Synalloy Corporation, a Delaware Corporation ("the Company"), was incorporated in 1958 as the successor to a chemical manufacturing business founded in 1945. Its charter is perpetual. The name was changed on July 31, 1967 from Blackman Uhler Industries, Inc. On June 3, 1988, the state of incorporation was changed from South Carolina to Delaware. The Company's executive offices are located at Croft Industrial Park, Spartanburg, South Carolina.

Metals Segment-- This segment is comprised of a wholly-owned subsidiary, Synalloy Metals, Inc. which owns 100 percent of Bristol Metals, L.P.,("Bristol") located in Bristol, Tennessee.

Bristol manufactures welded pipe, primarily from stainless steel, but also from other corrosion-resistant metals. Pipe is produced in sizes from one-half inch to 60 inches in diameter and wall thickness up to three-quarters inch. Sixteen-inch and smaller pipe is made on equipment that forms and welds the pipe in a continuous process. Pipe larger than sixteen inches is formed on presses or rolls and welded on batch welding equipment. Pipe is normally produced in standard 20-foot lengths. However, Bristol has unusual capabilities in the production of long length pipe without circumferential welds. This can reduce installation cost for the customer. Lengths up to 60 feet can be produced in sizes up to sixteen inches in diameter. In larger sizes Bristol has a unique ability among domestic producers to make 48-foot lengths in sizes up to 30 inches.

A significant amount of the pipe produced is further processed into piping systems that conform to engineered drawings furnished by the customers. This allows the customer to take advantage of the high quality and efficiency of Bristol's fabrication shop instead of performing all of the welding on the construction site. The pipe fabricating shop can make one and one-half diameter cold bends on one-half inch through eight-inch stainless pipe with thicknesses up through schedule 40. Most of the piping systems are produced from pipe manufactured by Bristol.

Bristol also has the capability of producing carbon and chrome piping systems from pipe purchased from outside suppliers since Bristol does not manufacture carbon or chrome pipe. Carbon and chrome pipe fabrication enhances the stainless fabrication business by allowing Bristol to quote inquiries utilizing any of these three material types. Bristol can also produce pressure vessels and reactors, tanks and other processing equipment.

In order to establish stronger business relationships, only a few raw material suppliers are used. Three suppliers furnish more than two-thirds of total dollar purchases of raw materials. However, raw materials are readily available from a number of different sources and the Company anticipates no difficulties in obtaining its requirements.

This segment's products are used principally by customers requiring materials that are corrosion-resistant or suitable for high-purity processes. The largest users are the chemical, petrochemical and pulp and paper industries with some other important industry users being mining, power generation, waste water treatment, liquid natural gas, brewery, food processing, petroleum and pharmaceutical.

Chemicals Group-- This group is comprised of two business segments: Colors Segment and Specialty Chemicals Segment. The Group includes four operating companies: Blackman Uhler Chemical Company (BU Specialties), a division of the Company; Manufacturers Soap and Chemical Company, which owns 100 percent of Manufacturers Chemicals, L.P. (MC); Organic-Pigments Corporation (OP); and Blackman Uhler, LLC (BU Colors). MC and OP are wholly-owned subsidiaries of the Company and BU Colors is 75 percent owned by the Company. BU Specialties and BU Colors operate out of a plant in Spartanburg, South Carolina which is fully licensed for chemical manufacture and maintains a permitted waste treatment system. BU Colors also has a sales and distribution facility in Clifton, New Jersey. MC is located in Cleveland, Tennessee and Dalton, Georgia and is fully licensed for chemical manufacture. OP is located in Greensboro, North Carolina.

The Colors Segment includes OP and BU Colors. The Colors Segment's principal business is the manufacture and sale of dyes and pigments ("colors") to the paper, textile, carpet, flexographic printing, graphic arts and coatings industries. BU Colors produces dyes at the Spartanburg plant and pigments are produced at OP in Greensboro. Dyes are produced in both liquid and powder form, and pigments primarily as a specially formulated paste. Dyes fix themselves to textile fibers by a particular reaction or penetration into the yarn fiber, whereas pigments are normally applied as a surface coating during a printing operation. Dyeing of textile fabrics in solid colors is primarily accomplished by the use of dyes. Pigment colors are uniquely suitable for printing of multi-colored patterns. Raw materials used to manufacture colors consist chiefly of organic intermediates and inorganic chemicals which are purchased from manufacturers in the United States, Europe and Asia. Currently, raw ma terials are readily available and management does not anticipate any difficulty in obtaining adequate supplies.

The Company purchased OP in 1998. OP manufactures aqueous pigment dispersions sold to the textile industry and used in printing inks for use on paper and in paints for the industrial coatings industry. The addition of OP provided the ability to produce higher solid and finer particle size dispersions allowing the Colors Segment to diversify into non-textile applications.

On July 29, 2003, the Company acquired certain assets of Rite Industries. These assets along with Synalloy's existing textile dye business were placed into a newly formed subsidiary of the Company called Blackman Uhler, LLC (BU Colors). The newly formed company is owned 75 percent by the Company with the remaining percentage owned by a group of former Rite Industries executives now associated with BU Colors. The acquisition provides a significant number of customers in the paper and other non-textile industries and expands the Colors Segment's non-textile sales base. Combining the production capacity and eliminating duplicated overhead costs provides the opportunity to reduce operating costs. It also provides a more diverse product offering and stronger selling and technical support capabilities.

