**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON,DC  20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended: January 31, 2004  CommissionFile Number:  1-14091**

 

**SHERWOODBRANDS, INC.**

(Exact name of Registrant as specified in itscharter)

 

| **North Carolina**                                                                 |   | **56-1349259**                        |
|------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdictions of  incorporation or organization)                   |   | (I.R.S. Employer  Identification No.) |
|                                                                               |   |                                  |
| **1803 Research Boulevard, Suite 201  Rockville, MD 20850**                   |
| (Address of principal executive offices)                                           |
|                                                                               |
| Registrant’s telephone number, including  area code:  **(301) 309-6161** |

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports and (2) has been subject to such filingrequirement for the past 90 days.

 

Yes ý        Noo

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

 

Yes o        Noý

 

The number ofshares outstanding of the registrant’s Class A Common Stock, $.01 par value pershare, as of March 11, 2004 was 3,021,531. The number of sharesoutstanding of the registrant’s Class B Common Stock, $.01 par value per share,as March 11, 2004 was 1,000,000. The Class B Common Stock is not publiclytraded.

 

Transitional SmallBusiness Disclosure Format (check one):

 

Yes o        Noý

 

 

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** **

**SHERWOODBRANDS, INC.**

** **

**INDEX**

 
| PART I                                                                                                         | FINANCIAL INFORMATION                                                                       |   |
|----------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|--------|
|                                                                                                           |                                                                                        |   |
| Item 1.                                                                                                        | FINANCIAL STATEMENTS                                                                        |   |
|                                                                                                           |                                                                                        |   |
| Consolidated Balance Sheets - January 31, 2004 (unaudited) and  July 31, 2003                        |                                                                                        |
|                                                                                                           |                                                                                        |
| Consolidated Statements of Operations -  Three and six months ended January 31, 2004 and 2003 (unaudited) |                                                                                        |
|                                                                                                           |                                                                                        |
| Consolidated Statements of Cash Flows - Six  months ended January 31, 2004 and 2003 (unaudited)           |                                                                                        |
|                                                                                                           |                                                                                        |
| Item 2.                                                                                                        | Management’s Discussion and Analysis of Financial Condition and  Results of Operations |   |
|                                                                                                           |                                                                                        |   |
| Item 3.                                                                                                        | Quantitative and Qualitative Disclosures About Market Risk                                  |   |
|                                                                                                           |                                                                                        |   |
| Item 4.                                                                                                        | Controls and Procedures                                                                     |   |
|                                                                                                           |                                                                                        |   |
| PART II OTHER INFORMATION                                                                                      |                                                                                        |
|                                                                                                           |                                                                                        |
| Item 1.                                                                                                        | Legal Proceedings                                                                           |   |
|                                                                                                           |                                                                                        |   |
| Item 4.                                                                                                        | Submission of Matters to a vote of Security  Holders                                        |   |
|                                                                                                           |                                                                                        |   |
| Item 6.                                                                                                        | Exhibits and Reports on Form 8-K                                                            |   |
|                                                                                                           |                                                                                        |   |
| SIGNATURES                                                                                                     |                                                                                        |

 

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**SHERWOOD BRANDS, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                         |   | **January 31,  2004** |       | **July 31,  2003** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|------------|-------------------------|--------|
|                                                                                                                         |   | **(unaudited)**            |       | **(audited)**           |   |
| Assets                                                                                                                       |   |                       |       |                    |   |
| Current assets                                                                                                               |   |                       |       |                    |   |
| Cash and cash equivalents                                                                                                    |   | $                          | 67,959     |                    | $      | 227,352 |   |
| Accounts receivable, less allowance of  $239,000 and $92,000                                                                 |   | 4,211,597                  |       | 899,230                 |   |
| Inventory                                                                                                                    |   | 13,068,732                 |       | 13,719,294              |   |
| Income taxes receivable                                                                                                      |   | 1,020,428                  |       | 1,020,379               |   |
| Other current assets                                                                                                         |   | 566,634                    |       | 578,155                 |   |
| Deferred taxes on income                                                                                                     |   | 614,000                    |       | 614,000                 |   |
| Total current assets                                                                                                         |   | 19,549,350                 |       | 17,058,410              |   |
| Net property and equipment                                                                                                   |   | 6,671,537                  |       | 7,129,227               |   |
| Goodwill                                                                                                                     |   | 2,001,330                  |       | 2,001,330               |   |
| Other assets                                                                                                                 |   | 150,952                    |       | 313,504                 |   |
| TOTAL ASSETS                                                                                                                 |   | $                          | 28,373,169 |                    | $      | 26,502,471 |   |
| Liabilities and Stockholders’ Equity                                                                                    |   |                       |       |                    |   |
| Current liabilities                                                                                                          |   |                       |       |                    |   |
| Line of credit                                                                                                               |   | $                          | 5,618,497  |                    | $      | 6,260,264 |   |
| Current portion of long-term debt                                                                                            |   | 530,377                    |       | 530,377                 |   |
| Current portion of subordinated debt                                                                                         |   | 2,000,000                  |       | 2,000,000               |   |
| Current portion of capital lease obligation                                                                                  |   | 15,718                     |       | 15,718                  |   |
| Accounts Payable                                                                                                             |   | 6,471,219                  |       | 6,257,145               |   |
| Accrued expenses                                                                                                             |   | 1,052,255                  |       | 1,325,891               |   |
| Total current liabilities                                                                                                    |   | 15,688,065                 |       | 16,389,395              |   |
| Deferred taxes on income                                                                                                     |   | 464,000                    |       | 464,000                 |   |
| Long-term debt                                                                                                               |   | 905,553                    |       | 1,150,513               |   |
| Obligations under capital lease                                                                                              |   | 416,150                    |       | 423,892                 |   |
| TOTAL LIABILITIES                                                                                                            |   | 17,473,768                 |       | 18,427,800              |   |
| Stockholders’ equity                                                                                                    |   |                       |       |                    |   |
| Preferred stock, $.01 par value, 5,000,000  shares authorized; no shares issued or outstanding                               |   | —                     |       | —                  |   |
| Common stock, Class A, $.01 par value,  30,000,000 shares authorized, 3,018,476 and 3,003,476 shares issued and  outstanding |   | 30,185                     |       | 30,035                  |   |
| Common stock, Class B, $.01 par value,  5,000,000 shares authorized, 1,000,000 shares issued and outstanding                 |   | 10,000                     |       | 10,000                  |   |
| Additional paid-in-capital                                                                                                   |   | 9,877,280                  |       | 9,843,774               |   |
| Retained earnings (deficit)                                                                                                  |   | 981,936                    |       | (1,809,138              | )      |
|                                                                                                                         |   |                       |       |                    |   |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                              |   | 10,899,401                 |       | 8,074,671               |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                              |   | $                          | 28,373,169 |                    | $      | 26,502,471 |   |

** **

**See accompanying summary ofaccounting policies and notes to consolidated financial statements**

** **

**1**

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** **

**SHERWOOD BRANDS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFOPERATIONS**UNAUDITED

 
|                                         |   | **Three  Months Ended** |       | **Six Months  Ended January 31,** |   |
|----------------------------------------------|--------|-------------------------|------------|----------------------------------------|--------|
|                                         |   | **2004**                |       | **2003**                               |   | **2004** |   | **2003** |   |
|                                         |   |                    |       |                                   |   |   |   |   |   |
| Net sales                                    |   | $                       | 17,413,159 |                                   | $      | 19,390,601 |   | $ | 34,833,972 |   | $ | 37,852,813 |   |
| Cost of sales                                |   | 12,156,930              |       | 14,343,300                             |   | 24,541,072 |   | 27,299,042 |   |
| Gross profit                                 |   | 5,256,229               |       | 5,047,301                              |   | 10,292,900 |   | 10,553,771 |   |
| Selling, general and administrative expenses |   | 2,494,317               |       | 2,748,809                              |   | 4,725,834 |   | 5,312,509 |   |
| Salaries and related expenses                |   | 1,056,186               |       | 1,283,401                              |   | 2,119,168 |   | 2,458,409 |   |
| Pre production costs                         |   | —                  |       | 880,440                                |   | — |   | 1,384,376 |   |
| Total operating expenses                     |   | 3,550,503               |       | 4,912,650                              |   | 6,845,002 |   | 9,155,294 |   |
| Income from operations                       |   | 1,705,726               |       | 134,651                                |   | 3,447,898 |   | 1,398,477 |   |
| Other income (expense)                       |   |                    |       |                                   |   |   |   |   |   |
| Interest income                              |   | 41                      |       | 233                                    |   | 60 |   | 2,492 |   |
| Interest expense                             |   | (293,964                | )          | (196,015                               | )      | (530,730 | ) | (337,072 | ) |
| Other (expense)income                        |   | (130,729                | )          | (63,711                                | )      | (126,191 | ) | (62,175 | ) |
| Total other (expense)income                  |   | (424,651                | )          | (259,493                               | )      | (656,861 | ) | (396,755 | ) |
| Income before provision for taxes on income  |   | 1,281,075               |       | (124,842                               | )      | 2,791,037 |   | 1,001,722 |   |
| Provision for taxes on income                |   | —                  |       | (46,977                                | )      | — |   | 370,637 |   |
| Net income                                   |   | $                       | 1,281,075  |                                   | $      | (77,865 | ) | $ | 2,791,037 |   | $ | 631,085 |   |
| Net income per share-basic                   |   | $                       | 0.32       |                                   | $      | (0.02 | ) | $ | 0.70 |   | $ | 0.16 |   |
| -diluted                                     |   | 0.29                    |       | (0.02                                  | )      | 0.65 |   | 0.15 |   |
| Weighted average shares outstanding-basic    |   | 4,011,900               |       | 3,993,476                              |   | 4,007,688 |   | 3,993,476 |   |
| -diluted                                     |   | 4,401,187               |       | 3,993,476                              |   | 4,290,487 |   | 4,326,082 |   |
|                                              |        |                         |            |                                        |        |  |  |  |  |  |  |  |  |  |

 

See accompanying summary of accounting policies andnotes to consolidated financial statements.

