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 deployment of capital; availability of qualified personnel; 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. 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 needs 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 $10,189,000 in the 1997 fiscal year compared to $7,162,000 in 1996 and $5,580,000 in 1995. Accounts receivable balances increased $1,367,000 in 1997(13%) due to record fourth quarter sales, decreased by $185,000 in 1996 (2%) due to strong collections, and increased $769,000 (8%) in 1995 due to the continued expansion of the business and changing nature of the customer base. Inventories increased $1,754,000 (13%) in 1996 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. Non-current assets increased $1,122,000 (17.1%), $1,240,000 (23.3%), and $1,170,000 (28.2%) in 1997, 1996, and 1995 due primarily to the increased cash surrender value of life-insurance polices and increases in deferred income tax benefits due primarily to increases in non-funded employee benefits. Accounts payable and accrued expenses increased $1,759,000 (18.5%) in 1997, due to higher purchasing activity to support record fourth quarter sales volume, and increased product promotion and bonus accruals. In 1996 the $1,083,000 (12.8%) increase was primarily a result of increases in accrued advertising.

The Company’s capital improvement expenditures decreased in 1997 compared to recent years. Cash used for additions to property, plant and equipment decreased $4,039,000 (67%) in 1997 and by $2,787,000 (32%) in 1996. Significant projects were completed at all locations in 1996, primarily the Dallas freezer expansion at a total cost of $6,005,000 and the North Carolina plant at a total cost of $5,070,000. Capital expenditures for these projects totaled approximately $4.0 and $6.3 million in fiscal years 1996 and 1995, respectively. These investments are expected to yield higher production capacities, improved plant utilization and realize cost savings in future years.

Cash and cash equivalents increased $6,035,000 (95%) in 1997 primarily as a result of lower capital expenditures, improved profitability and significant increases in non-funded employee benefits. 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 an increase in cash dividends paid. The Company has remained free of interest-bearing debt for eleven consecutive years. Working capital increased $5,436,000 (22.4%) in 1997. The increase in working capital reflects lower capital spending, improved profitability and significant increases in non-funded employee benefits. The Company maintains a line of credit with Bank of America that expires April 30, 1999. There were no borrowings under this line of credit during 1997.

Certain reclassification entries have been recorded in prior year balance sheets to conform to the fiscal 1997 year balance sheet presentation. These reclassifications increased working capital balances in all years presented.