Introduction

The Company was organized in 1991 to develop, market and distribute specialty chewing gum products under its own brand names and on a private label basis for other chewing gum marketers. The Company's current chewing gum products contain ingredients which it claims (i) reduces tobacco cravings (under the "CigArrest" brand name which is licensed to Bancroft Pharmaceuticals), (ii) may reduce the risk of osteoporosis (under the "Calcium Gum" brand name), (iii) contribute to energy and endurance (under the "Ginseng Gum," "Love Gum," "High Gear" and "Buzz Gum" brand names), (iv) promotes weight management (under the "ChromaTrim" and "CitrusSlim" brand names), (v) reduces free radicals (under the "Complete Antioxidant Formula" brand name) and (vi) promotes oral hygiene and breath freshness (under the "DentaHealth" brand name). The Company also produces gum under the "Chew and Sooth Zinc" brand name for the cold and flu season. Sales of CigArrest, Calcium Gum, High Gear, Ginseng Gum and Chew and Sooth Zinc Gum, commenced in 1997. Sales of Buzz Gum, ChromaTrim, Love Gum, CitrusSlim and DentaHealth commenced in 1991, 1993, 1994, 1995 and 1996, respectively. The Complete Antioxidant Formula Gum will be introduced in mid-1998. In 1998 the Company also plans to include its DentaHealth product in a line with other oral care products marketed as an OTC anti-plaque oral care regimen.

The Company contracted with others for the manufacture of all its chewing gum products until February 1996 when it completed leasehold improvements and began manufacture of chewing gum products in its 28,000 square foot facility in Phoenix, Arizona. The facility employs 37 workers and produces all of the Company's chewing gum products. See "Item l - Manufacturing and Packaging."

The Company's business strategy is to: (i) manufacture its own chewing gum products and the private label chewing gum products of other chewing gum marketers in greater quantities and at lower costs; (ii) increase revenues by (a) expanding its marketing efforts for existing chewing gum products, (b) developing new chewing gum products through its own research and development facilities, (c) developing further its private label business, and (d) forming marketing alliances and joint ventures with multinational companies which market consumer packaged goods; and (iii) expand its distribution and customer base by adding over-the-counter ("OTC") non-prescription medications, such as antacids, cough suppressants and pain relievers to its chewing gum products. See "Item 1 - Strategy."

The Company markets its branded chewing gum products directly and through wholesale distributors who distribute primarily to drug store and convenience chains (Duane Reade, Genovese, CVS, Rite Aid, Drug Emporium, Long's, Thrifty, Payless, Phar-Mor, Eckard and 7-11), mass market chains (Kmart and Pamida), major supermarket chains (Smith's, Randall's, H.E.Butt, Pathmark and Fry's) and to various natural foods stores. In addition, the Company sells its branded and private label gum in a number of international markets, including Europe, Asia and Canada. The Company also manufactures product for sale to private label customers who market under their own brand names.

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The Company's chewing gum products are subject to regulation by the United States Food and Drug Administration ("FDA"). The FDA may conclude that certain of the Company's chewing gum products are "drugs" under applicable FDA regulations. Further, if the Company commences marketing of OTC chewing gum products, such products will be considered "drugs" under such regulations. In either case, the FDA may restrict or remove any or all of the Company's chewing gum products from the market if such products violate applicable FDA rules or regulations.

The Company was incorporated in Utah in February 1991 as a specialty chewing gum products marketer under the name Nekros International Marketing, Inc. with office and warehouse facilities located in Ogden, Utah. In November 1994, control of the Company changed and between May 1995 and November 1995, the Company raised an aggregate of $1,006,000 of equity capital and $2,400,000 of debt capital. The funds raised in 1995 were used to establish a new management team, develop additional chewing gum products, build inventories and purchase chewing gum manufacturing equipment for its 28,000 square foot leased manufacturing facility in Phoenix, Arizona.

In October 1995, the Company borrowed $1,550,000 from a group of four lenders (the "1995 Bridge Loan"). As additional compensation for the 1995 Bridge Loan, the Company issued an aggregate of 465,000 common stock purchase warrants to the lenders, each such warrant exercisable to purchase one share of the Company's Common Stock at $2.00 per share exercisable in perpetuity. The Bridge Loan bore interest at 8% per annum and was repaid in April 1996 using proceeds from a public offering in April, 1996, which is further described below. The Bridge Loan lenders included Brett Bouchy, a former principal stockholder of the Company, who received 165,000 warrants, and Robert H. Wood, a former director of the Company, who received 75,000 warrants.

