SHERWOOD BRANDS INC, 424B1, 1998-05-11

SHERWOOD BRANDS INC
424B1, 1998-05-11
SUGAR & CONFECTIONERY PRODUCTS

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<PAGE>

Filed Pursuant to Rule 424(B)(1)
Under Registration Statement No. 333-44655
[LOGO]
SHERWOOD BRANDS, INC.
1,550,000 Shares of Class A Common Stock and Redeemable Warrants
To Purchase 775,000 Shares of Class A Common Stock
-------------------
The Company is offering hereby 1,550,000 shares of Class A Common Stock
(the "Class A Common Stock") and redeemable warrants to purchase 775,000 shares
of Class A Common Stock (the "Warrants"). The shares of Class A Common Stock
and Warrants may be purchased separately and will be transferable immediately
upon issuance. Each Warrant entitles the registered holder thereof to purchase
one share of Class A Common Stock at a price of $7.50, subject to adjustment in
certain circumstances, at any time commencing May 6, 1999 through and including
May 6, 2003. The Warrants are redeemable by the Company at any time commencing
May 6, 1999, upon notice of not less than 30 days, at a price of $.10 per
Warrant, provided that the closing bid quotation of the Class A Common Stock on
all 20 trading days ending on the third day prior to the day on which the
Company gives notice (the "Call Date") has been at least 134% (currently
$10.05, subject to adjustment) of the then effective exercise price of the
Warrants and the Company obtains the written consent of the Underwriter to such
redemption prior to the Call Date. See "Description of Securities."

Prior to this offering there has been no public market for the Class A
Common Stock or Warrants and there can be no assurance that any such market
will develop. The Class A Common Stock and Warrants have been approved for
listing on the American Stock Exchange under the symbols "SHD" and "SHDW,"
respectively. The offering prices of the Class A Common Stock and Warrants, and
the exercise price of the Warrants, were determined pursuant to negotiations
between the Company and the Underwriter and do not necessarily relate to the
Company's book value or any other established criteria of value. For a
discussion of the factors considered in determining the offering prices, see
"Underwriting."

The Company's capital stock consists of Class A Common Stock and Class B
Common Stock (collectively, the "Common Stock"), which classes are
substantially identical, except that the Class A Common Stock is entitled to
one vote per share and the Class B Common Stock is entitled to seven votes per
share on all matters, including the election of directors. Upon the
consummation of this offering, Uziel Frydman, Chairman, President and Chief
Executive Officer of the Company, will beneficially own 1,000,000 shares of
Class A Common Stock and all of the 1,000,000 shares of Class B Common Stock
outstanding and will be able to control the Company. See "Principal
Stockholders" and "Description of Securities."
-------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO
CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS"
COMMENCING ON PAGE 7.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
==============================================================================
Price Underwriting Proceeds
to Discounts and to
Public Comissions(1) Company(2)
- ------------------------------------------------------------------------------
Per Share ........... $ 5.95 $ .5355 $ 5.4145
- ------------------------------------------------------------------------------
Per Warrant ......... $ .10 $ .009 $ .091
- ------------------------------------------------------------------------------
Total (3) ........... $9,300,000 $837,000 $8,463,000
==============================================================================

(1) The Company has agreed to pay to the Underwriter a 3% nonaccountable
expense allowance, to sell to the Underwriter warrants (the "Underwriter's
Warrants") to purchase up to 155,000 shares of Class A Common Stock and/or
77,500 Warrants and to retain the Underwriter as a financial consultant.
The Company has also agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, including the
Underwriter's nonaccountable expense allowance in the amount of $279,000
($320,850 if the Underwriter's over-allotment option is exercised in
full), estimated at $600,000.
(3) The controlling shareholder of the Company has granted to the Underwriter
an option, exercisable within 45 days from the date of this Prospectus, to
purchase up to 232,500 additional shares of Class A Common Stock and the
Company has granted to the Underwriter an option, exercisable within 45
days from the date of this Prospectus, to purchase up to 116,250
additional Warrants on the same terms as set forth above, solely for the
purpose of covering over-allotments, if any. If the Underwriter's
over-allotment option is exercised in full, the total price to public,
underwriting discounts and commissions and proceeds to Company will be
$10,695,000, $962,550 and $8,473,230, respectively, and the proceeds to
the selling shareholder will be $1,217,370. See "Underwriting."

The shares of Class A Common Stock and Warrants are being offered, subject
to prior sale, when, as and if delivered to and accepted by the Underwriter,
and subject to approval of certain legal matters by counsel and to certain
other conditions. The Underwriter reserves the right to withdraw, cancel or
modify this offering and to reject any order in whole or in part. It is
expected that delivery of certificates representing the shares of Class A
Common Stock and Warrants will be made against payment therefor at the offices
of the Underwriter, 7 Hanover Square, New York, New York 10004, on or about May
12, 1998.

[GRAPHIC OMITTED]

The date of this Prospectus is May 6, 1998
<PAGE>

[Picture showing various company products]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
ON THE AMERICAN STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE,
WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICES OF THE CLASS A COMMON
STOCK AND WARRANTS. SPECIFICALLY, THE UNDERWRITER MAY OVER-ALLOT IN CONNECTION
WITH THE OFFERING AND MAY BID FOR AND PURCHASE SHARES OF CLASS A COMMON STOCK
AND WARRANTS IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."

<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety. Unless otherwise indicated, all share and per share
data and information in this Prospectus (i) gives retroactive effect to a
recapitalization (the "Recapitalization") effected in December 1997, pursuant
to which all of the outstanding shares of common stock of the Company were
converted to 1,150,000 shares of Class A Common Stock and 1,000,000 shares of
Class B Common Stock and (ii) assumes no exercise of the Underwriter's
over-allotment option to purchase up to 232,500 additional shares of Class A
Common Stock from Mr. Uziel Frydman, the Company's Chairman, President and
Chief Executive Officer, and/or 116,250 additional Warrants from the Company.
See "Underwriting."

The Company

The Company manufactures, markets and distributes a diverse line of brand
name candies, cookies, chocolates and other food products. The Company's
principal products are COWS(TM) butter toffee candies, demitasse(R) biscuits,
RUGER(R) wafers and ELANA(R) Belgian chocolates. The Company also markets SOUP
DU JOUR(TM) soups, SOUR FRUIT BURST(TM) fruit-filled hard candies, as well as
holiday specialty products, such as PIRATE'S GOLD COINS(TM) milk chocolates for
Christmas and TOKENS OF LOVE(TM) milk chocolates for Valentine's Day. The
Company's marketing strategy, including its packaging of products designed to
maximize freshness, taste and visual appeal, emphasizes highly distinctive,
premium quality products that are sold at prices that compare favorably to
those of competitive products.

Sales of candy and cookie products in the United States have increased
significantly in recent years. According to the United States Department of
Commerce, manufacturers' domestic shipments of confectionery products
(excluding chewing gum) have grown steadily from approximately $9 billion in
1990 to $12.1 billion in 1996. The Chocolate Manufacturers Association/National
Confectioners Association has estimated that retail sales of confectionery
products in the United States in 1996 were more than $21 billion, and industry
trade reports project continued growth in these markets into the next century.
Despite such growth, the United States ranks only tenth in per capita candy
consumption among industrialized nations. The Company believes that these
expanding markets present attractive growth opportunities for its business, and
is focusing its strategy on introducing new products in these market categories
as well as achieving greater brand recognition and market penetration for all
of the Company's products.

The Company sells its products primarily to mass merchandisers and other
retail customers; vending companies; gourmet distributors; and grocery and drug
store chains, convenience stores, specialty shops and wholesalers. Sales to
mass merchandisers have accounted for a significant portion of the Company's
revenues. These customers include K-Mart, Dollar General and 99 Cents Only
stores. The Company believes that the visibility of its products in vending
channels enhances market acceptance and consumer appeal of the Company's
products in other distribution channels. The Company engages independent food
brokers in various regions throughout the United States and Canada for
marketing to retail and wholesale customers.

The Company currently purchases most of its finished products from
third-party manufacturers located in Europe and South America. In April 1996,
the Company acquired a 70,000 square foot manufacturing facility in Chase City,
Virginia in order to reduce its dependence on foreign manufacturers. The
Company modernized and equipped the facility and commenced production of its
demitasse biscuit products in February 1997. The Company also recently
completed the installation of equipment designed to manufacture candy products,
is currently formulating a candy product and anticipates that it will begin to
manufacture this candy product in May 1998.

During the twelve months following the consummation of the offering, the
Company intends to continue to shift its operations from importing finished
products to manufacturing products at its Chase City

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<PAGE>

facility. The Company intends to use a significant portion of the proceeds of
this offering to purchase and install equipment necessary to manufacture
additional products. The Company has improved its operating margins for
demitasse biscuits, and believes that it is positioned to improve operating
margins by manufacturing additional products at its Chase City facility. There
can be no assurance that the Company will be successful in manufacturing
additional products at its Chase City facility or improving its operating
margins.

Despite its relatively limited capital resources, the Company has achieved
increased levels of revenues. The Company intends to use a significant portion
of the proceeds of this offering to expand its marketing and sales efforts,
primarily by aggressively advertising its brand name products. The Company's
strategy is to (i) capitalize on the popularity of its existing products by
developing new products and brand extensions, (ii) expand its manufacturing
operations by adding products and by developing private label and contract
manufacturing capabilities, and (iii) pursue opportunities by making selective
acquisitions of products or businesses which management believes will enhance
the Company's growth prospects.

The Company was incorporated under the laws of the State of North Carolina
in December 1982 under the name Sherwood Foods, Inc. and changed its name to
Sherwood Brands, Inc. in December 1997. The Company's principal executive
offices are located at 6110 Executive Blvd., Suite 1080, Rockville, Maryland
20852, and its telephone number is (301) 881-9340. Unless the context otherwise
requires, references in this Prospectus to the "Company" include its
wholly-owned subsidiaries, Sherwood Brands, LLC ("Sherwood LLC") and Sherwood
Brands Overseas, Inc. ("Sherwood Overseas"). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

The Offering

Securities offered....... 1,550,000 shares of Class A Common Stock and
Warrants to purchase 775,000 shares of Class A
Common Stock. See "Description of Securities."

Common Stock to be outstanding
after this offering(1):

Class A Common Stock(2) 2,700,000 shares

Class B Common Stock.... 1,000,000 shares

Warrants to be outstanding after
this offering(3)........ 775,000 Warrants

Exercise terms.......... Exercisable at any time commencing May 6, 1999,
each to purchase one share of Class A Common Stock
at a price of $7.50, subject to adjustment in
certain circumstances. See "Description of
Securities -- Redeemable Warrants."

Expiration date......... May 6, 2003

Redemption.............. Redeemable by the Company, at any time commencing
May 6, 1999 upon notice of not less than 30 days, at
a price of $.10 per Warrant, provided that the
closing bid quotation of the Class A Common Stock on
all 20 trading days ending on the third day prior to
the day on which the Company gives notice (the "Call
Date") has been at least 134% (currently $10.05,
subject to adjustment) of the then effective
exercise price of the Warrants and the Company
obtains the written consent of the Underwriter to
such redemption prior to the Call Date. See
"Description of Securities -- Redeemable Warrants."

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<PAGE>

Use of Proceeds......... The Company intends to use the net proceeds of
this offering for the purchase of capital equipment;
potential acquisitions; repayment of indebtedness;
sales, marketing and promotion; and for working
capital and general corporate purposes. See "Use of
Proceeds."

Risk Factors............ The securities offered hereby are speculative and
involve a high degree of risk and immediate
substantial dilution and should not be purchased by
investors who cannot afford the loss of their entire
investment. See "Risk Factors" and "Dilution."

American Stock Exchange
symbols................ Class A Common Stock -- "SHD"
Warrants -- "SHDW"

- -------------
(1) The rights of holders of the two classes of Common Stock are identical,
except that (i) the Class A Common Stock is entitled to one vote per share
and the Class B Common Stock is entitled to seven votes per share on all
matters, including the election of directors, and (ii) the Class B Common
Stock automatically converts into Class A Common Stock on a share for
share basis upon transfer to an unaffiliated party. Uziel Frydman,
Chairman, President and Chief Executive Officer of the Company holds all
of the outstanding shares of Class B Common Stock. See "Principal
Stockholders" and "Description of Securities."

(2) Does not include: (i) 775,000 shares of Class A Common Stock reserved for
issuance upon exercise of the Warrants; (ii) an aggregate of 232,500
shares of Class A Common Stock reserved for issuance upon exercise of the
Underwriter's Warrants and the warrants included therein; (iii) 140,000
shares of Class A Common Stock reserved for issuance upon exercise of
outstanding options granted under the Company's 1998 Stock Option Plan
(the "Option Plan"); and (iv) 210,000 shares of Class A Common Stock
reserved for issuance upon exercise of options available for future grant
under the Option Plan. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Management -- 1998 Stock
Option Plan," "Description of Securities" and "Underwriting."

(3) Does not include any of the warrants referred to in footnote 2 above.

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<PAGE>

Summary Financial Information

The summary financial information set forth below is derived from and
should be read in conjunction with the financial statements, including the
notes thereto, appearing elsewhere in this Prospectus.

Statement Of Operations Data:

<TABLE>
<CAPTION>
Years ended July 31, Six Months ended January 31,
--------------------------- ----------------------------
1996 1997 1997 1998
------------ ------------ ------------ ------------
(in thousands, except share data)
<S> <C> <C> <C> <C>
Net sales ............................. $ 14,638 $ 17,424 $ 9,574 $ 9,721
Cost of sales ......................... 10,864 12,570 7,136 6,515
Gross profit .......................... 3,773 4,853 2,437 3,205
Selling, general and administrative
expenses ............................ 2,342 2,680 1,173 1,417
Pre-production costs(1) ............... 212 769 616 54
Salaries and related expenses ......... 937 1,180 461 521
Income from operations ................ 281 223 187 1,213
Net income(2) ......................... 270 303 286 820
Basic and diluted income per share .13 .14 .13 .38
Supplemental net income per
share(3) ............................ .12 .34
Number of shares outstanding .......... 2,150,000 2,150,000 2,150,000 2,150,000
</TABLE>

Balance Sheet Data:

January 31, 1998
--------------------------------
Actual As Adjusted(4)
-------------- ---------------
Working capital .............. $ 2,726,037 $ 9,467,835
Total assets ................. 9,685,944 15,577,742
Total liabilities ............ 7,173,071 5,480,869
Shareholders' equity ......... 2,512,873 10,096,873

- -------------
(1) Represents costs associated with commencing manufacturing operations at the
Chase City facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

(2) Includes non-recurring income, net of legal expenses, recorded in
connection with an insurance litigation settlement (the "Insurance
Settlement") of $223,605, $364,028 and $102,223 in the fiscal years ended
July 31, 1996 and 1997 and the six months January 31, 1998, respectively.
See Note 4 to Notes to Consolidated Financial Statements.

(3) Supplemental net income per share for the year ended July 31, 1997 and the
six months ended January 31, 1998 is based upon the weighted number of
shares of Common Stock used in the calculation of net income per share
increased by the sale of 284,404 shares, the proceeds of which would be
necessary to reduce borrowings by $1,692,202. See Consolidated Financial
Statements -- Summary of Accounting Principles.

(4) Gives effect to the sale of the shares of Class A Common Stock and Warrants
offered hereby and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."

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<PAGE>

RISK FACTORS

The securities offered hereby are speculative and involve a high degree of
risk. Prospective investors should carefully consider the following risk
factors before making an investment decision.

Limited Historical Profitability; Future Operating Results. Although the
Company has achieved increased levels of revenues, the Company has historically
achieved limited profitability. The Company's operating expenses have increased
and can be expected to continue to increase in connection with any expansion
activities undertaken by the Company, including those relating to advertising
and product manufacturing. Accordingly, the Company's profitability will depend
on the Company's ability to improve its operating margins and increase revenues
from operations. Unanticipated expenses, unfavorable currency exchange rates,
increased price competition and adverse changes in economic conditions could
have a material adverse effect on the Company's operating results. There can be
no assurance that the Company will achieve significantly increased levels of
revenues or that its future operations will be profitable. See "Business" and
Consolidated Financial Statements.

Dependence on Limited Product Line; Uncertainty of Market Acceptance. To
date, a substantial portion of the Company's revenues have been derived from a
limited number of products, a decline in the sale of which would have a
material adverse effect on the Company. For the year ended July 31, 1997,
domestic sales of seven products accounted for approximately 84.5% of the
Company's revenues, with COWS butter toffee candies, RUGER wafers, demitasse
biscuits and chocolate products (four products in the aggregate) accounting for
approximately 30.8%, 20.9%, 17.7%, and 15.1%, respectively, of the Company's
revenues. Sales of chocolate and cookie products declined approximately $14,000
or 1% and $173,000 or 5%, respectively, during the six months ended January 31,
1998. The Company recently introduced additional products and product line
extensions and intends to add other products to extend its line. Achieving
market acceptance for new products requires substantial marketing and sales
efforts and the expenditure of significant funds to create customer and
consumer awareness of and demand for new products. There can be no assurance
that recent or future additions to the Company's product line will achieve
market acceptance or result in significantly increased levels of revenues, or
that market acceptance of or revenues from the Company's existing products will
increase significantly or remain at present levels. See "Business -- Products."

Shift in Operations; Limited Manufacturing Experience; Uncertainty of
Business Plans. During the twelve months following the consummation of this
offering, the Company intends to continue to shift its operations from
importing finished products to manufacturing products at its Chase City
facility. The Company commenced production of demitasse biscuits in February
1997, plans to commence production of a candy product in May 1998 and intends
to use a significant portion of the proceeds of this offering to purchase
capital equipment necessary to manufacture additional products. The Company has
limited manufacturing experience and currently has limited financial,
operational and management resources to undertake extensive manufacturing
operations. Expansion of the Company's manufacturing operations will require
substantial resources and will be dependent upon the Company's ability to
successfully equip its facility, achieve manufacturing efficiencies, expand
capacity on a timely and cost effective basis and successfully monitor
operations (including controlling costs and maintaining effective inventory and
quality controls). The Company's efforts are subject to all of the risks
inherent in the establishment of new manufacturing operations and the
manufacture of new products, including unanticipated delays, expenses,
technical problems and difficulties, as well as the possible insufficiency of
funds to fully implement the Company's strategy, which could result in
abandonment or material change in product commercialization. The Company's
success also will be largely dependent upon its products satisfying targeted
cost, price and quality specifications. There can be no assurance that the
Company's business plans will be successfully implemented, that the Company's
products will satisfy anticipated price or quality objectives, that
unanticipated technical or other problems will not occur which would result in
increased costs or material delays or that new manufacturing operations will
not result in increased competition and a decline in revenues from existing
operations. The Company's manufacturing operations will also be dependent on
the Company's ability to protect its equipment from fire, flood, vandalism and
similar events. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Manufacturing."

Dependence on Third-Party Manufacturers and Suppliers. The Company has
limited manufacturing capabilities and is currently dependent on third parties
for the manufacture of all of its products except demitasse biscuits. For the
fiscal year ended July 31, 1997, five manufacturers accounted for approximately
66.8% of

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product purchases sold domestically, with the producers of COWS butter toffee
candies, RUGER wafers and chocolate products (four products in the aggregate)
accounting for approximately 30.8%, 20.9% and 15.1%, respectively, of product
purchases. The Company relies on a sole manufacturer for each of its products.
The Company does not maintain agreements with the manufacturers of COWS butter
toffee candies, RUGER wafers and certain other manufacturers and, accordingly,
such manufacturers could terminate their relationships at any time and compete
directly against the Company. Failure by any such manufacturer to continue to
supply finished products to the Company on commercially reasonable terms, or at
all, in the absence of readily available alternative sources, would have a
material adverse effect on the Company. The Company is dependent on the ability
of its manufacturers to adhere to the Company's product, price and quality
specifications and scheduling requirements. The Company's operations require it
to have production orders in place in advance of shipment to the Company's
warehouses (product deliveries typically take 60 days). Any delay by
manufacturers in supplying finished products to the Company would adversely
affect the Company's ability to deliver products on a timely and competitive
basis. In addition, raw materials necessary for the manufacture of the
Company's products at its Chase City facility, including flour, sugar,
shortening, butter and flavorings, are purchased from third-party suppliers.
The Company does not maintain agreements with any such suppliers and is subject
to risks of periodic price fluctuations, shortages and delays. The Company
anticipates that it will become increasingly dependent on third parties for
necessary raw materials used in the manufacture of its products, and a material
interruption in the availability or significant price increases for raw
materials would have a material adverse effect on the Company's operating
margins. See "Business -- Suppliers."