The Specialty Chemicals Segment includes MC in Cleveland, Tennessee and Dalton, Georgia and specialty chemicals produced in the BU Specialties plant. The Segment is a producer of specialty chemicals for the textile, carpet, chemical, paper, metals, photographic, pharmaceutical, agricultural and fiber industries. The Company has been focusing on specialty chemicals as a primary growth area over the past several years. Facilities and equipment at the BU Specialties plant provide toll and custom manufacturing of organic chemicals using reactions that include nitrations, hydrogenation, distillation, diazotizations, methylation and custom drying. These chemicals are used in a wide array of products including sun screens, UV absorbers for plastics, Cetane improver for diesel fuel, absorbers for gaseous pollutants, herbicides, anti-wicking agents, fire retardants, processing aids for PVC and paper resins.

The Company purchased MC in 1996. MC produces defoamers, surfactants, dye assists, softening agents, polymers and specialty lubricants for the textile, paper, chemical and metals industries. MC also manufactures chelating agents and water treatment chemicals. Manufacturing capabilities include a wide range of chemical reactions and mixing and blending applications. MC's products are sold to direct users in a variety of manufacturing areas, directly to other chemical companies in the form of intermediates or as finished products for resale, and as contract manufacturing where the customer provides formula specifications and, in some cases, raw materials.

In 2000, MC acquired the assets of a manufacturer of sulfated fats and oils. The manufacturing equipment for these products was moved to the Cleveland, Tennessee plant where both capacity and chilling capabilities were increased. These products are used as lubricants, wetting agents, detergents and emulsifiers in a variety of chemical formulations. The addition of these capabilities and processes broadens the range of sulfated products already manufactured at MC.

In July 2001, the Company completed an asset purchase of Global Chemical Resources (Dalton) located in Dalton, Georgia. Dalton manufactures and resells chemical specialties and heavy chemicals and blends and resells dyestuffs to the carpet and rug industries, selected textile mills and the wire drawing industry. The manufacture of liquid products was immediately transferred to the Cleveland plant, and the remaining warehousing and dye blending operation along with the shade matching lab and sales offices were moved to a leased facility in Dalton. In addition, Dalton markets the chemical specialties produced at other Specialty Chemicals Segment locations.

The Chemicals Group maintains eight laboratories for applied research and quality control which are staffed by 32 employees.

Metals Segment-- The Metals Segment utilizes separate sales organizations for its different product groups. Stainless steel pipe is sold nationwide under the Brismet trade name through authorized stocking distributors with over 200 warehouse locations throughout the country. In addition, large quantity orders are shipped directly from Bristol's plant to end-user customers. Producing sales and providing service to the distributors and end-user customers are the Vice President of Sales, two outside sales employees, four independent manufacturers' representatives and six inside sales employees.

Piping systems are sold nationwide under the Bristol Piping Systems trade name by three outside sales employees. They are under the direction of the Vice President in charge of piping systems who spends over half of his time in sales and service to customers. Piping systems are marketed to engineering firms and construction companies or directly to project owners. Orders are normally received as a result of competitive bids submitted in response to inquiries and bid proposals.

Colors Segment-- Ten full-time outside sales employees and 19 manufacturers' representatives market colors to the textile industry nationwide. In addition, the market development manager of BU Colors devotes a substantial part of his time to sales.

Specialty Chemicals Segment-- Specialty chemicals are sold directly to various industries nationwide by 11 full-time outside sales employees and four manufacturers' representatives. In addition, the President, market development manager and another employee of MC devote a substantial part of their time to sales.

Metals Segment-- Welded stainless steel pipe is the largest sales volume product of the Metals Segment. Although information is not publicly available regarding the sales of most other producers of this product, management believes that the Company is one of the largest domestic producers of such pipe. This commodity product is highly competitive with eight known domestic producers and imports from many different countries. The largest sales volume among the specialized products comes from fabricating light-wall stainless piping systems. Management believes the Company is one of the largest producers of such systems.

Colors Segment-- The market for dyes and pigments is highly competitive and the Company has less than ten percent of the market for its products.

Specialty Chemicals Segment-- The Company is the sole producer of certain specialty chemicals manufactured for other companies under processing agreements. However, the Company's sales of specialty products are insignificant compared to the overall market for specialty chemicals. The market for most of the products is highly competitive and many competitors have substantially greater resources than does the Company.

Environmental expenditures that relate to an existing condition caused by past operations and that do not contribute to future revenue generation are expensed. Liabilities are recorded when environmental assessments and/or cleanups are probable and the costs of these assessments and/or cleanups can be reasonably estimated. See Note I to Consolidated Financial Statements for further discussion.

The Company spent approximately $457,000 in 2003, $524,000 in 2002 and $701,000 in 2001 on research and development programs in its Chemicals Group. Nine individuals, all of whom are graduate chemists, are engaged primarily in research and development of new products and processes, the improvement of existing products and processes, and the development of new applications for existing products.

The annual requirements of certain specialty chemicals are produced over a period of a few months as requested by the customers. Accordingly, the sales of these products may vary significantly from one quarter to another.

