
("GFG"); and Lisa Paige for breach of written contract; legal malpractice;
intentional misrepresentation; negligent misrepresentation; securities fraud;
conversion; constructive fraud; breach of fiduciary duty; insider trading;
breach of covenant of good faith and fair dealing; and violation of the
racketeering influenced and corrupt organizations act. The Company reached a
settlement with defendants PBC; Peter D. Bistrian; HC&B and M. Richard Cutler in
which certain of the foregoing defendants would pay the Company the sum of
$225,000 to settle this action with respect to all named defendants, exclusive
of GFG. The settlement is contingent upon, amongst other things, the execution
of a release by Peter Bistrian in favor of HC&B and M. Richard Cutler, and a
determination of good faith settlement by the court. On May 12, 1997 defendant
GFG filed a cross-complaint against the Company, the Company's former President
and other parties for equitable indemnity; partial indemnity and declaratory
relief. The Company believes that the allegations contained in the
cross-complaint are without merit and intends to respond to the cross-complaint
accordingly.


David J. Krizman vs. KCD Incorporated, et. al.

In April 1997, David Krizman, individually and as attorney in fact, sued the
Company and the Company's former President, Clark M. Holcomb, in the United
States Bankruptcy Court for the Central District of California. The Complaint
alleges that the Company breached a written contract by failing to transfer
shares of the Company's common stock owned by Mr. Holcomb to the plaintiff. It
is the Company's position that it has no obligation or liability to plaintiff in
connection with this matter other than to facilitate the transfer of the shares
in the ordinary course of business in compliance with applicable securities laws
and orders applicable to Mr. Holcomb. The Company intends to respond to the
Complaint accordingly and to vigorously defend this action.

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

                                      F-18

<PAGE>   19
                        SEQUESTER HOLDINGS, INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      APRIL 30, 1997 AND JANUARY 31, 1997


Except as otherwise specifically indicated above, management believes that the
Company does not have any material liability for any lawsuits, settlements,
judgments or fees of defense counsel which have not been paid or accrued as of
April 30, 1997.

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.


<PAGE>   20
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

General

         SeQuester Holdings, Incorporated ("the Company"), formerly KCD Holdings
Incorporated, was incorporated in the state of Nevada on February 13, 1986. The
Company's activities from inception until 1993 consisted primarily of reviewing
possible business opportunities and acquisitions, and maintaining the business
entity. The Company had only nominal net assets and no operational activities
from the fiscal years 1989 through 1993 and all expenses incurred were solely
related to maintaining the entity and reviewing potential business
opportunities.

         The Company is a holding company which operates primarily through its
wholly-owned subsidiary, SeQuester Incorporated ("SeQuester"), formerly KCD
Incorporated, which was incorporated in November 1993. The Company is a
distributor and marketer of technically advanced health products. The Company
currently markets dietary aid products under the names SeQuester(R),
ChromaQuest(TM) and PhytoQuest(TM). These products are sold to national drug and
food chain retailers, wholesalers and mass merchandisers throughout the United
States using several of the nation's largest food brokerage firms.

         In October 1994, the Company acquired 100% of the ownership of
SeQuester in a reverse merger by issuing 14,100,000 shares of its common stock,
$0.002 par value, which consisted of 100,000 shares to the stockholders of the
Company for cancellation of indebtedness then outstanding and 14,000,000 shares
to the stockholders of SeQuester when unrestricted shares were trading at
approximately $1.00 per share. The stock exchange was recorded as a
recapitalization of SeQuester using the Company's historical cost. SeQuester,
which is engaged in the business of marketing and distributing dietary aids,
commenced its operations in February 1994.

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

                                       20

<PAGE>   21
         Market leaders in the weight reduction industry include Dexatrim(TM)
and Accutrim(TM), with several additional smaller product marketers.

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


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 have been incurred that 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.
The results of these efforts have brought the Company's SeQuester(R) products to
national attention.


For the three month period ended April 30, 1997 compared to the three month
period ended April 30, 1996:

         Revenues are derived from sales of the dietary fat sequestrant product,
an appetite suppressant, a chromium based dietary supplement and a physterol
based dietary supplement all under the name SeQuester(R). Gross Revenues for the
three months ended April 30, 1997 decreased to $572,141 from $1,240,742 for the
three months ended April 30, 1996 or a 54% decrease.