In March 1996, Brett Bouchy sold the 165,000 warrants acquired pursuant to the Bridge Loan for $5.00 per warrant. 100,000 warrants were sold to Gary S. Kehoe and 65,000 to Robert H. Wood, both of whom were officers and directors of the Company. Messrs. Kehoe and Wood paid the purchase price by issuing promissory notes to Mr. Bouchy bearing interest at 9% per annum. The warrants were not collateral for the promissory notes. The promissory notes are due the earlier of (i) six months after the warrants are exercised, or (ii) if during the period from April 24, 1997 until April 24, 2000 the closing price of the Company's Common Stock on NASDAQ is $10.00 or more per share for five consecutive trading days, then the promissory notes are due six months from the last such trading day. If neither event occurs, the promissory notes become void and of no value on April 24, 1999 and the warrants remain the property of Messrs. Kehoe and Wood. Under no circumstances will the warrants become returnable to Mr. Bouchy. In July, 1997, Mr. Kehoe sold the 100,000 warrants acquired from Mr. Bouchy to Andrew Lessman for $6.88 per warrant and used the proceeds to satisfy the promissory note to Mr. Bouchy. Mr. Lessman has not exercised the warrants.

In December 1995, Dale Holdings, Inc. ("Dale"), a principal shareholder of the Company owned by Riverlux Trust REG and Mr. Brett Bouchy, dissolved and transferred 51% and 49%, respectively, of its Common Stock in the Company and its loans receivable due from the Company to Riverlux Trust REG and Brett Bouchy. Riverlux Trust REG and Brett Bouchy received 665,265 shares and 639,175 shares, respectively, of Dale's stockholdings in the Company and $433,500 and

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$416,500, respectively, of Dale's loans receivable from the Company. The loans were repaid out of proceeds of the 1996 Public Offering, which is further described below. Subsequently, Riverlux Trust REG and Mr. Bouchy each sold 20,000 shares of the Company's Common Stock to Mr. Kehoe for $2.00 per share.

Through a private equity placement in January 1996, the Company raised $3,095,875 to repurchase and retire 619,175 shares of the Company's Common Stock held by a former principal stockholder.

In April 1996, the Company sold 460,000 Units to the public at $18.00 per Unit, for gross proceeds of $8,280,000. Each Unit consisted of three shares of Common Stock and one Common Stock Purchase Warrant (the "Public Warrant") to purchase an additional share of Common Stock at any time until April 14, 2001 at $7.50 per share (the "1996 Public Offering"). At the same time, the Company registered the 619,115 shares which were sold in the January 1996 private placement. The 1996 Public Offering was underwritten by Kensington Securities, Inc.

In June of 1997, the Company called for the redemption of all of the Public Warrants at the redemption price of $.01 per share. Prior to the July 21, 1997 redemption date, in excess of 99% of the Public Warrants were exercised at $7.50 per share.

In March 1997, the Company completed the sale of an aggregate of $2,530,000 of convertible debentures ("Debentures"). The Debentures bear interest at 11% per annum, mature on January 1, 2002 and are convertible into the Company's Common Stock at $4.75 per share. The Common Stock issuable under the Debentures carries certain demand registration rights after July 31, 1997. Common Stock issuable upon conversion of the Debentures was subject to a lock-up agreement with the Company through January 31, 1998. Proceeds from the sale of the Debentures are being used for working capital and other corporate purposes.

Strategy

The Company pursues the following business strategy:

(i) Manufacture its own chewing gum products. The Company will continue to manufacture its chewing gum products under its own labels and on a private label basis for other chewing gum marketers. The Company believes that operating its own manufacturing facility significantly reduces its dependence on third party manufacturers, assists it in maintaining the secrecy of its proprietary chewing gum formulas, will reduce its per unit product costs given sufficient volumes, and increases product capacity for itself and its large volume customers.

(ii) Increase revenues by expanding its marketing efforts for existing chewing gum products, developing new chewing gum products, further developing its private label business and forming marketing alliances. The Company will continue to expand marketing efforts for existing products, both in the United States and internationally, and to further develop its private label business in order to manufacture more chewing gum products for other chewing gum marketers.

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The Company will continue to develop new specialty chewing gum products for itself and its private label customers. Because of the Company's expertise in formulating chewing gum, the Company has been able to attract private label customers that are looking for an alternative delivery system to pills and capsules. The Company also seeks to form marketing alliances and joint venture arrangements with multinational companies which market consumer packaged goods to promote and distribute the Company's existing and future gum products.

(iii) Expand its distribution and customer base by adding OTC medications, such as antacids, cough suppressants, and pain relievers, to its chewing gum products. The Company has certain OTC chewing gum products in development and plans to explore the market potential for a number of such products in the future, given sufficient capital and market acceptance for the products. The Company believes that OTC chewing gum products may appeal to certain retailers, such as drug stores and health food stores, and offer the Company the potential to develop new consumer niche markets. Certain OTC chewing gum products will require FDA permission prior to their being introduced to market and, in any event, will be subject to ongoing FDA marketing and manufacturing regulations. See "FDA and Other Government Regulation."