Risks Relating to Foreign Manufacturing. The Company has been and will
continue to be subject to risks associated with the manufacture of products in
foreign countries, primarily in Austria, Belgium and Argentina. Such risks
include material shipping delays, fluctuations in foreign currency exchange
rates, customs duties, tariffs and import quotas and international political,
regulatory and economic developments. The Company assumes the risk of loss,
damage or destruction of products when shipped by a manufacturer, although the
Company maintains cargo insurance on such shipments. Because the Company pays
for certain of its products manufactured outside the United States in foreign
currencies, any weakening of the United States dollar in relation to relevant
foreign currencies, as occurred in 1995, could result in significantly
increased costs to the Company. The Company incurred a net loss of $22,984 for
the year ended July 31, 1995 primarily as a result of unfavorable currency
exchange rates. In addition, certain products manufactured overseas are subject
to import duties. The Company currently pays a 7% import duty on its chocolate
products. Deliveries of products from the Company's foreign manufacturers could
also be delayed or restricted by the future imposition of quotas, and there can
be no assurance that the Company would be able to obtain quality products at
favorable prices from domestic or other suppliers whose quotas have not been
exceeded by the supply of products to existing customers. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- Suppliers" and Note 2 to Notes to Consolidated Financial
Statements.

Dependence on Significant Customers. The Company is dependent on a limited
number of customers for a significant portion of its revenues. For the year
ended July 31, 1997 and the six months ended January 31, 1998, five customers
accounted for approximately 20.5% and 23%, respectively, of the Company's
revenues, with the Company's three largest customers, Dollar General, Dollar
Tree and K-Mart, accounting for approximately 6.5%, 4.9% and 4.1%,
respectively, of the Company's revenues for the year ended July 31, 1997. The
Company does not maintain agreements with its customers and sells products
pursuant to purchase orders placed from time to time in the ordinary course of
business. The loss of a significant customer could have an adverse effect on
the Company. See "Business -- Customers."

Competition. The Company faces significant competition in the marketing
and sale of its products. The Company's products compete for consumer
recognition and shelf space with candies, cakes, cookies, chocolates and other
food products which have achieved international, national, regional and local
brand recognition and consumer loyalty. These products are marketed by
companies (which may include the Company's suppliers) with significantly
greater financial, manufacturing, marketing, distribution, personnel and other
resources than the Company. Certain of such competitors, such as Hershey Food
Corporation, M&M Mars, Inc., Nestle, S.A., Nabisco, Inc., Keebler Company and
Sunshine Biscuits, Inc., dominate the markets for candy and cookie products,
and have substantial promotional budgets which enable them to implement
extensive advertising campaigns. The food industry is characterized by frequent
introductions of new products, accompanied by

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<PAGE>

substantial promotional campaigns. While the Company believes that its existing
products compete favorably and that increased marketing and sales efforts will
result in increased product recognition and market penetration, there can be no
assurance that the Company will be able to continue to compete successfully.
See "Business -- Competition."

Consumer Preferences and Industry Factors. The markets for candy and
cookie products are affected by changes in consumer tastes and preferences and
nutritional and health-related concerns. The Company could be subject to
increased competition from companies whose products or marketing strategies
address these concerns. In addition, the markets for the Company's products may
be subject to national, regional and local economic conditions which affect
discretionary spending, demographic trends and product life cycles, whereby
product sales increase from their introductory stage through their maturity and
then reach a stage of decline over time. See "Business."

Dependence on Trademarks. The Company holds United States trademark
registrations for the "ELANA," "RUGER" and "demitasse" names, has filed for
trademark registrations for certain other names, including "COWS," and uses
other names for which it has not applied for registration. The Company believes
that its rights in these names is a significant part of the Company's business
and that its ability to create demand for its products is dependent to a large
extent on its ability to exploit these trademarks. There can be no assurance as
to the breadth or degree of protection which trademarks may afford the Company
or that any trademark applications will result in registered trademarks or that
trademarks will not be invalidated if challenged. The Company is not aware of
any infringement claims or other challenges to the Company's rights to use
these marks. Other than Canadian registrations for the "ELANA" and "RUGER"
names, the Company does not hold any international trademarks. See "Business --
Trademarks."

Risks Associated with Expansion and Acquisitions. The Company's expansion
plans could place a significant strain on its management, administrative,
operational, financial and other resources. The Company plans to increase its
manufacturing capacity, add new products to its line, expand its advertising,
marketing and promotional activities, expand its work force and expand its
presence in new and existing geographic markets. To successfully manage growth,
the Company will be required to implement and improve its operating, inventory,
management and accounts receivable systems and train and manage its employees.
The Company has limited experience in effectuating rapid expansion and in
managing new operations, and there can be no assurance that the Company will be
able to successfully expand its operations or manage growth. For the year ended
July 31, 1997 and the six months ended January 31, 1998, sales of the Company's
products in foreign markets accounted for 10.8% and 11.9%, respectively, of the
Company's revenues. Expansion of the Company's sales activities in foreign
markets could subject the Company to shipping delays, increased credit risks,
currency fluctuations and other international factors, including increased
competition from its suppliers. The Company may seek to pursue opportunities by
making selective acquisitions of products or businesses which the Company
believes will enhance its growth prospects. As of the date of this Prospectus,
the Company has no plans, agreements, commitments, understandings or
arrangements with respect to any such acquisition. There can be no assurance
that the Company will ultimately effect any acquisition or that it will be able
to successfully integrate into its operations any product or business which it
may acquire. Any inability to do so, particularly in instances where the
Company has made significant capital investments, could have a material adverse
effect on the Company.

The Company may determine, depending upon the opportunities available to
it, to seek additional debt or equity financing to fund the cost of continuing
expansion. To the extent that the Company finances an acquisition with equity
securities, any such issuance of equity securities would result in dilution to
the interests of the Company's stockholders. Additionally, to the extent that
the Company incurs indebtedness or issues debt securities in connection with
any acquisition or facility expansion, the Company will be subject to risks
associated with incurring substantial indebtedness, including the risks that
interest rates may fluctuate and cash flow may be insufficient to pay principal
and interest on any such indebtedness. See "Use of Proceeds."

Possible Fluctuations in Operating Results; Seasonality. The Company's
operating results may be subject to fluctuations as a result of new product
introductions, the timing of significant operating expenses and customer
orders, pricing and seasonality. The Company's sales typically increase toward
the middle of the Company's fiscal year, principally due to the holiday season.
Unanticipated events, including delays in product shipments

9
<PAGE>

past the time of peak sales or significant decreases in sales during the middle
of the Company's fiscal year, could have an adverse effect on the Company's
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

Allocation of Proceeds to Repay Indebtedness; Loan Covenants and Security
Interests; Personal Guarantee. In order to finance the Company's operations,
the Company has incurred significant indebtedness. Of the Company's total
indebtedness of $4,316,275 outstanding at January 31, 1998, $1,419,589 was
outstanding under a working capital line of credit with First Union National
Bank of Maryland (the "Bank"); an aggregate of $2,054,484 was outstanding under
two industrial revenue bonds ("IRBs") and two county development authority
subordinated notes ("Subordinated Notes"); and $842,202 was outstanding under a
note payable to Ilana Frydman (the "Related Party Note"), the wife of Uziel
Frydman, Chairman, President and Chief Executive Officer of the Company. The
Company intends to use a portion of the proceeds of this offering to repay
$850,000 to the Bank (and to use the increased borrowing availability for
future expansion) and the entire amount outstanding on the Related Party Note
to Ms. Frydman, which proceeds will not be available for other corporate
purposes. The Company's line of credit with the Bank is secured by
substantially all of the assets of Sherwood LLC and Sherwood Overseas. The
principal amount of the IRBs are backed by irrevocable letters of credit issued
by Central Fidelity Bank of Virginia ("Fidelity") and are collateralized by a
first deed of trust and security interest in the Company's real and personal
property at the Chase City facility. In addition to certain financial
covenants, the Company's financing arrangements prohibit the Company, without
the consent of the lender, from incurring additional indebtedness, which could
limit the Company's ability to implement its proposed expansion. In the event
of a violation by the Company of its loan covenants or other default by the
Company on its obligations, the Company's lenders could elect to declare the
Company's indebtedness to be immediately due and payable and foreclose on the
Company's assets. As of the date of this Prospectus, the Company is in
compliance with all of the terms of its financing agreements and has obtained
all necessary consents from its lenders, including in connection with this
offering and the repayment of the entire amount outstanding on the Related
Party Note. There can be no assurance that the Company will be able to comply
with the terms of its financing agreements in the future.

Uziel Frydman, Chairman, President and Chief Executive Officer of the
Company, has personally guaranteed the repayment of indebtedness owing to the
Bank and to Fidelity. Neither Mr. Frydman nor any other person has any
obligations to make personal guarantees available to the Company in the future.
There can be no assurance that personal guarantees will be available to the
Company or that the absence of personal guarantees will not adversely affect
the Company's ability to borrow in the future. See "Use of Proceeds" and
"Certain Transactions."

Government Regulation. The Company is subject to extensive regulation by
the United States Food and Drug Administration, the United States Department of
Agriculture and by other state and local authorities in jurisdictions in which
the Company's products are manufactured or sold. Among other things, such
regulation governs the importation, manufacturing, packaging, storage,
distribution and labeling of the Company's products, as well as sanitary
conditions and public health and safety. Applicable statutes and regulations
governing the Company's products include "standards of identity" for the
content of specific types of products, nutritional labeling and serving size
requirements and general "Good Manufacturing Practices" with respect to
manufacturing processes. The Company's Chase City facility and products are
subject to periodic inspection by federal, state and local authorities. The
Company believes that it is in compliance with all governmental laws and
regulations and maintains all permits and licenses required for its operations.
Nevertheless, there can be no assurance that the Company will continue to be in
compliance with current laws and regulations or that the Company will be able
to comply with any future laws and regulations and licensing requirements.
Failure by the Company to comply with applicable laws and regulations could
subject the Company to civil remedies, including fines, injunctions, recalls or
seizures, as well as potential criminal sanctions. See "Business -- Government
Regulation."

Product Liability and Insurance. As a manufacturer and marketer of food
products, the Company is subject to product liability claims from consumers.
The Company maintains product liability insurance with limits of $2,000,000 in
the aggregate and $1,000,000 per occurrence (with excess coverage of
$3,000,000), which it believes is adequate for the types of products currently
offered by the Company. There can be no assurance,

10
<PAGE>

however, that such insurance will be sufficient to cover potential claims or
that adequate levels of coverage will be available in the future at a
reasonable cost. In the event of a partially or completely uninsured successful
claim against the Company, the Company's financial condition and reputation
would be materially affected. See "Business -- Insurance."

Significant Capital Requirements; Possible Need for Additional
Financing. The food manufacturing and distribution business is capital
intensive. The Company is dependent on the proceeds of this offering to
implement its expansion plans. Based on currently proposed plans and
assumptions relating to its operations, the Company believes that the proceeds
of this offering, together with projected cash flow from operations and
available cash resources, including its line of credit, will be sufficient to
satisfy its contemplated cash requirements for at least twelve months following
the consummation of this offering. In the event that the Company's plans
change, its assumptions change or prove to be inaccurate or if the proceeds of
this offering or cash flow prove to be insufficient to implement the Company's
proposed expansion, the Company may be required to obtain additional financing
sooner than anticipated. There can be no assurance that additional financing
will be available to the Company on commercially reasonable terms, or at all,
or that the proceeds of this offering will be adequate for all of the Company's
requirements, particularly the capital requirements associated with the
Company's anticipated increased product manufacturing activities. See "Use of
Proceeds."

Dependence on Key Personnel; Limited Management Personnel. The success of
the Company is dependent on the personal efforts of Uziel Frydman, its
Chairman, President and Chief Executive Officer, Amir Frydman, its Vice
President of Marketing, and Anat Schwartz, its Vice President -- Finance and
Secretary. Although the Company intends to enter into employment agreements
with each of these officers prior to the consummation of this offering, the
loss or interruption of the services of such individuals could have a material
adverse effect on the Company's business and prospects. The Company maintains
"key-man" insurance in the amount of $1 million on the life of Mr. Uziel
Frydman. The success of the Company will also be dependent upon its ability to
hire and retain additional qualified management, marketing and other personnel,
including a qualified Chief Financial Officer. The Company intends to hire a
Chief Financial Officer following the consummation of this offering. The
Company currently has limited management and other personnel. None of such
personnel has experience in managing the affairs of a publicly-held company.
Competition for qualified personnel in the food industry is intense, and there
can be no assurance that the Company will be able to hire or retain additional
qualified personnel. Failure to hire and retain additional qualified personnel
could adversely affect the Company's ability to expand its operations. See
"Management."

Benefits to Related Parties. The Company intends to use $842,202
(approximately 11% of the estimated net proceeds of this offering) to repay the
Related Party Note issued to Ilana Frydman, the wife of Uziel Frydman,
President and Chief Executive Officer of the Company. The Company also intends
to use $850,000 of the proceeds of this offering to reduce amounts outstanding
under its line of credit with the Bank, which will reduce Mr. Frydman's
potential liability under his personal guarantee. The Company also will seek to
release Mr. Frydman from this personal guarantee following this offering. See
"Use of Proceeds" and "Certain Transactions."

Concentration of Ownership. Upon the consummation of this offering, Mr.
Uziel Frydman, President and Chief Executive Officer of the Company, will own
1,000,000 shares of Class A Common Stock (767,500 shares if the Underwriter's
over-allotment option is exercised in full) and 1,000,000 shares of Class B
Common Stock, representing, in the aggregate, approximately 54% of the
outstanding Common Stock of the Company and 82% of the voting control of the
Company (48% and 80%, respectively, if the Underwriter's overallotment option
is exercised in full and assuming no exercise of the Warrants). Accordingly,
Mr. Frydman will be able to direct the election of all of the Company's
directors, increase the authorized capital, dissolve, merge or sell the assets
of the Company, and generally direct the affairs of the Company. See
"Management" and "Principal Shareholders."

Anti-Takeover Effects of Preferred Stock. The Company's Articles of
Incorporation authorize the Company's Board of Directors to issue up to
5,000,000 shares of "blank check" preferred stock (the "Preferred Stock")
without shareholder approval, in one or more series and to fix the dividend
rights, terms, conversion rights, voting rights, redemption rights and terms,
liquidation preferences, and any other rights, preferences, privileges, and
restrictions applicable to each new series of Preferred Stock. The issuance of
shares of Preferred Stock in the future could, among other things, adversely
affect the voting power of the holders of Common Stock and, under certain
circumstances, could make it difficult for a third party to gain control of the
Company, prevent or substantially delay a change in control, discourage bids
for the Common Stock at a premium, or otherwise adversely

11
<PAGE>

affect the market price of the Common Stock. Although the Company has no
current plans to issue any shares of Preferred Stock or designate any series of
Preferred Stock, there can be no assurance that the Board will not decide to do
so in the future. See "Description of Securities -- Capital Stock -- Preferred
Stock."

No Dividends. The Company has never paid any cash dividends on its Common
Stock and does not anticipate paying cash dividends in the foreseeable future.
The payment of cash dividends is prohibited by the terms of the Company's
financing agreements with the Bank and Fidelity. See "Dividend Policy."

Dilution. This offering involves an immediate and substantial dilution of
$3.22 per share (or 54.1%) between the net tangible book value per share of
Common Stock after this offering and the initial public offering price per
share in this offering. See "Dilution."

Shares Eligible for Future Sale. Upon consummation of this offering, the
Company will have 3,700,000 shares of Common Stock outstanding (assuming no
exercise of the Warrants), of which the 1,550,000 shares of Class A Common
Stock offered hereby will be freely tradable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"). All of the remaining 2,150,000 shares of Common Stock outstanding are
"restricted securities," as that term is defined under Rule 144 promulgated
under the Securities Act and will become eligible for sale, pursuant to Rule
144, commencing on various dates commencing 90 days following the date of this
Prospectus, subject to contractual restrictions described below. The holders of
all of such shares have agreed not to sell such shares for a period of 18
months from the date of this Prospectus without the Underwriter's prior written
consent. No prediction can be made as to the effect, if any, that sales of
shares of Class A Common Stock or even the availability of such shares for sale
will have on the market prices prevailing from time to time. The possibility
that substantial amounts of Class A Common Stock may be sold in the public
market may adversely affect the prevailing market price for the Class A Common
Stock and could impair the Company's ability to raise capital through the sale
of its equity securities. See "Shares Eligible for Future Sale" and
"Underwriting."

No Assurance of Public Market; Possible Volatility of Market Price of
Class A Common Stock and Warrants; Underwriter's Potential Influence on the
Market. Prior to this offering, there has been no public trading market for the
Common Stock or Warrants. There can be no assurance that a regular trading
market for the Class A Common Stock or Warrants will develop after this
offering or that, if developed, it will be sustained. Moreover, the initial
public offering prices of the Class A Common Stock and the Warrants and the
exercise price of the Warrants have been determined by negotiations between the
Company and the Underwriter. The market prices of the Company's securities
following this offering may be highly volatile as has been the case with the
securities of other emerging companies. Factors such as the Company's operating
results, announcements by the Company or its competitors and various factors
affecting the food industry generally may have a significant impact on the
market price of the Company's securities. In addition, in recent years, the
stock market has experienced a high level of price and volume volatility and
market prices for the stock of many companies have experienced wide price
fluctuations which have not necessarily been related to the operating
performance of such companies. Although it has no obligation to do so, the
Underwriter intends to make a market in the Class A Common Stock and Warrants
and may otherwise effect transactions in the Class A Common Stock and Warrants.
If the Underwriter makes a market in the Class A Common Stock or Warrants, such
activities may exert a dominating influence on the market and such activity may
be discontinued at any time. The prices and liquidity of the Class A Common
Stock and Warrants may be significantly affected to the extent, if any, that
the Underwriter participates in such market. See "Underwriting."

Possible Delisting of Securities from AMEX; Risks Relating to Low-Priced
Stocks. The Class A Common Stock and Warrants are eligible for listing on AMEX.
In order to continue to be listed on AMEX, the Company must maintain a public
float of $1,000,000, at least 200,000 shares of common stock publicly held and
at least 300 public shareholders. Failure to meet these maintenance criteria
may result in the suspension or delisting of the Company's securities from
AMEX, and trading in the Company's securities would thereafter be conducted in
the over-the-counter market. As a result of such suspension or delisting, an
investor could find it more difficult to dispose of the Company's securities.
In addition, if the Class A Common Stock were to become delisted from trading
on AMEX and the trading price of the Class A Common Stock were to fall below
$5.00 per share on the date the Company's securities were delisted, trading in
such securities would also be subject to the requirements of certain rules
promulgated under the Securities Exchange Act of 1934, as amended (the

12
<PAGE>

"Exchange Act"), which require additional disclosure by broker-dealers in
connection with any trades involving a stock defined as a penny stock
(generally, any unlisted equity security that has a market price of less than
$5.00 per share, subject to certain exceptions). Such rules require the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and
impose various sales practice requirements on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). For these types of transactions, the broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction prior to sale. The
additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from effecting transactions in the Company's
securities, which could severely limit the market price and liquidity of such
securities and the ability of purchasers in this offering to sell their
securities of the Company in the secondary market.

Potential Adverse Effect of Warrant Redemption. The Warrants are subject
to redemption by the Company at any time commencing May 6, 1999 upon notice of
not less than 30 days, at a price of $.10 per Warrant, provided that the
closing bid quotation of the Class A Common Stock on all 20 trading days ending
on the third day prior to the day on which the Company gives notice has been at
least 134% (currently $10.05, subject to adjustment) of the then effective
exercise price of the Warrants and the Company obtains the written consent of
the Underwriter to such redemption prior to the Call Date. Redemption of the
Warrants could force the holders to exercise the Warrants and pay the exercise
price at a time when it may be disadvantageous for the holders to do so, to
sell the Warrants at the then current market price when they might otherwise
wish to hold the Warrants, or to accept the redemption price, which is likely
to be substantially less than the market value of the Warrants at the time of
redemption. See "Description of Securities -- Redeemable Warrants."

