<PAGE>
As filed with the Securities and Exchange Commission on March 27, 1998
Registration No. 333-44655
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 1 TO
Form SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SHERWOOD BRANDS, INC.
(Exact name of Registrant as Specified in its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
North Carolina 2060 56-1349259
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
6110 Executive Blvd.
Suite 1080
Rockville, Maryland 20852
(301) 881-9340
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal
Executive Offices)
---------------
Uziel Frydman
President and Chief Executive Officer
Sherwood Brands, Inc.
6110 Executive Blvd.
Suite 1080
Rockville, Maryland 20852
(301) 881-9340
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Copies of all communications to:
GARY EPSTEIN, ESQ. ROBERT J. MITTMAN, ESQ.
Greenberg Traurig Hoffman Tenzer Greenblatt LLP
Lipoff Rosen & Quentel, P.A. The Chrysler Building
1221 Brickell Avenue 405 Lexington Avenue
Miami, Florida 33131 New York, New York 10174-0208
Telephone: (305) 579-0500 Telephone: (212) 885-5000
Facsimile: (305) 579-0717 Facsimile: (212) 885-5001
Approximate date of proposed sale to the public: As soon as practicable after
this Registration Statement becomes effective. If this Form is filed to register
additional securities for an offering pursuant to Rule 462(b) under the
Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. If delivery of the prospectus is expected to be
made pursuant to Rule 434, please check the following box. |X|
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------------
Proposed
Proposed Maximum Maximum
Title of Each Class of Amount Offering Price Aggregate Amount of
Securities to be Registered to be Registered Per Security(1) Offering Price(1) Registration Fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock, par value $0.01 per share(2).... 1,782,500 $5.95 $10,605,875 $3,128.73
- ------------------------------------------------------------------------------------------------------------------------------------
Warrants, each to purchase one share of Class A 891,250 $ .10 $ 89,125 $26.29
Common Stock(2).......................................
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Common Stock, par value $0.01 per share,
issuable upon exercise of the Warrants(2)(3).......... 891,250 $7.50 $ 6,684,375 $1,971.89
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriter's Warrants(4)............................. 155,000 -- (5)
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Common Stock, par value $0.01 per share(6).... 155,000 $7.14 $ 1,106,700 $326.48
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriter's Option Warrants(7)...................... 77,500 $.12 $9,300 $2.74
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Common Stock, par value $0.01 per share(8).... 77,500 $7.50 $581,250 $171.47
- ------------------------------------------------------------------------------------------------------------------------------------
Total........................................................................................................... $5,627.60(9)
===============================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Assumes the Underwriter's over-allotment option to purchase up to 232,500
additional shares of Class A Common Stock and/or 116,250 Warrants is
exercised in full.
(3) Pursuant to Rule 416, there are also being registered such indeterminable
additional shares of Class A Common stock as may become issuable upon
exercise of the Warrants pursuant to anti-dilution provisions contained in
the Warrants.
(4) To be issued to the Underwriter, as set forth in the Prospectus comprising
a portion of this Registration Statement under the caption "Underwriting."
(5) Pursuant to Rule 457(g), no fee is being paid.
(6) Issuable upon exercise of the Underwriter's Warrants, together with such
indeterminate number of shares of Class A Common Stock as may be issuable
by reason of the anti-dilution provisions contained therein.
(7) Issuable upon exercise of the Underwriter's Warrants. (8) Issuable upon the
Underwriter's exercise of Option Warrants.