Marketing

The Company markets its chewing gum products directly and through wholesale distributors which distribute primarily to drug store and convenience chains (Duane Reade, Genovese, CVS, Rite Aid, Drug Emporium, Long's, Thrifty, Payless, Phar-Mor, Eckard and 7-11), mass market chains (Kmart and Pamida), major supermarket chains (Smith's, Randall's, H.E.Butt, Pathmark and Fry's) and to various natural foods stores. In addition, the Company sells in a number of international markets, including Europe, Asia and Canada. The Company also manufactures product for sale to private label customers who market under their own brand names, including Herbalife's "Chew Slim," GNC's "Optibolic" and "Ginseng Gold," Kevis' "BrainGum," NuCare's "Chewtrition,"and GEN's "Creatine Gum."

The Company manufactures for, and is continually working on research and development projects with, over 35 private label customers which intend to bring their products to market. Included in these projects is the Company's development of certain OTC chewing gum products, including both nicotine and non-nicotine alternatives in the smoking cessation category. Under private label arrangements, the Company supplies chewing gum products, including formulas used by the Company and its customers, labeled with brand names selected by its private label customers or otherwise includes the private label customer's name on the gum product packaging. Some of these private label customers include Nabisco, Herbalife, General Nutrition Centers (GNC), NuCare, Kevis, Pro Health and Genetic Evolutionary Nutrition (GEN).

The Company intends to continue to expand its marketing efforts by: (i) retaining personnel to further develop the Company's private label business and seek other forms of contract manufacturing business; (ii) forming marketing alliances and joint ventures with multinational companies which market consumer

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packaged goods; (iii) hiring additional sales personnel to obtain and manage new brokers and distributors; and (iv) developing media advertising materials for use by the Company and its brokers and distributors. The Company plans to use its private label business to expand its branded product in 1998.

Manufacturing and Packaging

The Company began manufacturing, packaging and shipping its chewing gum products from a 28,000 square foot leased manufacturing facility in Phoenix, Arizona in March 1996, The manufacture of chewing gum products involves: (i) storing bulk raw materials and "fine" raw materials, such as flavor, colors and active ingredients; (ii) producing and mixing the gum base in large stainless steel mixers; (iii) extruding the gum into selected sizes and shapes; (iv) coating the gum, in the case of chiclet gums, with sugar or sugarless solutions; and (v) packaging the gum in bottles or blister packages for shipment.

Prior to commencing production of the chewing gum, the Company records lot numbers for all ingredients, examines and files certificates of ingredients, performs quality control tests and sanitizes equipment and utensils. It conducts additional quality control tests throughout the manufacturing process. All processes are done under strict common good manufacturing procedures requiring written standard operating procedures.

In December of 1997, the Company refinanced its lease obligation with Textron Financial Corporation relating to its chewing gum manufacturing equipment by entering into an installment note in the principal amount of $1,564,000 payable over a 48 month term. The note bears interest at 9.73% per annum, is payable at a rate of $39,550 per month, and is secured by the equipment.

The Company's manufacturing facility produces all of the Company's chewing gum products and provides the capacity to meet all of the Company's private label product requirements for the foreseeable future. During 1997, the Company doubled its coating capacity and in 1998 the Company anticipates doubling its blister packaging capabilities.

Competition

The distribution and sale of chewing gum products are highly competitive. The Company currently markets its products in three categories at the retail level. These categories are OTC drug, dietary supplements and traditional chewing gums with value added features. The Company's principal OTC competition is Smith-Kline Beecham, which markets the smoking cessation product, Nicorette. Its principal competition in the dietary supplement market is Twin Labs, a leader in that industry. Wrigley, Warner Lambert and Ford Gum and Machine are the Company's main competition in the value added market.

Competitive factors in the chewing gum industry include price, flavor and name recognition resulting from media advertising. The Company does not have the capital resources, marketing and distribution networks, manufacturing facilities, personnel, product name recognition or advertising budget to produce

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or introduce chewing gum brands which compete or will compete with the multinational chewing gum manufacturers or the large specialty chewing gum marketers. However, although there can be no assurances in this regard, the Company believes that it can develop and market specialty chewing gum products in niche markets, such as the weight loss, vitamin, dental hygiene, anti-smoking, zinc and calcium markets, that are considered too small for exploitation by many of the Company's competitors.