Possible Inability to Exercise Warrants. A current prospectus covering the
Class A Common Stock issuable upon exercise of the Warrants must be in effect
before the Company may accept Warrant exercises. There can be no assurance the
Company will be able to have a current prospectus in effect when this
Prospectus is no longer current, notwithstanding the Company's commitment to
use its best efforts to do so. See "Description of Securities -- Redeemable
Warrants."

13
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 1,550,000 shares of
Class A Common Stock and 775,000 Warrants offered hereby (after deducting
underwriting discounts and commissions and other expenses of the offering) are
estimated to be $7,584,000 ($7,594,230 if the Underwriter's over-allotment
option with respect to the Warrants is exercised in full). The Company expects
to use the net proceeds over the next 12 months approximately as follows:

<TABLE>
<CAPTION>
Approximate Approximate Percentage
Application of Proceeds Dollar Amount of Net Proceeds
- ----------------------- --------------- -----------------------
<S> <C> <C>
Purchase of capital equipment(1) .......... $2,000,000 26.4%
Acquisitions(2) ........................... 2,000,000 26.4
Repayment of indebtedness(3) .............. 1,700,000 22.4
Sales, marketing and promotion(4) ......... 800,000 10.5
Working capital ........................... 1,084,000 14.3
---------- -----
Total ................................... $7,584,000 100.0%
========== =====
</TABLE>

- ------------
(1) Represents anticipated costs associated with the purchase and installation
of capital equipment required for the manufacture of additional products
at the Chase City facility and the salaries for up to ten additional
personnel. The Company may seek to finance a portion of the cost of such
equipment. There can be no assurance that the Company will be able to
obtain satisfactory equipment financing arrangements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Business -- Manufacturing."
(2) Represents anticipated costs to acquire products or businesses which the
Company believes will enhance its growth prospects. As of the date of this
Prospectus, the Company has no plans, agreements, commitments,
understandings or arrangements with respect to any acquisition. See
"Business."
(3) Consists of the repayment of (i) $850,000 to the Bank and (ii) up to
$850,000 to Ilana Frydman, the wife of Uziel Frydman, Chairman, President
and Chief Executive Officer of the Company. The Company intends to reduce
amounts outstanding under its line of credit with the Bank, permitting it
to utilize the full borrowing availability under the line of credit.
Borrowings under the line of credit vary daily based on the Company's
working capital requirements. At January 31, 1998 and February 28, 1998,
approximately $1,419,589 and $1,141,589, respectively, was outstanding
under the line of credit. Interest accrues on advances made under the line
of credit at the prime rate established by the Bank (8.5% at January 31,
1998). The line of credit expires on November 30, 1998. Advances under the
line of credit have been used to finance increased levels of inventories
and accounts receivable. The Company also intends to repay the remaining
outstanding principal and accrued interest at the rate of 9% per annum
under a promissory note payable to Ilana Frydman. Such indebtedness is due
on demand after March 1, 1999. See "Management's Discussion and Analysis
of Financial Conditions and Results of Operations" and "Certain
Transactions."
(4) Represents amounts to be used in connection with sales, marketing and
promotional activities, including advertising in trade journals,
preparation of sales literature and participation at trade shows. See
"Business -- Marketing, Sales and Advertising."
(5) Working capital may be used, among other things, to pay for inventories,
rent, trade payables, professional fees and other expenses.

If the Underwriter exercises its over-allotment option in full with
respect to the Warrants, the Company will realize additional net proceeds of
$10,230 which will be added to working capital. The Company will not realize
any additional net proceeds if the Underwriter exercises its over-allotment
option with respect to the Class A Common Stock.

Based on currently proposed plans and assumptions relating to its
operations, the Company believes that the proceeds of this offering, together
with projected cash flow from operations and available cash resources,
including its line of credit, will be sufficient to satisfy its contemplated
cash requirements for at least twelve months following the consummation of this
offering. In the event that the Company's plans change (due to changes in
market conditions, competitive factors or new or different business
opportunities that may become

14
<PAGE>

available in the future), its assumptions change or prove to be inaccurate or
if the proceeds of this offering or cash flow prove to be insufficient to
implement the Company's proposed expansion strategy (due to unanticipated
expenses, operating difficulties or otherwise), the Company may find it
necessary to reallocate a portion of the proceeds within the above-described
categories, use proceeds for other purposes, seek additional financing or
curtail its expansion activities. There can be no assurance that additional
financing, if required, will be available to the Company on commercially
reasonable terms, or at all.

Proceeds not immediately required for the purposes described above will be
invested principally in United States government securities, short-term
certificates of deposit, money market funds or other short-term interest
bearing investments.

DILUTION

The difference between the initial public offering price per share and the
adjusted net tangible book value per share of Common Stock after this offering
constitutes the dilution to investors in this offering. Net tangible book value
per share of Common Stock on any given date is determined by dividing the net
tangible book value of the Company (total tangible assets less total
liabilities) on that date, by the number of shares of Common Stock (including
shares of Class A Common Stock issuable upon conversion of outstanding shares
of Class B Common Stock) outstanding on that date.

As of January 31, 1998, the net tangible book value of the Company was
$2,512,873 or $1.17 per share of Common Stock. After giving effect to the sale
of the 1,550,000 shares of Class A Common Stock and 775,000 Warrants being
offered hereby (after payment of underwriting discounts and commissions and
estimated expenses of this offering) the net tangible book value of the Company
as of January 31, 1998 would have been $10,096,873 or $2.73 per share,
representing an immediate increase in net tangible book value of $1.56 per
share of Common Stock to existing shareholders and an immediate dilution of
$3.22 per share (or 54.1%) to new investors. The following table illustrates
this dilution to new investors on a per share basis:

<TABLE>
<S> <C> <C>
Public offering price ................................... $ 5.95
Net tangible book value before this offering ......... $ 1.17
Increase attributable to this offering ............... 1.56
------
Net tangible book value after this offering ............. 2.73
------
Dilution to investors in this offering .................. $ 3.22
======
</TABLE>
<PAGE>

The following table sets forth, with respect to existing shareholders and new
investors in this offering, a comparison of the number of shares of Class A
Common Stock issued by the Company (including shares issuable upon conversion
of the outstanding Class B Common Stock), the percentage of ownership of such
shares, the total cash consideration paid, the percentage of total cash
consideration paid and the average price per share.

<TABLE>
<CAPTION>
Total Cash
Shares Purchased Consideration Paid
----------------------- ------------------------- Average Price
Number Percent Amount Percent Per Share
----------- --------- ------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Existing shareholders ......... 2,150,000 58.1% $ 268,500 2.8% $ .13
New investors ................. 1,550,000 41.9 9,222,500 97.2 5.95
--------- ----- ---------- -----
Total ...................... 3,700,000 100.0% $9,491,000 100.0%
========= ===== ========== =====

</TABLE>

The above table assumes no exercise of the Underwriter's over-allotment
option. If such option is exercised in full, the new investors will have paid
$10,605,875 for 1,782,500 shares of Class A Common Stock, representing
approximately 97.53% of the total consideration for 48.2% of the total number
of shares of Common Stock outstanding.

In addition, the table assumes no exercise of other outstanding stock
options or warrants. The Company has issued, as of the date of this Prospectus,
options under the Option Plan to purchase an aggregate of 140,000 shares of
Common Stock at an exercise price of $5.95 per share. To the extent that these
options and warrants are exercised, there will be further ownership dilution to
new investors. See "Management -- 1998 Stock Option Plan," "Description of
Securities" and "Underwriting."

15
<PAGE>

DIVIDEND POLICY

The Company has never paid any cash dividends on its Common Stock, and the
Company's Board of Directors does not intend to declare or pay any dividends on
its Common Stock in the foreseeable future. The Board of Directors currently
intends to retain all available earnings (if any) generated by the Company's
operations for the development and growth of its business. The declaration in
the future of any cash or stock dividends on the Common Stock will be at the
discretion of the Board and will depend upon a variety of factors, including
the earnings, capital requirements and financial position of the Company and
general economic conditions at the time in question. The payment of cash
dividends on the Common Stock currently is limited or prohibited by the terms
of the Company's financing agreements with the Bank and Fidelity and under the
Subordinated Notes. See "Description of Securities -- Capital Stock."

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
January 31, 1998, on an actual basis after giving effect to the
Recapitalization and as adjusted to give effect to the sale of the 1,550,000
shares of Class A Common Stock and 775,000 Warrants offered hereby and the
anticipated application of the estimated net proceeds therefrom:

<TABLE>
<CAPTION>
January 31, 1998
------------------------------
Actual As Adjusted
------------- --------------
<S> <C> <C>
Long term debt(excluding current portion) ......................... $ 2,670,809 $ 1,828,607
----------- -----------
Shareholders' equity(1):
Class A Common Stock, $.01 par value, 30,000,000 shares
authorized, 1,150,000 shares issued and outstanding and
2,700,000 shares issued and outstanding (as adjusted)(2) ......... 11,500 27,000
Class B Common Stock, $.01 par value, 5,000,000 shares
authorized, 1,000,000 shares issued and outstanding (actual
and as adjusted) ................................................. 10,000 10,000
Preferred Stock, $.01 par value, issuable in series: 5,000,000
shares authorized: no shares issued and outstanding, actual
and as adjusted .................................................. --
Additional paid-in capital ........................................ 247,000 7,815,500
Accumulated earnings .............................................. 2,244,373 2,244,373
----------- -----------
Total shareholders' equity ....................................... 2,512,873 10,096,873
----------- -----------
Total capitalization ........................................... $ 5,183,682 $11,925,480
=========== ===========
</TABLE>

- ------------
(1) Gives effect to the Recapitalization.
(2) Does not include (i) 775,000 shares of Class A Common Stock reserved for
issuance upon exercise of the Warrants; (ii) an aggregate of 232,500
shares of Class A Common Stock reserved for issuance upon exercise of the
Underwriter's Warrants and the warrants included therein; (iii) 140,000
shares of Class A Common Stock reserved for issuance upon exercise of
outstanding options granted under the Company's Option Plan; and (iv)
210,000 shares of Class A Common Stock reserved for issuance upon exercise
of options available for future grant under the Option Plan. See
"Management -- 1998 Stock Option Plan," "Descripion of Securities" and
"Underwriting."

16
<PAGE>

SELECTED FINANCIAL DATA

The following table sets forth certain selected historical financial data
of the Company as of and for the dates indicated. The selected financial data
as of July 31, 1996 and 1997 and for the years then ended have been derived
from the Company's financial statements on a consolidated basis set forth
elsewhere in this Prospectus that have been audited by BDO Seidman, LLP,
independent auditors. The selected financial data for the six months ended
January 31, 1997 and 1998 are derived from the Company's unaudited financial
statements for such periods set forth elsewhere in this Prospectus, which
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a proper statement of the results for such period. The results of
operations for the six months ended January 31, 1998 are not necessarily
indicative of results of operations to be expected for any future quarter or
the next fiscal year ended July 31, 1998. The financial data set forth below is
qualified by reference to and should be read in conjunction with the Company's
financial statements, related notes and other financial information contained
in this Prospectus, as well as "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

Statement Of Operations Data:

<TABLE>
<CAPTION>
Years ended July 31, Six Months ended January 31,
--------------------------- ----------------------------
(in thousands, except share data)
1996 1997 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales .................................... $ 14,638 $ 17,424 $ 9,574 $ 9,721
Cost of sales ................................ 10,864 12,570 7,136 6,515
Gross profit ................................. 3,773 4,853 2,437 3,205
Selling, general and administrative
expenses .................................... 2,342 2,680 1,173 1,417
Pre-production costs(1) ...................... 212 769 616 54
Salaries and related expenses ................ 937 1,180 461 521
Income from operations ....................... 281 223 187 1,213
Net income (2) ............................... 270 303 286 820
Basic and diluted income per share ........... .13 .14 .13 .38
Supplemental net income per share(3) ......... .12 .34
Number of shares outstanding ................. 2,150,000 2,150,000 2,150,000 2,150,000
</TABLE>

Balance Sheet Data:

January 31, 1998
-------------------------------
Actual As Adjusted(4)
------------- ---------------
Working capital .............. $2,726,037 $ 9,467,835
Total assets ................. 9,685,944 15,577,742
Total liabilities ............ 7,173,071 5,480,869
Shareholders' equity ......... 2,512,873 10,096,873

- ------------
(1) Represents costs associated with commencing manufacturing operations at the
Chase City facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(2) Includes non-recurring income, net of legal expenses, recorded in
connection with an insurance litigation settlement (the "Insurance
Settlement") of $223,605, $364,028 and $102,223 in the fiscal years ended
July 31, 1996 and 1997 and the six months ended January 31, 1998,
respectively. See Note 4 to Notes to Consolidated Financial Statements.
(3) Supplemental net income per share for the year ended July 31, 1997 and the
six months ended January 31, 1998 is based upon the weighted number of
shares of Common Stock used in the calculation of net income per share
increased by the sale of 284,404 shares, the proceeds of which would be
necessary to reduce borrowings by $1,692,202. See "Consolidated Financial
Statements -- Summary of Accounting Principles."
(4) Gives effect to the sale of the shares of Class A Common Stock and Warrants
offered hereby and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."

17
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The Company's Consolidated Financial Statements include the operations of
the Company as the surviving corporation of a merger and subsequent
restructuring of the Company's affiliated entities in July 1997. The
transaction was treated like a pooling of interests for accounting purposes
and, accordingly, the Company's Consolidated Financial Statements include the
results of operations and financial position of the affiliated entities for all
periods presented. The Company's manufacturing operations are segregated from
its domestic and overseas marketing and distribution operations, which are
conducted through its direct and indirect wholly-owned subsidiaries, Sherwood
LLC and Sherwood Overseas, respectively. See Note 1 to Notes to Consolidated
Financial Statements.

During the twelve months following the consummation of the offering, the
Company intends to continue its shift in operations from importing finished
products to manufacturing products at its Chase City facility. The Company
intends to use up to $2,000,000 of the proceeds of this offering to purchase
and install equipment necessary to manufacture additional products. The Company
expects to capitalize equipment purchases. The Company anticipates increases in
salary expense beyond its current level of expenditures as new products are
manufactured and additional personnel are required. The Company also intends to
use up to $2,000,000 of the proceeds of this offering to acquire products or
businesses which the Company believes will enhance its growth prospects. In
connection with any possible acquisition, the Company may acquire complementary
products, facilities or equipment which may be used to manufacture newly
acquired products. There can be no assurance that the Company will be
successful in manufacturing additional products at its Chase City facility,
improving its operating margins or consummating acquisitions of products or
businesses.

For the fiscal years ended July 31, 1996 and 1997 and the six months ended
January 31, 1997 and January 31, 1998, the Company incurred pre-production
costs of $212,089, $769,585, $616,015 and $54,125, respectively, representing
expenses associated with commencing manufacturing operations at the Chase City
facility, including the cost of parts and labor. See Note 16 to Notes to
Consolidated Financial Statements.

The Company recorded non-recurring income from the Insurance Settlement of
$223,605, $364,028 and $102,223 in the fiscal years ended July 31, 1996 and
1997, and the six months ended January 31, 1998, respectively. See Note 4 to
Notes to Consolidated Financial Statements.

At January 31, 1998, the Company had available net operating loss
carryforwards of approximately $950,000 which are available through 2012. These
net operating loss carryforwards are available to offset consolidated taxable
income generated in future periods. The Company has a net deferred tax asset of
approximately $62,000 at July 31, 1997, due to the net operating loss
carryforwards. See Note 10 to Notes to Consolidated Financial Statements.

18
<PAGE>

Results of Operations

The following table below sets forth, for the periods indicated, certain
of the Company's income and expense items as approximate percentages of net
sales:

<TABLE>
<CAPTION>
Years ended July 31, Six Months ended January 31,
------------------------- ----------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales ............................. 100.0% 100.0% 100.0% 100.0%
Cost of sales ......................... 74.2 72.1 74.5 67.0
Gross profit .......................... 25.8 27.8 25.5 33.0
Selling, general and administrative
expenses ............................. 16.0 15.4 12.3 14.6
Pre-production costs .................. 1.4 4.4 6.4 0.1
Salaries and related expenses ......... 6.4 6.8 4.8 5.4
Income from operations ................ 1.9 1.3 2.0 12.5
Net income ............................ 1.8 1.7 3.0 8.4
</TABLE>

Six Months Ended January 31, 1998 Compared to Six Months Ended January 31, 1997

Sales: Net sales for the six months ended January 31, 1998 and 1997 were
$9,720,784 and $9,573,540, respectively. Sales of candy products in the United
States increased approximately $612,602, or 22%, for the period, reflecting an
increase in sales of candy products (particularly COWS) as well as seasonal
products with the introduction of seasonal candy items. Sales of cookie
products in the United States decreased approximately $172,569, or 5%,
reflecting an 8% decrease in sales of RUGER wafers, partially offset by a 5%
increase in sales of demitasse biscuits. The decrease in RUGER sales was
primarily due to timing differences in order deliveries. Sales of chocolate
products in the United States decreased approximately $14,065, or 1%, due to a
two-month delay in connection with the development of new product sizes and
graphic design and other packaging improvements. For the six months ended
January 31, 1998, domestic and foreign sales were approximately $8,565,321 and
$1,155,463, or 88.1% and 11.9%, respectively, of the Company's sales.

Gross Profit: Gross profit increased to $3,205,322 from $2,437,385 and, as
a percentage of net sales, from 25% to 33%. The increases were primarily
attributable to lower costs associated with manufacturing demitasse biscuits at
the Chase City facility and also to favorable currency exchange rates.

Operating Expenses: Operating expenses consist of selling, general and
administrative expenses, pre-production costs and salaries and related
expenses. Selling, general and administrative expenses for the six months ended
January 31, 1998 were $1,416,816, compared to $1,173,426 for the prior
comparable period. This increase was primarily due to increased commissions
paid to food and candy brokers and to higher storage and freight costs
associated with increased sales in Canada. Pre-production costs decreased to
$54,125 for the six months ended January 31, 1998 from $616,015 for the prior
comparable period. This decline was a result of the Company having incurred
most of the costs associated with the start-up of manufacturing operations at
the Chase City facility during the prior period. Salaries and related expenses
increased to $521,041 for the six months ended January 31, 1998 from $460,629
for the prior comparable period. This increase was primarily due to an increase
in personnel at the Chase City facility.

Income from Operations: Income from operations for the six months ended
January 31, 1998 was $1,213,340, compared to $187,315 for the same period one
year earlier. The increase was due primarily to an increase in gross profit of
approximately $767,937 and a decrease in pre-production costs of approximately
$561,890, partially offset by an increase in salaries and selling, general and
administrative expenses of $303,802.

Other Income (expense): Other income (expense) decreased from $232,906 for
the six months ended January 31, 1997 to $(6,673) for the six months ended
January 31, 1998. The change was primarily due to income of $324,223, net of
legal expenses, recorded as part of the Insurance Settlement in the prior
period.

Income Taxes: The Company's provision for taxes on income for the six
months ended January 31, 1998 and 1997 was $386,267 and $134,471, respectively.
The Company's effective tax rate is lower than the statutory

19
<PAGE>

rate due primarily to the untaxed income of Sherwood Overseas, which is not
subject to U.S. income tax. Sherwood Overseas makes annual royalty payments to
the Company of 7% of net sales for the use of its brand names. See Note 10 to
Notes to Consolidated Financial Statements.

Net Income: Net income was $820,400 for the six months ended January 31,
1998 compared to $285,750 for the prior comparable period. This improvement was
due primarily to the increase in gross margins as described above and a
reduction in pre-production costs.

Fiscal Year Ended July 31, 1997 Compared to Fiscal Year Ended July 31, 1996

Sales: Net sales for fiscal 1997 increased $2,785,747, or 19.0%, to
$17,424,243, as compared to $14,638,496 for fiscal 1996. The increase in sales
was due to significant growth in sales volume in all product categories,
particularly increases in domestic sales of cookie products, which increased
approximately $1,699,000, or 29%, and candy products, which increased
approximately $904,000 or 19%. For the year ended July 31, 1997, domestic and
foreign sales were approximately $15,549,000 and $1,875,000 or 89.2% and 10.8%,
respectively, of the Company's sales.