(9) Such registration fee was paid upon the original filing of the Registration
Statement on January 21, 1998.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
SHERWOOD BRANDS, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Form SB-2 Item Number and Caption Captions in Prospectus
- ---------------------------------------------------------- -----------------------------------------------------
<S> <C>
1. Front of Registration Statement and Outside Front Facing Page of Registration Statement; Cross
Cover Page of Prospectus Prospectus Reference Sheet; Outside Front Cover Page of
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of
Prospectus Prospectus
3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Risk Factors; Underwriting
6. Dilution Risk Factors; Dilution
7. Selling Security Holders *
8. Plan of Distribution Outside Front and Outside Back Cover Pages of
Prospectus; Underwriting
9. Legal Proceedings Business
10. Directors, Executive Officers, Promoters and Management
Control Persons
11. Security Ownership of Certain Beneficial Owners and Principal Shareholders
Management
12. Description of Securities Description of Securities
13. Interest of Named Experts and Counsel *
14. Disclosure of Commission Position on Management
Indemnification for Securities Act Liabilities
15. Organization Within Last Five Years *
16. Description of Business Prospectus Summary; Business
17. Management's Discussion and Analysis or Plan of Management's Discussion and Analysis of Financial
Operation Condition and Results of Operations
18. Description of Property Business
19. Certain Relationships and Related Transactions Certain Transactions
20. Market for Common Equity and Related Stockholder Outside Front Cover Page of Prospectus; Description
Matters of Securities; Shares Eligible for Future Sale
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Accountants on *
Accounting and Financial Disclosure
</TABLE>
* Not Applicable
- ---------------
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PRELIMINARY PROSPECTUS, DATED MARCH 27, 1998
SUBJECT TO COMPLETION
[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 , 1999 through and including ,
2003. The Warrants are redeemable by the Company at any time commencing , 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 Company has received approval to list the Class A Common Stock and
Warrants on the American Stock Exchange upon official notice of issuance 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.
<PAGE>
<TABLE>
<CAPTION>
==========================================================================================================================
Price Underwriting Proceeds
to Discounts and to
Public Commissions(1) Company(2)
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<S> <C> <C> <C>
Per Share.................................. $5.95 $.5355 $ 5.4145
-------------------------------------------------------------------------------------------------------------------------
Per Warrant................................ $ .10 $.009 $ .091
-------------------------------------------------------------------------------------------------------------------------
Total(3)................................... $9,300,000 $ 837,000 $ 8,463,000
==========================================================================================================================
</TABLE>
(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 , 1998.
PARAGON CAPITAL CORPORATION
The date of this Prospectus is , 1998
<PAGE>
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 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.
3
<PAGE>
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."
4
<PAGE>
<TABLE>
<CAPTION>
The Offering
<S> <C>
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 , 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........................... , 2003
Redemption................................ Redeemable by the Company, at any time commencing , 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."
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."
Proposed American Stock Exchange Class A Common Stock - "SHD"
symbols................................... Warrants - "SHDW"
</TABLE>
- -----------------
(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."
5
<PAGE>
(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.
6
<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,
------------------------------ -------------------------------
(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............. 281 222 187 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
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
</TABLE>
- ---------------------
(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."
7
<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 product purchases sold domestically, with the producers of COWS butter
toffee candies, RUGER wafers and chocolate products (four products in the
aggregate)
8
<PAGE>
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 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."
9
<PAGE>
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 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
10
<PAGE>
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, 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, 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
11
<PAGE>
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 Stockholders."
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 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."
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<PAGE>
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. It is currently anticipated that the Class A Common Stock and
Warrants will be 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 "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 , 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
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<PAGE>
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."
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<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
Application of Proceeds Dollar Amount Percentage 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 Conditions 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 - Advertising, Marketing and Promotion."
(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
15
<PAGE>
new or different business opportunities that may become 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.
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<PAGE>
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>
<CAPTION>
<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>
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 Average Price
Shares Purchased Consideration Paid Per Share
----------------------- --------------------------- -------------
Number Percent Amount Percent
------ ------- ------ -------
<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."
17
<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," "Description of Securities" and
"Underwriting."
18
<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............. 281 222 187 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
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
</TABLE>
(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."
19
<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.
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 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.
20
<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.
21
<PAGE>
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 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
22
<PAGE>
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 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
23
<PAGE>
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.
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 less
than 3% 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 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
24
<PAGE>
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 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.
25
<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 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
certain 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.
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.
26
<PAGE>
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 2,380 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% $15,991 100.0% $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.
The following is a brief description of the Company's products by
category:
Candy
COWS(TM): 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.
COWPOKES(TM) 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 BURST(TM) 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.
Cookies
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.
27
<PAGE>
Countdown to Christmas(TM) 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 COINS(TM) 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 LOVE(TM) 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 JOUR(TM) 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 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 COINS(TM) milk chocolates and SOUP DU
JOUR(TM) 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
28
<PAGE>
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 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.
