MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES

Certain statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report constitute “forward-looking statements” within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such forward looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of Bridgford Foods Corporation to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Such factors include, among others, the following; general economic and business conditions; the impact of competitive products and pricing; success of operating initiatives; development and operating costs; advertising and promotional efforts, adverse publicity; acceptance of new product offerings; consumer trial and frequency; changes in business strategy or development plans; availability, terms and commodity, labor, and employee benefit costs; changes in, or failure to comply with, government regulations; weather conditions; construction schedules; and other factors referenced in this report.

The Company’s operating results are heavily dependent upon the prices paid for raw materials. The marketing of the company’s value-added products does not lend itself to instantaneous changes in selling prices. Changes in selling prices are relatively infrequent and do not compare with the volatility of commodity markets. Higher flour and pork prices were experienced during the fiscal 1996 compared o prior fiscal years. Management anticipates that these costs will continue to stabilize into fiscal year 1997 although no assurances can be given. Costs of flour have declined in 10 to 20% range since the close of the third quarter of 1996 while pork prices have remained at historically high levels.

The impact of inflation on the Company’s financial position and results of operations has not been significant during the last three years. Management is of the opinion that the Company’s strong financial position and its capital resources are sufficient to provide for its operating results and capital expenditures.

Favorable operating results over the past several years have continued to provide significant liquidity to the Company. Net cash provided by operating activities was $7,162,000 in the 1996 fiscal year compared to $5,580,000 in 1995 and $9,902,000 in 1994. Accounts receivable balances decreased by $185,000 in 2996 (2%) due to strong collections, and increased $769,000 (8%) in 1995 and $794,000 (9%) in 1994 due to the continued expansion of the business and changing nature of the customer base. Inventories increased $1,754,000 (13%) in 1196 and $1,790,000 (15%) in 1995 due to continued business expansion, higher storage capacities, higher raw materials costs and increased distribution of the Company’s products. Prepaid expenses increased $494,000 (15%0, $894,000 (33%), and $256,000 (11%) in 1996, 1995, and 1994 due primarily to the increased cash surrender value of life-insurance policies. The Company also recorded income tax receivable in prepaid expenses of $287,000 in 1995. Accounts payable and accrued expenses increased $2,200,000 (14%) in 1996 and $1,462,000 (10%) in 1995 due primarily to increases in non-funded employee benefits and accrued advertising.

The Company’s capital improvement programs continued into 1996. Cash used for additions to property, plant and equipment decreased $2,787,000 (32%). Significant projects were completed at all locations, primarily the Dallas Freezer expansion at a total cost of $6,005,000 ($1,820,000 for fiscal year 1996) and the North Carolina plant at a total cost of $5,070,000 ($2,177,000 for fiscal year 1996). The balance of projects in process at November 1, 1996 was $167,000. Capital expenditures in fiscal year 1995 for these projects totaled approximately $6.3 million. These investments are expected to yield higher production capacities, improved plant utilization and realize cost savings in future years, Although annual depreciation expense will increase as a result of these additions, such increase is not expected to have a material adverse impact on the operating results of the Company. Cash used for additions to property, plant and equipment increased $993,000 (57%) in 1994 compared to the prior year. Expenditures consisted primarily of additions of delivery vehicles, machinery and equipment and $1,554,000 in construction projects.

Cash flows used to pay cash dividends increased $94,000 (4%) in 1996, $282,000 (15%) in 1995 and $376,000 (25%) in 1994, when compared to the prior year, in recognition of the continuing success of the Company.

Cash and cash equivalents decreased $1,023,000 (14%) in 1996 and $5,282,000 (42%) in 1995 due primarily to significant investments made in property, plant and equipment and in an increase in cash dividends paid. Cash and cash equivalents increased in 1994 $5,375,000 (74%) due to the continued operating success of the Company and significant increases in non-funded employee benefits. The Company has remained free of interest-bearing debt for ten consecutive years. Working capital decreased by $93,000 (1%) in 1996 and $2,376,000 (10%) in 1995 after reaching a record high of $24,871,000 in 1994. The decrease in working capital is directly attributable to significant investments made by the Company in projects in-process during the 1996 and 1995 fiscal years. The Company maintains a $2,000,000 revolving line of credit with Bank of America that expires April 30, 1998. There were no borrowings under this line of credit during 1996.