Gross Profit: Gross profit for fiscal 1997 increased to $4,853,637 from
$3,773,714 and, as a percentage of net sales, from 25.8% to 27.8%. The increase
was primarily attributable to lower costs associated with manufacturing
demitasse biscuits at the Chase City facility and favorable currency exchange
rates.

Operating Expenses: Selling, general and administrative expenses for
fiscal 1997 increased 14.4%, from $2,342,330 to $2,680,897, but decreased as a
percentage of sales from 16.0% to 15.4%. The decrease in selling, general and
administrative expenses as a percentage of sales was primarily due to focused
advertising programs that reduced expenditures and higher volumes of direct
sales for which no commissions were paid. Pre-production costs of $769,585 and
$212,089 in fiscal 1997 and 1996, respectively, represent expenses associated
with the start-up of manufacturing operations at the Company's Chase City
facility. Salaries and related expenses increased from $937,893 in fiscal 1996
to $1,180,522 in fiscal 1997. The increase was due to the staged hiring over
the course of the year of a new plant manager and 40 new employees at the Chase
City facility.

Income from Operations: Income from operations decreased from $281,402 in
fiscal 1996 to $222,633 in fiscal 1997, due primarily to the additional
pre-production costs associated with the manufacturing facility, which were
incurred in fiscal 1997.

Other Income (expense): Other income increased approximately $43,000, from
$61,003 in fiscal 1996 to $103,747 in fiscal 1997. This increase was due
primarily to a $140,000 increase in income recorded from the Insurance
Settlement, which was offset by an increase in interest expense of
approximately $84,000 associated with two IRBs.

Income Taxes: The Company's provision for taxes on income was less than
the statutory income tax rates in each of fiscal 1997 and 1996, due primarily
to the untaxed income from Sherwood Overseas. The provision for taxes on income
for the fiscal years ended July 31, 1997 and 1996 was $23,100 and $71,700,
respectively.

Net Income: Net income for the year increased to $303,280 compared to
$270,705 for the prior fiscal year, a 12.0% increase from the prior fiscal
year. This increase was due largely to the increase in gross profit and the
Insurance Settlement as described above.

Liquidity and Capital Resources

The Company's primary cash requirements have been to fund the purchase,
manufacture and commercialization of its products. The Company has historically
financed its operations and expansion with a combination of cash flow from
operations and borrowings, primarily from banks and a related-party loan. The
Company's working capital at July 31, 1997 and January 31, 1998 was $2,219,735
and $2,726,037, respectively.

Net cash used in operating activities was $658,172 for the year ended July
31, 1997, compared to net cash provided by operating activities of $135,370 for
the year ended July 31, 1996. The decrease in cash provided by operating
activities was due primarily to an increase in inventory in anticipation of an
increase in volume of fall

20
<PAGE>

and holiday orders. Net cash provided by operations was $545,056 for the six
months ended January 31, 1998, compared to net cash used in operations of
$239,823 for the prior comparable period. The increase in cash provided by
operating activities was primarily attributable to an increase in net income
and receipt of cash from the Insurance Settlement.

Net cash used in investing activities for the years ended July 31, 1996
and 1997 and the six months ended January 31, 1998 were $1,649,386, $816,196
and $201,066, respectively. Capital expenditures were made in connection with
commencing manufacturing operations at the Chase City facility.

Net cash provided by financing activities was $1,218,553 for the year
ended July 31, 1997, compared to $1,763,278 for the year ended July 31, 1996.
Net cash provided by financing activities for fiscal 1997 and 1996 reflects
borrowings under the line of credit with the Bank and the Related Party Note to
use as working capital and additional long-term debt borrowings to fund the
purchase and modernization of the Chase City facility. Net cash used in
financing activities was $332,736 for the six months ended January 31, 1998,
compared to net cash provided by financing activities of $788,694 for the
comparable period in 1997. This change reflects the payments of principal and
interest due under the Bank line of credit and the Related Party Note. At
January 31, 1998, the Company had cash and cash equivalents of $625,363.

In November 1996, the Company entered into a loan agreement with the Bank
which provides for borrowings under a line of credit of up to $4,000,000.
Advances under the line of credit are based on a borrowing formula equal to the
lesser of (i) $2,000,000 or (ii) 80% of domestic accounts receivable plus 70%
of domestically-owned inventory (subject to certain limitations) less the
aggregate amount of outstanding letters of credit. Interest accrues on such
advances at the Bank's prime lending rate (8.5% at January 31, 1998) and is
payable monthly. The loan agreement expires in November 1998. At January 31,
1998 and February 28, 1998, approximately $1,419,589 and $1,141,589,
respectively, was outstanding under the line of credit. Up to $2,000,000 of the
line of credit is available for letters of credit for use in connection with
the Company's product purchases. Amounts drawn on the letters of credit are
included in the Company's accounts payable.

The Company intends to use $850,000 of the proceeds of this offering to
reduce amounts outstanding under the line of credit. The Company expects to use
the increased borrowing availability to fund working capital needs. The line of
credit is secured by Sherwood LLC's and Sherwood Overseas' cash and cash
equivalents, receivables and inventory, and is also personally guaranteed by
Uziel Frydman, the Company's Chairman, President and Chief Executive Officer.
In addition to financial covenants requiring, among other things, a minimum
tangible net worth (as defined in the loan agreement) of $2,000,000, the
Company's loan agreement with the Bank limits or prohibits the Company, without
the Bank's consent, from incurring additional indebtedness, which could, under
certain circumstances, limit the Company's ability to expand its operations.

In June 1996 and May 1997, the Company borrowed $935,000 and $580,000,
respectively, from Industrial Development Authority of Mecklenburg County
("IDAMC") for the acquisition and improvement of the Chase City facility and
the purchase and installation of new production equipment, financed through the
issuance of two series of IRBs (Series 1996 and Series 1997). The IRBs are
backed by irrevocable letters of credit issued by Fidelity. Advances on the
letters of credit (which expire June 2006 and 2002, respectively) are, in turn,
secured by the Company's Chase City facility and all other real and personal
property of the Company and personally guaranteed by Uziel Frydman, the
Company's Chairman, President and Chief Executive Officer, pursuant to a
reimbursement agreement ("Reimbursement Agreement") between Fidelity and the
Company.

Under the Reimbursement Agreement, the Company makes monthly interest and
sinking fund payments to Fidelity. Interest is calculated at the rate of 10%
per annum. The sinking fund payments for the Series 1996 IRBs are based upon a
15 year straight line amortization of $640,000 advanced for the purchase of the
Chase City facility and a 7 year straight line amortization for approximately
$295,000 advanced for manufacturing equipment. Annual payments to the sinking
fund for the Series 1997 IRBs are due June 1 each year in the following
amounts: $85,000 in 1998, $105,000 in 1999 and $130,000 in each of 2000, 2001
and 2002. The total monthly payments vary from month to month and are subject
to variable market tax exempt interest rates (3.95% at July 31, 1997). The
terms of the Reimbursement Agreement require, among other things, that the
Company maintain certain financial ratios and adhere to certain covenants,
including, without Fidelity's permission, borrowing additional funds, merging
or consolidating, amending its Articles of Incorporation and repaying
subordinated debt.

21
<PAGE>

As part of the financing for the acquisition of the Chase City facility,
in May and June 1996, the Company borrowed $400,000 to finance equipment from
IDAMC and $250,000 for working capital from the Lake Country Development
Corporation ("LCDC"), respectively, evidenced by the Subordinated Notes. The
IDAMC Subordinated Note has a five year term, amortized over a ten year period
at an interest rate of 7% per annum, payable in monthly installments of $4,644
in principal and interest with a balloon payment of $239,193 due June 2001. The
LCDC Subordinated Note is pari passu with the IDAMC Subordinated Note in terms
of security, and has a five year term bearing interest at 5.25% per annum,
payable in monthly installments of interest only for the first nine payments
and thereafter payable in equal monthly payments of $5,480 in principal and
interest until June 2001. The IDAMC Subordinated Note is secured by the
Company's equipment and the LCDC Subordinated Note is secured by the real
property, fixtures and equipment located at the Chase City facility. The
Subordinated Notes limit the Company's capital expenditures, prohibit a change
in ownership greater than 50% and require the Company to create 50 full-time
jobs at the Chase City facility within two years of the date of the
Subordinated Notes. Both loans are personally guaranteed by Uziel Frydman, the
Company's Chairman, President and Chief Executive Officer.

In 1991, the Company issued the Related Party Note to Ilana Frydman, an
employee of the Company and the wife of Uziel Frydman, the Chairman, President,
and Chief Executive Officer of the Company, in the principal amount of
$1,500,000. The Related Party Note accrues interest at 9% and is due upon
demand after March 1, 1999. As of January 31, 1998, the outstanding principal
and interest on the Related Party Note was $842,202. The Related Party Note is
secured by cash and cash equivalents and is subordinated to the Company's other
indebtedness. The Company has obtained consent to repay the Related Party Note
and intends to use a portion of the net proceeds of this offering to pay all of
the remaining principal and interest on the Related Party Note. See "Certain
Transactions."

The Company's inventory consists of raw materials for production of
demitasse biscuits at its Chase City facility and finished products imported
from third-party manufacturers. The Company maintains inventory in its Chase
City facility as well as bonded public warehouses and takes a physical
inventory on a quarterly basis. The Company averaged over 90 days of inventory
in fiscal 1997. The average time from order to delivery of imported inventory
was approximately 60 days in fiscal 1997. Inventory turns were approximately
3.34 in fiscal 1996, as compared to approximately 3.98 in fiscal 1997, and 1.74
(or 3.48 on an annualized basis) for the six months ended January 31, 1998.

The Company's accounts receivable, less allowance for doubtful accounts,
at January 31, 1998 were $2,127,186, as compared to $2,101,950 at July 31,
1997. As of January 31, 1998, accounts 90 or more days past due were
approximately 6% of aggregate accounts receivable. Trade accounts receivable
averaged approximately 40 days in fiscal 1997, as compared to approximately 53
days for fiscal 1996, and approximately 44 days for the six months ended
January 31, 1998. Bad debt accounted for less than 1% of the Company's revenues
for fiscal 1996 and 1997.

As of the date of this Prospectus, the Company has no material commitments
for capital expenditures. The Company intends to use up to $2,000,000 of the
net proceeds of this offering for the purchase and installation of capital
equipment required to manufacture additional products at the Company's Chase
City facility and salaries for additional personnel. The Company may seek to
finance a portion of the cost of such equipment. The Company also intends to
use up to $2,000,000 of the net proceeds of this offering to pursue
opportunities for possible acquisitions of products or businesses which
management believes will enhance the Company's growth prospects. Based on
currently proposed plans and assumptions relating to its operations, the
Company believes that the proceeds of this offering, together with projected
cash flow from operations and available cash resources, including its line of
credit, will be sufficient to satisfy its contemplated cash requirements for at
least twelve months following the consummation of this offering.

Foreign Currency Fluctuations

The Company currently purchases most of its products from foreign
manufactures under terms that provide for the payment of goods in foreign
currency approximately 60 to 90 days from the invoice date. Purchases of COWS
butter toffee candies and other candies from manufacturers located in Argentina
are paid in U.S. dollars. Purchases of RUGER wafers and ELANA Belgian
chocolates products are purchased from manufacturers

22
<PAGE>

located in Austria and Belgium, respectively, and are paid for in local
currencies. These goods are recorded at cost in equivalent U.S. dollars at the
exchange rate in effect on the invoice date. The difference between the
recorded cost and the amount required for payment is reflected as a realized
foreign currency transaction gain or loss. Prior year fluctuations in gross
margin were attributable in large part to the decline in value of the U.S.
dollar. In prior years, the Company has hedged its exposure to foreign currency
rate changes by purchasing forward contracts based upon analysis of foreign
current markets. The Company may hedge against currency fluctuations in the
future. All sales of the Company's products in foreign markets are made in U.S.
dollars, except for a portion of Canadian sales which are in Canadian dollars.
See Note 2 to Notes to Consolidated Financial Statements.

Seasonality

The Company's sales typically increase toward the end of the calendar
year, principally due to the holiday season. Unanticipated events, including
delays in product shipments past the time of peak sales or significant
decreases in sales during such period, could have an adverse effect on the
Company's operating results.

Inflation

Inflation has not had a significant impact on the Company's results of
operations for the periods presented.

Year 2000 Computer Issue

The Company has assessed the issues associated with the programming code
in its existing computer systems with respect to a two digit year value as the
year 2000 approaches and believes that addressing such issues is not a material
event or uncertainty that would cause reported financial information not to be
indicative of future operating results or financial condition.

Recent Accounting Pronouncements

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). SFAS 123 will begin to affect the Company in 1998
with the establishment of the 1998 Stock Option Plan. The Company will adopt
only the disclosure provisions of SFAS 123 and account for stock-based
compensation using the intrinsic value method set forth in APB Opinion 25. See
"Management -- 1998 Stock Option Plan."

In March 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS 128
provides a different method of calculating earnings per share than is currently
used in APB Opinion 15. SFAS 128 provides for the calculation of basic and
diluted earnings per share. Basic earnings per share includes no dilution and
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution of securities that could share in the
earnings of an entity, similar to existing fully diluted earnings per share.
The Company believes adopting SFAS 128 will not have a material effect on its
calculation of earnings per share. Effective January 31, 1998, the Company has
adopted the provisions for computing earnings per share set forth in SFAS 128.

23
<PAGE>

BUSINESS

General

The Company manufactures, markets and distributes a diverse line of brand
name candies, cookies, chocolates and other food products. The Company's
principal products are COWSTM butter toffee candies, demitasse(R) biscuits,
RUGER(R) wafers and ELANA(R) Belgian chocolates. The Company also markets SOUP
DU JOURTM soups, SOUR FRUIT BURSTTM fruit-filled hard candies, as well as
certain holiday specialty products, such as PIRATE'S GOLD COINSTM milk
chocolates for Christmas and TOKENS OF LOVETM milk chocolates for Valentine's
Day. The Company's marketing strategy, including its packaging of products
designed to maximize freshness, taste and visual appeal, emphasizes highly
distinctive, premium quality products that are sold at prices that compare
favorably to those of competitive products.

Market Overview

Sales of candy and cookie products in the United States have increased
significantly in recent years. According to the United States Department of
Commerce, manufacturers' domestic shipments of confectionery products
(excluding chewing gum) have grown steadily from approximately $9 billion in
1990 to $12.1 billion in 1996. The Chocolate Manufacturers Association/National
Confectioners Association has estimated that total retail sales of
confectionery products in the United States in 1996 were more than $21 billion,
and industry trade reports project continued growth in these markets into the
next century. Despite such growth, the United States ranks only tenth in per
capita candy consumption among the industrialized nations. The Company believes
that these expanding markets present attractive growth opportunities for its
business, and is focusing its strategy on introducing new products in these
market categories as well as achieving greater brand recognition and market
penetration for all of the Company's products.

The markets for candy and cookie products are dominated by a number of
large, well capitalized corporations. In the candy market, these companies
include Hershey Food Corporation, M&M Mars and Nestle S.A. The cookie and
biscuit market is dominated by Nabisco, Inc., Keebler Company and Sunshine
Biscuits, Inc. In addition to domestic manufacturers, foreign candy and cookie
companies, such as Lindt of Switzerland, Bahlsen KG, and Storck, have
established their products in this market. The Company believes that the
remainder of the market is otherwise highly fragmented, with numerous
manufacturers and hundreds of products and distribution channels, such as mass
merchandisers, vending companies and gourmet distributors. Management believes
that the Company's experience in these markets and distribution channels,
coupled with its expanded manufacturing capabilities, positions the Company to
capitalize on the growth opportunities in these markets.

Products

The table below sets forth, for the periods indicated, the approximate
revenues (in thousands) and percentages of revenues derived from United States
sales of the Company's products in the following categories:

<TABLE>
<CAPTION>
Year Ended July 31, Six months ended January 31,
----------------------------------------------- -----------------------------------------------
Product Category 1996 1997 1997 1998
- ------------------- ---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Candy ............. $ 4,668 34.7% $ 5,572 35.0% $2,738 31.9% $3,351 38.0%
Cookies ........... 5,942 44.2 7,641 48.0 3,757 43.8 3,584 40.6
Chocolate ......... 2,115 15.7 2,308 14.5 1,631 19.1 1,617 18.3
Other ............. 728 5.4 398 2.5 448 5.2 273 3.1
------- ----- ------- ----- ------ ----- ------ -----
Total(1) .......... $13,453 100.0% $15,919 100.0% $8,574 100.0% $8,825 100.0%
======= ===== ======= ===== ====== ===== ====== =====
</TABLE>

- ------------
(1) Includes intercompany sales to Sherwood Overseas of approximately $352,000,
$370,000, $240,105 and $259,410 for the years ended July 31, 1996 and 1997
and the six months ended January 31, 1997 and 1998, respectively.

24
<PAGE>

The following is a brief description of the Company's products by
category:

Candy

COWSTM: COWS is a line of butter toffee candy offering both a soft and
chewy toffee and a dairy butter and cream hard candy. COWS butter toffee
candies are made with real dairy butter and cream and are sold in 7 oz. bags,
in tubs, and in bulk, and are packed in foil fresh packs to preserve freshness
and extend shelf life. COWS butter toffee candies are also packaged as gift
items in decorative tins and milk jars.

COWPOKESTM Lollipops: Cowpokes lollipops is a new product first introduced
in the fall of 1997. Cowpokes are an extension of the COWS line and are made
with a hard dairy butter and cream candy on the outside and a soft, chewy
butter toffee on the inside. Cowpokes are available in 7.3 oz. bags and are
also distributed in 60-count check-stand display cartons for single-item sales.

SOUR FRUIT BURSTTM Hard Candies: SOUR FRUIT BURST is a line of
fruit-filled hard candies in a variety of flavors sold in 3 oz. and 12 oz. bags
and distributed in a variety of packages.

RUGER(R) Wafers: RUGER wafers is a line of wafer cookie available in three
flavors: chocolate, vanilla, and strawberry and in two sugar free varieties.
RUGER wafers are offered in a 7oz. grocery size as well as a 2 1/8 oz. size in
two different shapes in order to assure a proper fit in vending machine slots.
The RUGER wafer cookie formula designed by the Company utilizes an aeration
process which gives RUGER wafers its very light and delicate filling. RUGER
wafers are distributed in a mylar packaging material that resists sunlight and
humidity and is designed to preserve freshness and extend shelf life.

Demitasse(R) Biscuits: Demitasse is a line of tea biscuits offered in a
variety of flavors including the traditional tea biscuit, "Petit Beurre" (with
real butter), Cinnamon Honey, Coconut and Chocolate. The demitasse biscuit line
is certified kosher by the Orthodox Union.

Chocolate

ELANA(R) Belgian Chocolates: ELANA Belgian chocolate bars are sold in a
variety of flavors, including Mint, Caramel, Mocca, Truffle, White Truffle,
Honey Almond, Crispers, and Almonds, and are offered in two sizes (25 grams and
45 grams) for retail stores and vending, and also in a variety of package
combinations.

Countdown to ChristmasTM Chocolate Calendars: Countdown to Christmas
chocolate calendars are recently introduced advent calendars made with 24
milk-chocolate candies behind numbered doors. The calendar is marketed
domestically for the Christmas holiday season.

PIRATE'S GOLD COINSTM Foil-Wrapped Chocolate Coins: Pirate's Gold Coins is
a milk chocolate candy product designed in coin shapes and wrapped in embossed
gold foil. They are offered in two sizes of mesh bags, 2lb. 10oz. tubs and in
bulk, and marketed primarily for the Christmas holiday season.

TOKENS OF LOVETM Chocolate Candies: Tokens of Love is a line of milk
chocolate candy product in token shapes, wrapped in foil and containing
removable/resusable stickers with expressions of love and friendship. They are
offered in two sizes of mesh bags and in bulk, and marketed primarily for
Valentine's Day.

Other

SOUP DU JOURTM Soups: SOUP DU JOUR Soups is a line of instant powdered
soups offered in five different varieties, Chicken Noodle, Spring Vegetable,
French Onion, Minestrone and Mushroom, sold in single-serving packets, 3-packet
boxes and distributed in a variety of larger size packages.