 

2

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** **

**SHERWOOD BRANDS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSUNAUDITED**

** **
|                                                 |   | **Six months  ended January 31,** |      |
|------------------------------------------------------|--------|----------------------------------------|-----------|
|                                                 |   | **2004**                               |      | **2003** |   |
|                                                 |   |                                   |      |   |   |
| Cash flows from operating activities                 |   |                                   |      |   |   |
| Net income                                           |   | $                                      | 2,791,037 |   | $ | 631,085 |   |
| Adjustments to reconcile net income to net           |   |                                   |      |   |   |
| Cash used in operating activities                    |   |                                   |      |   |   |
| Depreciation expense                                 |   | 494,673                                |      | 446,253 |   |
| Provision for inventory allowance                    |   | (298,995                               | )         | 137,376 |   |
| Provision for doubtful accounts                      |   | 146,777                                |      | 97,696 |   |
| (Increase) decrease in assets                        |   |                                   |      |   |   |
| Accounts receivable                                  |   | (3,444,144                             | )         | (4,160,925 | ) |
| Income taxes receivable                              |   | —                                 |      | — |   |
| Inventory                                            |   | 949,557                                |      | (160,925 | ) |
| Other current assets                                 |   | 11,472                                 |      | 1,247,837 |   |
| Other assets                                         |   | 162,552                                |      | (106,099 | ) |
| Increase (decrease) in liabilities                   |   |                                   |      |   |   |
| Accounts payable                                     |   | 214,074                                |      | (842,097 | ) |
| Accrued expenses                                     |   | (273,599                               | )         | 678,901 |   |
|                                                 |   |                                   |      |   |   |
| Net cash provided by (used in) operating  activities |   | 738,404                                |      | (2,030,898 | ) |
|                                                 |   |                                   |      |   |   |
| Cash flows from investing activities                 |   |                                   |      |   |   |
| Proceeds from sales of assets                        |   | 142,750                                |      | — |   |
| Capital expenditures                                 |   | (179,733                               | )         | (586,549 | ) |
|                                                 |   |                                   |      |   |   |
| Net cash used in investing activities                |   | (36,983                                | )         | (586,549 | ) |
|                                                 |   |                                   |      |   |   |
| Cash flows from financing activities                 |   |                                   |      |   |   |
| Net (repayments) borrowings on line of  credit       |   | (641,767                               | )         | 1,929,938 |   |
| Proceeds from exercise of options                    |   | 33,656                                 |      | 10,834 |   |
| Borrowing on debt                                    |   | —                                 |      | 350,000 |   |
| Payments on long term debt                           |   | (252,702                               | )         | (153,889 | ) |
|                                                 |   |                                   |      |   |   |
| Net cash (used in) provided by financing  activities |   | (875,814                               | )         | 2,136,883 |   |
|                                                 |   |                                   |      |   |   |
| Net decrease in cash and cash equivalents            |   | (159,393                               | )         | (408,564 | ) |
|                                                 |   |                                   |      |   |   |
| Cash and cash equivalents, at beginning of  period   |   | 227,352                                |      | 709,247 |   |
|                                                 |   |                                   |      |   |   |
| Cash and cash equivalents, at end of period          |   | $                                      | 67,959    |   | $ | 228,683 |   |

 

See accompanying summary of accounting policies andnotes to consolidated financial statements

 

3

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**SHERWOODBRANDS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED**)

 

**1.**             BASIS OF PRESENTATION

 

The consolidatedfinancial statements include the accounts of Sherwood Brands, Inc., and itswholly-owned subsidiaries, Sherwood Brands, LLC, a Maryland limited liabilitycompany, Sherwood Brands of RI Inc., a Rhode Island corporation, SherwoodBrands Overseas, Inc., a Bahamas entity (“Overseas”), and Asher Candy, Inc., aWyoming corporation (collectively referred to herein as, “we”, “our” “us” or,the “Company”). All material inter-company transactions and balances have beeneliminated in consolidation.

 

The accompanyingconsolidated financial statements have been prepared in accordance withgenerally accepted accounting principles for interim financial information andwith the instructions to Form 10-Q and Article 10 of Regulation S-X.Certain information and footnote disclosures normally included in theconsolidated financial statements prepared in accordance with generallyaccepted accounting principles have been condensed or omitted pursuant to suchrules and regulations. These consolidated financial statements should be readin conjunction with the consolidated financial statements, and the notesthereto, included in the Company’s Annual Report and Form 10-K filed onOctober 29, 2003.

** **

**2.**             ORGANIZATION ANDDESCRIPTION OF BUSINESS

 

Sherwood Brands, Inc. (the “Company”) was incorporated inDecember 1982 in the state of North Carolina. Sherwood Brands, Inc. isengaged in the manufacture, marketing and distribution of a diverse line ofbrand name candies, cookies, chocolates and gifts. The Company manufactures andpurchases; lollipops, biscuits and assembles seasonal gift items including giftbaskets for Christmas, Valentines Day and Easter. The Company’s principalbranded products include COWS(TM) butter toffee candies, DEMITASSE(R) biscuits,RUGER(R) wafers, SMILE POPS(R) lollipops, STRIP-O-POPS(R) lollipops andELANA(R) chocolates, SOUR FRUIT BURST(TM) fruit-filled hard candies andPIRATE’S GOLD COINS(R) milk chocolates. The Company’s marketing strategy,including its packaging of products, is designed to maximize freshness, tasteand visual appeal, and emphasizes highly distinctive, premium quality productsthat are sold at prices that compare favorably to those of competitiveproducts. The Company operates in the confectionery industry and aligns itsoperations into three business segments for management to measure financialperformance by product type.  TheCompany’s business segments are (i) Manufactured Candy, (ii) Purchased Candyand (iii) Gift Items.

 

Sherwood Brands, Inc. is the owner of Sherwood Brands, LLC, a Marylandlimited liability company. Sherwood Brands, LLC markets and distributes its ownline of confectionery products in the United States.

 

Sherwood Overseas, Inc. (a wholly-owned subsidiary of Sherwood Brands,LLC) was incorporated in July 1993 in the Bahamas to market and distributethe Sherwood lines of confectionery products internationally.

 

4

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Sherwood Brands of RI, Inc. is a wholly owned subsidiary of SherwoodBrands, Inc. that was incorporated in September 1998 in the state of RhodeIsland. Sherwood Brands of RI, Inc. d/b/a E. Rosen Company manufactures hardcandies and jelly beans and assembles and markets gift items and baskets tochains such as Wal-Mart, Kmart and CVS.

 

Sherwood Acquisition Corporation, a wholly-owned subsidiary of theCompany, was incorporated in April 2002 in the state of Wyoming. On May 1,2002, Sherwood Acquisition merged with and into Asher Candy Acquisition Corporation,a Wyoming corporation. Asher Candy Acquisition Corporation is a manufacturer ofcandy canes and other hard candies under the “Asher” name. The survivingcorporation of the merger is Asher Candy Acquisition Corporation, which haschanged its name to Asher Candy, Inc.

 

**3.**             INTERIM FINANCIALINFORMATION

 

The financialinformation as of January 31, 2004 and for the three and six months endedJanuary 31, 2004 and 2003 is un-audited. In the opinion of management,such information contains all adjustments, consisting only of normal recurringadjustments, necessary for a fair presentation of the results for such periods.Results for interim periods are not necessarily indicative of results to beexpected for an entire year.

** **

**4.**             INVENTORY

 

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

Inventory consists of the following:

 
|                                    |   | **January 31  2004** |       | **July 31  2003** |   |
|-----------------------------------------|--------|---------------------------|------------|------------------------|--------|
|                                    |   | **(unaudited)**           |       | **(audited)**          |   |
| Raw materials and ingredients           |   | $                         | 404,958    |                   | $      | 423,497 |   |
| Components used in assembly             |   | 3,075,405                 |       | 1,496,166              |   |
| Packaging materials                     |   | 3,696,329                 |       | 2,936,702              |   |
| Work-in-process                         |   | 512,804                   |       | 648,539                |   |
| Finished product                        |   | 6,223,951                 |       | 9,358,100              |   |
|                                    |   |                      |       |                   |   |
|                                    |   | 13,913,447                |       | 14,863,004             |   |
| Less reserve for inventory obsolescence |   | (844,715                  | )          | (1,143,710             | )      |
|                                    |   | $                         | 13,068,732 |                   | $      | 13,719,294 |   |

 

**5.**             USE OF ESTIMATES

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosures of

 

5

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contingent assetsand liabilities at the date of the financial statements and reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

** **

**6.**             INCOME TAXES

 

Income taxes are calculated using the liability method specified byStatement of Financial Accounting Standards No. 109, “Accounting for IncomeTaxes (SFAS 109).” Under SFAS 109, deferred taxes are determined using theliability method which requires the recognition of deferred tax assets andliability based on differences between the financial statement and the incometax basis using presently enacted tax rates.