29
<PAGE>
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 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.
30
<PAGE>
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 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.
31
<PAGE>
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.
32
<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 March 1998, Mr.
Sadauskas was self employed as an engineer consultant. From 1985 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, 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.
33
<PAGE>
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 Dominion Resources, Inc., a
public company traded on the New York Stock Exchange which is the holding
company for Virginia Power.
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 102,794
1996 101,642
1995
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.
34
<PAGE>
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 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.
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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.
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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
Name and Address(1) Beneficial Ownership(2) Before Offering After Offering
------------------- ----------------------- --------------- --------------
<S> <C> <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) ....................... 100.0% 58.1%
2,150,000
</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.
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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 July 31, 1998. 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 automatically convert
into one share of Class A Common Stock
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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 , 2002. The Warrants will be separately transferable immediately upon
issuance.
The Warrants are redeemable by the Company at any time commencing ,
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.
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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 AMEX or other national
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
40
<PAGE>
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.
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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 $ per share of Class A
Common Stock and $ per Warrant, of which not in excess of $ per share of Class A
Common Stock and $ 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 $8.03 per share
(135% 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 $.135 per Warrant (135% 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
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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.
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.
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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.
44
<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 ............................. 2
Consolidated Financial Statements
Consolidated balance sheets ............................. 3
Consolidated statements of operations ................... 4
Consolidated statements of stockholder's equity ......... 5
Consolidated statements of cash flows ................... 6
Summary of accounting policies .......................... 7-8
Notes to consolidated financial statements .............. 9-15
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 and retained earnings, 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
========= ======= ========= =======
<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
SUMMARY OF ACCOUNTING POLICIES -- (Continued)
(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
SUMMARY OF ACCOUNTING POLICIES -- (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
SUMMARY OF ACCOUNTING POLICIES -- (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
SUMMARY OF ACCOUNTING POLICIES -- (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
SUMMARY OF ACCOUNTING POLICIES -- (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
SUMMARY OF ACCOUNTING POLICIES -- (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
SUMMARY OF ACCOUNTING POLICIES -- (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 12, 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>
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.........................................................
RISK FACTORS...............................................................
USE OF PROCEEDS............................................................
DILUTION...................................................................
DIVIDEND POLICY............................................................
CAPITALIZATION.............................................................
SELECTED FINANCIAL DATA....................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.....................................
BUSINESS...................................................................
The Company................................................................
MANAGEMENT.................................................................
PRINCIPAL SHAREHOLDERS.....................................................
CERTAIN TRANSACTIONS.......................................................
DESCRIPTION OF SECURITIES..................................................
SHARES ELIGIBLE FOR FUTURE SALE............................................
UNDERWRITING...............................................................
LEGAL MATTERS..............................................................
EXPERTS....................................................................
ADDITIONAL INFORMATION.....................................................
Index to Financial Statements............................................. F-1
Until , 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>
================================================================================
Sherwood Brands, Inc.
[LOGO]
1,550,000 SHARES OF CLASS A
COMMON STOCK
AND
REDEEMABLE WARRANTS TO
PURCHASE
775,000 SHARES OF COMMON STOCK
_______________________
PROSPECTUS
_______________________
Paragon Capital Corporation
[Paragon Logo]
, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 55-2-02 of the North Carolina Business Corporation Act (the
"NCBCA") enables a North Carolina corporation in its articles of incorporation
to eliminate or limit, with certain exceptions, the personal liability of a
director for monetary damages for breach of duty as a director. No such
provision is effective to eliminate or limit a director's liability for (i) acts
or omissions that the director at the time of the breach knew or believed to be
clearly in conflict with the best interests of the corporation, (ii) improper
distributions described in Section 55-8-33 of the NCBCA, (iii) any transaction
from which the director derived an improper personal benefit, or (iv) acts or
omissions occurring prior to the date the exculpatory provision became
effective. The Registrant's Restated and Amended Articles of Incorporation limit
the personal liability of its directors to the fullest extent permitted by the
NCBCA. This provision does not prevent the Registrant or its shareholders from
seeking equitable remedies, such as injunctive relief or rescission. If
equitable remedies are found not to be available to shareholders in any
particular case, however, shareholders may not have any effective remedy against
actions taken by directors that constitute negligence or gross negligence.