Suppliers

The Company currently purchases most of its finished products from
third-party manufacturers located in Argentina, Austria and Belgium. For the
fiscal year ended July 31, 1997, five manufacturers accounted for approximately
66.8% of product purchases sold domestically, with the producers of COWS butter
toffee candies, RUGER wafers, and chocolate products accounting for
approximately 30.8%, 20.9% and 15.1%, respectively, of

25
<PAGE>

product purchases. The Company's products are manufactured to specific recipe
and design specifications developed by the Company. The Company's operations
require it to have production orders in place in advance of shipment to the
Company's warehouses (product deliveries typically take 60 days). Each of the
Company's foreign suppliers generally delivers finished products free on board
to a freight forwarder, cargo consolidator or directly to a seaport for
transport by steamship. The Company assumes the risk of loss, damage or
destruction of products, although the Company maintains cargo insurance. The
products are transported to United States seaports and then by rail and truck
to one of six regional warehouses used by the Company.

The Company has entered into agreements with the manufacturers of ELANA(R)
Belgian chocolates, PIRATE'S GOLD COINSTM milk chocolates and SOUP DU JOURTM
soups. Generally, under these agreements, the supplier may not export into the
United States, and in certain cases, other countries, any products similar to
those produced for the Company. The agreements require the Company to purchase
annual minimum volumes at specific prices (which minimums are subject to a
reduction and, ultimately, a suspension, in the event of certain price
increases by the supplier). The Company currently exceeds these purchase
requirements. The Company's supplier agreements require the supplier to
maintain product liability insurance with the Company as an additional named
insured and are generally terminable on short notice.

In addition, raw materials necessary for the manufacture of the Company's
products at its Chase City facility, including flour, sugar, shortening, butter
and flavorings, are purchased from numerous third-party suppliers. The Company
anticipates that it will become increasingly dependent on these suppliers for
necessary raw materials used in the manufacture of its products.

Customers

The Company sells its products primarily to mass merchandisers and other
retail customers; vending companies; gourmet distributors; and grocery and drug
store chains, convenience stores, specialty shops and wholesalers. Domestic
sales to mass merchandisers, vending companies and gourmet distributors
accounted for approximately 36.18%, 16.84% and 13.86%, respectively, of the
Company's revenues for the year ended July 31, 1997. The Company's mass
merchandiser customers include Dollar General, K-Mart, Dollar Tree and 99 Cents
Only Stores.

Vending companies are the Company's second largest customer category.
ELANA Belgian chocolates, RUGER wafers, COWS butter toffee candies and SOUR
FRUIT BURST are available in vending machines as well as through traditional
outlets. The Company believes that the visibility of its products in vending
channels enhances market acceptance and consumer appeal of the Company's
products in other distribution channels.

The Company sells its products to numerous gourmet distributors throughout
the United States. These distributors in turn sell products to a wide base of
gourmet stores. The Company believes that it has been able to penetrate this
market segment because of its ability to satisfy consumer demand for premium
quality products at prices that are attractive to these distributors. For the
same reason, the Company also believes that gift basket producers are a natural
extension of the gourmet market.

Distribution

The Company distributes its products throughout the United States and
internationally. The Company's principal market outside the United States is
Canada, which accounts for approximately 90% of the Company's international
sales. For the year ended July 31, 1997 and the six months ended January 31,
1998, sales of the Company's products in foreign markets accounted for
approximately 11% and 12%, respectively, of the Company's revenues. The Company
has recently introduced its products in certain countries in South America and
the Caribbean, and management intends to continue to expand its international
marketing efforts by selling products to distributors in these geographic
markets. In each country, the Company targets distributors that purchase large
quantities of products for mass distribution.

The Company engages independent food and candy brokers in various regions
throughout the United States for marketing to retail customers. These brokers
account for a majority of the Company's sales. Food and candy brokers are paid
on a commission basis (typically 5%) and are generally responsible in their
respective geographic markets for identifying customers, soliciting customer
orders and inspecting merchandise on store

26
<PAGE>

shelves. As of the date of this Prospectus, the Company had arrangements with
approximately 50 food and candy broker organizations. Such arrangements
prohibit the brokers from selling competing products. The Company believes the
use of food and candy brokers, which typically specialize in specific products
and have knowledge of and contracts in particular markets, enhances the quality
and scope of the Company's sales operations and permits the Company to limit
the significant costs associated with creating and maintaining a direct
distribution network. The Company's executive officers and three regional sales
managers work with brokers on an individual basis and are responsible for
managing the broker network, identifying opportunities and developing sales in
their respective territories.

The Company uses six regional bonded public warehouses that specialize in
food and confectionery storage. These warehouses are selected based on
proximity to the Company's customers, the ability to provide prompt customer
service and efficient and economic delivery. The Company generally sells its
products pursuant to customer purchase orders and fills these orders from
inventory generally within one to two days of receipt. Because orders are
filled shortly after receipt, backlog is not material to the Company's
business. Substantially all of the Company's products are delivered by common
carrier.

Manufacturing

The Company produces demitasse biscuits at its Chase City facility. The
facility consists of a brick building with over 70,000 square feet (including a
1,750 square foot office) situated on approximately ten acres in Chase City,
Virginia. The facility is accessible to a major seaport and rail lines. The
facility is equipped with state-of-the-art equipment for the manufacture and
packaging of cookie and candy products. The facility, which currently operates
one daily shift, operates at approximately 25% of its productive capacity for
the demitasse product. The facility is certified kosher by the Orthodox Union.

The Company's Vice President - Manufacturing Operations is responsible for
the operations at the Chase City facility. The Company currently employs
technical and production personnel who have working knowledge of the technical
and operational aspects of the Company's production equipment. The Company also
employs personnel responsible for conducting quality control testing at the
facility via on-site laboratory analysis and quality assurance inspections. The
inspectors evaluate the Company's products on the basis of subjective factors
such as taste and appearance. The Company monitors the efficiency of the
production equipment continuously and the facility is climate controlled.

The Company intends to use up to $2,000,000 of the proceeds of this
offering for the purchase and installation of capital equipment required for
the manufacture of additional products at the Chase City facility. The Company
also recently completed the installation of equipment designed to manufacture
candy products, is currently formulating a candy product and currently
anticipates that it will begin to manufacture this candy product in May 1998.
The Company expects to hire up to ten additional personnel during the twelve
months following this offering to operate this equipment. The Company will seek
to expand its manufacturing operations by adding products and by developing
private label and contract manufacturing capabilities. The Company will be
required to hire additional personnel as it expands its operations.

Marketing, Sales and Advertising

The Company believes that product recognition by retail and wholesale
customers, consumers and food brokers is an important factor in the marketing
of the Company's products. Accordingly, the Company promotes its products and
brand names through the use of attractive promotional materials, including
full-color product brochures and newspaper inserts, advertising in trade
magazines targeted to the mass merchandisers, vending industry, gourmet trade
and gift basket markets, and participation in trade shows. For the year ended
July 31, 1997 and the six months ended January 31, 1998, the Company spent
$450,446 and $175,367, respectively, on advertising. The Company intends to use
up to $800,000 of the proceeds of this offering to expand its marketing and
sales efforts primarily by aggressively advertising its brand name products.

The Company also promotes its products through sales discounts and
advertising allowances. The level of promotional programs is generally highest
during the initial introduction of a product. As distribution of the new

27
<PAGE>

product increases, the Company gradually shifts from promotion to direct
advertising to reinforce trade and consumer repeat purchasing. Management
believes that these promotional programs have shortened the time periods
necessary to achieve market penetration of its products. The Company intends to
continue to develop and implement marketing and advertising programs to
increase brand recognition of its products and to emphasize favorable pricing
compared to competing products. The Company also promotes its products through
payments of slotting allowances. Slotting allowances enable the Company to
obtain shelf space for its products. Payment of slotting allowances does not
assure that a product will continue to be carried beyond an initial period.

Competition

The Company faces significant competition in the marketing and sale of its
products. The Company's products compete for consumer recognition and shelf
space with candies, cakes, cookies, chocolates and other food products which
have achieved international, national, regional and local brand recognition and
consumer loyalty. These products are marketed by companies (which may include
the Company's suppliers) with significantly greater financial, manufacturing,
marketing, distribution, personnel and other resources than the Company.
Certain of such competitors, such as Hershey Food Corporation, M&M Mars, Inc.,
Nestle, S.A., Nabisco, Inc., Keebler Company and Sunshine Biscuits, Inc.,
dominate the markets for candy and cookie products, and have substantial
promotional budgets which enable them to implement extensive advertising
campaigns. The food industry is characterized by frequent introductions of new
products, accompanied by substantial promotional campaigns. Competitive factors
in these markets include brand identity, product quality, taste and price.

Trademarks

The Company holds United States trademark registrations for the "ELANA,"
"RUGER" and "demitasse" names, has filed for trademark registrations for
certain other names, including "COWS," and uses other names for which it has
not applied for registration. The Company believes that its rights in these
names is a significant part of the Company's business and that its ability to
create demand for its products is dependent to a large extent on its ability to
exploit these trademarks. There can be no assurance as to the breadth or degree
of protection which trademarks may afford the Company or that any trademark
applications will result in registered trademarks or that trademarks will not
be invalidated if challenged. The Company is not aware of any infringement
claims or other challenges to the Company's rights to use these marks. Other
than Canadian registrations for the "ELANA" and "RUGER" names, the Company does
not hold any international trademarks.

Government Regulation

The Company is subject to extensive regulation by the United States Food
and Drug Administration, the United States Department of Agriculture and by
other state and local authorities in jurisdictions in which the Company's
products are manufactured or sold. Among other things, such regulation governs
the importation, manufacturing, packaging, storage, distribution and labeling
of the Company's products, as well as sanitary conditions and public health and
safety. Applicable statutes and regulations governing the Company's products
include "standards of identity" for the content of specific types of products,
nutritional labeling and serving size requirements and general "Good
Manufacturing Practices" with respect to manufacturing processes. The Company's
Chase City facility and products are subject to periodic inspection by federal,
state and local authorities. The Company believes that it is in compliance with
all governmental laws and regulations and maintains all permits and licenses
required for its operations. Nevertheless, there can be no assurance that the
Company will continue to be in compliance with current laws and regulations or
that the Company will be able to comply with any future laws and regulations
and licensing requirements. Failure by the Company to comply with applicable
laws and regulations could subject the Company to civil remedies, including
fines, injunctions, recalls or seizures, as well as potential criminal
sanctions.

Insurance

The Company maintains product liability insurance with limits of
$2,000,000 in the aggregate and $1,000,000 per occurrence (with excess coverage
of $3,000,000), which it believes is adequate for the types of products
currently offered by the Company. There can be no assurance, however, that such
insurance will be

28
<PAGE>

sufficient to cover potential claims or that adequate levels of coverage will
be available in the future at a reasonable cost. In the event of a partially or
completely uninsured successful claim against the Company, the Company's
financial condition and reputation would be materially affected.

Properties

The Company's corporate headquarters are located in 3,620 square feet of
leased office space located at 6110 Executive Boulevard, Rockville, Maryland.
This lease commenced on October 14, 1988 and expires November 30, 1998. The
current annual rental is approximately $45,000.

The Company's 70,000 square foot manufacturing facility is located on
approximately 10 acres at 807 South Main Street, Chase City Virginia. The
Company acquired the real estate and building in April 1996. The Company
granted senior and junior security interests in such facility in connection
with its issuance of the IRBs. See "Risk Factors."

Employees

As of March 1, 1998, the Company employed a total of 80 full-time
employees, with 18 full-time employees employed at the principal offices in
Rockville, Maryland and 62 full-time employees employed at the Chase City
facility. The Company's employees are not represented by any labor union. The
Company believes that its relations with its employees are good.

Legal Proceedings

The Company is from time to time involved in litigation incidental to the
conduct of its business. Although the Company is not currently a party to any
legal proceedings, there can be no assurance that the Company will not be a
party to litigation in the ordinary course of business.

29
<PAGE>

MANAGEMENT

Directors and Executive Officers

The following are the directors and executive officers of the Company:

<TABLE>
<CAPTION>
Name Age Position
- ---- ----- --------
<S> <C> <C>
Uziel Frydman ............... 61 Chairman, President and Chief Executive Officer
Anat Schwartz ............... 37 Vice President -- Finance and Secretary
Amir Frydman ................ 35 Director, Treasurer and Vice President -- Marketing
and Product Development
Zigmund Sadauskas ........... 61 Vice President -- Manufacturing Operations
Douglas A. Cummins .......... 55 Director
Jean E. Clary ............... 54 Director Nominee
</TABLE>

Uziel Frydman has been the President and Chief Executive Officer of the
Company and each of its subsidiaries since inception. Mr. Frydman has served as
the Chairman of the Board of Directors of the Company since December 1997. Mr.
Frydman served as Director of Marketing and Planning Sciences at R.J. Reynolds
Tobacco Company from 1977 to 1980, and prior to that, as Manager, Planning and
Operations Improvement at Lever Brothers Company from 1971 to 1977. He also
served as Projects Manager at Sperry & Hutchinson Company and as an independent
consultant to local governments in Turkey, Burma and Sierra Leone from 1962 to
1965. Mr. Frydman was an adjunct professor at the Graduate School of Business
at Rutgers University from 1970 to 1975. Mr. Frydman earned a Masters of
Business Administration, Management Science degree from Case Western Reserve
University in 1968 and a Bachelor of Science degree in Civil Engineering from
Technion Institute of Technology, Haifa, Israel in 1960. Mr. Frydman is the
father of Anat Schwartz and Amir Frydman.

Anat Schwartz has been Vice President -- Finance and Secretary of the
Company since January 1996 and Sherwood Brands, LLC (and its predecessors)
since 1988, and has been a director of Sherwood Brands Overseas, Inc. since
1993. Prior to joining the Company, Ms. Schwartz served as Manager - Loan
Syndications and Asset Sales for the Bank of Montreal in 1988 and as Team
Leader - Communications/Media Group and Account Officer for such bank's
Southeastern United States region from 1983 to 1988. Ms. Schwartz earned a
Masters of Business Administration, Finance/Health Care degree from Bernard
Baruch College in 1983 and a Bachelor of Arts degree from Wake Forest
University in 1981. Ms. Schwartz is the daughter of Uziel Frydman and the
sister of Amir Frydman.

Amir Frydman has been a director of the Company and has served as
Treasurer and Vice President - Marketing and Product Development since 1985.
Prior to joining the Company, Mr. Frydman was Commercial Branch Manager at NCNB
National Bank of Florida, from 1984 to 1985. Mr. Frydman earned a Bachelor of
Arts degree from the University of North Carolina in 1983. Mr. Frydman is the
son of Uziel Frydman and the brother of Anat Schwartz.

Zigmund Sadauskas has been Vice President -- Manufacturing Operations
since March 1998. Prior to joining the Company, from 1995 to February 1998, Mr.
Sadauskas was self employed as an engineer consultant. From 1984 to 1995, Mr.
Sadauskas served as Chief Engineer to Stauffer-Meiji/Stauffer Biscuit Company.
From 1979 to 1985, Mr. Sadauskas served as Plant Manager for Peter Paul Cadbury
Candy Co. Prior to such service and since 1950, Mr. Sadauskas served in
capacities ranging from Foreman to Senior Project Engineer for various food and
beverage companies.

Douglas A. Cummins has been a director of the Company since December 1997.
In 1996, Mr. Cummins served as President and Chief Executive Officer of the
Liggett Group, a manufacturer and distributor of cigarettes. From 1993 to 1996,
Mr. Cummins served as President and Chief Executive Officer of North Atlantic
Trading Co, a cigarette paper manufacturer and distributor. From 1990 to 1993,
Mr. Cummins served as the President and Chief Executive Officer of Decision
Marketing, an advertising and consulting firm. From 1984 to 1990, Mr. Cummins
served as the President and Chief Operating Officer of Salem Carpet Mills, a
carpet manufacturer, and from 1981 to 1984, served as President of Stellar
Group, a consulting firm. From 1973 to 1981,

30
<PAGE>

Mr. Cummins was Director of Marketing -- International and Vice President _
Foods Marketing at R.J. Reynolds Industries. Mr. Cummins currently sits on the
Boards of Gold Leaf Tobacco Corp., Q.E.P. Company, Inc., Smokey Mountain
Products, Inc. and the Fort Ticonderoga Association. Mr. Cummins earned a
Masters of Business Administration degree from Columbia University in 1966 and
a Bachelor of Arts degree from Harvard University in 1964.

Jean E. Clary has agreed to become a director of the Company upon the
consummation of this offering. Ms. Clary has been the Chief Executive Officer
and President of Century 21 - Clary and Associates, Inc. since January 1973.
Ms. Clary is currently on the Board of Directors of Virginia Power, a wholly
owned subsidiary of Dominion Resources, Inc., a public company traded on the
New York Stock Exchange.

The Company's directors hold office until the next annual meeting of the
Company's shareholders and directors, respectively. The Company's officers are
elected annually by the Company's Board of Directors and serve at the Board's
discretion.

The Company intends to hire a Chief Financial Officer following the
consummation of this offering.

The Company intends to appoint one additional independent member to its
Board of Directors following the consummation of this offering. The Company
also intends to establish a Compensation Committee and an Audit Committee of
the Board of Directors prior to consummation of the offering.

The Company has also agreed, for a period of three years from the date of
this Prospectus, if so requested by the Underwriter, to nominate and use its
best efforts to elect a designee of the Underwriter as a director of the
Company, or, at the Underwriter's option, as a non-voting advisor to the
Company's Board of Directors. The Company's officers, directors and
shareholders have agreed to vote their shares of Common Stock in favor of such
designee. The Underwriter has not yet exercised its right to designate such a
person.

Executive Compensation

The following table sets forth compensation paid by the Company during the
fiscal years ended July 31, 1997, 1996 and 1995 to its Chief Executive Officer
and its other officer who received compensation in excess of $100,000 for such
fiscal years.

Summary Compensation Table

<TABLE>
<CAPTION>
Annual Compensation
---------------------------------------
Other Annual
Name and Principal Position Fiscal Year Salary Bonus Compensation
- --------------------------- ------------- ----------- --------- -------------
<S> <C> <C> <C> <C>
Uziel Frydman, Chairman, President and 1997 $108,170 (1) (1)
Chief Executive Officer 1996 102,794
1995 101,642

Amir Frydman, Treasurer and Vice 1997 118,646 (1) (1)
President Marketing and Product 1996 106,059
Development 1995 97,971
</TABLE>

- ------------
(1) No bonuses or other compensation were received by the individuals named
above.

The Company did not grant any options to its executive officers during the
year ended July 31, 1997. See "Management -- 1998 Stock Option Plan."

Key Man Life Insurance

The Company maintains a $1 million key man life insurance policy on Uziel
Frydman, the Company's Chairman, President and Chief Executive Officer.

Employment Agreements

The Company has entered into employment agreements with Uziel Frydman,
Chairman of the Board, President and Chief Executive Officer, Anat Schwartz,
Vice President -- Finance and Secretary, and Amir Frydman, Vice President --
Marketing and Product Development and Treasurer. Such agreements become
effective

31
<PAGE>

upon the consummation of this offering, are for a term of three years and
provide annual base salaries of $175,000, $105,000 and $150,000 for Uziel
Frydman, Anat Schwartz and Amir Frydman, respectively. In addition, such
employment agreements entitle the executives to a portion of a bonus pool as
determined by the Board of Directors equal to the sum of (i) the first $150,000
in excess of $1 million of Company pre tax net income (this item (i) is
applicable solely for fiscal 1998) and (ii) 15% of Company pre tax net income
in excess of certain incremental earnings targets. If either Uziel Frydman,
Amir Frydman or Anat Schwartz is terminated without cause or upon a change in
control of the Company, each is entitled to continue to receive his or her
annual base salary for a period of three years, any accrued incentive
compensation through the date of termination and certain other benefits. Each
of the above listed executives is prohibited from competing with the Company
for the duration of his or her respective employment agreement, and if
terminated or upon voluntary resignation, for one year thereafter.

1998 Stock Option Plan

In January 1998, the Company's shareholders approved a stock option plan
(the "Option Plan") pursuant to which 350,000 shares of Class A Common Stock
have been reserved for issuance upon the exercise of options designated as
either (i) options intended to constitute incentive stock options ("ISOs")
under the Internal Revenue Code of 1986, as amended (the "Code") or (ii)
nonqualified options. ISOs may be granted under the Option Plan to officers and
employees of the Company. Non-qualified options may be granted to consultants,
directors (whether or not they are employees), employees or officers of the
Company.