 

The income tax rate utilized on an interim basis is based on theCompany’s estimate of the effective income tax rate for the fiscal year endingJuly 31, 2004. The Company has a net operating loss carry forward whichmanagement believes will offset all taxable income generated in fiscal year2004.  Therefore, the Company estimatedits effective tax rate at 0%.

 

**7.**             **STOCK COMPENSATION OF STOCK OPTIONS**

 

**The Company has adopted thedisclosure only provisions of Statement of Financial Accounting Standards No.123, “Accounting for Stock-Based Compensation” (SFAS 123”), but it continues tomeasure compensation cost for the stock options using the intrinsic valuemethod prescribed by APB Opinion No. 25. As allowable under SFAS 123, theCompany used the Black-Scholes method to measure the compensation cost of stockoptions granted.  The Company did notgrant any stock options to employees in the period ended January 31, 2004or 2003.**

** **

There were no adjustments made in calculating the fair value to accountfor vesting provisions, for non-transferability or risk of forfeiture. Becausethe Company’s employee stock options have characteristics significantlydifferent from those of traded options, and because changes in the subjectiveinput assumptions can materially affect the fair value estimate, inmanagement’s opinion, the existing models do not necessarily provide a reliablesingle measure of the fair value of its employee stock options.

 

If the Company had elected to recognize compensation cost based on thevalue at the grant dates with the method prescribed by SFAS 123, net income andearnings per share would have been changed to the pro forma amounts indicatedin the following table:

 
|                                                                                                                                          |   | **For the  three months ended January 31,** |      |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|-----------|
|                                                                                                                                          |   | **2004**                                         |      | **2003** |   |
| Net Income/(loss)                                                                                                                             |   |                                             |      |   |   |
| As Reported                                                                                                                                   |   | $                                                | 1,281,075 |   | $ | (77,865 | ) |
|                                                                                                                                          |   |                                             |      |   |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | 26,000                                           |      | 37,000 |   |
|                                                                                                                                          |   |                                             |      |   |   |
| Pro Forma net income (loss)                                                                                                                   |   | 1,255,075                                        |      | (114,865 | ) |
| Basic Income/(loss) per Common Share:                                                                                                         |   |                                             |      |   |   |
| As Reported                                                                                                                                   |   | $                                                | 0.32      |   | $ | (0.02 | ) |
| Pro Forma                                                                                                                                     |   | 0.31                                             |      | (0.03 | ) |
| Diluted income/(loss) per Common Share:                                                                                                       |   |                                             |      |   |   |
| As reported                                                                                                                                   |   | $                                                | 0.29      |   | $ | (0.02 | ) |
| Pro Forma                                                                                                                                     |   | 0.28                                             |      | (0.03 | ) |

** **

**6**

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** **
|                                                                                                                                          |   | **For the  six months ended January 31,** |      |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|-----------|
|                                                                                                                                          |   | **2004**                                       |      | **2003** |   |
| Net Income/(loss)                                                                                                                             |   |                                           |      |   |   |
| As Reported                                                                                                                                   |   | $                                              | 2,791,037 |   | $ | 631,085 |   |
|                                                                                                                                          |   |                                           |      |   |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | 52,000                                         |      | 74,000 |   |
|                                                                                                                                          |   |                                           |      |   |   |
| Pro Forma net income (loss)                                                                                                                   |   | 2,739,037                                      |      | 557,085 |   |
| Basic Income/(loss) per Common Share:                                                                                                         |   |                                           |      |   |   |
| As Reported                                                                                                                                   |   | $                                              | 0.70      |   | $ | 0.16 |   |
| Pro Forma                                                                                                                                     |   | 0.68                                           |      | 0.14 |   |
| Diluted income/(loss) per Common Share:                                                                                                       |   |                                           |      |   |   |
| As reported                                                                                                                                   |   | $                                              | 0.65      |   | $ | 0.14 |   |
| Pro Forma                                                                                                                                     |   | 0.64                                           |      | 0.13 |   |

** **

**8.**             EARNINGS PER SHARE

 

Earnings per shareis based on weighted average number of shares of common stock and dilutivecommon stock equivalents outstanding. Basic earnings per share includes no dilution and is computed bydividing income available to common shareholders by the weighted average numberof common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securitiesthat could share in the earnings of an entity. The following table presents a reconciliation between the weightedaverage shares outstanding for basic and diluted earnings per share for thethree and six months ended January 31, 2004 and January 31, 2003,except for the three months ended January 31, 2003, where the common stockequivalents outstanding were anti dilutive:

 
| **For the  three months ended January 31, 2004** |   | **Income** |      | **Shares** |      | **Per Share  Amount** |   |
|-------------------------------------------------------|--------|------------|-----------|------------|-----------|-----------------------|--------|
|                                                  |   |       |      |       |      |                  |   |
| Basic earnings per share                              |   |       |      |       |      |                  |   |
| Income available to common shareholders               |   | $          | 1,281,075 |       | 4,011,900 |                  | $      | 0.32 |   |
| Effect of dilutive stock options                      |   |       |      | 389,287    |      |                  |   |
| Dilutive earnings per share                           |   | $          | 1,281,075 |       | 4,401,187 |                  | $      | 0.29 |   |

 

7

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| **For the six months ended January 31, 2004** |   | **Income** |      | **Shares** |      | **Per Share  Amount** |   |
|----------------------------------------------------|--------|------------|-----------|------------|-----------|-----------------------|--------|
|                                               |   |       |      |       |      |                  |   |
| Basic earnings per share                           |   |       |      |       |      |                  |   |
| Income available to common shareholders            |   | $          | 2,791,037 |       | 4,007,688 |                  | $      | 0.70 |   |
| Effect of dilutive stock options                   |   |       |      | 282,799    |      |                  |   |
| Dilutive earnings per share                        |   | $          | 2,791,037 |       | 4,290,487 |                  | $      | 0.65 |   |

 
| **For the six months ended  January 31, 2003** |   | **Income** | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** |
|-----------------------------------------------------|--------|------------|------------|------------|------------|-----------------------|------------|
|                                                |   |       |       |       |       |                  |       |
| Basic earnings per share                            |   |       |       |       |       |                  |       |
| Income available to common shareholders             |   | $          | 631,085    |       | 3,993,476  |                  | $          | 0.16 |   |
| Effect of dilutive stock options                    |   |       |       | 332,606    |       |                  |       |
| Dilutive earnings per share                         |   | $          | 631,085    |       | 4,326,082  |                  | $          | 0.15 |   |

 

**9.**             CONTINGENCIES

 

The Company is, from time to time, involved in litigation incidental tothe conduct of its business. The Company is currently involved in severalactions.  In particular, the Company’slandlord at its Rhode Island facility named the Company as a defendant in anaction seeking security for claims relating to the lease agreement. The Companydeposited $180,000 with the registry of the court relating to claims forpayment of real estate taxes, water and sewer, rent of other occupied space andrepair expenses. In September 2002, the landlord claimed other breaches ofthe lease agreement, alleging an obligation of $932,000 under the lease anddemanded $750,000 to settle the disputes. The Company has claims against thelandlord it is pursuing and continues to occupy space at the leased premises.The Company has accrued amounts to cover current charges.  In November 2003, the Company settledits claims with the landlord.  Theaccrual reflected in the financial statements was sufficient to cover alloutstanding obligations to the landlord.

 

The Company is currently involved as Plaintiff in a suit brought beforethe Circuit Court for Montgomery County, Maryland, presenting claims inconnection with the merger agreement under which Sherwood Brands acquiredsecurities of Asher Candy Acquisition Corporation and agreed to sell securitiesin Sherwood Brands to prior shareholders of Asher Candy.  The complaint alleges that the Company wasfraudulently induced to enter into the merger agreement on the basis of, amongother things, material misrepresentations and omissions by the shareholders ofAsher Candy.  Sherwood Brands is seekingdeclaratory and injunctive relief and award of damages against the formershareholders of Asher Candy for violations of the merger agreement and forcommon law fraud and violations of applicable securities laws.  Pending resolution of the litigation, theCompany has refused to honor the demand of the former shareholders for theCompany to repurchase half of the shares issued to them at a price of $4.50 pershare. Certain of the shareholders have filed a counterclaim seeking $7.0million in damages.  The Companybelieves that it has defenses to the counterclaim. There can be no assurancethat

 

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the Company will not be a party to other litigation in the future.

** **

**10.**          LICENSING AGREEMENTS

 

During the sixmonths ended January 31, 2004, the Company entered into two licensingagreements to incorporate products into gift sets. The Company now has a totalof seventeen licensing agreements. The royalty rates for such licenses are from2% to 15% of net sales and expire in range of two to three years.