The Colors and Specialty Chemicals Segments operate primarily on the basis of delivering products soon after orders are received. Accordingly, backlogs are not a factor in these businesses. The same applies to commodity pipe sales in the Metals Segment. However, backlogs are important in the piping systems products because they are produced only after orders are received, generally as the result of competitive bidding. Order backlogs for these products were $6,700,000, $5,800,000 and $3,700,000 at the 2003, 2002 and 2001 respective year ends.

As of January 3, 2004, the Company had 470 employees. The Company considers relations with employees to be satisfactory. The number of employees of the Company represented by unions at the Bristol, Tennessee facility is 170. They are represented by two locals affiliated with the AFL-CIO and one local affiliated with the Teamsters. Collective bargaining contracts will expire in December 2004, March 2005 and February 2009.

Information about revenues derived from domestic and foreign customers is set forth in Note R to the Consolidated Financial Statements.

The Company operates the major plants and facilities described herein, all of which are well maintained and in good condition. All facilities throughout the Company are adequately insured. The buildings are of various types of construction including brick, steel, concrete, concrete block and sheet metal. All have adequate transportation facilities for both raw materials and finished products. The Company owns all of these plants and facilities, except as noted.

(1) Leased facility.
(2) Plant closed in 2001.

For a discussion of legal proceedings, see Note O to the Consolidated Financial Statements.

No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through the solicitation of proxies or otherwise.

The Company had 1,039 common shareholders of record at January 3, 2004. The Company's common stock trades on the Nasdaq National Market System of The Nasdaq Stock Market and changed its trading symbol to SYNL effective October 6, 2003. On October 26, 2001, the Company's Board of Directors voted to suspend cash dividends. On July 26, 2002, the Company entered into a new credit agreement which prohibits the payment of dividends. The prices shown below are the last reported high and low sales prices for the common stock for each full quarterly period in the last two fiscal years as quoted on The Nasdaq National Market System.

The information required by Item 201(d) of Regulation S-K is set forth under Part III, Item 12 of this Form 10-K.

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments based on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimate s under different assumptions or conditions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of the Company's consolidated financial statements.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. A significant portion of the Company's accounts receivable in the Colors Segment are from domestic customers in the textile industry, which has been in a steady decline over the last several years. If the financial condition of these or any other customers of the Company were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

The Company writes down its inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and current market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

As with the accounts receivable, a significant portion of the Company's inventories in the Colors Segment are used by domestic customers in the textile industry. In addition, most of the key raw materials are imported from Asian countries which requires the Company to maintain significant amounts of inventory for certain products in order to adequately service the Colors Segment's customers in a timely manner. If the financial condition of these customers were to deteriorate, resulting in the elimination or reduction of their demand for our products, additional inventory write-downs may be required.

As noted in Note I to the Consolidated Financial Statements, the Company has accrued $845,000 in environmental remediation costs which, in management's best estimate, will satisfy anticipated costs of known remediation requirements as outlined in Note I. As a result of the evolving nature of the environmental regulations, the difficulty in estimating the extent and remedy of environmental contamination, and the availability and application of technology, the estimated costs for future environmental compliance and remediation are subject to uncertainties and it is not possible to predict the amount or timing of future costs of environmental matters which may subsequently be determined. Subject to the difficulty in estimating future environmental costs, the Company believes that the likelihood of material losses in excess of the amounts recorded is remote. However, any changes, including regulatory changes, may require the Company to record additional remediation reserves.

The current ratio for the year ended January 3, 2004, was 3.5:1, which is up from the previous year-end ratios of 2.5:1 in 2002 and 2.2:1 in 2001. Working capital increased $8,646,000 to $28,706,000 and cash flows used in operations totaled $3,820,000. The increase in working capital and use of cash flows came primarily from increases in accounts receivable and inventories of $4,845,000 and $5,136,000, respectively, offset by an increase of $1,410,000 in accounts payable. Also contributing to the cash use was the net loss incurred of $1,421,000 offset by depreciation and amortization expense of $3,072,000, and the receipt of a $2,653,000 tax refund from prior years. The increases in inventories, accounts receivable and accounts payable were generated from a combination of the acquisition of the Rite Industries' assets by the Colors Segment, and increased sales activity in the Metals Segment discussed in the Segment comparisons below. An increase in line of credit bo rrowings of $4,898,000 funded the working capital increase along with capital expenditures of $2,009,000. The Company expects that cash flows from 2004 operations and available borrowings will be sufficient to make debt payments and fund estimated capital expenditures of $2,400,000 and normal operating requirements. On July 26, 2002, the Company entered into a new Credit Agreement with a new lender to provide a $19,000,000 line of credit. On July 24, 2003, the Agreement was amended increasing the borrowing amount to $23,000,000, primarily under the existing terms, and extending the expiration date to July 25, 2006. Borrowings under the Agreement are limited to a borrowing base calculation including eligible accounts receivable, inventories, and cash surrender value of the Company's life insurance as defined in the Agreement. As of January 3, 2004, the amount available for borrowing was $23,000,000 of which $18,761,000 was borrowed leaving $4,239,000 of availability. Covenants include, among others, a prohibi tion on the payment of dividends. At January 3, 2004, the Company was in violation of its earnings covenant for which the Company received a waiver from its lender.

