RESULTS OF OPERATIONS
1998 compared to 1997

Sales in fiscal year 1998 increased $6,956,000 (5.4%) when compared to sales of the prior year, primarily as a result of increased sales volume.

Cost of products sold increased by only $255,000 when compared to the prior year. The gross margin was approximately 40% in 1998, 36.9% in 1997 and 35.9% in 1996. Costs for pork commodity products reached historically low levels and flour costs continued to be favorable in 1998 and 1997 compared to the prior years.

Selling, general and administrative expenses increased $3,303,000 (9.8%) when compared to the prior year. This increase was generally consistent with the overall increase in sales. Selling expenses outpaced sales growth due to an increased sales force and higher performance bonuses due to record profitability.

The Company’s capital expansion projects declined significantly compared to recent years. The Company expects to continue the growth and modernization of facilities and equipment used in the business and, after experiencing lower capital expenditures in 1998 and 1997, anticipates increased capital investments in future years. The effective tax rate remained consistent with the prior year at 38%.

1997 compared to 1996

Sales in fiscal year 1997 increased $9,543,000 (8.1%) when compared to sales of the prior year, primarily as a result of increased sales volume.

Cost of products sold increased by $4,747,000 (6.3%) when compared to the prior year. The gross margin was approximately 36.9% in 1997 and 35.9% in 1996. Costs for pork commodity products remained at historically high levels while flour costs became more favorable in 1997 compared to the prior year. Improved sales of higher margin products and lower flour costs resulted in a slight improvement in the gross margin.

Selling, general and administrative expenses increased $2,801,000 (9.1%) when compared to the prior year. This increase was generally consistent with the overall increase in sales. Advertising expenses continued to outpace the increase in sales as a result of aggressive promotional programs to increase sales of the Company’s products and to maintain current distribution channels. Depreciation expense increased $457,000 (18%) when compared to the prior year. The Company completed significant expansion projects to existing facilities located in Texas and a food processing facility in North Carolina. Second year (half-year convention) depreciation related to these projects totaled approximately $980,000. The Company expects to continue the growth and modernization of facilities and equipment used in the business and, after experiencing lower capital expenditures in 1997, anticipates increased capital investments in future years. The effective tax rate remained consistent with the prior year at 38%.

1996 (52 weeks) compared to 1995 (53 weeks)

Sales in fiscal year 1996 increased $5,819,000 (5.2%) when compared to sales of the prior year. After considering the 53-week year, sales volume increased approximately 7.2% when compared to the prior year.

Cost of products sold increased by $4,020,000 (5.6%) when compared to the prior year. The gross margin was approximately 36% in 1996 and 1995 compared to 35% for 1994. Costs for commodity products were less favorable in 1996 compared to prior years. However, a changing sales mix and increased selling prices helped mitigate the impact of these increased costs.

Selling, general and administrative expenses increased $2,784,000 (9.9%) when compared to the prior year. This increase was generally consistent with the overall increase in sales. Advertising expenses outpaced the increase in sales as a result of aggressive promotional allowances to promote the Company’s products and to maintain current distribution channels.

Depreciation expense increased $530,000 (27%) when compared to the prior year. The Company completed significant expansion projects to existing facilities located in Texas and a food processing facility in North Carolina. First year (half-year convention) depreciation from these projects totaled approximately $490,000. The Company expects to continue the growth and modernization of facilities and equipment used in the business. The effective tax rate remained consistent with the prior year at 38%.

LIQUIDITY AND CAPITAL RESOURCES

Favorable operating results over the past several years have continued to provide significant liquidity to the Company. Net cash provided by operating activities was $14,579,000 in the 1998 fiscal year compared to $10,189,000 in 1997 and $7,162,000 in 1996. Accounts receivable balances increased $699,000 (6%) in 1998 and $1,367,000 in 1997(13%) due to record fourth quarter sales and decreased by $185,000 in 1996 (2%) due to strong collections. Inventories decreased $1,490,000 in fiscal 1998 due primarily to significantly lower commodity costs and lower quantities compared to the prior fiscal year. Inventories increased $1,754,000 (13%) in 1996 due to continued business expansion, higher storage capacities, higher raw materials costs and increased distribution of the Company’s products. Non-current assets increased $1,363,000 (18%), $1,122,000 (17%) and $1,240,000 (23%) in 1998, 1997, and 1996, respectively, due primarily to the increased cash surrender value of life-insurance policies and increases in deferred income tax benefits due principally to increases in non-funded employee benefits. Accounts payable and accrued expenses increased $1,759,000 (19%) 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 (13%) increase was primarily a result of increases in accrued advertising.

The Company’s capital improvement expenditures decreased in 1998 and 1997 compared to recent years. Cash used for additions to property, plant and equipment decreased $4,039,000 (67%) in 1997. 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. Cash and cash equivalents increased $9,894,000 (80%) in 1998 and $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 due primarily to significant investments made in property, plant and equipment and to increases in cash dividends paid. The Company has remained free of interest-bearing debt for twelve consecutive years. Working capital increased $7,569,000 (25.5%) and $5,436,000 (22.4%) in 1998 and 1997, respectively. 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, 2000. There were no borrowings under this line of credit during 1998.

The Company has and will continue to make certain investments in its software systems and applications to ensure year 2000 compliance. The financial impact to the Company has not been and is not anticipated to be material to its financial position or results of operations in any given year. Detail disclosure regarding the Company’s year 2000 plan and discussion of risk factors is contained under Item 1., “Business” in Form 10-K for the fiscal year ended October 30, 1998.