Sections 55-8-50 through 55-8-58 of the NCBCA contain provisions
entitling the Registrant's directors and officers to indemnification from
judgments, settlements, penalties, fines, and reasonable expenses (including
attorney's fees) as the result of an action or proceeding in which they may be
involved by reason of having been a director or officer of the Registrant. The
Restated and Amended Articles of Incorporation also include provisions to the
effect that (subject to certain exceptions) the Registrant shall, to the maximum
extent permitted from time to time under the NCBCA, indemnify, and upon request
shall advance expenses to, any director or officer to the extent that such
indemnification and advancement of expenses is permitted under such law, as may
from time to time be in effect. In addition, the Registrant intends to enter
into indemnification agreements with its directors and officers prior to the
consummation of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to any charter provision, by-law, contract, arrangement,
statute or otherwise, the Registrant 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. See Item 28.
Additionally, Section 55-8-57 of the NCBCA authorizes a corporation to
purchase and maintain insurance on behalf of an individual who is or was a
director, officer, employee or agent of the corporation against certain
liabilities incurred by such persons, whether or not the corporation is
otherwise authorized by the NCBCA to indemnify such party. The Registrant's
directors and officers and the Underwriter, are currently covered under
directors' and officers' insurance policies maintained by the Registrant that
will indemnify such persons against certain liabilities arising from acts or
omissions in the discharge of their duties. Such insurance policies provide $2.5
million coverage for liabilities, including liabilities for alleged violation of
securities laws.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered (other than
underwriting discounts and commissions and the Underwriter's nonaccountable
expense allowance) are as follows:
Securities and Exchange Commission registration fee $5,619.37
NASD filing fee $5,000.00
AMEX listing fee $27,500
Underwriter's consulting fee $96,000.00
Printing and engraving expenses *
Legal fees and expenses *
Accounting fees and expenses *
Blue sky fees and expenses (including legal fees) *
Transfer agent, warrant agent and registrar fees and expenses *
Miscellaneous *
----------
Total *
==========
- --------
* To be filed by amendment.
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 27. EXHIBITS.
Exhibit
Number Description
- ------ -----------
1.1 Form of Underwriting Agreement.
3.1 Articles of Incorporation, as amended, of the Registrant.
3.2 Bylaws, as amended, of the Registrant.
4.1* Form of Registrant's Class A Common Stock Certificate
4.2* Form of Underwriter's Warrant Agreement, including Form of Warrant
Certificate.
4.3* Form of Public Warrant Agreement among the Registrant, Paragon Capital
Corporation, as Underwriter and Continental Stock Transfer & Trust
Company, as Warrant Agent.
4.4* Form of Registrant's Public Warrant Certificate
5.1* Opinion of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.
10.1 Amended and Restated Reimbursement Agreement between Central Fidelity
National Bank and the Registrant, dated as of May 1, 1997.
10.2 Loan Agreement between Industrial Development Authority of Mecklenburg
County, Virginia and the Registrant, Dated as of May 1, 1997.
10.3 Irrevocable Letter of Credit dated May 15, 1997 issued on behalf of the
Registrant to the Trustee for the holders of Industrial Revenue Bonds
(Series 1997) issued by the Industrial Development Authority of
Mecklenburg County, Virginia.
10.4 Amended and Restated Credit Line Deed of Trust and Security Agreement,
among the Registrant and Trustees, for the benefit of Central Fidelity
National Bank dated May 1, 1997.
10.5 Pledge and Security Agreement between the Registrant and Central
Fidelity National Bank, dated as of May 1, 1997.
10.6 Guaranty between Uziel Frydman, the Registrant and Central Fidelity
National Bank, dated as
of May 1, 1997.
10.7 Loan Agreement between Industrial Development Authority of Mecklenburg
County, Virginia and the Registrant, Dated as of June 1, 1996.