The Company incurred a consolidated loss for 2003 of $.24 per share on a 16 percent sales increase to $98,808,000. This compares to a loss of $.81 per share in the prior year. For the fourth quarter of 2003, the Company had a loss of $1,272,000, or $.21 per share, on a 35 percent increase in sales to $28,504,000. This compares to net income of $17,000, or $.00 per share earned in the fourth quarter of 2002.

Consolidated operating results were significantly impacted by several transactions that were recorded during the year. In the fourth quarter of 2003, the Company recorded charges discussed in the Segment comparisons below totaling $979,000, net of tax, or $.17 per share. Without the charges, losses of $442,000 and $293,000, or $.07 and $.05 per share, were incurred for the year ended and fourth quarter of 2003, respectively. Included in the 2003 other income are $150,000 of non-recurring income received from the sale of the Company's NASDAQ stock symbol, and $119,000 in dividend income received from the Company's life insurance policies, both recorded in the third quarter of 2003.

Consolidated selling, general and administrative expense for 2003 increased $1,956,000 to $12,132,000 compared to 2002 and was 12 percent of sales for both 2003 and 2002. The acquisition of the Rite Industries operations by the Colors Segment accounted for almost all of the dollar increase offset somewhat by cost reductions of personnel and non-critical operating expense items, many of which impacted selling and administrative expense, implemented in the third quarter of 2002.

Consolidated sales were down for 2002, decreasing six percent from the same period one year ago, as the Company incurred a loss for 2002 of $.81 per share. This compares to a loss of $.05 per share in the prior year. For the fourth quarter of 2002, the Company had a profit of $17,000 on a 6 percent increase in sales to $21,675,000. This compares to a loss of $457,000 in the last quarter of 2001.

Consolidated operating results for 2002 were significantly impacted by several transactions that were recorded during the year. In the second quarter of 2002, the Company recorded charges discussed in the Segment comparisons below totaling $3,368,000, net of tax, or $.56 per share. The Company sold certain non-operating assets during 2002, including its investments in equity securities, for an after-tax gain of $392,000, or $.07 per share, of which $349,000, or $.06 per share, was recorded in the fourth quarter of 2002.

Consolidated selling, general and administrative expense for 2002 declined $396,000 to $10,176,000 compared to 2001, and was 12 percent of sales for both 2002 and 2001. Beginning in September 2002, cost reductions, including reductions of personnel and non-critical operating expenses, were implemented, many of which impacted selling, general and administrative expense.

Metals Segment-- The following table summarizes operating results and backlogs for the three years indicated. Reference should be made to Note R to the Consolidated Financial Statements.

Dollar sales increased 12 percent for the year from the same period a year earlier. The increase for the year resulted from 19 percent higher average selling prices partially offset by six percent lower unit volumes. Surcharges paid on stainless steel raw materials increased throughout the year increasing from an average of about $.12 per pound in December 2002 to an average of about $.38 per pound in December 2003. The Segment was able to pass through most of these cost increases, which accounted for most of the increase in selling prices, especially in the fourth quarter. The increase in the year-to-date selling price also resulted from a change in product mix to a higher percentage of higher-margin large diameter pipe, experienced primarily in the second and third quarters of 2003. The combination of higher selling prices and favorable product mix along with cost reductions implemented in the third quarter of 2002 contributed to the significant profit improvement experienced for the year compared to the same period of 2002. While commodity pipe generated operating income for the year, piping systems did not fare as well, incurring losses for the year consistent with 2002. Piping systems' backlog maintained a better than average level throughout the year, ending the year at $6,700,000. However, due to the customers' scheduling requirements for our material, we were unable to get a sufficient amount of work in the shop from the backlog to enable piping systems to operate profitably through the first nine months. The situation improved in the fourth quarter as piping systems was able to generate a modest profit for the quarter.

Selling and administrative expense decreased $320,000, or nine percent, and declined slightly as a percentage of sales compared to 2002 as a result of cost reductions implemented in September of 2002, including reductions of personnel and non-critical operating expense items, many of which impacted selling and administrative expense.

Dollar sales for 2002 were down eight percent as the result of an 18 percent average decline in sales prices offset by a 12 percent increase in unit volumes. Extremely competitive market conditions, together with a change in product mix, with a lower percentage of sales coming from higher-priced fabricated piping systems, led to the fall in average selling prices. The increase in volume came primarily from the increase in sales of lower-margin smaller diameter commodity pipe. The market conditions, together with the change in product mix had a significant effect on profits as the Segment incurred an operating loss of $981,000 for 2002 compared to operating income of $2,444,000 in 2001. Also contributing to the loss was the recording of a $671,000 charge in the second quarter of 2002 to write down inventory. The Company has historically sold off excess inventory slowly to avoid distressed pricing that would be required to dispose of the excess inventory more quickly. With the price erosion that occurred over the first six months of the year and weak business conditions that existed, excess inventories were not reduced as much as planned. Most of the inventory write-down was the result of excess inventories of fittings, flanges and special alloy pipe related to the piping systems business. The unexpectedly low level of new orders impacted piping systems' products to the extent that use of some of this inventory became uncertain. Therefore, excess inventories were written down to reflect management's estimate of the values that could be realized under a plan to scrap, sell or return the excess inventory as quickly as feasible.