The purpose of the Option Plan is to encourage stock ownership by certain
directors, officers and employees of the Company and other persons instrumental
to the success of the Company. The Option Plan is intended to qualify under
Rule 16b-3 under the Exchange Act and is administered by the Board of
Directors. The Board, within the limitations of the Option Plan, determines the
persons to whom options will be granted, the number of shares to be covered by
each option, whether the options granted are intended to be ISOs, the duration
and rate of exercise of each option, the option purchase price per share and
the manner of exercise, and the time, manner and form of payment upon exercise
of an option.

ISOs granted under the Option Plan may not be granted at a price less than
the fair market value of the Class A Common Stock on the date of grant (or 110%
of fair market value in the case of persons holding 10% or more of the voting
stock of the Company). The aggregate fair market value of shares for which ISOs
granted to any employee are exercisable for the first time by such employee
during any calendar year (under all stock option plans of the Company and any
related corporation) may not exceed $100,000. Non-qualified options granted
under the Option Plan may not be granted at a price less than the fair market
value of the Class A Common Stock on the date of grant. Options granted under
the Option Plan will expire not more than ten years from the date of grant
(five years in the case of ISOs granted to persons holding 10% or more of the
voting stock of the Company). All options granted under the Option Plan are not
transferable during an optionee's lifetime but are transferable at death by
will or by the laws of descent and distribution. In general, upon termination
of employment of an optionee, all options granted to such person which are not
exercisable on the date of such termination immediately terminate, and any
options that are exercisable terminate 90 days following termination of
employment.

The Company has issued, as of the date of this Prospectus, options to
purchase 140,000 shares of Class A Common Stock under the Option Plan at an
exercise price of $5.95 per share of which options to purchase 35,000 shares
will be granted to each of Uziel Frydman, Amir Frydman, Anat Schwartz and Ilana
Frydman. These options are exercisable as to one-third of the shares covered
thereby on the first, second and third anniversaries of the date of such grant.

Employee Benefit Plan

Effective August 1, 1997, the Company established a 401(k) and profit
sharing plan (the "Plan"). The Plan provides that the Company may elect in its
sole discretion to make contributions and/or distributions of up to 15% of
employee compensation. As of the date of this Prospectus, the Company has not
made any contributions or distributions under the Plan.

32
<PAGE>

Exculpatory Provisions and Indemnification

As authorized by the North Carolina Business Corporations Act (the
"NCBCA"), the Company's Amended and Restated Articles of Incorporation provide
that no director or officer of the Company shall be personally liable to the
Company or its shareholders for damages for breach of any duty owed to the
Company or its shareholders, except for liability for any breach of duty based
upon an act or omission that the director or officer at the time of the breach
knew or believed to be clearly in conflict with the best interests of the
corporation. In addition, the Company intends to enter into agreements to
indemnify its directors and executive officers prior to the consummation of
this offering. The Company also intends to obtain directors and officers
liability insurance naming the Underwriter as an additional insured prior to
the consummation of the offering.

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted for directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.

33
<PAGE>

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information, immediately prior to
the consummation of this offering and as adjusted to reflect the sale by the
Company of the 1,550,000 shares offered hereby (based on information obtained
from the persons named below), relating to the beneficial ownership of shares
of Class A Common Stock by: (i) each person or entity who is known by the
Company to own beneficially five percent or more of the outstanding Class A
Common Stock, (ii) each of the Company's directors and (iii) all directors and
executive officers of the Company as a group.

<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
---------------------------
Amount and Nature of Before After
Name and Address(1) Beneficial Ownership(2) Offering Offering
- ------------------- ------------------------- ---------- ---------------
<S> <C> <C> <C>
Uziel Frydman ............................................... 2,000,000(3) 93.0% 54.1%(3)
Anat Schwartz ............................................... 75,000 3.5 2.0
Amir Frydman ................................................ 75,000 3.5 2.0
Douglas A. Cummins .......................................... 0 0 0
Jean E. Clary ............................................... 0 0 0
All directors and executive officers as a group (6 persons) . 2,150,000 100.0% 58.1%
</TABLE>

- ------------
(1) The address for each of the executive officers and directors is in care of
Sherwood Brands, Inc., 6110 Executive Blvd., Suite 1080, Rockville,
Maryland 20852.

(2) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities that can be acquired by such person within
60 days from the date of this Prospectus upon the exercise of options,
warrants or convertible securities. Each beneficial owner's percentage
ownership is determined by assuming that options, warrants or convertible
securities that are held by such person (but not those held by any other
person) and which are exercisable within 60 days of the date of this
Prospectus have been exercised and converted.

(3) Includes 1,000,000 shares of Class A Common Stock and 1,000,000 shares of
Class B Common Stock. Since each share of Class B Common Stock entitles
the holder to seven votes per share on all matters submitted to a vote of
shareholders, Mr. Frydman will retain 82% of the voting control of the
Company. If the over-allotment option is exercised in full, Mr. Frydman will
own 1,767,500 shares of Common Stock, or 48% of the outstanding shares of
Common Stock and will retain 80% of the voting control of the Company.

34
<PAGE>

CERTAIN TRANSACTIONS

Uziel Frydman, President and Chief Executive Officer of the Company, has
personally guaranteed the repayment of all of the Company's indebtedness. The
Company will seek to release Mr. Frydman from his personal guarantee to the
Bank following this offering.

In 1991, the Company issued the Related Party Note to Ilana Frydman, an
employee of the Company and the wife of Uziel Frydman, the Chairman, President,
and Chief Executive Officer of the Company, in the principal amount of
$1,500,000. The Related Party Note accrues interest at 9% and is due upon
demand after March 1, 1999. As of January 31, 1998, the outstanding principal
and interest on the Related Party Note was $842,202. The Company intends to use
a portion of the net proceeds of this offering to pay all of the remaining
principal and interest on the Related Party Note.

Any future transactions will be on terms no less favorable to the Company
than could be obtained from unaffiliated parties and will be approved by a
majority of the independent and disinterested members of the Board of
Directors, outside the presence of any interested directors and, to the extent
deemed appropriate by the Board of Directors, the Company will obtain
shareholder approval or fairness opinions in connection with any such
transaction.

DESCRIPTION OF SECURITIES

Capital Stock

General

The Company is authorized to issue 30,000,000 shares of Class A Common
Stock, par value $.01 per share, 5,000,000 shares of Class B Common Stock, par
value $.01 per share, and 5,000,000 shares of Preferred Stock, par value $.01
per share. As of the date of this Prospectus, there are 1,150,000 shares of
Class A Common Stock and 1,000,000 shares of Class B Common Stock outstanding.

Class A Common Stock

The holders of Class A Common Stock are entitled to one vote per share on
all matters submitted to a vote of the shareholders, including the election of
directors, and, subject to preferences that may be applicable to any Preferred
Stock outstanding at the time, are entitled to receive ratably such dividends,
if any, as may be declared from time to time by the Board of Directors out of
funds legally available therefor. In the event of liquidation or dissolution of
the Company, the holders of Class A Common Stock are entitled to receive all
assets available for distribution to the shareholders, subject to any
preferential rights of any Preferred Stock then outstanding. The holders of
Class A Common Stock have no preemptive or other subscription rights, and there
are no conversion rights or redemption or sinking fund provisions with respect
to the Class A Common Stock. All outstanding shares of Class A Common Stock
are, and the shares of Class A Common Stock offered hereby upon issuance and
sale will be, fully paid and non-assessable. The rights, preferences and
privileges of the holders of Class A Common Stock are subject to, and may be
adversely affected by, the right of the holders of any shares of Preferred
Stock which the Company may designate in the future.

Class B Common Stock

The shares of Class A Common Stock and Class B Common Stock are identical
in all respects, except that each share of the Class B Common Stock entitles
the holder to seven votes on each matter submitted to a vote of the
shareholders. Except as required by applicable law, holders of the Class A
Common Stock and Class B Common Stock will vote together as a single class on
all matters submitted to a vote of the shareholders. Neither the Class A Common
Stock nor the Class B Common Stock has cumulative voting rights.

Class B Common Stock will be convertible into Class A Common Stock, in
whole or in part, at any time and from time to time at the option of the holder
commencing 180 days after the consummation of this offering, on the basis of
one share of Class A Common Stock for each share of Class B Common Stock
converted. Each share of Class B Common Stock will also automatically convert
into one share of Class A Common Stock upon transfer to a non-affiliate of the
holder or the Company. Each share of Class B Common Stock will also

35
<PAGE>

automatically convert into one share of Class A Common Stock if, on the record
date for any meeting of the shareholders, the number of shares of Class B
Common Stock then outstanding is less than 10% of the aggregate number of
shares of Class A Common Stock and Class B Common Stock then outstanding.

Preferred Stock

The authorized but undesignated shares of Preferred Stock may be issued
from time to time in one or more series upon authorization by the Company's
Board of Directors. The Board of Directors, without further approval of the
shareholders, is authorized to fix the dividend rights and terms, conversion
rights, voting rights, redemption rights and terms, liquidation preferences,
and other rights, preferences, privileges and restrictions applicable to each
series of Preferred Stock. The issuance of Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes could, among other things, adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, make it more
difficult for a third party to gain control of the Company, prevent or
substantially delay a change of control, discourage bids for the Company's
Common Stock at a premium or otherwise adversely affect the market price of the
Common Stock. The Company has no current plans to issue any Preferred Stock.

Redeemable Warrants

Each Warrant offered hereby entitles the registered holder thereof (the
"Warrant Holders") to purchase one share of Class A Common Stock at a price of
$7.50, subject to adjustment in certain circumstances, at any time from the
date that is thirteen months after the date hereof and until 5:00 p.m., Eastern
Time on May 6, 2003. The Warrants will be separately transferable immediately
upon issuance.

The Warrants are redeemable by the Company at any time commencing May 6,
1999, upon notice of not less than 30 days, at a price of $.10 per Warrant,
provided that the closing bid quotation of the Class A Common Stock on all 20
trading days ending on the third day prior to the day on which the Company
gives notice (the "Call Date") has been at least 134% (currently $10.05,
subject to adjustment) of the then effective exercise price of the Warrants and
the Company obtains the written consent of the Underwriter to such redemption
prior to the Call Date. The Warrant Holders shall have the right to exercise
their Warrants until the close of business on the date fixed for redemption.
The Warrants will be issued in registered form under a warrant agreement by and
among the Company, Continental Stock Transfer & Trust Company, as warrant
agent, and the Underwriter (the "Warrant Agreement"). The exercise price and
number of shares of Class A Common Stock or other securities issuable on
exercise of the Warrants are subject to adjustment in certain circumstances,
including in the event of a stock dividend, recapitalization, reorganization,
merger or consolidation of the Company. However, the Warrants are not subject
to adjustment for issuances of Class A Common Stock at prices below the
exercise price of the Warrants. Reference is made to the Warrant Agreement
(which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part) for a complete description of the terms and conditions
therein (the description herein contained being qualified in its entirety by
reference thereto).

The Warrants may be exercised upon surrender of the Warrant certificate
during the exercise period at the offices of the warrant agent, with the
exercise form on the reverse side of the Warrant certificate completed and
executed as indicated, accompanied by full payment of the exercise price (by
certified check or bank draft payable to the Company) to the warrant agent for
the number of Warrants being exercised. The Warrant Holders do not have the
rights or privileges of holders of Common Stock.

No Warrant will be exercisable unless at the time of exercise the Company
has declared effective a current registration statement with the Commission
covering the shares of Class A Common Stock issuable upon exercise of such
Warrant and such shares have been registered or qualified or deemed to be
exempt from registration or qualification under the securities laws of the
state of residence of the holder of such Warrant. The Company will use its best
efforts to have all such shares so registered or qualified on or before the
exercise date and to maintain a current prospectus relating thereto until the
expiration of the Warrants, subject to the terms of the Warrant Agreement.
While it is the Company's intention to do so, there can be no assurance that it
will be able to do so.

No fractional shares will be issued upon exercise of the Warrants.
However, if a Warrant Holder exercises all Warrants then owned of record by
him, the Company will pay to such Warrant Holder, in lieu of the issuance of
any fractional share which is otherwise issuable, an amount in cash based on
the market value of the Class A Common Stock on the last trading day prior to
the exercise date.

36
<PAGE>

North Carolina Anti-Takeover Statutes

The Company's Certificate of Incorporation and Bylaws include provisions
which may have the effect of discouraging non-negotiated takeover attempts by
delaying or preventing changes in control of management of the Company. These
provisions include, in addition to the provision for Preferred Stock, no
cumulative voting and a denial of the ability of shareholders to call special
meetings of shareholders.

North Carolina has enacted legislation that may deter or frustrate
takeovers of corporations. The North Carolina Control Share Acquisition Act
applies to public companies incorporated in North Carolina that meet certain
additional requirements, including (i) over 40% of the corporation's assets
located in North Carolina, (ii) over 10% of its shareholders residing in North
Carolina or over 10% of its shares held by residents of North Carolina, and
(iii) over 40% of its employees are North Carolina residents. This Act
generally provides that shares acquired in excess of certain specified
thresholds will not possess any voting rights unless such voting rights are
approved by a majority vote of a corporation's disinterested shareholders. The
Company currently does not satisfy the above-listed requirements for the
application of such act. The North Carolina Shareholder Protection Act applies
to North Carolina corporations and generally requires 95% approval by
disinterested directors or shareholders of certain specified "multi-staged"
takeover transactions between a corporation and holders of more than 20% of the
outstanding voting shares of the corporation (or their affiliates).

Transfer Agent and Warrant Agent

The transfer agent for the Class A Common Stock and the warrant agent for
the Warrants is Continental Stock Transfer & Trust Company, 2 Broadway, New
York, New York 10004.

Reports to Shareholders

The Company intends to file a registration statement with the Securities
and Exchange Commission to register its Class A Common Stock and Warrants under
the provisions of Section 12(g) of the Exchange Act prior to the date of this
Prospectus and has agreed with the Underwriter that it will use its best
efforts to continue to maintain such registration. Such registration will
require the Company to comply with periodic reporting, proxy solicitation and
certain other requirements of the Exchange Act.

SHARES ELIGIBLE FOR FUTURE SALE

Upon the consummation of this offering, the Company will have 2,700,000
shares of Class A Common Stock outstanding (assuming no exercise of the
Warrants) and 1,000,000 shares of Class B Common Stock outstanding. All
1,550,000 of the shares of Class A Common Stock being offered hereby will be
immediately tradable without restriction or further registration under the
Securities Act. The remaining 1,150,000 shares of Class A Common Stock and
1,000,000 shares of Class B Common Stock outstanding are deemed to be
"restricted securities," as that term is defined under Rule 144 promulgated
under the Securities Act, in that such shares were acquired by the shareholders
of the Company in transactions not involving a public offering, and, as such,
may only be sold pursuant to a registration statement under the Securities Act,
in compliance with the exemption provisions of Rule 144, or pursuant to another
exemption under the Securities Act. The 2,150,000 restricted shares of Common
Stock (Class A and Class B inclusive) will become eligible for sale under Rule
144, subject to the volume limitations prescribed by the Rule, on various dates
commencing 90 days following the date of this Prospectus. The Company and its
current shareholders have agreed not to sell or otherwise dispose of any
securities of the Company beneficially owned by them for a period of 18 months
from the date of this Prospectus, without the prior written consent of the
Underwriter and, that for an additional period of 12 months thereafter, all
sales of Common Stock of the Company shall be made only in accordance with
limitations of Rule 144 applicable to affiliates' sales of restricted shares.
See "Underwriting."

In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated with an affiliate), who has
owned restricted shares of Common Stock beneficially for at least one year is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class or, if the common stock is quoted on the American Stock Exchange or
other national

37
<PAGE>

securities exchange or automated quotation system of a registered securities
association, the average weekly trading volume during the four calendar weeks
preceding the sale. A person who has not been an affiliate of the Company for a
least three months immediately preceding the sale and who has beneficially
owned shares of Common Stock for at least two years is entitled to sell such
shares under Rule 144 without regard to any of the limitations described above.

Prior to this offering, there has been no market for the Class A Common
Stock or Warrants and no prediction can be made as to the effect, if any, that
public sales of shares of Class A Common Stock or the availability of such
shares for sale will have on the market prices of the Class A Common Stock and
the Warrants prevailing from time to time. Nevertheless, the possibility that
substantial amounts of Class A Common Stock may be sold in the public market
may adversely affect prevailing market prices for the Class A Common Stock and
the Warrants and could impair the Company's ability in the future to raise
additional capital through the sale of its equity securities.

38
<PAGE>

UNDERWRITING

Paragon Capital Corporation (the "Underwriter") has agreed, subject to the
terms and conditions contained in the Underwriting Agreement, to purchase the
1,550,000 shares of Class A Common Stock and 775,000 Warrants offered hereby
from the Company. The Underwriter is committed to purchase and pay for all of
the shares of Class A Common Stock and Warrants offered hereby if any of such
securities are purchased. The shares of Class A Common Stock and Warrants are
being offered by the Underwriter, subject to prior sale, when, as and if
delivered to and accepted by the Underwriter and subject to approval of certain
legal matters by counsel and to certain other conditions.

The Underwriter has advised the Company that it proposes to offer the
shares of Class A Common Stock and Warrants to the public at the public
offering prices set forth on the cover page of this Prospectus. The Underwriter
may allow to certain dealers who are members of the National Association of
Securities Dealers, Inc. (the "NASD") concessions, not in excess of $.2142 per
share of Class A Common Stock and $.0036 per Warrant, of which not in excess of
$.1071 per share of Class A Common Stock and $.0018 per Warrant may be
reallowed to other dealers who are members of the NASD.

The Company has granted to the Underwriter an option, exercisable for 45
days from the date of this Prospectus, to purchase up to 116,250 additional
Warrants and Mr. Uziel Frydman has granted to the Underwriter an option,
exercisable for 45 days from the date of this Prospectus, to purchase up to
232,500 shares of Class A Common Stock at the public offering prices set forth
on the cover page of this Prospectus, less the underwriting discounts and
commissions. The Underwriter may exercise these options in whole or, from time
to time, in part, solely for the purpose of covering over-allotments, if any,
made in connection with the sale of the shares of Class A Common Stock and/or
Warrants offered hereby.

The Company has agreed to pay the Underwriter a nonaccountable expense
allowance of 3% of the gross proceeds of this offering, of which $50,000 has
been paid as of the date of this Prospectus. The Company has also agreed to pay
all expenses in connection with qualifying the shares of Class A Common Stock
and Warrants offered hereby for sale under the laws of such states as the
Underwriter may designate, including expenses of counsel retained for such
purpose by the Underwriter.

The Company has agreed to sell to the Underwriter and its designees for an
aggregate of $100, warrants (the "Underwriter's Warrants") to purchase up to
155,000 shares of Class A Common Stock at an exercise price of $9.22 per share
(155% of the public offering price per share) and up to 77,500 Warrants (each
exercisable to purchase one share of Class A Common Stock at a price of $7.50
per share) at an exercise price of $.155 per Warrant (155% of the public
offering price per Warrant). The Underwriter's Warrants may not be sold,
transferred, assigned or hypothecated for one year from the date of this
Prospectus, except to the officers and partners of the Underwriter and members
of the selling group and are exercisable at any time and from time to time, in
whole or in part, during the five-year period commencing on the date of this
Prospectus (the "Warrant Exercise Term"). During the Warrant Exercise Term, the
holders of the Underwriter's Warrants are given, at nominal cost, the
opportunity to profit from a rise in the market price of the Class A Common
Stock. To the extent that the Underwriter's Warrants are exercised, dilution to
the interests of the Company's shareholders will occur. Further, the terms upon
which the Company will be able to obtain additional equity capital may be
adversely affected since the holders of the Underwriter's Warrants can be
expected to exercise them at a time when the Company would, in all likelihood,
be able to obtain any needed capital on terms more favorable to the Company
than those provided in the Underwriter's Warrants. Any profit realized by the
Underwriter on the sale of the Underwriter's Warrants, the underlying shares of
Class A Common Stock or the underlying warrants, or the shares of Class A
Common Stock issuable upon exercise of such underlying warrants may be deemed
additional underwriting compensation. The Company has agreed, at the request of
the holders of a majority of the Underwriter's Warrants, at the Company's
expense, to register the Underwriter's Warrants, the shares of Class A Common
Stock and warrants underlying the Underwriter's Warrants, and the shares of
Class A Common Stock issuable upon exercise of the underlying warrants under
the Securities Act on one occasion during the Warrant Exercise Term and to
include the Underwriter's Warrants and all such underlying securities in any
appropriate registration statement which is filed by the Company during the
seven years following the date of this Prospectus.

