MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (con't)

LIQUIDITY AND CAPITAL RESOURCES (in thousands)

Net cash provided by operating activities was $7,929 and $3,812 in fiscal years 2003 and 2002, respectively. Gross accounts receivable balances increased $622 in 2003 and $3,134 in 2002. The balance in 2003 increased as a result of strong fourth quarter sales compared to the prior year. The primary reason for the increase in 2002 was the bankruptcy of a significant customer not yet written off as of the end of the 2002 year ($2.7 million) and slower collections. Inventories increased $471 in fiscal year 2003 due to higher unit quantities needed to support increased sales activity beginning in the last quarter of the fiscal year. Inventories decreased $1,603 in 2002 due to lower business levels and lower valuations due to favorable commodity costs. Accounts payable increased $749 in 2003 consistent with higher inventories and business activity at the end of the fiscal year. The current portion of non-current liabilities decreased $329 in 2003 due to lower incentive compensation accruals. Due to adverse pension investment results in past years, the Company has significantly increased its contributions to the defined benefit pension plan. Included in the current portion of non-current liabilities is $1,136 related to the anticipated contribution required in fiscal 2004. A minimum pension liability in the amount of $2,780 has been recorded in the accompanying financial statements as a result of adverse investment results and a lower discount rate being applied to the accumulated benefit obligation. The net tax effected amount of this liability is included in shareholders' equity as “Accumulated comprehensive loss”.

The Company's capital improvement expenditures decreased $675 in 2003 compared to the prior year. Significant projects in process ($846) at October 31, 2003 included equipment to expand processing capabilities at the Chicago facility ($704). Cash and cash equivalents increased $1,891 in 2003 and decreased $2,669 in 2002. Net cash flow improved in 2003 as a result of lower income tax payments and collection of amounts refundable. The decrease in 2002 was primarily a result of capital expenditures in the amounts of $3,767. Working capital decreased $1,416 in 2003 and $3,412 in 2002.

Working capital decreased in 2003 primarily due to the repurchase of 172,000 shares of common stock in the aggregate amount of $1,307. Working capital decreased in 2002 primarily as a result of non-current obligations becoming current, primarily the Company's defined benefit pension plan and supplemental executive retirement plans which historically were classified as non-current liabilities. The Company has remained free of interest-bearing debt for seventeen consecutive years. The Company maintains a line of credit with Bank of America that expires April 30, 2004. Under the terms of this line of credit, the Company may borrow up to $2,000 at an interest rate equal to the bank's reference rate, unless the Company elects an optional interest rate. The borrowing agreement contains various covenants, the more significant of which require the Company to maintain certain levels of shareholders' equity and working capital. The Company was in compliance with all provisions of the agreement during the 2003 fiscal year and there were no borrowings under this line of credit during such period. 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 for fiscal 2004.

Contractual Obligations (in thousands)

The Company remained free of interest bearing long-term debt for the seventeenth consecutive year and had no other long-term debt or other contractual obligations except for leases. The Company leases certain transportation and computer equipment under operating leases expiring in 2006. Future minimum lease payments are approximately $379 in the years 2004, $304 in 2005 and $28 in 2006.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the respective reporting periods. Actual results could differ from those estimates. Amounts estimated related to liabilities for self-insured workers' compensation, employee healthcare and pension benefits are especially subject to inherent uncertainties and these estimated liabilities may ultimately settle at amounts not originally estimated. Management believes its current estimates are reasonable and based on the best information available at the time.

The Company's credit risk is diversified across a broad range of customers and geographic regions. Losses due to credit risk have historically been immaterial although losses in fiscal year 2002 were significant due to a bankruptcy of a significant customer. The provision for losses on accounts receivable is based on historical trends and current collectibility risk. The Company has significant amounts receivable with a few large, well known customers which, although historically secure, could be subject to material risk should these customers' operations suddenly deteriorate. The Company monitors these customers closely to minimize the risk of loss. One customer comprised 14.6% of revenues in fiscal year 2003.

Revenues are recognized upon passage of title to the customer typically upon product shipment or delivery to customers. Products are delivered to customers primarily through its own long-haul fleet or through a company owned direct store delivery system.

Recent Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 45 (FIN 45), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees Of Indebtedness Of Others. FIN 45 requires a guarantor to recognize a liability, at the inception of the guarantee, for the fair value of obligations it has undertaken in issuing the guarantee and also requires more detailed disclosures with respect to guarantees. FIN 45 is effective for guarantees issued or modified after December 31, 2002 and requires additional disclosures for existing guarantees. This statement did not have any impact on the Company's financial position or results of operations.

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities. This interpretation requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities and results of the activities of the variable interest entity should be included in consolidated financial statements of the business enterprise. This interpretation applies immediately to variable interest entities created after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of this interpretation were effective beginning in our third quarter of fiscal 2003. This Interpretation did not have any impact on the Company's financial position or results of operations.

In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. This Statement did not have any effect on the Company's financial position, results of operations and cash flows.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (“SFAS No. 148”). SFAS No. 148 amends the disclosure requirements of Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123), to require disclosures in both interim and annual financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 also amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. As we decided not to adopt the SFAS No. 123 fair value method of accounting for stock-based employee compensation, the new transition alternatives of SFAS No. 148 did not have an effect on the consolidated financial statements. The pro forma effect to net income (loss) is presented under the Stock-based compensation paragraph above as if the fair value method had been applied.

In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. The new statement requires that those instruments be classified as liabilities in statements of financial position. Most of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the fourth quarter of fiscal year 2003. This Statement did not have any effect on the Company's financial position, results of operations and cash flows.

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