FDA and Other Government Regulation

The Company is subject to various federal, state and local laws affecting its business. The Company's chewing gum products manufactured by it or by others for it under contract or otherwise that are considered foods rather than "drugs," are subject to regulation by the FDA, including regulations with respect to labeling of products, approval of ingredients in products, claims made regarding the products and disclosure of product ingredients. Moreover, if the FDA concludes that any of the Company's chewing gum products are "drugs" under applicable FDA regulations or otherwise violate FDA rules or regulations, the products will be subject to the foregoing regulations and FDA may also (i) require that manufacture of such products be in accordance with FDA drug "good manufacturing practices," which prescribe specific requirements and procedures for the manufacture of FDA regulated drug products, or (ii) restrict or remove such products from the market. The Company: (i) believes all of its products are in compliance with all regulatory requirements; (ii) has not been advised that the FDA considers any of its products to be "drugs," except for its CigArrest product; and (iii) has not submitted any information or applications for approval to the FDA. If the Company commences marketing OTC chewing gum products, such products will be deemed to be "drugs" and will be subject to marketing permission and ongoing regulation by the FDA including: (i) requirements that the Company comply with certain more stringent FDA manufacturing standards and practices; (ii) conformity with FDA labeling requirements including dosage information; and (iii) the ability to determine the origin of all chewing gum ingredients included in the manufacturing process.

Advertising claims made by the Company with respect to its products are subject to the jurisdiction of the FDA and the FTC. In both cases the Company is required to obtain scientific data to support any advertising or labeling health claims it makes concerning its products, although no preclearance is required to be made with either agency.

The Company's chewing gum manufacturing facility is subject to regulation by various governmental agencies, including state and local licensing, zoning, land use, construction and environmental regulations and various health,

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sanitation, safety and fire codes and standards. Suspension of certain licenses or approvals, due to failure to comply with applicable regulations or otherwise, could interrupt the Company's manufacturing operations. If the Company commences marketing OTC chewing gum products, its manufacturing facility will also be subject to inspection and regulation by the FDA as a drug producing facility. The Company is subject to federal and state laws establishing minimum wages and regulating overtime and working conditions. Because many of the Company's personnel are paid at rates based on the federal minimum wage, an increase in such minimum wage will result in an increase in the Company's labor costs.

Barter Agreements

The Company entered into barter agreements (the "Barter Agreements") with Active Media Services, Inc. ("Active") in December 1996 and with SKR Resources, Inc. ("SKR") in May 1997 under which it exchanged certain of its gum products with Active and SKR for advertising, printing and travel credits totaling $3,550,000 and $750,000, respectively. Under the Barter Agreements, the Company must pay for approximately 75% of the advertising, printing and travel expenses in cash and may pay the remaining 25% using its bartered credits. Further, any unused credits on February 28, 2000 expire and will be valueless. The Company shipped product in the fourth quarter of calendar year 1996 as a result of the Barter Agreement with Active and the balance of product during the 1997 calendar year under the Barter Agreement with SKR. The Company has recorded the barter credits in an amount equal to the carrying value of the inventory, which was reduced to zero prior to the exchange (as more fully described in Note 2 to the financial statements "Restatement of Financial Information"). Therefore, no amounts have been recorded for the barter credits.

Trademarks, Trade Names and Proprietary Rights

The Company routinely seeks trademark protection from the United States Patent Office ("USPO") and from similar agencies in foreign countries for chewing gum brands. There can be no assurance that the Company will be able to successfully defend any trademarks or trade names granted to it against claims from or use by competitors or that trademark or trade name applications will be approved by the USPO or any similar foreign agency.

The Company considers some of its chewing gum formulations and processes to be proprietary in nature and relies upon a combination of nondisclosure agreements, other contractual restrictions and trade secrecy laws to protect such proprietary information. There can be no assurance that these steps will be adequate to prevent misappropriation of the Company's proprietary information or that the Company's competitors will not independently develop chewing gum formulations and processes that are substantially equivalent or superior to those of the Company.

Employees

As of March 26, 1998, the Company employed 46 individuals including its two executive officers, 26 manufacturing and warehouse personnel, 3 research and development personnel, 4 sales personnel, and 11 administrative personnel.

On February 10, 1998 the Company accepted the resignation of Gerald N. Kern, the Chairman, Chief Executive Officer and President of the Company. Mr. Kern's severance package includes a payment of $200,000, the forgiveness of $116,000 of debt and officer's advances owed to the Company, and 100,000 Company stock options which are exercisable by Mr. Kern for up to one year at $5.81 per

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share upon cancellation of all of his existing options. $50,000 of the cash payment to Mr. Kern is being held in trust for 120 days subject to a mutual non-disparagement clause.

Gary Kehoe was named the interim President, and Bruce Jorgenson was named the Chairman.