39
<PAGE>

The Company has also agreed, for a period of three years from the date of
this Prospectus, if so requested by the Underwriter, to nominate and use its
best efforts to elect a designee of the Underwriter as a director of the
Company, or, at the Underwriter's option, as a non-voting advisor to the
Company's Board of Directors. The Company's officers, directors and
shareholders have agreed to vote their shares of Class A Common Stock in favor
of such designee. The Underwriter has not yet exercised its right to designate
such a person.

In addition, the Company has agreed to enter into a consulting agreement
to retain the Underwriter as a financial consultant for a period of two years
from the consummation of this offering at an annual fee of $25,000 per year,
payable in advance upon consummation of this offering. The consulting agreement
will not require the consultant to devote a specific amount of time to the
performance of its duties thereunder. In the event that the Underwriter
originates a financing or a merger, acquisition, joint venture or other
transaction to which the Company is a party, the Underwriter will be entitled
to receive a finder's fee in consideration for origination of such transaction.

The Company has agreed, in connection with the exercise of the Warrants
pursuant to solicitation (commencing one year from the date of this
Prospectus), to pay to the Underwriter a fee of 5% of the exercise price for
each Warrant exercised; provided, however, that the Underwriter will not be
entitled to receive such compensation in Warrant exercise transactions in which
(i) the market price of Class A Common Stock at the time of exercise is lower
than the exercise price of the Warrants; (ii) the Warrants are held in any
discretionary account; (iii) disclosure of compensation arrangements is not
made, in addition to the disclosure provided in this Prospectus, in documents
provided to holders of Warrants at the time of exercise; (iv) the exercise of
the Warrants is unsolicited by the Underwriter; or (v) the solicitation of
exercise of the Warrants was in violation of Regulation M.

The Company and all of its current shareholders, officers and directors
have agreed not to sell or otherwise dispose of any securities of the Company
beneficially owned by them for a period of 18 months from the date of this
Prospectus, without the prior written consent of the Underwriter. In addition,
the current shareholders, officers and directors have agreed that for an
additional period of 12 months thereafter, all sales of Common Stock of the
Company shall be made only in accordance with limitations of Rule 144
applicable to affiliates' sales of restricted shares, unless waived by the
Underwriter.

The Underwriter has advised the Company that it does not expect sales made
to discretionary accounts to exceed 1% of the securities offered hereby.

The Company has agreed to indemnify the Underwriter against certain civil
liabilities, including liabilities under the Securities Act.

Prior to this offering, there has been no public trading market for the
Class A Common Stock or Warrants. Consequently, the initial public offering
price of the Class A Common Stock and Warrants and the exercise price of the
Warrants have been determined by negotiations between the Company and the
Underwriter. Among the factors considered in determining these prices were the
Company's financial condition and prospects, market prices of similar
securities of comparable publicly-traded companies and the general condition of
the securities market.

In order to facilitate the offering, the Underwriter may engage in
transactions that stabilize, maintain or otherwise affect the prices of the
Class A Common Stock and Warrants. Specifically, the Underwriter may over-allot
in connection with the offering, creating a short position in the Class A
Common Stock and Warrants for its own account. In addition, to cover
over-allotments or to stabilize the price of the Class A Common Stock and
Warrants, the Underwriter may bid for, and purchase shares of Class A Common
Stock and Warrants in the open market. The Underwriter may also reclaim selling
concessions allowed to a dealer for distributing the Common Stock and Warrants
in the offering, if the Underwriter repurchases previously distributed Class A
Common Stock and Warrants in transactions to cover short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Class A Common Stock and Warrants above
independent market levels. The Underwriter is not required to engage in these
activities, and may end any of these activities at any time.

40
<PAGE>

LEGAL MATTERS

The legality of the securities offered by this Prospectus will be passed
upon for the Company by Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.,
Miami, Florida. Tenzer Greenblatt LLP, New York, New York, has acted as counsel
to the Underwriter in connection with this offering.

EXPERTS

The financial statements of the Company included in this Prospectus have
been audited by BDO Seidman, LLP independent auditors as stated in their report
appearing herein and have been included herein in reliance upon the report of
said firm given upon their authority as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Commission a registration statement on Form
SB-2 (the "Registration Statement") under the Securities Act with respect to
the securities offered by this Prospectus. This Prospectus, filed as a part of
such Registration Statement, does not contain all of the information set forth
in, or annexed as exhibits to, the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and this
offering, reference is made to the Registration Statement, including the
exhibits filed therewith, which may be inspected without charge at the Office
of the Commission, 450 Fifth Street, N.W., Washington D.C. 20549; and at the
following regional offices: Midwest Regional Office, Northwestern Atrium
Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661-2511, and the
Northeast Regional Office, 7 World Trade Center, 13th Floor, New York, New York
10048. Copies of the Registration Statement may be obtained from the Commission
at its principal office upon payment of prescribed fees. Statements contained
in this Prospectus as to the contents of any contract or other document are not
necessarily complete and, where the contract or other document has been filed
as an exhibit to the Registration Statement, each statement is qualified in all
respects by reference to the applicable document filed with the Commission. The
Commission maintains an Internet web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. The address of that site is
http://www.sec.gov.

Upon consummation of this offering, the Company will become subject to the
reporting requirements of the Exchange Act and, in accordance therewith, will
file reports, proxy statements and other information with the Securities and
Exchange Commission. The Company intends to furnish its shareholders with
annual reports containing audited financial statements and such other periodic
reports as the Company deems appropriate or as may be required by law.

41
<PAGE>

SHERWOOD BRANDS, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1997 AND 1996
AND THE SIX MONTHS ENDED JANUARY 31, 1998 AND 1997

Independent Auditors' Report ............................. F-2
Consolidated Financial Statements
Consolidated balance sheets ............................. F-3
Consolidated statements of operations ................... F-4
Consolidated statements of stockholder's equity ......... F-5
Consolidated statements of cash flows ................... F-6
Summary of accounting policies .......................... F-7 to F-8
Notes to consolidated financial statements .............. F-9 to F-15

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

Shareholder
Sherwood Brands, Inc.
and Subsidiaries
Rockville, Maryland

We have audited the accompanying consolidated balance sheets of Sherwood
Brands, Inc. and Subsidiaries as of July 31, 1997 and 1996 and the related
consolidated statements of operations, stockholder's equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sherwood Brands,
Inc. and Subsidiaries at July 31, 1997 and 1996 and the results of its
operations and cash flows for the years then ended, in conformity with
generally accepted accounting principles.

BDO Seidman, LLP

Washington, D.C.
October 7, 1997,
Except for Note 18,
the date of which
is December 12, 1997

F-2
<PAGE>

SHERWOOD BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
July 31, January 31,
------------------------------- --------------
1996 1997 1998
-------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents (Note 6) ....................... $ 869,924 $ 614,109 $ 625,363
Accounts receivable, less allowance of $21,900 and
$23,400 and $27,800 (Note 6) ........................... 2,109,995 2,101,950 2,127,186
Insurance settlement receivable (Note 4) ................. 262,574 262,574 29,383
Inventory (Notes 3 and 6) ................................ 2,892,510 3,412,962 4,080,698
Other current assets ..................................... 98 46,062 86,369
Deferred taxes on income (Note 10) ....................... -- 170,700 170,700
----------- ----------- -----------
Total current assets ................................... 6,135,101 6,608,357 7,119,699
----------- ----------- -----------
Net property and equipment (Notes 5, 7, 8 and 9) .......... 1,644,322 2,335,556 2,481,356
----------- ----------- -----------
Other Assets .............................................. 22,738 19,447 84,889
----------- ----------- -----------
TOTAL ASSETS .............................................. $ 7,802,161 $ 8,963,360 $ 9,685,944
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Line of credit (Note 6) .................................. $ 744,589 $ 1,644,589 $ 1,419,589
Current portion of long-term debt (Note 8) ............... 15,000 145,000 145,000
Current portion of subordinated debt (Note 9) ............ 46,447 85,757 80,877
Accounts payable (Note 2) ................................ 2,796,169 2,124,764 2,021,430
Accrued expenses ......................................... 100,233 198,012 340,499
Income taxes payable ..................................... 36,000 190,500 386,267
Deferred taxes on income (Note 10) ....................... 88,000 -- --
----------- ----------- -----------
Total current liabilities .............................. 3,826,438 4,388,622 4,393,662
----------- ----------- -----------
Long-term debt (Note 8) ................................... 920,000 1,355,000 1,355,000
Subordinated debt (Note 9) ................................ 601,242 515,485 473,607
Deferred taxes on income (Note 10) ........................ 1,000 108,600 108,600
Due to related parties (Note 11) .......................... 1,064,288 903,180 842,202
----------- ----------- -----------
TOTAL LIABILITIES ......................................... 6,412,968 7,270,887 7,173,071
----------- ----------- -----------
Commitments (Note 12)
Stockholder's equity (Notes 1 and 18)
Preferred Stock, $.01 par value, 5,000,000 shares autho-
rized; no shares issued or outstanding ................. -- -- --
Common Stock, Class A, $.01 par value, 30,000,000
shares authorized, 1,150,000 shares issued and out-
standing ............................................... 11,500 11,500 11,500
Common Stock, Class B, $.01 par value, 5,000,000
shares authorized, 1,000,000 shares issued and out-
standing ............................................... 10,000 10,000 10,000
Additional paid-in capital ............................... 247,000 247,000 247,000
Retained earnings ........................................ 1,120,693 1,423,973 2,244,373
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY ............................... 1,389,193 1,692,473 2,512,873
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S
EQUITY ................................................. $ 7,802,161 $ 8,963,360 $ 9,685,944
=========== =========== ===========

</TABLE>

See accompanying summary of accounting polices and notes to consolidated
financial statements.

F-3
<PAGE>

SHERWOOD BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Six months
Years ended July 31, ended January 31,
------------------------------- -----------------------------
1996 1997 1997 1998
-------------- -------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Net sales ........................................ $14,638,496 $17,424,243 $9,573,540 $9,720,784
----------- ----------- ---------- ----------
Cost of sales .................................... 10,864,782 12,570,606 7,136,155 6,515,462
----------- ----------- ---------- ----------
Gross profit ..................................... 3,773,714 4,853,637 2,437,385 3,205,322
----------- ----------- ---------- ----------
Selling, general and administrative expenses ..... 2,342,330 2,680,897 1,173,426 1,416,816
Pre-production costs (Note 16) ................... 212,089 769,585 616,015 54,125
Salaries and related expenses .................... 937,893 1,180,522 460,629 521,041
----------- ----------- ---------- ----------
Total operating expenses ......................... 3,492,312 4,631,004 2,250,070 1,991,982
----------- ----------- ---------- ----------
Income from operations ........................... 281,402 222,633 187,315 1,213,340
----------- ----------- ---------- ----------
Other income (expense)
Interest income ............................... 26,023 26,073 21,375 8,802
Interest expense .............................. (189,961) (273,511) (126,555) (122,424)
Insurance claim, net (Note 4) ................. 223,605 364,028 324,223 102,223
Other (expense) income ........................ 1,336 (12,843) 13,863 4,726
----------- ----------- ---------- ----------
Total other income (expense) .................. 61,003 103,747 232,906 (6,673)
----------- ----------- ---------- ----------
Income before provision for taxes on
income ....................................... 342,405 326,380 420,221 1,206,667
Provision for taxes on income (Note 10) ....... 71,700 23,100 134,471 386,267
----------- ----------- ---------- ----------
Net income .................................... $ 270,705 $ 303,280 $ 285,750 $ 820,400
----------- ----------- ---------- ----------
Basic and diluted earnings per share .......... $ .13 $ .14 $ .13 $ .38
----------- ----------- ---------- ----------
Weighted average common shares out-
standing ..................................... 2,150,000 2,150,000 2,150,000 2,150,000
=========== =========== ========== ==========
</TABLE>

See accompanying summary of accounting policies and notes to consolidated
financial statements.

F-4
<PAGE>

SHERWOOD BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>
Common Stock
------------------------------------------------
Class A Class B
----------------------- -----------------------
Shares Amount Shares Amount
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Balance, at August 1, 1996 ............ 1,150,000 $11,500 1,000,000 $10,000
--------- ------- --------- -------
Net income ............................ -- -- -- --
--------- ------- --------- -------
Balance, at July 31, 1996 ............. 1,150,000 11,500 1,000,000 10,000
--------- ------- --------- -------
Net income ............................ -- -- -- --
--------- ------- --------- -------
Balance, at July 31, 1997 ............. 1,150,000 11,500 1,000,000 10,000
--------- ------- --------- -------
Net income, six months ended
January 31, 1998 (unaudited) ......... -- -- -- --
--------- ------- --------- -------
Balance, at January 31, 1998
(unaudited) .......................... 1,150,000 $11,500 1,000,000 $10,000
========= ======= ========= =======

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Additional
Paid-in Retained
Capital Earnings Total
----------- ------------ -------------
<S> <C> <C> <C>
Balance, at August 1, 1996 ............ $247,000 $ 849,988 $1,118,488
-------- ---------- ----------
Net income ............................ -- 270,705 270,705
-------- ---------- ----------
Balance, at July 31, 1996 ............. 247,000 1,120,693 1,389,193
-------- ---------- ----------
Net income ............................ -- 303,280 303,280
-------- ---------- ----------
Balance, at July 31, 1997 ............. 247,000 1,423,973 1,692,473
-------- ---------- ----------
Net income, six months ended
January 31, 1998 (unaudited) ......... -- 820,400 820,400
-------- ---------- ----------
Balance, at January 31, 1998
(unaudited) .......................... $247,000 $2,244,373 $2,512,873
======== ========== ==========
</TABLE>

F-5
<PAGE>

SHERWOOD BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Six Months
Years Ended July 31, Ended January 31,
--------------------------------- -------------------------------
1996 1997 1997 1998
--------------- --------------- ------------- ---------------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) ................................ $ 270,705 $ 303,280 $ 285,750 $ 820,400
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities
Depreciation expense .......................... 55,338 121,557 62,660 55,266
Deferred income taxes ......................... 146,700 (151,100) -- --
Unrealized (gain) loss on foreign
currency exchange ........................... 22,077 (84,519) (84,850) (7,590)
Loss on disposal of fixed asset ............... -- 3,405 -- --
Provision for inventory allowance ............. -- (18,192) -- --
Provision for doubtful accounts ............... 33,933 72,606 (891) 4,400
Write-off of accounts receivable .............. (31,015) (71,084) -- --
(Increase) decrease in assets
Accounts receivable ........................... (203,071) 6,523 253,290 (29,636)
Inventory ..................................... 730,122 (502,260) (850,358) (667,736)
Insurance settlement receivable ............... (262,574) -- (364,026) 233,191
Other current assets .......................... 42,289 (45,964) (5,472) (40,307)
Other assets .................................. (14,178) 3,291 -- (65,442)
Increase (decrease) in liabilities
Accounts payable .............................. (749,677) (586,886) 121,761 (95,744)
Accrued expenses .............................. 25,419 97,779 243,842 142,487
Accrued interest to related parties ........... 33,302 38,892
Income taxes payable .......................... 36,000 154,500 98,471 195,767
------------ ------------ ---------- -----------
Net cash provided by (used in) operating
activities ....................................... 135,370 (658,172) (239,823) 545,056
------------ ------------ ---------- -----------
Cash flows from investing activities
Capital expenditures ............................. (1,649,386) (816,196) (932,533) (201,066)
------------ ------------ ---------- -----------
Net cash used in investing activities ............. (1,649,386) (816,196) (932,533) (201,066)
------------ ------------ ---------- -----------
Cash flows from financing activities
Borrowings on line of credit ..................... 4,083,986 2,300,000 1,000,000 --
Repayments on line of credit ..................... (4,103,397) (1,400,000) (800,000) (225,000)
Proceeds from issuance of long-term debt ......... 1,585,000 580,000 580,000 --
Payments on debt ................................. (2,311) (61,447) (14,152) (46,758)
Borrowings from related parties .................. 200,000 -- 22,846 --
Payments to related parties ...................... -- (200,000) -- (60,978)
------------ ------------ ---------- -----------
Net cash provided by (used in) financing
activities ..................................... $ 1,763,278 $ 1,218,553 $ 788,694 $ (332,736)
------------ ------------ ---------- -----------
Net increase (decrease) in cash and cash
equivalents .................................... 249,262 (255,815) (383,662) 11,254
Cash and cash equivalents, at beginning
of period ...................................... 620,662 869,924 869,924 614,109
------------ ------------ ---------- -----------
Cash and cash equivalents, at end of period . $ 869,924 $ 614,109 $ 486,262 $ 625,363
============ ============ ========== ===========

</TABLE>

See accompanying summary of accounting policies and notes to consolidated
financial statements.

F-6
<PAGE>

SHERWOOD BRANDS, INC. AND SUBSIDIARIES

SUMMARY OF ACCOUNTING POLICIES

(Information as of January 31, 1998 and for the six
months ended January 31, 1997 and 1998 is unaudited)

Basis of Presentation

The consolidated financial statements include the accounts of Sherwood
Brands, Inc. and its wholly-owned subsidiaries, Sherwood Brands, LLC and
Sherwood Brands Overseas, Inc. ("Overseas") (collectively, the "Company"). All
material inter-company transactions and balances have been eliminated in
consolidation. Subsequent to July 31, 1997, Sherwood Foods, Inc. changed its
name to Sherwood Brands, Inc. (See Note 1).

Organization and Description of Business

Sherwood Brands, Inc. (formerly Sherwood Foods, Inc.) was incorporated in
December 1982 in the state of North Carolina. Sherwood Brands, Inc.
manufactures its own line of confectionery products, Demitasse(R) biscuits and
is developing and installing a new product line of candies. Sherwood Brands,
Inc. was inactive from 1987 until April 1996, when it acquired the building and
equipment for its manufacturing plant.

Sherwood Brands, Inc. is the owner of Sherwood Brands, LLC, a Maryland
limited liability company. Sherwood Brands, LLC markets and distributes its own
lines of confectionery products in the United States.

Overseas (a wholly-owned subsidiary of Sherwood Brands, LLC) was
incorporated in July 1993 in the Bahamas to market and distribute the Sherwood
lines of confectionery products internationally. Sherwood Brands, LLC and
Overseas purchase confectionery products from Sherwood Brands, Inc. as well as
third party suppliers.

Interim Financial Information

The financial information as of January 31, 1998 and for the six months
ended January 31, 1997 and 1998 is unaudited. In the opinion of management,
such information contains all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for such periods.
Results for interim periods are not necessarily indicative of results to be
expected for an entire year.

Cash Equivalents

For purposes of the statement of cash flows, the Company considers highly
liquid investments with maturities at original date of acquisition of three
months or less to be cash equivalents.

Inventory

Inventory consists of raw materials and finished goods and is stated at
the lower of cost or market. Cost is determined by the FIFO (first-in,
first-out) method.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using
accelerated and straight-line methods over the estimated useful lives of the
individual assets which range from five to twenty years for machinery and
equipment to thirty years for the building.

Revenue Recognition

Sales are recognized upon shipment of products.

F-7
<PAGE>

SHERWOOD BRANDS, INC. AND SUBSIDIARIES

SUMMARY OF ACCOUNTING POLICIES -- (Continued)

(Information as of January 31, 1998 and for the six
months ended January 31, 1997 and 1998 is unaudited)

Income Taxes

Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."

Use of Estimates

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

Financial Instruments

Financial instruments of the Company include long-term debt. Based upon
current borrowing rates available to the Company, estimated fair values of
these financial instruments approximate their recorded amounts.

Recent Accounting Pronouncements

In October 1995, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"). SFAS 123 will begin to affect the
Company in fiscal 1998 with the establishment of the 1998 Stock Option Plan.
The Company will adopt only the disclosure provisions of SFAS 123 for stock
issued to employees and will account for such stock-based compensation using
the intrinsic value method set forth in APB Opinion 25.