Although fabricated piping systems' volume was down for 2002, it improved slightly in the fourth quarter of 2002 compared to the first three quarters of the same year. Management achieved modest success in obtaining non-stainless projects for fabricated piping systems during 2002 with most of the fourth quarter's sales coming from non-stainless projects. However, projects requiring stainless steel pipe, which is provided by the Segment's pipe manufacturing plant, were significantly below prior years' levels. This reduction in volume through the pipe manufacturing plant impacted the absorption of operating costs which also contributed to the lack of profitability by the Segment for the year.

Selling and administrative expense decreased $178,000, or five percent in 2002 compared to the prior year. However, it increased slightly as a percent of sales compared to the prior year as a result of the decline in sales in 2002 compared to 2001. Beginning in September 2002, cost reductions, including reductions of personnel and non-critical operating expense items, were implemented many of which impacted selling and administrative expense. As a result, selling and administrative expense for the fourth quarter of 2002 declined to $717,000 or six percent of sales as compared to $933,000 or nine percent of sales for the same period of the previous year.

Chemicals Group-- The following tables summarize operating results for the three years indicated. Reference should be made to Note R to the Consolidated Financial Statements.

Sales were up five percent and operating income increased 232 percent for the year from 2002 as both of this Segment's locations ended the year profitable. The large increase in operating income was mostly due to a $481,000 impairment charge taken in 2002 discussed in the comparison of 2002 to 2001 below. The Segment was unable to pass higher operating costs, especially energy costs, to its customers which more than offset additional margin contribution received from the increased sales volume. As a result, the Segment experienced a reduction in gross profits for the year compared to 2002. The Segment has been able to expand production at its Spartanburg location by adding new products, which provides a better opportunity for the location to more evenly absorb manufacturing cost and avoid significant negative manufacturing variances this location has historically experienced. This allowed the location to operate profitably for the year. However, the location continu es to have significant swings in profitability from the timing of its contract tolling campaigns as it incurred losses in the first and fourth quarters of 2003, while generating profits in the second and third quarters of 2003.

Selling and administrative expense for 2002 includes the impairment charge discussed below of $481,000. Without the charge, selling and administrative expense declined $77,000 in 2003 compared to the adjusted 2002 total of $2,786,000. Selling and administrative expenses as a percent of sales declined to 11 percent in 2003 compared to 12 percent in 2002. The decline came from cost reductions implemented in the fourth quarter of 2002, including reductions of personnel, many of which impacted selling and administrative expense.

Sales were up 11 percent for 2002 as compared to 2001 and the Segment had operating profits for 2002 of $222,000, including a $481,000 impairment charge as discussed in the Comparison of 2002 to 2001 - Colors Segment, compared to an operating loss of $743,000 for 2001. The improved performance was experienced at both of the Segment's locations as both operations ended the year profitable. Several factors, including improved business conditions, increases in toll and other contract business compared to the prior year, and cost reductions implemented in the third quarter of 2002, including reductions of personnel and non-critical operating expense items, led to the increase in sales and profits. These factors were most prevalent in the last six months of 2002 as the Segment had $594,000 of operating income compared to an operating loss of $372,000 for the first six months of 2002.

Selling and administrative expense for 2002 totaled $2,786,000 which is $213,000 above the 2001 amount primarily as a result of increased selling expenses from the acquisition of the Dalton, Georgia business in the third quarter of 2001, offset by the cost reductions described above. Selling and administrative expenses as a percent of sales remained consistent at 12 percent for 2002 and 2001.

Sales increased 36 percent for 2003 from the same period of 2002 reflecting the impact of acquiring certain assets of Rite Industries, Inc. ("Rite") on July 23, 2003. Without the addition of Rite's sales, revenues in the Segment would have decreased 15 percent for 2003 from the same period of 2002 reflecting the continued decline in the textile industry. The acquisition of Rite provides a significant amount of non-textile dye sales, $6,292,000 in 2003, primarily to the paper industry. During a transition period, the Segment reimbursed Rite for part of its operating costs at its plant in High Point, North Carolina where it blended and shipped dyes for the Segment. By the middle of November 2003, production in High Point was discontinued and the blending operation installed in the Segment's Spartanburg plant became fully operational. The Segment incurred significant non-recurring costs transitioning the operations acquired from Rite into the existing Colors business a s the transition was more difficult than anticipated. The Segment also incurred $667,000 of bad debt expense for 2003, primarily from accounts receivable write-offs due to the bankruptcy of several customers. The difficult transition performance and accounts receivable write-offs, coupled with the impact from the deteriorated conditions in the textile industry, accounted for the majority of the Segment's significant losses incurred for the year without including the charges recorded for writing down plant, equipment and inventory in both years as discussed below and in the comparison of 2002 to 2001.