 

The products to be incorporated into the Company’s gift set items isduring the Christmas holiday season and are effective on the selling season ofJanuary 2004. The Company paid $7,500 in advance fee for rights toincorporate products into its gift set items. These advance fees will be offsetagainst any amounts due on royalties. There are minimum guaranteed license feesunder these agreements. The Company incurred $563,000 in royalty expense forthe three months ended January 31, 2004 and $776,000 for the six monthsended January 31, 2004. There were no royalty expenses for the three andsix months ended January 31, 2003. The Company is currently pursuing otherlicenses with similar terms and conditions.

 

**11.**          CREDIT FACILITY

 

During the quarter ended January 31, 2004, the Company was incompliance with its business and financial covenants under its credit facilityrelating to the fixed charge coverage ratio. Management believes the Companywill continue to be in compliance with the covenants for the remainder of 2004.

 

**12.****          CONCENTRATIONOF CREDIT RISK AND EXPORT SALES**

 

The Company has a variety of customers, including mass merchandisers, drugstores and grocery stores throughout the United States and abroad. For the sixmonths ended January 31, 2004, three customers accounted for approximately27%, 9% and 9% of the Company’s net sales. For the six months endedJanuary 31, 2003 the same three customers accounted for approximately 14%,11% and 9% of the Company’s total net sales. The Company had sales to customers in Canada which represent 0.87% and0.23% of net sales for the six months ended January 31, 2004 and 2003,respectively.

 

**13.**          **OPERATING SEGMENTS**

 

The Company operates in the confectionery industry and aligns itsoperations into three business segments for management reporting purposes.These segments are based on product type. This alignment allows management tomeasure financial performance by product type. The Company’s business segmentsare (i) Manufactured Candy and Cookies, (ii) Purchased Candy and Cookies and(iii) Purchased Gift Items. The Company reports these as reportable segments inaccordance with SFAS 131, “Disclosures about Segments of an Enterprise andRelated Information.” The accounting policies of the operating segments are thesame as those described in the summary of significant accounting policies.

 

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The Company’s Chief Operating Decision Maker, who is its Chairman andChief Executive Officer, evaluates performance based upon a measure of segmentoperating profit or loss that includes an allocation of common expenses, butexcludes some unallocated expenses. Unallocated expenses represent corporateexpenditures that are not specifically allocated to the segments.

 

**TheCompany’s reportable segments are strategic business units that offer differentproducts in different geographic areas. The Company has no assets outside of the United States.  There is no concentration of net sales inany one area within the United States. Net sales outside of the United States are minimal.**

** **
|                          |   | **Three  Months ended January 31, 2004** |      |
|-------------------------------|--------|-----------------------------------------------|-----------|
|                          |   | **Manufactured  Candy**                       |      | **Purchased  Candy** |   | **Gift  Items** |   | **Other** |   | **Consolidated  Total** |   |
|                          |   |                                          |      |   |   |   |   |   |   |   |   |
| Total revenue                 |   | $                                             | 1,503,945 |   | $ | 11,480,884 |   | $ | 4,428,330 |   | $ | — |   | $ | 17,413,159 |   |
| Gross margin                  |   | (1,021,601                                    | )         | 4,741,773 |   | 1,536,057 |   | — |   | 5,256,229 |   |
| Interest expense              |   | 141,103                                       |      | 107,055 |   | 45,806 |   | — |   | 293,964 |   |
| Segment assets                |   | 9,990,158                                     |      | 5,693,237 |   | 11,387,509 |   | 1,302,265 |   | 28,373,169 |   |
| Depreciation and amortization |   | 203,410                                       |      | — |   | 34,171 |   | 8,648 |   | 246,229 |   |
|                               |        |                                               |           |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                          |   | **Three Months ended January 31, 2003** |      |
|-------------------------------|--------|----------------------------------------------|-----------|
|                          |   | **Manufactured  Candy**                      |      | **Purchased  Candy** |   | **Gift  Items** |   | **Other** |   | **Consolidated  Total** |   |
|                          |   |                                         |      |   |   |   |   |   |   |   |   |
| Total revenue                 |   | $                                            | 5,501,797 |   | $ | 6,944,300 |   | $ | 6,944,504 |   | $ | — |   | $ | 19,390,601 |   |
| Gross margin                  |   | (1,031,602                                   | )         | 3,451,564 |   | 2,627,339 |   | — |   | 5,047,301 |   |
| Interest expense              |   | 94,087                                       |      | 71,384 |   | 30,544 |   | — |   | 196,015 |   |
| Segment assets                |   | 9,968,904                                    |      | 9,488,182 |   | 14,083,817 |   | 454,823 |   | 33,995,726 |   |
| Depreciation and amortization |   | 187,347                                      |      | — |   | 25,560 |   | 10,425 |   | 223,332 |   |
|                               |        |                                              |           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                          |   | **Six Months ended January 31, 2004** |      |
|-------------------------------|--------|--------------------------------------------|-----------|
|                          |   | **Manufactured  Candy**                    |      | **Purchased  Candy** |   | **Gift  Items** |   | **Other** |   | **Consolidated  Total** |   |
|                          |   |                                       |      |   |   |   |   |   |   |   |   |
| Total revenue                 |   | $                                          | 7,107,320 |   | $ | 19,783,196 |   | $ | 7,943,456 |   | $ | — |   | $ | 34,833,972 |   |
| Gross margin                  |   | (933,804                                   | )         | 8,543,348 |   | 2,683,356 |   | — |   | 10,292,900 |   |
| Interest expense              |   | 254,751                                    |      | 193,280 |   | 82,699 |   | — |   | 530,730 |   |
| Segment assets                |   | 9,990,158                                  |      | 5,693,237 |   | 11,387,509 |   | 1,302,265 |   | 28,373,169 |   |
| Depreciation and amortization |   | 376,101                                    |      | — |   | 68,056 |   | 50,516 |   | 494,673 |   |
|                               |        |                                            |           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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|                          |   | **Six Months ended January 31, 2003** |       |
|-------------------------------|--------|--------------------------------------------|------------|
|                          |   | **Manufactured  Candy**                    |       | **Purchased  Candy** |   | **Gift  Items** |   | **Other** |   | **Consolidated  Total** |   |
|                          |   |                                       |       |   |   |   |   |   |   |   |   |
| Total revenue                 |   | $                                          | 15,662,900 |   | $ | 13,050,801 |   | $ | 9,139,112 |   | $ | — |   | $ | 37,852,813 |   |
| Gross margin                  |   | 1,146,003                                  |       | 6,078,006 |   | 3,329,762 |   | — |   | 10,553,771 |   |
| Interest expense              |   | 161,795                                    |       | 122,754 |   | 52,523 |   | — |   | 337,072 |   |
| Segment assets                |   | 9,968,904                                  |       | 9,488,182 |   | 14,083,817 |   | 454,823 |   | 33,995,726 |   |
| Depreciation and amortization |   | 347,129                                    |       | — |   | 51,132 |   | 47,992 |   | 446,253 |   |
|                               |        |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Item 2**.        Management’s Discussionand Analysis of Financial Condition and Results of Operations

** **

ImportantInformation Regarding Forward-Looking Statements

 

This quarterlyreport on Form 10-Q contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. Thosestatements include statements regarding the intent, belief or currentexpectations of the company and its management.  Such statements are subject to a variety of risks anduncertainties, many of which are beyond our control, which could cause actualresults to differ materially from those contemplated in such forward-lookingstatements, including in particular the risks and uncertainties described under“Risk Factors” in our Form 10-K filed with the commission on October 29,2003. Existing and prospective investors are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the datehereof. We undertake no obligation to update or revise the informationcontained in this quarterly report on Form 10-Q, whether as a result of newinformation, future events or circumstances or otherwise.

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of certain assets and liabilities at the date of thefinancial statements. Significant estimates in our financial statements includethe accounts receivable and inventory reserves. We continually evaluate thesereserves based upon historical experience. Although actual results could differfrom those disclosed, management feels that the estimates used to establish thereserves are conservative in nature. Furthermore, management contends that itwould be unlikely that the reserve level would be materially different from anyother independently prudently established reserve.

 

If any of the following risks occurs, our business, financial conditionor results of operations could be adversely affected.

 

The loss of a significant customer could have an adverse effect on ourbusiness. We are dependent on a limited number of customers for a significantportion of our revenues. Sam’s Club, Big Lots and Wal-Mart accounted forapproximately 9%, 9% and 27%, respectively, of our sales for the six monthsended January 31, 2004 and for the six months ended January 31, 2003Sam’s Club, Big Lots and Wal-Mart accounted for approximately 14%, 11% and 9%,respectively. We do not maintain agreements with our customers and sellproducts pursuant to

 

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purchase orders placed from time to time in the ordinary course ofbusiness. The loss of a significant customer could have an adverse effect onour business.