         Gross Revenues have been reduced for a variety of discounts to provide
Net Revenues of $260,675 for the three months ended April 30, 1997 and
$1,116,259 for the three months ended April 30, 1996 or a 77% decrease. The
decrease is attributed to a decrease in sales and an increase in returns. The
decrease in sales is due to a lack of adequate financing to continue the
Company's advertising campaign. 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.


                                       21

<PAGE>   22
<TABLE>
<CAPTION>
                                                    Three Months Ended
                                                    ------------------
                                            April 30, 1997           April 30, 1996
                                            --------------           --------------
                                            $           %            $            %
                                            -           -            -            -
<S>                                         <C>        <C>           <C>         <C>
Gross Revenues                              572,141    100           1,240,742   100
                                            -------    ---           ----------  ---

Discounts:
         Refunds and Returns                260,892     46              13,882     1
         Introductory and Promotional        19,109      3              41,613     3
         Co-op Advertising                   23,589      4              49,299     4
         Other                                7,876      1              19,689     2
                                            -------     --           ---------    --
         Total Discounts                    311,466     54             124,483    10
                                            -------     --           ---------    --
         Net Revenues                       260,675     46           1,116,259    90
                                            =======    ===           =========    ==
</TABLE>


         Gross Profits are comprised of Net Revenues less direct costs of
products, packaging and services. The Cost of Sales of the dietary products for
the three month period ended April 30, 1997 was $96,429 or 37% of Net Revenues
which provided a Gross Profit of $164,246 or 63% of Net Revenues. For the three
month period ended April 30, 1996, the Cost of Sales was $306,216 or 27% of Net
Revenues, which provided a Gross Profit for the first three month period of the
previous year of $810,043 or 73% of Net Revenues. The decrease in Gross Profit
percent resulted from an increase in returns. The increase in refunds and
returns resulted primarily from (i) return of dated products which had remained
unsold by retailers and which could not be resold, (ii) disposal by retailers of
unsaleable products and (iii) a reserve recorded for estimated sales returns.


<TABLE>
<CAPTION>
                                                    Three Months Ended
                                                    ------------------
                                            April 30, 1997           April 30, 1996
                                            --------------           --------------
                                            $           %            $            %
                                            -           -            -            -
         <S>                                <C>        <C>           <C>         <C>
         Net Revenues                       260,675    100           1,116,259   100
         Cost of Goods Sold                  96,429     37             306,216    27
                                            -------    ---           ---------    --
         Gross Profit                       164,246     63             810,043    73
                                            =======    ===           =========    ==
</TABLE>


         Advertising expenses consist of a multi-media advertising campaign
which included magazines, TV and radio, signage and other displays. Selling and
Marketing expenses consist of sales commissions and salaries, coupon redemption,
warehouse, freight, supplies and travel expenses. General and administrative
expenses consist of salaries and benefits of officers and staff, accounting,
legal and other professionals, rent and occupancy costs, factoring commissions
and fees, bad debt expense, travel expenses and other administrative costs.

                                       22

<PAGE>   23
         In April 1996, the Company reached a settlement of the advertising
litigation which resulted in a gain of $845,482. Financing become available
beginning in April 1996. The Company is currently evaluating its marketing
programs and anticipates a new advertising campaign commencing in the second
quarter of 1997.

         Selling and Marketing expenses decreased to $193,828 for the three
months ended April 30, 1997 from $197,610 for the three months of 1996. The
Company experienced decreases in sales commissions and freight due to a
reduction in sales for the 1997 period which were partially offset by increases
in salaries and travel expenses.

         General and Administrative expenses decreased to $349,696 for the three
months ended April 30, 1997 from $507,399 for the same three months of 1996. The
Company experienced decreases in consulting fees, salaries, legal fees, travel
and office expenses.

         Interest expense decreased to $5,142 for the three months ended April
30, 1997 from $31,609 for the three months of 1996. Interest expense for the
1997 period reflects reduced principal balances on short term loans from
stockholders which decreased to $344,888 as of April 30, 1997 from $1,317,597 as
of January 31, 1996.

         Interest income of $3,699 for the three months ended April 30, 1997 is
the result of interest earned on a certificate of deposit of $100,000 which the
Company will be required to pledge as collateral in accordance with the terms of
a proposed consent order with the Federal Trade Commission.