Effective January 31, 1998, the Company has adopted the provisions of
statement of financial accounting standards No. 128, Earnings per share.
Statement No. 128 replaces the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options and convertible securities. Diluted earnings per share is computed
similarly to fully diluted earnings per share. The companies calculation for
basic and fully diluted earnings per share is the same as there are no options
or convertible securities outstanding. All earnings per share amounts for all
periods presented have been restated to conform to the requirements of
Statement No. 128.

Basic and diluted earnings per share is computed based on the weighted
average number of common shares outstanding, after giving effect to the stock
split as described in Note 18.

Supplementary proforma earnings per share for the years ended July 31,
1996 and 1997 and the six months ended January 31, 1997 and 1998 of $.11, $.12,
$.12 and $.34, respectively, is based upon the weighted average number of
shares of common stock used in the calculation of earnings per share increased
by the sale of 284,404 shares assuming an initial offering price of $5.95, the
proceeds of which would be necessary to reduce borrowings of $1,692,202.

F-8
<PAGE>

SHERWOOD BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information as of January 31, 1998 and for the six
months ended January 31, 1997 and 1998 is unaudited)

1. Merger

Effective July 25, 1997, Sherwood Brands, Inc. merged into Sherwood Foods,
Inc. with Sherwood Foods, Inc. being the surviving corporation. Sherwood Foods,
Inc. subsequently changed its name to Sherwood Brands, Inc. Since both
corporations were owned 100% by the sole shareholder, the transaction is
treated like a pooling and all accounts have been combined retroactively for
all periods presented. Sherwood Brands, Inc., previously a December 31 year
end, changed its fiscal year end to July 31.

2. Foreign Currency Transactions

The Company purchases products from foreign manufacturers under terms that
provide for the payment of goods in foreign currency approximately 60 to 90
days from the invoice date. The goods are recorded at cost in equivalent United
States dollars at the exchange rate in effect on the invoice date. The
difference between the recorded cost and the amount required for payment is
reflected as a realized foreign currency transaction gain or loss. Based on
exchange rates in effect at July 31, 1996 and 1997 and January 31, 1997 and
1998, a provision for unrealized foreign currency transaction loss (gain) of
$22,077, ($84,519), $(84,850) and $(7,590), respectively, on the future payment
of open invoices is included in the financial statements as cost of goods sold.

3. Inventory

Inventory consists of the following:

<TABLE>
<CAPTION>
July 31, January 31,
------------------------------- --------------
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Raw materials ............ $ -- $ 184,921 $ 290,452
Work in progress ......... -- -- 12,350
Finished goods ........... 2,892,510 3,228,041 3,777,896
----------- ----------- -----------
$ 2,892,510 $ 3,412,962 $ 4,080,698
=========== =========== ===========
</TABLE>

4. Insurance Settlement Receivable

In 1991, the Company filed suit against its insurance company for
reimbursement of legal costs related to a vendor dispute. In 1996 the Company
recorded a receivable of $262,574 in anticipation of settlement. In February
1997, the Company was awarded a partial payment from the insurance company for
$464,026, net of approximately $100,000 in legal fees, per the terms of the
settlement agreement.

The Company was further involved in a dispute with the insurance company
relating to reimbursement of additional legal costs. During the six month
period ended January 31, 1998, the Company has received the majority of the
amount which was previously recorded from the insurance company.

5. Property and Equipment

Property and equipment consists of the following:

<TABLE>
<CAPTION>
July 31, January 31,
--------------------------------- ---------------
1996 1997 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Land ............................. $ 65,000 $ 65,000 $ 65,000
Building ......................... 635,000 635,000 635,000
Machinery and equipment .......... 1,013,340 1,826,131 2,027,197
Furniture and fixtures ........... 13,933 13,933 13,933
Vehicles ......................... 139,564 139,564 139,564
----------- ----------- -----------
Accumulated depreciation ......... (222,515) (344,072) (399,338)
----------- ----------- -----------
Total ............................ $ 1,644,322 $ 2,335,556 $ 2,481,356
=========== =========== ===========
</TABLE>

F-9
<PAGE>

SHERWOOD BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(Information as of January 31, 1998 and for the six
months ended January 31, 1997 and 1998 is unaudited)

Depreciation expense for the years ended July 31, 1996 and 1997 and the
six months ended January 31, 1997 and 1998 was $55,338, $121,557, $62,660 and
$55,266, respectively.

6. Line of Credit

Sherwood Brands, LLC has a $4,000,000 line of credit available for
issuance of letters of credit, of which up to $2,000,000 is available for cash
draws to finance inventory and accounts receivable. Interest is payable monthly
at the prime rate (8.5% at July 31, 1997 and January 31, 1998). During July 31,
1996 and 1997, and January 31, 1998, Sherwood Brands, LLC incurred and paid
approximately $88,000, $92,000 and $37,000 of interest expense, respectively.
The balance outstanding on the line of credit is secured by Sherwood Brands,
LLC's cash and cash equivalents, receivables and inventory, and is also
guaranteed by Sherwood Brands, LLC's sole stockholder. Outstanding letters of
credit approximated $1,397,000 and $1,251,000 at July 31, 1997 and January 31,
1998, respectively.

Average short-term borrowings and the related interest rates are as
follows:

<TABLE>
<CAPTION>
Six
months
Years ended ended
July 31, January 31,
--------------------------------- ----------------
1996 1997 1998
-------------- ---------------- ----------------
<S> <C> <C> <C>
Borrowings under revolving line of credit ........... $ 744,589 $ 1,644,589 $ 1,419,589
Weighted average interest rate ...................... 8.5% 8.5% 8.5%
Maximum month-end balance during the period ......... $ 1,390,413 $ 1,644,589 $ 1,419,589
Average balance during the period ................... $ 708,416 $ 1,091,849 $ 1,190,422
</TABLE>

7. Letters of Credit

Sherwood Brands, Inc. has available an irrevocable letter of credit of
$935,000 with a bank, to be used for payments of principal portions of Virginia
Revenue Bonds in the event of Sherwood Brands, Inc.'s default on payment. The
letter is collateralized by a first deed of trust and security interest in
Sherwood Brands, Inc.'s land, building and equipment. The letter expires in
2006. The letter of credit agreement has a debt to worth and a debt coverage
requirement as well as a limitation on dividends paid and on borrowings, as
well as a limitation on the requirement of subordinated debt. Sherwood Brands,
Inc. was in compliance with all covenants as of July 31, 1997.

Sherwood Brands, Inc. also has available another irrevocable letter of
credit of $580,000 with a bank, to be used for payment of principal portions of
Virginia Revenue Bonds in the event of Sherwood Brands, Inc.'s default on
payment. The letter is collateralized by a first deed of trust in Sherwood
Brands, Inc.'s commercial property as well as a lien on certain assets of
Sherwood Brands, Inc. The letter expires in 2002.

F-10
<PAGE>

SHERWOOD BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(Information as of January 31, 1998 and for the six
months ended January 31, 1997 and 1998 is unaudited)

8. Long-term Debt

Long term debt consists of the following:

<TABLE>
<CAPTION>
July 31, January 31,
----------------------------- --------------
1996 1997 1998
------------ -------------- --------------
<S> <C> <C> <C>
Mecklenberg County, Virginia Variable Rate Demand Rev-
enue Bonds issued on June 1, 1996; collateralized by an
irrevocable letter of credit (see Note 7); payable in vary-
ing annual amounts; to be redeemed in whole by June 1,
2006; interest at variable market tax exempt rates
(3.95% at July 31, 1997 and 3.625% at January 31,
1998) ..................................................... $ 935,000 $ 920,000 $ 920,000
Mecklenberg County, Virginia Revenue Bond issued on
May 15, 1997; collateralized by an irrevocable letter of
credit (See Note 7); payable in varying annual amounts;
to be redeemed in whole by May 15, 2002; interest at
variable market tax exempt rates (3.95% at July 31, 1997
and 3.625% at January 31, 1998). .......................... -- 580,000 580,000
--------- ----------- -----------
935,000 1,500,000 1,500,000
Less current maturities .................................... 15,000 145,000 145,000
--------- ----------- -----------
Long-term portion .......................................... $ 920,000 $ 1,355,000 $ 1,355,000
</TABLE>

Scheduled maturities of long-term debt are as follows:

July 31, 1997
- -------- --------------
1998 .................. $ 145,000
1999 .................. 175,000
2000 .................. 205,000
2001 .................. 210,000
2002 .................. 215,000
Thereafter ............ 550,000
-----------
$ 1,500,000
===========

F-11
<PAGE>

SHERWOOD BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(Information as of January 31, 1998 and for the six
months ended January 31, 1997 and 1998 is unaudited)

9. Subordinated Debt

Subordinated debt consists of the following:

<TABLE>
<CAPTION>
July 31, January 31,
--------------------------- ------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Mecklenberg County, Virginia Industrial Development
Authority note; collaterallized by second deed of trust on
land, building and equipment; payable in monthly
installments of $4,644, including interest of 7%, with a
final payment of $239,193 due in June 2001. .............. $ 397,689 $ 368,882 $ 352,992
Lake Country Development Corporation Note; collateral-
ized by second deed of trust on land, building and equip-
ment; payable in monthly installments of $5,480, includ-
ing interest of 5.25% beginning on April 1, 1997 and
payable in full on June 1, 2001. ......................... 250,000 232,360 201,492
--------- --------- ---------
647,689 601,242 554,484
Less current maturities ................................... 46,447 85,757 80,877
--------- --------- ---------
Long-term portion ......................................... $ 601,242 $ 515,485 $ 473,607
========= ========= =========
</TABLE>

Scheduled maturities of subordinated debt are as follows:

July 31, 1997
- ------------------- -----------
1998 ............ $ 85,757
1999 ............ 90,941
2000 ............ 96,444
2001 ............ 328,100
-----------
$ 601,242
===========

10. Income Taxes

The provision for income taxes in the statement of operations for the year
ended July 31, 1997 and 1996 is as follows:

July 31,
-----------------------------
1996 1997
-------------- ------------
Current tax provision
Federal ............................... $ (83,000) $ 162,600
State ................................. 8,000 11,600
---------- ----------
Total current ......................... (75,000) 174,200
---------- ----------
Deferred tax expense (credit) ......... 146,700 (151,100)
---------- ----------
Total taxes on income ................. $ 71,700 $ 23,100
========== ==========

F-12
<PAGE>

SHERWOOD BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(Information as of January 31, 1998 and for the six
months ended January 31, 1997 and 1998 is unaudited)

The following summary reconciles taxes at the federal statutory rate with
actual taxes:

<TABLE>
<CAPTION>
July 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
Income taxes at the statutory rate ............................... $ 116,000 $ 114,000
Increase (decrease) in taxes resulting from:
Effect of untaxed income from a foreign subsidiary ............... (64,000) (80,500)
State and local taxes, net of federal income tax benefit ......... 3,000 4,000
Other ............................................................ 16,700 (14,400)
--------- ---------
Total taxes on income ............................................ $ 71,700 $ 23,100
========= =========
</TABLE>

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The principal items
giving rise to the Company's net deferred tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
July 31,
-------------------------------
1996 1997
------------- ---------------
<S> <C> <C>
Deferred tax assets
Net operating loss ......................................... $ 71,000 $ 363,400
Officer salary payable ..................................... 5,000 14,600
Allowance for doubtful accounts ............................ 7,000 8,300
Inventory obsolescence reserve ............................. -- 6,400
---------- -----------
Total deferred tax assets ................................ 83,000 392,700
---------- -----------
Deferred tax liabilities
Anticipated legal settlement ............................... (89,000) (89,000)
Accumulated depreciation ................................... (1,000) (108,600)
Accounts receivable service costs .......................... -- (110,300)
Unrealized gain/loss of foreign exchange contracts ......... 7,000 (22,700)
Supplier credit receivable ................................. (31,000) --
Argentina duty receivable .................................. (58,000) --
---------- -----------
Total deferred tax liabilities ........................... (172,000) (330,600)
---------- -----------
Net deferred tax asset (liability) .......................... $ (89,000) $ 62,100
========== ===========
Net current deferred tax asset (liability) .................. $ (88,000) $ 170,700
Net long-term deferred tax liability ........................ $ (1,000) $ (108,600)
========== ===========
</TABLE>

At July 31, 1997, the Company has approximately $950,000 of net operating
loss carryforwards that expire in years through 2012.

The Company's estimated effective tax rate for the six months ended
January 31, 1998 was approximately 32%. This rate is lower than the Federal and
State statutory rates due to the untaxed income of the Company's foreign
subsidiary (Overseas).

11. Related Party Transactions

The Company's stockholder is a guarantor of the Company's line of credit
note payable and long-term debt.

The Company has a note payable to a related party in the amount of
$1,064,288, $903,180 and $842,202 at July 31, 1996 and 1997, and January 31,
1998, respectively. The note accrues interest at 9% per year and is due upon
demand, but not prior to March 1, 1999.

F-13
<PAGE>

SHERWOOD BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(Information as of January 31, 1998 and for the six
months ended January 31, 1997 and 1998 is unaudited)

12. Commitments

The Company occupies office space under a noncancelable operating lease
expiring in November 1998. The lease is subject to annual increases based upon
both certain allocated operating costs and increases in the Consumer Price
Index. Future minimum rental commitments under operating leases as of July 31,
1997 are as follows:

1998 ........... $ 42,549
1999 ........... 14,183
--------
$ 56,732
========

13. Employee Benefit Plans

Effective January 1, 1987, the Company established a profit-sharing plan
and a money purchase pension plan covering all full-time employees meeting the
minimum age and service requirements. Under the terms of the Money Purchase
Pension Plan, the Company contributed 5.7% of total wages in July 31, 1996 and
1997. Contributions to the Profit-Sharing Plan are at the discretion of the
Company and were 3% and 5% in July 31, 1996 and 1997, respectively. Total
expenses for the Money Purchase Pension Plan and the Profit-Sharing Plan were
$52,355 and $56,296, respectively, for the years ended July 31, 1996 and 1997
and $22,500 and $-0- for the six months ended January 31, 1997 and 1998,
respectively.

Effective August 1, 1997, the Company amended the Money Purchase Pension
Plan to a 401(k) and Profit Sharing Plan ("401(k) Plan"). The Money Purchase
Pension Plan was terminated and the assets were merged with the 401(k) Plan.
All participants in the Money Purchase Pension Plan were fully vested in the
401(k) Plan as of August 1, 1997.

14. Supplemental Cash Flows Disclosure

Cash paid for interest amounted to $230,310, $224,055, $122,973, and
$140,491 for the years ended July 31, 1996 and 1997 and the six months ended
January 31, 1997 and 1998, respectively.

Cash paid for income taxes amounted to $13,082, $19,622, $-0- and $167,007
for the years ended July 31, 1996 and 1997 and the six months ended January 31,
1997 and 1998, respectively.

15. Concentration of Credit Risk and Export Sales

The Company purchases some of its products from three main vendors in
Europe and South America. The Company has a variety of customers, including
mass merchandisers, drug stores and grocery stores throughout the United States
and abroad. For the years ended July 31, 1996 and 1997, and the six monts ended
January 31, 1998, one customer comprised 5.0%, 6.5%, and 8.0% of the Company's
total sales, respectively.

Export sales for the years ended July 31, 1996 and 1997 and the six months
ended January 31, 1997 and 1998 were $1,536,578, $1,874,875, $ 1,240,044 and
$1,155,463 respectively. The majority of export sales are made to Canada.

F-14
<PAGE>

SHERWOOD BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(Information as of January 31, 1998 and for the six
months ended January 31, 1997 and 1998 is unaudited)

16. Pre-Production Costs

During the years ended July 31, 1996 and 1997, and the six months ended
January 31, 1997 and 1998, Sherwood Foods, Inc. incurred certain costs relating
to the development of its production facilities for its Demitasse(R) and candy
product lines. The following pre-production costs for the years ended July 31,
1997 and 1996 and the six months ended January 31, 1997 and 1998 were charged
to operations when incurred and are included in operating expenses. These costs
consist of the following:

<TABLE>
<CAPTION>
Six months
Years ended ended
July 31, January 31,
--------------------------- --------------------------
1996 1997 1997 1998
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Parts and supplies ................. $ 1,517 $ 279,998 $ 264,130 $ 28,798
Assembly salaries .................. -- 166,386 72,488 20,474
Sub-contract labor ................. 54,748 140,119 58,028 --
Other .............................. 155,824 183,082 126,239 4,853
--------- --------- --------- --------
Total pre-production costs ......... $ 212,089 $ 769,585 $ 520,885 $ 54,125
========= ========= ========= ========
</TABLE>

17. Advertising Costs

Advertising costs, included in selling, general and administrative
expenses, are expensed as incurred and were $479,397, $450,446, $175,295 and
$175,367 for the years ended July 31, 1996 and 1997 and the six months ended
January 31, 1997 and 1998, respectively.

18. Subsequent Events

In October 1997, the shareholder authorized the filing of a registration
statement for an initial public offering of the Company's common stock as well
as changing the Company's name from Sherwood Foods, Inc. to Sherwood Brands,
Inc.

Effective December 30, 1997, the Company amended its articles of
incorporation to provide for a recapitalization of its common stock. As a
result of the recapitalization, two new classes of common stock were authorized
as follows: 30 million shares of Class A Common Stock, par value $.01, and 5
million shares of Class B Common Stock, par value $.01. The shares of Class A
Common Stock and Class B Common Stock are identical in all respects, except
that each share of Class B Common Stock entitles the holder to seven votes on
each matter submitted to a vote of the shareholders. In addition, the Company
is authorized to issue 5 million shares of Preferred stock.

As a result of the recapitalization, all 251 issued and outstanding shares
of common stock were recapitalized and converted into 1,150,000 validly issued,
fully paid and nonassessable shares of Class A Common Stock reflecting a
conversion ratio of 4581.67331:1 and 1,000,000 validly issued, fully paid and
nonassessable shares of Class B Common Stock, reflecting a conversion ratio of
3984.063745:1.

The change in the Company's common stock for the stock split and the
calculation of basic and diluted earnings per share have been retroactively
adjusted to give effect to the increases in authorized, issued and outstanding
shares of common stock for all periods presented.

In November 1997, the Company adopted the 1998 Stock Option Plan (the
"Plan"). Under the Plan, the Company may grant qualified and nonqualified stock
options to selected employees, consultants and directors. The Company has
reserved 350,000 shares of common stock for issuance under the Plan. As of
January 31, 1998, no options have been issued.

F-15
<PAGE>

[Picture showing various company products]

<PAGE>

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No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus,
and, if given or made, such information or representation must not be relied
upon as having been authorized by the Company or the Underwriter. This
Prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, any security other than the securities offered by this Prospectus, or
an offer to sell or a solicitation of an offer to buy any securities by anyone
in any jurisdiction in which such offer or solicitation is not authorized or is
unlawful. The delivery of this Prospectus shall not, under any circumstances,
create any implication that the information contained herein is correct as of
any time subsequent to the date hereof.

-------------------
TABLE OF CONTENTS

Page
-----------
Prospectus Summary ....................... 3
Risk Factors ............................. 7
Use of Proceeds .......................... 14
Dilution ................................. 15
Dividend Policy .......................... 16
Capitalization ........................... 16
Selected Financial Data .................. 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................ 18
Business ................................. 24
Management ............................... 30
Summary Compensation Table ............... 31
Principal Shareholders ................... 34
Certain Transactions ..................... 35
Description of Securities ................ 35
Shares Eligible for Future Sale .......... 37
Underwriting ............................. 39
Legal Matters ............................ 41
Experts .................................. 41
Additional Information ................... 41
Index to Financial Statements ............ F-1

Until May 31, 1998, (25 days after the date of this Prospectus), all
dealers effecting transactions in the shares of Class A Common Stock or
Warrants offered hereby, whether or not participating in this distribution, may
be required to deliver a Prospectus. This is in addition to the obligation of
dealers to deliver a Prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
==============================================================================

<PAGE>
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Sherwood Brands, Inc.

[LOGO]

1,550,000 SHARES OF CLASS A
COMMON STOCK
AND
REDEEMABLE WARRANTS TO
PURCHASE
775,000 SHARES OF CLASS A
COMMON STOCK

-------------
PROSPECTUS
-------------

[GRAPHIC OMITTED]

May 6, 1998

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