 

We face significant competition in the marketing and sales of ourproducts. Our products compete for consumer recognition and shelf space withcandies, cakes, cookies, chocolates and other food products which have achievedinternational, national, regional and local brand recognition and consumerloyalty. These products are marketed by companies (which may include oursuppliers) with significantly greater financial, manufacturing, marketing,distribution, personnel and other resources than we have. Some of thesecompetitors, such as Hershey Food Corporation, Masterfoods USA (M&M Mars),Inc., Nestle, S.A., and Kraft Foods, dominate the markets for candy and cookieproducts, and have substantial promotional budgets which enable them toimplement extensive advertising campaigns. The food industry is characterizedby frequent introductions of new products, accompanied by substantialpromotional campaigns. If we are unable to continue to compete successfully ourbusiness could be adversely affected.

 

We face various risks relating to a recent acquisition. In May 2002 weacquired the business of Asher Candy Acquisition Corporation. Asher CandyAcquisition Corporation manufactured candy canes, a product which we had noprior experience in manufacturing. If we are unable to successfully produce aquality product, and maintain or increase the customer base, our profitabilitycould be adversely affected.

 

Our success is highly dependent on consumer preferences and industryfactors. The markets for candy and cookie products are affected by changes inconsumer tastes and preferences and nutritional and health-related concerns. Wecould be subject to increased competition from companies whose products ormarketing strategies address these concerns. In addition, the markets for ourproducts may be subject to national, regional and local economic conditionswhich affect discretionary spending, demographic trends and product lifecycles, whereby product sales increase from their introductory stage throughtheir maturity and then reach a stage of decline over time.

 

We have limited historical profitability and may not be profitable inthe future. Our operating expenses have increased and can be expected tocontinue to increase in connection with any expansion activities undertaken byus, including those relating to advertising and product manufacturing. Accordingly,our profitability will depend on our ability to improve our operating marginsand increase revenues from operations. Unanticipated expenses, unfavorablecurrency exchange rates, increased price competition and adverse changes ineconomic conditions could have a material adverse effect on our operatingresults. If we are unable to achieve significantly increased levels ofrevenues, our future operations may not continue to be profitable.

 

We depend on our trademarks. We hold United States trademark registrationsfor the “ELANA,” “RUGER”, “TONGUE TATTOO”, “STRIP-O-POP”, “SMILE POPS” and“demitasse” names, and have filed applications to register certain other names,including “COWS,” and use other names for which we have not applied forregistration. We believe that our rights to these names are a significant partof our business and that our ability to create demand for our products isdependent to a large extent on our ability to exploit these trademarks. Ourfailure to protect our

 

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trademarks and other intellectual property rights could negativelyimpact the value of our brand names. We have requested some of our marks incountries other than the U.S. and may apply for additional registration asappropriate.

 

We are dependent on third party manufacturers and suppliers. We aredependent on the ability of our manufacturers to adhere to our product, priceand quality specifications and scheduling requirements. Our operations requireus to have production orders in place in advance of shipment to our warehouses(product deliveries typically take 60 days). Any delay by manufacturers insupplying finished products to us would adversely affect our ability to deliverproducts on a timely and competitive basis. In addition, raw materialsnecessary for the manufacture of our products at our facilities, includingflour, sugar, shortening, butter and flavorings, are purchased from third-partysuppliers. We do not maintain agreements with any such suppliers and we are,therefore, subject to risks of periodic price fluctuations, shortages anddelays. If there is a material interruption in the availability or significantprice increases for raw materials would have a material adverse effect on ouroperating margins.

 

We face various risks relating to foreign manufacturing. During thethree months ended January 31, 2004 and 2003, approximately 66% and 36%,respectively, of our products were manufactured in foreign countries. Duringthe six months ended January 31, 2004 and 2003, approximately 57% and 34%,respectively, of our products were manufactured in foreign countries. We havebeen and will continue to be subject to risks associated with the manufactureof products in foreign countries, primarily in Argentina, Austria, Belgium,China and Holland. These risks include material shipping delays, fluctuationsin foreign currency exchange rates, customs duties, tariffs and import quotasand international political, regulatory and economic developments. We assumethe risk of loss, damage or destruction of products when shipped by amanufacturer. Because we pay for some of our products manufactured outside theUnited States in foreign currencies, any weakening of the United States dollarin relation to relevant foreign currencies, could result in significantlyincreased costs to us. In addition, some products manufactured overseas aresubject to import duties. Deliveries of products from our foreign manufacturerscould also be delayed or restricted by the future imposition of quotas. Ifquotas were imposed, it is possible that we would not be able to obtain qualityproducts at favorable prices from domestic or other suppliers whose quotas havenot been exceeded by the supply of products to their existing customers.

 

We are subject to government regulation. We are subject to extensiveregulation by the United States Food and Drug Administration, the United StatesDepartment of Agriculture and by other state and local authorities injurisdictions in which our products are manufactured or sold. Among otherthings, these regulations govern the importation, manufacturing, packaging,storage, distribution and labeling of our products, as well as sanitaryconditions and public health and safety. Applicable statutes and regulationsgoverning our products include “standards of identity” for the content ofspecific types of products, nutritional labeling and serving size requirementsand general “Good Manufacturing Practices” with respect to manufacturingprocesses. Our facilities and products are subject to periodic inspection byfederal, state and local

 

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authorities. Our failure to comply with applicable laws and regulationscould subject us to civil remedies, including fines, injunctions, recalls orseizures, as well as potential criminal sanctions.

 

We may incur product liability claims that are not fully insured. As amanufacturer and marketer of food products, we are subject to product liabilityclaims from consumers. We maintain product liability insurance with limits of$2,000,000 in the aggregate and $1,000,000 per occurrence (with excess coverageof $10,000,000). These insurance amounts may not be sufficient to coverpotential claims and adequate levels of coverage may not be available in thefuture at a reasonable cost. In the event of a partially or completelyuninsured successful claim against us, our financial condition and reputationwould be materially adversely affected.

 

We are dependent on key personnel and the loss of these key personnelcould have a material adverse effect on our success. Our success is dependenton the personal efforts of Uziel Frydman, our Chairman, President and ChiefExecutive Officer, Amir Frydman, our Vice President of Marketing andChristopher Willi, our Chief Financial Officer. The loss or interruption of theservices of such individuals could have a material adverse effect on ourbusiness. We maintain “key-man” insurance in the amount of $1,000,000 on thelife of Mr. Uziel Frydman. Our success also depends upon our ability to hireand retain additional qualified management, marketing and other personnel.Employment and retention of qualified personnel is important due to thecompetitive nature of the food industry. Our failure to hire and retain qualifiedpersonnel could adversely affect our success.

 

Our President and Chief Executive Officer controls our company. Mr.Uziel Frydman, President and Chief Executive Officer, owns 400,000 shares ofClass A Common Stock (with a right to acquire an additional 202,984 upon theexercise of options) and 1,000,000 shares of Class B Common Stock,representing, in the aggregate, approximately 38% of the outstanding CommonStock of our company and 76% of the voting control of our company, assumingthat all of the warrants are exercised. Accordingly, Mr. Frydman will be ableto direct the election of all of our company’s directors, increase theauthorized capital, dissolve, merge or sell the assets of our company, andgenerally direct the affairs of our company. In addition, the level of controlexercised by Mr. Frydman may discourage investors from purchasing our CommonStock.

 

We may issue “blank check” preferred stock that would prevent a changeof control. Our Articles of Incorporation, as amended, authorize our board ofdirectors to issue up to 5,000,000 shares of “blank check” preferred stockwithout stockholder approval, in one or more series and to fix the dividendrights, terms, conversion rights, voting rights, redemption rights and terms,liquidation preferences, and any other rights, preferences, privileges, andrestrictions applicable to each new series of preferred stock. The issuance ofshares of preferred stock in the future could, among other things, adverselyaffect the voting power of the holders of common stock and, under certaincircumstances, could make it difficult for a third party to gain control of ourcompany, prevent or substantially delay a change in control, discourage bidsfor the Common Stock at a premium, or otherwise adversely affect the marketprice of the Common Stock.

 

We are prohibited from paying dividends by the terms of our financingagreements. We have never paid any cash dividends on our common stock and donot anticipate paying cash dividends

 

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in the foreseeable future. The payment of cash dividends is prohibitedby the terms of our financing agreements.

 

For the six months ended January 31, 2004 and for the year endedJuly 31, 2003, we had a total of seventeen licensing agreements toincorporate our products into gift sets and to manufacture candies andwafers.  Two of these agreements weresigned during the six months ended January 31, 2004, nine of theseagreements were signed during the fiscal year ended July 31, 2003 and sixof these agreements were signed during the fiscal year ended July 31,2002. The royalty rates for these licensing agreements range from 2% to 15% ofnet sales and expire within two to three years. The products to be incorporatedinto our gift set items are primarily for the first quarter and Easter sellingseason. We have also entered into a licensing agreement to produce everydaycandies and wafers. We paid $262,000 in advance fees for the rights under thelicensing agreements. These advance fees were offset against any amounts due onroyalties. There were no other minimum license fees under these licensingagreements. For the three months ended January 31, 2004, we incurred$563,000 in royalties and for the six months ended January 31, 2004, we incurred$776,000 in royalties. We are currently pursuing other licensing agreementswith similar terms and conditions. We expect the greatest impact from theseagreements will occur in the fiscal year ending July 31, 2004.