         In April 1996, the Company settled certain advertising litigation
resulting in a gain of $845,482 and settled certain litigation, resulting in a
loss of $80,000, regarding a former sales broker in order to avoid the costs
inherent in defending the action.

         In April 1996, Clark Holcomb resigned as a Director and President of
the Company and retired 3,800,000 shares of Company common stock personally
owned by him in further satisfaction of the Company's outstanding loan
receivable from him in the amount of $2,223,707. As of January 31, 1996, the
balance of principal and interest receivable on this loan was $2,145,964 which
was expensed for the twelve months ended January 31, 1996. An additional $70,143
was expensed during the three months ended April 30, 1996.

          The provision for income taxes is the minimum for the 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 three month period ended April 30, 1997 of
$700,486 was incurred principally as a result of a decrease in net sales and a
related decrease in gross profit. The net profit for the three month period
ended April 30, 1996 of $730,645 was the result of profit from operations and a
net gain from settlement of litigation.

                                       23

<PAGE>   24
         Net profit (loss) per common share was $ (0.05) for the three months
ended April 30, 1997 and $0.05 for the three months ended April 30, 1996 based
on the weighted average shares of common stock outstanding.


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 April 30, 1997, 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 April 30, 1997 of $8,558,159 including a
net loss of $700,486 for the three months ended April 30, 1997 and net losses of
$1,852,365 and $4,317,833 during the fiscal years ended January 31, 1997 and
1996, respectively.

         Management devoted considerable effort during the three months ended
April 30, 1997 and the fiscal year ended January 31, 1997 towards (i) obtaining
additional equity financing (ii) settlement of remaining litigation matters
(iii) building adequate product inventories and (iv) rebuilding its marketing
campaign.

         Management has reduced its administrative expenses and anticipates
growth of revenues from its SeQuester(R) products during 1997. The Company
introduced an appetite suppressant and a chromium based dietary supplement in
December, 1995 and a phytosterol based dietary supplement in October 1996.

         During the twelve months ended January 31, 1996, the Company issued an
aggregate of 1,267,500 shares of restricted Company stock as consideration for
approximately $4,135,000 of advertising. In April 1996, the Company reached a
settlement of certain advertising litigation which resulted in return and
retirement of 640,000 of these previously issued shares.

                                       24


<PAGE>   25
         In January 1996, the Company issued 225,000 shares of common stock to a
consultant, for services which were subsequently terminated. In April 1996,
155,200 of these shares were returned to the Company and retired.

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

         In connection with this private placement, Clark Holcomb resigned as a
Director and President of the Company and agreed to manage the sales and
marketing programs on the following terms: (1) an annual base salary of
$100,000; (2) a sales incentive equal to 2% of net sales over the prior base
quarter; provided that, the Company has net income during the subject quarter;
and (3) an equity incentive equal to the sales incentive, and subject to the
same conditions, based on the average bid price during the subject quarter. In
addition, the Company will not increase the salaries of any of its officers or
make any loan to any officer, director or shareholder for a period of twelve
months and Clark Holcomb retired 3,800,000 shares of Company common stock
personally owned by him in further satisfaction of the Company's outstanding
loan receivable from him in the amount of $2,223,707.

         In May 1996, the Company issued 40,000 shares of restricted common
stock in settlement of litigation.

         In June 1996, the Company issued 300,000 shares of common stock to a
consultant for services and cash consideration of $15,000. In August 1996, the
Company issued 150,000 shares of common stock under the terms of a consulting
agreement for advertising, design and marketing services, and a stock purchase
agreement. In April 1997, the stock purchase agreement was canceled and
previously issued shares thereunder were returned to the Company and retired.

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

         In June 1996, the Company entered into a stock purchase agreement
pursuant to which the Company agreed to issue a maximum of 1,000,000 shares of
common stock offered at a price per share equal to the lesser of (i) 50% below
the closing bid price of the Company's 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

                                       25

<PAGE>   26
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. 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.

         During April 1997, an aggregate of 190 shares of outstanding preferred
stock were converted into 914,438 shares of Company common stock. During May
1997, an aggregate of 100 shares of outstanding preferred stock were converted
into 712,006 shares of Company common stock.