10.8 Irrevocable Letter of Credit dated June 20, 1996 issued on behalf of
the Registrant to the Trustee for the holders of Industrial Revenue
Bonds (Series 1996) issued by the Industrial Development Authority of
Mecklenburg County, Virginia.
10.9 Pledge and Security Agreement between the Registrant and Central
Fidelity National Bank, dated as of June 1, 1996.
10.10 Company Loan Agreement between the Industrial Development Authority of
Mecklenburg County, Virginia Loan Agreement through the Virginia Small
Business Financing Administration and the Registrant, dated as of June
20, 1996.
10.11 Revolving Loan Fund Agreement between the Registrant and Lake Country
Development Corporation, $250,000 Promissory Note to Lake Country
Development Corporation, Guaranty of Note by the Registrant and Uziel
Frydman, and Deed of Trust between the Registrant and Trustee for Lake
Country Development Corporation, all dated May 15, 1996.
10.12 Loan Agreement, Promissory Note, and Security Agreement between the
Registrant and First Union National Bank, all dated November 29, 1996,
and Guaranty between Uziel Frydman and First Union, dated November 29,
1996.
10.13 Promissory Note issued to Ilana Frydman by the Registrant, dated August
28, 1991.
10.14 Lease, as amended, for the Registrant's Rockville offices, executed
November 30, 1992.
10.15* 1998 Stock Option Plan.
10.16* Form of Employment Agreement between Registrant and Uziel Frydman,
dated , 1998.
10.17* Form of Employment Agreement between Registrant and Anat Schwartz,
dated , 1998.
10.18* Form of Employment Agreement between Registrant and Amir Frydman,
dated , 1998.
21.1 Subsidiaries of the Registrant.
23.1** Consent of BDO Seidman, LLP, Independent Certified Public Accountants.
23.2* Consent of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.
24.1 A power of attorney relating to the signing of amendments hereto is
incorporated in the signature pages of this Registration Statement.
27.1** Financial Data Schedule.
99.1** Consent of Jean E. Clary to be named in Registration Statement.
99.2** Consent of Zigmund Sadauskas to be named in Registration Statement.
- ------
* To be filed by amendment.
** Filed herewith.
II-2
<PAGE>
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the
Securities Act.
(ii)reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information set
forth in the Registration Statement;
(iii) include any additional or changed material information on the
plan of distribution;
(2) for determining liability under the Securities Act, treat each such
post-effective amendment as a new registration of the securities offered, and
the offering of such securities at that time to be initial bona fide offering;
and
(3) file a post-effective amendment to remove from registration any of
the securities that remain unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the standby under writing agreement
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for the
purpose of determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this Registration Statement as of the time
the Securities and Exchange Commission declares it effective; and (3) that for
the purpose of determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of Prospectus as a new
Registration Statement for the securities offered in the Registration Statement
therein, and treat the offering of the securities at that time as the initial
bona fide offering of those securities.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the city of
Rockville, State of Maryland on March 27, 1998.
SHERWOOD BRANDS, INC.
By: /s/ Uziel Frydman
- -------------------------------
President and
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below on this Registration Statement hereby
constitutes and appoints Uziel Frydman, Anat Schwartz and Amir Schwartz, and
each of them, as his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution for him and in his name, place and stead, in
any and all capacities (until revoked in writing) to sign any and all amendments
(including pre-effective amendments and post-effective amendments and amendments
thereto) to this Registration Statement on Form SB-2 of Sherwood Brands, Inc.
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact full power and authority to do and perform each and every
act and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, each acting
alone or his substitute, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signatures Title(s) Date
- ---------- -------- ----
<S> <C> <C>
/s/ Uziel Frydman President, Chief Executive Officer and Director March 27, 1998
- -------------------------------------------- (principal executive officer)
Uziel Frydman
/s/ Anat Schwartz Vice President -- Finance and Secretary March 27, 1998
- --------------------------------------------
Anat Schwartz (principal financial and accounting officer)
/s/ Amir Frydman Executive Vice President, Treasurer and Director March 27, 1998
- --------------------------------------------
Amir Frydman
/s/ * Director March 27, 1998
- --------------------------------------------
Douglas A. Cummins
*By: /s/ Anat Schwartz
- --------------------------------------------
Anat Schwartz as Attorney-in-Fact
</TABLE>
II-4
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
Sherwood Brands, Inc. and Subsidiaries
The audits referred to in our report to Sherwood Brands, Inc. and
Subsidiaries, dated October 7, 1997, except for Note 18, the date of which is
December 12, 1997, which is contained in the Prospectus constituting part of
this Registration Statement, included the audit of the financial statement
schedule listed in the accompanying index for each of the two years in the
period ended July 31, 1997. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statement schedule based upon our audits.