 

Our Rhode Islandmanufacturing facility, which occupied five stories in an old building, closedon May 31, 2002. All the production equipment, together with the electrical,piping, steam and air-conditioning were disassembled and transferred to ourexpanded Chase City, Virginia facility. This 75,000 square feet facility, withan additional 25,000 square feet from a recent expansion, and the 73,000 squarefoot facility at Keysville, Virginia (about 20 miles from Chase City,Virginia), is now the single manufacturing and distribution facility operatingunder one plant management for all products produced at the Chase City facility

 

Christmas andEaster gift sets and baskets are distributed at the Rhode Island andMassachusetts facilities. We source product for these gift sets and basketsprimarily from the Pacific Rim. We are continually looking to further reducecosts by more efficient sourcing on our gift set and gift baskets items throughother overseas suppliers.

 

We did not exercise the option to extend the term of the lease on ouroffice and assembly facility in Rhode Island and we plan to vacate the locationon March 31, 2004.  AfterMarch 31, 2004, our New Bedford, Massachusetts facility together with aplanned West Coast assembly and distribution facility will be utilized toimprove our shipping costs and assembly of our products.  There is no facility or commitments at thistime relating to the West Coast facility.

 

**Environmental Factors Affecting the Performance in theQuarter Ended October 31, 2002.**

 

On September 30, 2002, 29 west coast ports were shut down abruptlyand remained closed as contract negotiations between dock-workers and shippingcompanies broke off negotiations for new contracts. The shut down occurredduring our peak inventory shipping period for orders for the holiday season. Inmid-October 2002, the President of the United States of America signed anorder under the Taft-Hartley Act to reopen the ports and put a moratorium onthe strike for 60 days. The shut down had an effect on our first quarter ofshipments to our customers. A large

 

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portion of containers, which were to be received, remained either atports or on shipping vessels on the water. In addition, empty containers werenot brought back to ports in the Pacific Rim, which we needed to move some ofour other products.  Inmid-October 2002, our inventory began to be released for shipment to ourfacility in New Bedford, Massachusetts. A slow down by the long shore-men onshipping products was still prevalent. Our revenues for the three months endedOctober 31, 2002 were impacted by the shut down and resulted in a delay ofapproximately $6.0 million in sales. Approximately $3.5 million in inventory was shipped out during the secondquarter and approximately $1.5 million of the inventory was shipped during thefirst and second quarters of fiscal year 2004. We shipped $0.5 million of thisinventory in the quarter ended October 31, 2003 and $1.0 million of thisinventory was shipped in the quarter ended January 31, 2004.

 

**Results of Operations**

** **

**Three Months Ended January 31, 2004 and 2003**

 

Net sales for thethree months ended January 31, 2004 and 2003 were $17.4 million and $19.4million respectively, a decrease of 10.2%, or $2.0 million.  The decline in net sales was due to lowersales of manufactured candy of approximately $4.0 million and a decrease of$2.5 million on sales of gift items which were partially offset by theincreased sales of purchased candy of $4.5 million. Wal-Mart, Dollar Generaland Dollar Tree accounted for approximately 48%, 7% and 6%, respectively, ofsales for the three months ended January 31, 2004. Sam’s Club, Wal-Martand Dollar General accounted for approximately 20%, 10% and 10%, respectively,of sales for the prior year’s comparable period.

 

Net sales for each of our business segments was as follows:

 

Net sales of Manufactured Candy decreased to $1.5 million for the threemonths ended January 31, 2004 from $5.5 million for the three months endedJanuary 31, 2003.  The $4.0 milliondecrease was attributable to a $1.5 million decline in sales of ourmanufactured candy canes, a $0.9 million decline in sales of our manufactureditems for Valentine's Day, a $0.6 million decline in in sales of KastinsChristmas candy and a $1.0 million decline in our sales of Cows products. Thedecline is due to a shift in our focus toward purchasing products rather thanmanufacturing.  Therefore, there will bea continuing decline in sales of manufactured candy.

 

Net sales of Purchased Candy increased to $11.4 million for the threemonths ended January 31, 2004 from $6.9 million for the three months endedJanuary 31, 2003. The $4.5 million increase was attributable to $1.2million increase in the sale of purchased candy canes, a $0.4 million increasein the sales of purchased cows and a $2.9 million increase in the sales ofpurchased gift items, which had been assembled at our New Bedford,Massachusetts facility in the prior fiscal year.

 

Net sales of Gift Items decreased to $4.4 million for the three monthsended January 31, 2004 from $6.9 million for the three months endedJanuary 31, 2003.  The $2.5 milliondecrease was attributable to a $2.1 million decrease in sales of Easterassembled goods, of which, the $2.1 million relates to firm orders scheduled tobe shipped in the second quarter but delayed until the third quarter of 2004and a $0.4 million decrease in the sales of Valentine's Day gift items .

 

Gross margins increased to $5.2 million for the three months endedJanuary 31, 2004 from $5.0

 

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million for the three months ended January 31, 2003, and increasedto 30.2% from 26.0% as percent of sales, respectively.

 

Gross margins for each of our business segments were as follows:

 

Gross margins on our Manufactured Candy decreased to ($1.02 million)from ($1.03 million) for the three months ended January 31, 2004 and 2003,and from (18.1%) to (68.0%) as a percent of sales, respectively.  The decrease was mainly attributable to$100,000 of increased labor costs and overhead expenses at our manufacturingplant in New Hyde Park, New York.

 

Gross margins for our Purchased Candy increased to $4.7 million from$3.4 million for the three months ended January 31, 2004 and 2003, and to49.3% from 40.9% as a percent of sales, respectively. The $1.3 million increasewas primarily due to purchased pre-packed assembled gift items that were notassembled in our New Bedford, Massachusetts facility and better pricing ofpurchased candy from our third party overseas suppliers.

 

Gross margins on our Gift Items decreased to $1.5 million from $2.6million for the three months ended January 31, 2004 and 2003, and to 37.7%from 34.1% as a percent of sales, respectively.  The $1.1 million decrease was primarily due to the shipmentdelays on firm orders for our Easter gift baskets.

 

During the three months ended January 31, 2004 and 2003, selling,general and administrative expenses decreased to $2.5 million from $2.7million, respectively, and increased to 14.3% from 14.2% as a percent of sales,respectively. The $0.2 million decrease was attributable to $148,000 in travelexpenses, $238,000 of shipping and carrier costs, $70,000 in legal expenses,$39,000 in public relations expenses, $51,000 in trade show expenses, $20,000in building rental costs, $14,000 of pre-employment costs, $ 16,000 ofconsulting expenses and $7,000 in property insurance expenses.  The decreased expenses were partially offsetby a $403,000 increase in commissions.

 

We had no pre-productions startup costs during the three months endedJanuary 31, 2004 compared to $880,440 during the three months endedJanuary 31, 2003.  In the fourthquarter of the fiscal year ended July 31, 2002, we reduced the number ofemployees and changed the scope of operations at our Chase City, Virginiafacility eliminating the need for continued training costs for new employees atthe facility.

 

Salaries and related expenses decreased to $1.1 million for the threemonths ended January 31, 2004, from $1.3 million for the three monthsended January 31, 2003, or 6.1% from 6.6%, respectively, as a percent ofsales. This decrease resulted from a decline of approximately $0.2 million inour overhead due to our reorganization effort in the fourth quarter of thefiscal year ended July 31, 2003.

 

As a result of the foregoing, operating expenses decreased to $3.5million for the three months ended January 31, 2004 from $4.9 million forthe three months ended January 31, 2003 and decreased to 20.3% from 25.3%,respectively, as a percent of sales.

 

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Income from operations for the three months ended January 31, 2004was $1.7 million as compared to a loss of $0.01 million for the prior year’scomparable period. A majority of the increase resulted from the decrease in preproduction start up costs of approximately $0.9 million and other expensesexplained in results from operating expenses.

 

Interest income decreased to $41 for the three months endedJanuary 31, 2004 from $233 for the three months ended January 31,2003 as reserves declined. For the three months ended January 31, 2004,interest expense increased to $293,964 from $196,015 for the three months endedJanuary 31, 2003 due to an increase in our term debt financing of $1.3million associated with the merger with Asher Candy and interest on thesubordinated debt instrument we entered into during the fiscal year endedJuly 31, 2003.

 

Other expenses increased to $130,729 for the three months endedJanuary 31, 2004 from $63,711 for the three months ended January 31,2003 due to $136,000 of realized losses on foreign exchange transactions whichwas partially offset by $3,000 in gains on sales of assets at our Chase Cityfacility.

 

**The income tax rate utilized on an interim basis is basedon our estimate of the effective income tax rate for the fiscal year endingJuly 31, 2004. We have a net operating loss carry forward which managementbelieves will offset all taxable income generated in fiscal year 2004.  Therefore, we estimated our effective taxrate at 0%.**

** **

**Six Months Ended January 31, 2004 and 2003**

 

Net sales for thesix months ended January 31, 2004 and 2003 were $34.8million and $37.8million respectively, a decrease of 7.9%, or $3.0 million.  The decline in net sales was due to lowersales of manufactured candy of approximately $8.5 million offset by increasesin sales of purchased candy of $6.7 million and a decrease of $1.2 million onsales of gift items. Wal-Mart, Dollar General and Big Lots accounted forapproximately 27%, 9% and 9%, respectively, of sales for the six months endedJanuary 31, 2004. Sam’s Club, Big Lots and Dollar Tree accounted forapproximately 14%, 11% and 9%, respectively, of sales for the prior year’scomparable period.