As a result of the continuing downward trends in the textile industry producing poor results for this Segment, the Company is downsizing its dye business servicing the textile industry. The Company has entered into an agreement, which is expected to close before the end of March 2004, to sell the Segment's liquid dye business comprised of vat, sulfur, liquid disperse and liquid reactive dyes with annual sales of approximately $4,500,000. Several customers and related products serviced by the Segment's remaining textile dye business have been rationalized. The Segment is reducing staff and eliminating applicable manufacturing and support functions. At 2003 year-end, a $290,000 pretax charge was recorded to write down inventories related to discontinuing affected product lines and $191,000 was recorded to write off impaired plant and equipment utilized by the liquid dye business. The Segment will continue to maintain several specialty dye products to service the textile industry, including the hosiery industry and certain other textile customers with which the Segment has had long-term relationships.

The Segment's pigment business located in Greensboro, North Carolina, experienced a significant downturn in textile business during the last six months of 2003 incurring losses during that period. Although the non-textile portion of the pigment business is growing, it is not expanding fast enough to offset the declining textile business. The reduced volume did not produce sufficient contribution margin to offset operating costs causing the losses. As a result of lost business, mainly from customers closing their operations, the location accumulated excessive inventories with few or no customers available to systematically sell off and or blend off the inventory. As a result, a $481,000 inventory charge was recorded in the fourth quarter of 2003. Also during the fourth quarter of 2003, the Company completed an impairment assessment on the plant and equipment located at Greensboro and based on the results of the assessment, recorded a $490,000 impairment loss. See Note C to the Co nsolidated Financial Statements.

Selling and administrative expense increased $2,302,000 in 2003 over last year's amount and was 21 percent of sales compared to 16 percent. The increases came from adding sales and administrative personnel from the acquisition of Rite discussed above.

Sales declined 17 percent in 2002 from 2001 reflecting the continuing contraction of the textile industry. The operating loss for 2002 occurred primarily from the recording of an impairment charge of $1,786,000, described below, an inventory charge of $1,800,000 and an environmental charge of $97,000, all recorded in the second quarter of 2002. The poor sales performance also contributed to the loss, as market conditions continued to be extremely competitive, impacting margins and creating unabsorbed operating costs. The Segment implemented an aggressive inventory reduction program in the first two quarters of 2002 which also impacted profitability. As previously stated, the Company has historically sold off excess inventory slowly to avoid distressed pricing that would be required to dispose of the excess inventory more quickly. With the price erosion that occurred over the first six months of 2002 and weak business conditions that existed, excess inventories were not reduced as much as planned and the inventory charge was recorded.

Sales demand showed limited improvement in the third quarter and first half of the fourth quarter of 2002. In addition, cost reductions implemented at the beginning of September 2002, including reductions of personnel and non-critical operating expense items had a positive impact on the last half of 2002. However, the limited improved sales activity diminished over the last half of the fourth quarter of 2002. The reduced sales volume caused the Segment to incur an operating loss for the fourth quarter of 2002. The loss was disappointing since the Segment had $77,000 of operating profit for the third quarter of 2002 after four consecutive quarters of operating losses. The Segment was able to generate $1,644,000 of cash flow for 2002, resulting primarily from the inventory reduction program.

Selling and administrative expense for 2002 totaled $3,003,000, which was $336,000 below the prior year's amount, primarily as a result of the cost reductions discussed previously. However, selling and administrative expense as a percent of sales was 16 percent which was one percent above the prior year's percentage due to the significant decline in sales.

The Spartanburg plant, which includes the Colors Segment dye business and part of the Specialty Chemicals Segment's operations, was substantially underutilized and generated operating losses in 2002, primarily because of deteriorating market conditions. The Segments were able to minimize the operating losses for these operations through the first quarter of 2002, and 2002 business plans for this facility anticipated positive cash flows for these operations going forward. Although the Colors Segment experienced a significant decline of textile dye sales in the first quarter of 2002, management believed that this situation was temporary and seasonal and would not continue. There were indications that conditions should improve in the near term, such as increases in month-to-month sales and sales order activity. Based on historical results and management's projections, the operations were expected to generate positive cash flows and did not support a write down at the end of the fir st quarter of 2002. Although conditions improved slightly during the second quarter, there were sufficient new indications, including the unexpected loss of anticipated dye business, increases in pricing pressure from competitors, and reductions in expected revenues in the Specialty Chemicals Segment's tolling business, to require management to revise its projections to better reflect what management believed were current market conditions. After completing an analysis of the businesses, evaluations of the plant and equipment values at the site, completing projected cash flow calculations, and exploring other options that were available, it became apparent that the facility could not adequately recover costs related to the facility under current business conditions. Accordingly, an impairment charge of $2,267,000, $1,786,000 related to the Colors Segment and $481,000 to the Specialty Chemicals Segment, was recorded in the second quarter of 2002 to write down the plant and equipment reflecting the undiscounte d cash flow assessments.

For information related to environmental matters, see Note I to the Consolidated Financial Statements.

Reference should be made to Note R to the Consolidated Financial Statements for the schedule that includes these items.

Corporate expense increased $51,000, or seven percent to $833,000 for 2003 compared to 2002. The increase resulted primarily from an increase in directors' fees and expenses. In 2003, the Company began paying the directors' retainer fees by issuing shares of its common stock, and issued 25,000 shares expensing $103,000 as retainer fees compared to $66,000 paid and expensed in 2002. Other expense, net in 2003 included $150,000 of non-recurring income received from the sale of the Company's NASDAQ stock symbol, and $119,000 in dividend income received from the Company's life insurance policies, both recorded in the third quarter of 2003. Other expense, net in 2002 included the sale of certain non-operating assets, including its investment in a foreign corporation, for a pre-tax gain of $605,000. Interest expense in 2003 increased $150,000 from last year from increases in borrowings under the lines of credit with a lender.