         On April 30, 1997, the Company owed stockholders $344,888 including
principal and interest. These loans are interest bearing, at a rate of 9% per
annum, and have varying repayment terms, all of which mature on May 1, 1997,
principally for the purpose of providing the Company with working capital. These
notes are subject to a security agreement which covers all of the accounts
receivable of the Company. In March 1997, the Company entered into an agreement
with these stockholders to convert the outstanding principal balance of such
loans as of March 31, 1997 to approximately

                                       26


<PAGE>   27
1,047,242 restricted common shares of Company stock. The principal balance of
such loans will be converted at a price 25% below the closing bid price of the
Company's common stock as of March 31, 1997 (approximately $0.328). These
restricted shares were issued in May 1997 and contain certain registration
rights.

         As of April 30, 1997, the Company's working capital position decreased
to $439,736 from $639,789 at January 31, 1997. Increases in current assets
include increases in accounts receivable of $46,108 offset by decreases in cash
of $204,568, inventory of $90,117 and other assets of $4,501. Changes in current
liabilities include increases in accrued expenses of $147,124 and commissions
payable of $1,640, and decreases in accounts payable of $1,666 and accrued
advertising of $188,012. Notes payable and loans from stockholders decreased
$12,111. Current assets decreased a net of $253,078 and current liabilities
decreased a net of $53,025 for the three months ended April 30, 1997. The net
loss for the three months ended April 30, 1997 of $700,486 was reduced by
non-cash charges for depreciation and amortization of $156,359 and was increased
by issuance of stock of $25,624 in connection with settlement of litigation.

         The Company currently has no firm commitments for material capital
expenditures. The Company does not anticipate that future compliance with
existing environmental and occupational safety regulations will have a
significant impact on its financial condition or future operating results.

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

         Included in this Item 6. "Management's Discussion and Analysis or Plan
of Operation" are certain forward-looking statements reflecting the Company's
current expectations. Although the Company believes that its expectations are
based on reasonable assumptions, there can be no assurance that the Company's
financial goals or expectations will be realized. Numerous factors (such as the
availability of capital and the effectiveness of advertising) may affect the
Company's actual results and may cause results to differ materially from those
expressed in forward-looking statements made by the Company.


                                       27

<PAGE>   28
                                              PART II. OTHER INFORMATION


Item 1. - Legal Proceedings:

The Company is involved in several legal actions. For a description of this
litigation and certain other pending legal matters involving the Company refer
to the Company's Form 10-QSB - Part I for the three months ended April 30, 1997
which are incorporated herein by reference.

Item 2. - Changes in Securities:

In February 1997, the Company issued 20,000 shares of its $.002 par value common
stock to an attorney in settlement of prior litigation. The Company relied upon
the exemption from registration contained in Section 4(2) of the Securities Act
of 1933 ("1933 Act"), as amended, on the basis that the offer and sale of the
shares did not involve any public offering.

In March 1997, the Company issued 1,000,000 shares of its $.002 par value common
stock to an independent contractor for services as a performer in television
commercials, endorsing Company products and to provide other marketing services.
The independent contractor to whom the shares were issued is an "accredited
investor" as defined in Regulation D promulgated under the 1933 Act. 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. - Exhibits and Reports on Form 8-K:

         (b)      On February 10, 1997, the Company filed a report on Form 8-K,
which reported under Item 9 of such form.

                  On March 13, 1997, the Company filed a report on Form 8-K,
which reported under Items 5, 6 and 7 of such form.

         (27)     Financial Data Schedule (included only in EDGAR filing).





                                       28

<PAGE>   29
                                   SIGNATURES


         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                            SEQUESTER HOLDINGS, INCORPORATED
                                            (Registrant)

Dated June 6, 1997                          By: /s/ Wellington A. Ewen
                                                   ----------------------------
                                                   Wellington A. Ewen
                                                   President

         Pursuant to the requirements of Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.


<TABLE>
<CAPTION>
         Signature                                            Title                      Date
         ---------                                            -----                      ----
<S>                                 <C>                                               <C>
/s/ Wellington A. Ewen              President, Principal Accounting Officer,         June 6, 1997
---------------------------         and Director
Wellington A. Ewen         


/s/ Bonnie L. Richards              Vice President, Secretary, and Director          June 6, 1997
---------------------------
Bonnie L. Richards
</TABLE>