 

Net sales for each of our business segments was as follows:

 

Net sales of Manufactured Candy decreased to $7.1 million for the sixmonths ended January 31, 2004 from $15.6 million for the six months endedJanuary 31, 2003.  The $8.5 milliondecrease was primarily due to a decline of $3.6 million of sales ofmanufactured candy canes, a $1.1 million decline in sales of our manufactureditems for Valentine's Day, a $0.6 million decline in sales of our manufactureditems for Halloween, a $0.3 million decline in sales of our manufactured itemsfor Christmas, $1.3 million decline in Kastins Christmas candy and a $1.6million decline in sales of our Cows products. The decline is due to a shift in our focus toward purchasing productsrather than manufacturing.  Therefore,there will be a continuing decline in sales of manufactured candy.

 

Net sales of Purchased Candy increased to $19.8 million for the sixmonths ended January 31, 2004 from $19.8 million for the six months endedJanuary 31, 2003. The $6.8 million increase

 

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was primarily due to $1.7 million increase in the sale of purchasedcandy canes, a $0.6 million increase in the sales of purchased Cows productsand a $4.5 million increase in the sales of purchased gift items, which hadbeen assembled at our New Bedford, Massachusetts facility in the prior fiscalyear.

 

Net sales of Gift Items decreased to $7.9 million for the six monthsended January 31, 2004 to $9.1 million for the six month period endedJanuary 31, 2003.  The $1.2 milliondecrease was primarily a result of a $1.1 million decrease in sales of Easterassembled goods,  $1.1 million of whichrelates to firm orders scheduled to be shipped in the second quarter butdelayed until the third quarter of 2004 and a $0.1 million decrease in sales ofValentines gift items.

 

Gross margins decreased to $10.2 million for the six months endedJanuary 31, 2004 from $10.5 million for the six months endedJanuary 31, 2003, and increased to 29.5% from 27.8% as percent of sales,respectively.

 

Gross margins for each of our business segments were as follows:

 

Gross margins on our Manufactured Candy decreased from $1.1 million to($0.9 million) for the six months ended January 31, 2003 and 2004,respectively.  The decrease was mainlyattributable to increased labor costs and overhead expenses at ourmanufacturing plant in New Hyde Park, New York and decreased sales of CandyCanes.

 

Gross margins for our Purchased Candy increased from $6.1 million to$8.5 million for the six months ended January 31, 2003 and 2004,respectively or 46.6% and 42.9% as a percent of sales, respectively. Theincrease was primarily due to purchased pre-packed assembled gift items thatwere not assembled in our New Bedford, Massachusetts facility and betterpricing of purchased candy from our third party overseas suppliers.

 

Gross margins on our Gift Items decreased from $3.3 million to $2.7million for the six months ended January 31, 2003 and 2004, respectivelyor 36.3% and 34.2% as a percent of sales, respectively.  The decrease was due primarily due to theshipment delays on firm orders for our Easter gift baskets which will beshipped in the third quarter 2004.

 

During the six months ended January 31, 2004 and 2003, selling,general and administrative expenses decreased to $4.7 million from $5.3million, respectively, and decreased to 13.6% from 14.0% as a percent of sales,respectively. The decrease was largely due to $247,000 in travel expenses,$308,000 of shipping and carrier costs, $77,000 legal expense,  $61,000 trade show expense, $75,000advertising expense, $60,000 on courier expense, $61,000 in building rentalcosts, $26,000 of pre-employment costs, $47,000 of professional expense,$35,000 telephone expense and $75,000 in property insurance expenses, which wasoffset by $472,000 increase in commissions.

 

Pre-productions startup costs decreased to $0 during the six monthended January 31, 2004 compared to $1,384,376 from the six months endedJanuary 31, 2003 period.  In thefourth quarter of fiscal year ended July 31, 2002, we reduced the level ofemployees and the scope of operations eliminating the need for continuedtraining costs for new employees at our Chase

 

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City, Virginia facility.

 

Salaries and related expenses decreased to $2,119,168 for the six monthsended January 31, 2004, from $2,458,409 for the six months endedJanuary 31, 2003, or 6.1% from 6.5%, respectively, as a percent of sales.This decrease resulted from a approximate decline of $339,000 in our overheaddue to our reorganization effort in the fourth quarter of the fiscal year endedJuly 31, 2003.

 

As a result, operating expenses for the six months endedJanuary 31, 2004 decreased to $6.8 million from $9.2 million for the sixmonths ended January 31, 2003 and decreased to 19.6% from 24.1%,respectively, as a percent of sales.

 

Income from operations for the six months ended January 31, 2004was $3.4 million as compared to income of $1.4 million for the prior year’scomparable period. Most of the increase resulted from the decrease in pre productionstart up costs of approximately $1.4 million and other expense explained inresults from operating expenses.

 

For the six months ended January 31, 2004, interest incomedecreased to $60 from $2,492 for the six months ended January 31, 2003 asreserves declined. For the six months ended January 31, 2004, interestexpenses increased to $530,730 from $337,072 for the six months endedJanuary 31, 2003 due to an increase in our term debt financing of $1.3million associated with the merger with Asher Candy and interest on thesubordinated debt instrument we entered into during the fiscal year endedJuly 31, 2003.

 

For the six months ended January 31, 2004, other expensesincreased to $126,191 from $62,175 for the three months ended January 31,2003 due to $27,000 of realized losses on foreign exchange transactions,$51,000 non operating expenses and $14,000 in gains on sales of assets at theChase City facility.

 

**The income tax rate utilized on an interim basis is basedon the Company’s estimate of the effective income tax rate for the fiscal yearending July 31, 2004. The Company has a net operating loss carry forwardwhich management believes will offset all taxable income generated in fiscalyear 2004.  Therefore, the Companyestimated its effective tax rate at 0%.**

 

**Liquidity and Capital Resources**

 

Our primary cashrequirements have been to fund the purchase, manufacture and commercializationof our products. We finance our operation and manufacturing with cash flow fromoperations and bank financing. Our working capital at January 31, 2004 andJuly 31, 2003 was $3,861,285 and $669,015, respectively.

 

Net cash providedin operating activities for the six months ended January 31, 2004 was$738,404 and the six months ended January 31, 2003 net cash used was($2,030,898), respectively. The increase in cash provided by operatingactivities was due primarily to decreases

 

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in accountsreceivable and accounts payable, which were offset by the increase in net income,inventory and accrued expenses.

 

Net cash used ininvesting activities for the six months ended January 31, 2004 and 2003,decreased to $36,983 from $586,549, respectively, primarily due to decreasedcapital improvements for the manufacturing operations in our Chase City,Virginia facility and the proceeds from the sale of assets.

 

Net cash provided by and (used in) financing activities for the sixmonths ended January 31, 2004 and 2003, was ($875,814) and $2,136,883,respectively.  This decrease wasprimarily due to decreased reliance on borrowings under our line of credit tofinance working capital needs for seasonal materials.  The borrowings for the period ended January 31, 2004 wereapproximately $5,618,497 as compared to $6,260,264 for the prior yearscomparable period.  We have $14,381,503of our $20,000,000 line of credit available to meet additional seasonal needsto purchase and manufacture inventory subject to availability of accountsreceivable and inventory.

 

Principal paymentsfor our long-term debt for the six months ended January 31, 2004, were$252,702. We believe that cash provided by operations will be sufficient tofinance our operations and fund debt service requirements.

** **

**Schedule of Contractual Obligations**

** **
|                         |   |      |      | **Payments  Due by Period** |   |
|------------------------------|--------|-----------|-----------|-----------------------------|--------|
| **Contractual  Obligation**  |   | **Total** |      | **Less Than  1 year**       |   | **1-3 years** |   | **After 4  years** |   |
| Long-Term Debt               |   | $         | 1,435,930 |                        | $      | 530,377 |   | $ | 624,220 |   | $ | 281,333 |   |
| Subordinated Debt            |   | 2,000,000 |      | 2,000,000                   |   | — |   | — |   |
| Capital Lease Obligation     |   | 431,868   |      | 15,718                      |   | 53,215 |   | 362,935 |   |
| Operating Leases             |   | 1,270,247 |      | 347,729                     |   | 597,189 |   | 325,329 |   |
| Total Contractual Obligation |   | $         | 5,138,045 |                        | $      | 2,893,824 |   | $ | 1,274,624 |   | $ | 969,597 |   |

 

**Schedule of Commercial Commitments**

** **
|                         |   |      |       | **Amount of  Commitment expiration per period** |   |
|------------------------------|--------|-----------|------------|-------------------------------------------------|--------|
| **Commercial  Commitments**  |   | **Total** |       | **Less Than  1 year**                           |   | **1-3 years** |   | **After 4  years** |   |
| Line of Credit (*)           |   | $         | 20,000,000 |                                            | $      | 20,000,000 |   | — |   | — |   |
| Total Commercial Commitments |   | $         | 20,000,000 |                                            | $      | 20,000,000 |   | — |   | — |   |

 

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(*)   Theline of credit is available for advances to finance working capital and theissuance of letter of credits.  Advancesunder the line of credit are based on a borrowing formula equal to 85% ofeligible domestic accounts receivable plus 60% of eligible finished goods and 30%of eligible components inventory. The line of credit facility varies fromquarter to quarter based on working capital needs and the level of repayments.