Corporate expense declined $94,000, or 11 percent to $783,000 for 2002 compared to 2001. The decline resulted primarily from cost reductions implemented at the beginning of September 2002, including reductions of personnel and non-critical operating expense items. Other expense, net in 2002 declined $291,000 from 2001's total. The Company sold certain non-operating assets during 2002, including its investment in a foreign corporation, for pre-tax gains of $605,000. In 2001 the Company recognized gains from the sale of its Whiting plant in Camden, South Carolina of $143,000 and $68,000 from the partial sale of one of its investments. Interest expense in 2002 decreased $72,000 compared to 2001 from decreases in borrowings under the lines of credit with a lender. Interest income decreased $183,000 primarily from interest received in 2001 under a Metals Segment's contract with a customer.

Metals Segment's dollar sales increased 23 percent for the fourth quarter of 2003 from the same period a year earlier. The increase for the quarter resulted from eight percent higher average selling prices coupled with nine percent higher unit volumes. The Segment has been able to pass through most of the surcharge cost increases as discussed above, which accounted for most of the increase in selling prices in the fourth quarter. Piping systems' work through the shop improved significantly in the fourth quarter of 2003, allowing it to generate a modest profit for the quarter. The combination of piping systems' profitability and higher unit volumes and selling prices in commodity pipe contributed to the significant profit improvement experienced in the fourth quarter of 2003 compared to the same quarter of 2002. This Segment is tied very closely to domestic capital spending. Although market conditions in this Segment continue to be very competitive, sales activity, p ricing and unit volumes for commodity pipe have improved over the past several months, consistent with an apparent improvement in the construction industry. Management is optimistic about the current conditions that exist in the commodity pipe market. If piping systems can continue to generate sufficient volume through its operations and the construction sector continues to improve, management believes this Segment has a good chance to continue to operate profitably in 2004, especially in the first six months, but there can be no assurance that this will occur.

Specialty Chemicals Segment's sales increased three percent for the fourth quarter of 2003 from the same period of 2002. However, operating income declined 90 percent. The increase in sales for the fourth quarter of 2003 compared to the same period last year came from the Cleveland location. The Spartanburg location experienced a decline in fourth quarter of 2003 sales from the timing of several contract campaigns. The campaigns were completed by the end of the third quarter of 2003 compared to their running into the fourth quarter during 2002, causing declines in sales and profits for the 2003 fourth quarter compared to the 2002 quarter. The Segment has been able to expand production in Spartanburg by adding new products, which should help to reduce the significant swings in quarterly profits and losses historically experienced at this location. Management is encouraged by the performance of this Segment and believes it is positioned to continue to grow from new product opportu nities. This Segment's business tends to be impacted by general economic conditions. Assuming no significant downturn in the general economy, management feels this Segment has a good chance to continue to operate profitably in 2004, especially in the first six months, but there can be no assurance that this will occur.

Colors Segment sales increased 116 percent for the fourth quarter of 2003 from the same period of 2002 reflecting the impact of acquiring the Rite assets. Without the addition of Rite's sales, revenues in the segment would have decreased slightly for the 2003 quarter from the same period of the prior year. The Segment incurred $475,000 of bad debt expense for the fourth quarter of 2003, primarily from accounts receivable write-offs due to the bankruptcy of several customers. The difficult transition performance up through November of 2003 and accounts receivable write-offs, coupled with the impact of the deteriorated conditions in the textile industry, resulted in the Segment incurring significant losses in the fourth quarter without including the charges recorded for writing down plant, equipment and inventory. The Company's color business has always been primarily dependent on the domestic textile industry. It has proven to be impossible to avoid the fallout from the well-chro nicled decline of this industry resulting from cheap imports. Management believes the downsizing of the textile portion of this Segment's business will reduce its exposure to the inventory valuation and accounts receivable collection problems that have contributed to the operating losses incurred by this Segment. Management believes that by focusing on the non-textile dye business acquired from Rite and the non-textile pigment business, the Segment has the potential to operate profitably going forward, but there can be assurance that this will occur.

This Annual Report on Form 10-K includes and incorporates by reference "forward-looking statements" within the meaning of the securities laws. All statements that are not historical facts are "forward looking statements." The words "estimate," "project," "intend," "expect," "believe," "anticipate," "plan" and similar expressions identify forward-looking statements. The forward-looking statements are subject to certain risks and uncertainties, including without limitation those identified below, which could cause actual results to differ materially from historical results or those anticipated. Readers are cautioned not to place undue reliance on these forward looking statements. The following factors could cause actual results to differ materially from historical results or those anticipated: adverse economic conditions, the impact of competitive products and pricing, product demand and acceptance risks, raw material and other increased costs, customer delays or diff iculties in the production of products, unavailability of debt financing on acceptable terms and exposure to increased market interest rate risk, inability to comply with covenants and ratios required by our debt financing arrangements and other risks detailed from time-to-time in Synalloy's Securities and Exchange Commission filings. Synalloy Corporation assumes no obligation to update the information included in this Annual Report on Form 10-K.