In our opinion, such schedule presents fairly, in all material respects,
the information set forth therein.
BDO Seidman, LLP
Washington, D.C.
October 7, 1997, except
for Note 18, the date
of which is December 12, 1997
<PAGE>
Schedule II
SHERWOOD BRANDS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Charged
Balance to Costs Balance at
Beginning and End
Description of Period Expenses Deduction of Period
- ---------------------------------------------- ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Year ended July 31, 1996
Allowance for doubtful accounts ........... $19,000 $33,900 $ (31,000) $21,900
Reserve for slow moving inventory ......... $ -- $ -- $ -- $ --
Year ended July 31, 1997
Allowance for doubtful accounts ........... $21,900 $72,600 $ (71,100) $23,400
Reserve for slow moving inventory ......... $ -- $18,200 $ -- $18,200
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
1.1 Form of Underwriting Agreement.
3.1 Articles of Incorporation, as amended, of the Registrant.
3.2 Bylaws, as amended, of the Registrant.
4.1* Form of Registrant's Class A Common Stock Certificate
4.2* Form of Underwriter's Warrant Agreement, including Form of Warrant
Certificate.
4.3* Form of Public Warrant Agreement among the Registrant, Paragon Capital
Corporation, as Underwriter and Continental Stock Transfer & Trust
Company, as Warrant Agent.
4.4* Form of Registrant's Public Warrant Certificate
5.1* Opinion of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.
10.1 Amended and Restated Reimbursement Agreement between Central Fidelity
National Bank and the Registrant, dated as of May 1, 1997.
10.2 Loan Agreement between Industrial Development Authority of Mecklenburg
County, Virginia and the Registrant, Dated as of May 1, 1997.
10.3 Irrevocable Letter of Credit dated May 15, 1997 issued on behalf of the
Registrant to the Trustee for the holders of Industrial Revenue Bonds
(Series 1997) issued by the Industrial Development Authority of
Mecklenburg County, Virginia.
10.4 Amended and Restated Credit Line Deed of Trust and Security Agreement,
among the Registrant and Trustees, for the benefit of Central Fidelity
National Bank dated May 1, 1997.
10.5 Pledge and Security Agreement between the Registrant and Central
Fidelity National Bank, dated as of May 1, 1997.
10.6 Guaranty between Uziel Frydman, the Registrant and Central Fidelity
National Bank, dated as
of May 1, 1997.
10.7 Loan Agreement between Industrial Development Authority of Mecklenburg
County, Virginia and the Registrant, Dated as of June 1, 1996.
10.8 Irrevocable Letter of Credit dated June 20, 1996 issued on behalf of
the Registrant to the Trustee for the holders of Industrial Revenue
Bonds (Series 1996) issued by the Industrial Development Authority of
Mecklenburg County, Virginia.
10.9 Pledge and Security Agreement between the Registrant and Central
Fidelity National Bank, dated as of June 1, 1996.
10.10 Company Loan Agreement between the Industrial Development Authority of
Mecklenburg County, Virginia Loan Agreement through the Virginia Small
Business Financing Administration and the Registrant, dated as of June
20, 1996.
10.11 Revolving Loan Fund Agreement between the Registrant and Lake Country
Development Corporation, $250,000 Promissory Note to Lake Country
Development Corporation, Guaranty of Note by the Registrant and Uziel
Frydman, and Deed of Trust between the Registrant and Trustee for Lake
Country Development Corporation, all dated May 15, 1996.
10.12 Loan Agreement, Promissory Note, and Security Agreement between the
Registrant and First Union National Bank, all dated November 29, 1996,
and Guaranty between Uziel Frydman and First Union, dated November 29,
1996.