 

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**Item 3**.        Quantitative andQualitative Disclosures About Market Risk

** **

As a result of ourvariable rate line of credit, we are exposed to the risk of rising interestrates. Our $20,000,000 line of credit had an interest rate ranging from 4.11%to 4.12% for the six months ended January 31, 2004. Our long-term debt isat variable market tax exempt rates, which exposes us to fluctuations in themarket. However, since the rate is based on the tax exempt rate, it is belowthe market rate.

 

Our preparation offinancial statements in conformity with accounting principals generallyaccepted within the United States requires management to make estimates andassumptions in certain circumstances that effect amounts reported in theaccompanying financial statements and related notes. In preparing thesefinancial statement, management has made its best estimates and judgments ofcertain amounts included in the financial statements, giving due considerationto materiality. We do not believe there is a great likelihood that materiallydifferent amounts would be reported related to the accounting policies describedbelow; however, application of these accounting policies involves the exerciseof judgment and the use of assumptions as to future uncertainties and, as aresult, actual results could differ from these estimates.

 

We provide anallowance for un-collectible accounts receivable based on experience. Weconsider the following factors in developing an estimate of our allowance fornon-payment and the overall economic environment. Although it is reasonablypossible that management’s estimate of un-collectible accounts could change inthe near future, management is not aware of any events that would result in achange to its estimates which would be material to our financial position orresults from operations. For the quarter ended January 31, 2004, we had anallowance for doubtful accounts of approximately $239,000.

 

We provide anallowance for slow moving inventory based on experience and aging of products.We consider the following factors in developing an estimate of our allowancefor non-moving of inventory and the overall economic environment. Although itis reasonably possible that management’s estimate of slow moving inventorycould change in the near future, management is not aware of any events thatwould result in change to its estimates which would be material to ourfinancial position or results from operations. For the quarter endedJanuary 31, 2003, we had an allowance for slow moving inventory ofapproximately $844,715.

 

Goodwillrepresents the excess of consideration over the net assets acquired resultingfrom acquisitions of companies accounted for by the purchase method. We utilizethe annual evaluation as required by SFAS 142. At each Balance Sheet date,management evaluates the recoverability of the goodwill and reviews goodwilland other long-lived assets for impairment. As of January 31, 2003 therewas no impairment loss.

 

In April 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. We adopted the use of this accounting statement in June 2003. Adoption did not have a material effect on our financial position or results of operations.

 

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In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement established standards on how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and requires an issuer to classify a financial instrument that is within its scope as a liability, or an asset in some circumstances. We adopted the use of this accounting statement in May 2003. Adoption did not have a material effect on our financial position or results of operations.

 

**Seasonality and Cylicality; Fluctuation in QuarterlyOperating Results**

 

We haveexperienced and expect to continue to experience variability in revenues andnet income from quarter to quarter as a result of seasonality that mayaccompany private or public sector budget cycles. Sales of our products havehistorically been higher in the first and second quarters as a result ofpatterns of capital spending by our customers.

 

We also believethat the confectionery industry is influenced by general economic conditionsand particularly by the level of change. Increase levels of change can have afavorable impact on our revenues. We also believe that the confectionaryindustry tends to experience periods of decline and recession during economicdownturns. The confectionary industry could sustain periods of decline inrevenues in the future, and any decline may materially adversely effect us.

 

We could in thefuture experience quarterly fluctuations in operating results due to thefactors described above and other factors, including short-term nature ofcertain client commitments; patterns of capital spending by customers; loss ofa major client; seasonality that may accompany private or public budget cycles;pricing changes in response to various competitive factors; market factorsaffecting availability of qualified personnel and general economic conditions.

** **

**Item 4**.        Controls and Procedures

 

As of the end ofthe period covered by this report, our Chief Executive Officer and our ChiefFinancial Officer (collectively, the “certifying officers”) have evaluated theeffectiveness of our disclosure controls and procedures (as such term isdefined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act).  These disclosure controls and procedures aredesigned to ensure that the information required to be disclosed by us in ourperiodic reports filed with the Commission is recorded, processed, summarizedand reported within the time periods specified by the Commission’s rules andforms, and that the information is communicated to the certifying officers on atimely basis.

 

The certifyingofficers concluded, based on their evaluation, that our disclosure controls andprocedures are effective, taking into consideration the size and nature of ourbusiness and operations.

 

No change in our internal control over financial reporting (as suchterm is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) occurredduring the last fiscal quarter that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PART II OTHERINFORMATION**

** **

**Item 1.**        LegalProceedings

 

We are from time to time involved in litigation incidental to theconduct of our business. We were a plaintiff in an action with the landlord atour Rhode Island facility. The landlord sought security for its claims relatingto the lease agreement.  We deposited$180,000 with the registry of the court on allegation relating to amountssought for payment of real estate taxes, water and sewer, rent of otheroccupied space and repair expenses. On September 2002, the landlordclaimed other breaches of the lease agreement alleging an obligation of $932,000under the lease and has demanded $750,000 to settle the disputes.  We have continued claims against thelandlord and continue to occupy space at the leased premises. We have accruedamounts to cover current charges. Management does not believe that the outcome ofthese actions, individually or in the Aggregate, would have a material adverseeffect on our financial statements.  InNovember 2003, we settled the claims with the landlord.  The accrual in the financial statements wassufficient to cover all outstanding obligations to the landlord.

 

We are currently involved as Plaintiff in a suit brought before theCircuit Court for Montgomery County, Maryland, presenting claims in connectionwith the merger agreement under which Sherwood Brands acquired securities ofAsher Candy Acquisition Corporation and agreed to sell securities in SherwoodBrands to prior shareholders of Asher Candy. The complaint alleges that we were fraudulently induced to enter intothe merger agreement on the basis of, among other things, materialmisrepresentations and omissions by the shareholders of Asher Candy.  We are seeking declaratory and injunctiverelief and award of damages against the former shareholders of Asher Candy forviolations of the merger agreement and for common law fraud and violations ofapplicable securities laws.  Pendingresolution of the litigation, we have refused to honor the demand of the formershareholders for us to repurchase half of the shares issued to them at a price of$4.50 per share. Some of the shareholders have filed a counterclaim seeking$7.0 million in damages.  We believethat we have defenses to the counterclaim. There can be no assurance that wewill not be a party to other litigation in the future.

 

**Item 4.**        Submissionof Matters to a Vote of Security Holders

 

Our Annual Meeting of Shareholders (the “Meeting”) was held onJanuary 6th, 2004.

 

The only matters voted on at the Meeting consisted of the following;

 

The election of five members to our Board of Directors. The name ofeach nominee for the election and the number of shares voted and withheld forsuch nominee, as well as the number of broker non- votes with respect to suchmatters, are set forth below:

 
| **NAME**            |   | **FOR**   |   | **WITHHELD** |   | **NON-VOTES** |   |
|---------------------|--------|-----------|--------|--------------|--------|---------------|--------|
| Uziel Frydman       |   | 9,702,112 | *      | 33,869       |   | 275,580       |   |
| Amir Frydman        |   | 9,702,112 | *      | 33,869       |   | 275,580       |   |
| Douglas A. Cummins  |   | 9,702,112 | *      | 33,869       |   | 275,580       |   |
| Kenneth J. Lapiejko |   | 9,702,112 | *      | 33,869       |   | 275,580       |   |
| Guy M. Bynn         |   | 9,702,112 | *      | 33,869       |   | 275,580       |   |

 

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* Includes 1million shares of our Class B Common Stock which are entitled to carry sevenvotes per share.

** **

**Item 6.**        Exhibitsand Reports on Form 8-K

 

(a)           Exhibits

 

31.1         Certificationof the Chief Executive Officer Pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

31.2         Certificationof the Chief Financial Officer Pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

32.1         Certificationof the Chief Executive Officer Pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

32.2         Certificationof the Chief Financial Officer Pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

(b)           Reports on Form 8-K

 

None.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                       | SHERWOOD BRANDS,  INC.                            |
|----------------------------|---------------------------------------------------|
|                       |                                              |
| Date:  March 11, 2004 | /s/ Uziel  Frydman                                |   |
|                       | Chairman,  President and Chief Executive  Officer |
|                       |                                              |
| Date:  March 11, 2004 | /s/ Christopher  J. Willi                         |   |
|                       | Chief Financial  Officer and Secretary            |

 

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**Exhibit Index**

 
| **Exhibit  No.** |   | **Description**                                                                                                   |
|------------------|--------|-------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                              |
| **31.1**         |   | **Certification of the Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.** |
|             |   |                                                                                                              |
| **31.2**         |   | **Certification of the Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.** |
|             |   |                                                                                                              |
| **32.1**         |   | **Certification of the Chief Executive Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.** |
|             |   |                                                                                                              |
| **32.2**         |   | **Certification of the Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.** |

 

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