10.13 Promissory Note issued to Ilana Frydman by the Registrant, dated August
28, 1991.
10.14 Lease, as amended, for the Registrant's Rockville offices, executed
November 30, 1992.
10.15* 1998 Stock Option Plan.
10.16* Form of Employment Agreement between Registrant and Uziel Frydman,
dated , 1998.
10.17* Form of Employment Agreement between Registrant and Anat Schwartz,
dated , 1998.
10.18* Form of Employment Agreement between Registrant and Amir Frydman,
dated , 1998.
21.1 Subsidiaries of the Registrant.
23.1** Consent of BDO Seidman, LLP, Independent Certified Public Accountants.
23.2* Consent of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.
24.1 A power of attorney relating to the signing of amendments hereto is
incorporated in the signature pages of this Registration Statement.
27.1** Financial Data Schedule.
99.1** Consent of Jean E. Clary to be named in Registration Statement.
99.2** Consent of Zigmund Sadauskas to be named in Registration Statement.
- ------
* To be filed by amendment.
** Filed herewith.
<PAGE>
EXHIBITS FOLLOW
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Sherwood Brands, Inc. and Subsidiaries
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form SB-2 of our report dated October 7, 1997, except
for Note 18, the date of which is December 12, 1997, relating to the
consolidated financial statements of Sherwood Brands, Inc. and Subsidiaries,
which is contained in that Prospectus, and of our report dated October 7, 1997,
except for Note 18, the date of which is December 12, 1997, relating to the
schedule, which is contained in Part II of the Registration Statement.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO Seidman, LLP
Washington, D.C.
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from Form SB-2
for the year ended July 31, 1997, and the six months ended January 31, 1998, and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> JUL-31-1997 JUL-31-1997
<PERIOD-END> JUL-31-1997 JAN-31-1997
<CASH> 614,109 625,363
<SECURITIES> 0 0
<RECEIVABLES> 2,125,350 2,154,986
<ALLOWANCES> 23,400 27,800
<INVENTORY> 3,412,962 4,080,698
<CURRENT-ASSETS> 6,608,357 7,119,699
<PP&E> 2,679,628 2,880,694
<DEPRECIATION> 344,072 399,338
<TOTAL-ASSETS> 8,963,360 9,685,944
<CURRENT-LIABILITIES> 4,388,622 4,393,662
<BONDS> 1,870,485 1,828,607
0 0
0 0
<COMMON> 21,500 21,500
<OTHER-SE> 1,670,973 2,491,373
<TOTAL-LIABILITY-AND-EQUITY> 8,963,360 9,685,944
<SALES> 17,424,243 9,720,784
<TOTAL-REVENUES> 17,424,243 9,720,784
<CGS> 12,570,606 6,515,462
<TOTAL-COSTS> 12,570,606 6,515,462
<OTHER-EXPENSES> 1,950,107 575,166
<LOSS-PROVISION> 72,606 37,166
<INTEREST-EXPENSE> 273,511 122,424
<INCOME-PRETAX> 326,380 1,206,667
<INCOME-TAX> 23,100 386,267
<INCOME-CONTINUING> 222,633 1,213,339
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 303,280 820,400
<EPS-PRIMARY> .14 .38
<EPS-DILUTED> .14 .38
</TABLE>
<PAGE>
Exhibit 99.1
March 27, 1998
The undersigned hereby consents to the use of her name and information in
the Registration Statement on Form SB-2 (Registration No. 333-44655) of
Sherwood Brands, Inc., and in any amendments thereto or supplemental documents
publicly filed in connection therewith.
Signed,
/s/ Jean E. Clary
-------------------------------------
Jean E. Clary
<PAGE>
Exhibit 99.2
March 27, 1998
The undersigned hereby consents to the use of his name and information in
the Registration Statement on Form SB-2 (Registration No. 333-44655) of
Sherwood Brands, Inc., and in any amendments thereto or supplemental documents
publicly filed in connection therewith.
Signed,
/s/ Zigmund Sadauskas
-------------------------------------
Zigmund Sadauskas