The Company is exposed to market risks from adverse changes in interest rates. In this regard, changes in U. S. interest rates affect the interest earned on the Company's cash and cash equivalents as well as interest paid on its indebtedness. As a policy, the Company does not engage in speculative or leveraged transactions, nor does it hold or issue financial instruments for trading purposes. The Company is exposed to changes in interest rates primarily as a result of its borrowing activities used to maintain liquidity and fund business operations. There have been no significant changes in the Company's risk exposures from the prior year.

Fair value of the Company's debt obligations, which approximated the recorded value, consisted of:

At January 3, 2004

$18,761,000 under a $23,000,000 line of credit expiring July 25, 2006 with an average variable interest rate of 3.82 percent.

At December 28, 2002

$13,863,000 ($3,863,000 classified as current) under a $19,000,000 line of credit expiring July 25, 2004 with an average variable interest rate of 5.41 percent.

The Company's consolidated financial statements, related notes, report of management and report of the independent auditors follow on subsequent pages of this report.

See accompanying notes to financial statements

Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned except Blackman Uhler, LLC which is 75 percent owned by the Company (see Note Q). All significant intercompany transactions have been eliminated.

Reclassification. For comparative purposes, certain amounts in the 2001 financial statements have been reclassified to conform with the 2003 and 2002 presentation.

Use of Estimates. The preparation of the financial statements in conformity with U. S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Accounting Period. The Company's fiscal year is the 52- or 53-week period ending the Saturday nearest to December 31. Fiscal year 2003 ended on January 3, 2004, fiscal year 2002 ended on December 28, 2002 and 2001 ended on December 29, 2001. The 2003 fiscal year included 53 weeks and 2002 and 2001 fiscal years included 52 weeks.

Revenue Recognition. Revenue from product sales is recognized at the time ownership of goods transfers to the customer and the earnings process is complete. Shipping costs of approximately $2,252,000, $1,803,000 and $1,640,000 in 2003, 2002 and 2001, respectively, are recorded as a reduction of sales.

Inventories. Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and current market conditions.

Long-Lived Assets. Property, plant and equipment are stated at cost. Depreciation is provided on the straight-line method over the estimated useful life of the assets.

The costs of software licenses are amortized over five years using the straight-line method. Debt expenses are amortized over the periods of the underlying debt agreements using the straight-line method.

Intangibles arising from acquisitions represent the excess of cost over fair value of net assets of businesses acquired. In June 2001, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." Under the new rules, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment. Separate intangible assets that are not deemed to have an indefinite life are amortized over their useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill, recorded in the Specialty Chemicals Segment's assets, and intangible assets acquired prior to July 1, 2001, the Company has applied the new accounting rules beginning December 30, 2001. Application of the non amortization provisions of the statement resulted in an increase in net income of $110,000 or $.02 p er share in 2003 and 2002, and would have impacted 2001 by the same amounts.

The Company continually reviews the recoverability of the carrying value of long-lived assets. The Company also reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. When the future undiscounted cash flows of the operation to which the assets relate do not exceed the carrying value of the asset, the assets are written down to fair value.

Cash Equivalents. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Concentrations of Credit Risk. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of trade accounts receivable and cash surrender value of life insurance.

Accounts receivable from the sale of products are recorded at net realizable value and the Company grants credit to customers on an unsecured basis. Substantially all of the Company's accounts receivable are due from companies located throughout the United States. The Company provides an allowance for doubtful collections that is based upon a review of outstanding receivables, historical collection information and existing economic conditions. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Receivables are generally due within 30 to 45 days. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer.

The cash surrender value of life insurance is the contractual amount on policies maintained with one insurance company. The Company performs a periodic evaluation of the relative credit standing of this company as it relates to the insurance industry.

Research and Development Expense. The Company incurred research and development expense of approximately $457,000, $524,000 and $701,000 in 2003, 2002 and 2001, respectively.

Fair Value of Financial Instruments. The carrying amounts reported in the balance sheet for cash and cash equivalents, cash surrender value of life insurance, investments and borrowings under the Company's short-term line of credit and long-term debt approximate their fair values.

Stock Options. The Company accounts for stock options under Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees." See Note L.

In December 2002, the FASB issued Statement No. 148 (SFAS No. 148), "Accounting for Stock-Based Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim 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 is effective for financial statements for fiscal years ending after December 15, 2002. The Company adopted the disclosure requirements of this Statement in 2002.

Comprehensive Income. Comprehensive income is comprised of net income plus other comprehensive income which, under existing accounting standards, consists of unrealized gains and losses on certain investments in equity securities. Comprehensive income is reported by the Company in the Consolidated Statements of Shareholders' Equity.

Variable Interest Entities. In January 2003, the FASB released Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 requires that all primary beneficiaries of Variable Interest Entities (VIE) consolidate that entity. FIN 46 is effective immediately for VIEs created or acquired after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a VIE it acquired before February 1, 2003. The Company has determined that it has not created or modified any relationships or contracts since February 1, 2003 that could result in potential VIEs and did not identify any relationships that existed prior to February 1, 2003 that could potentially be classified as a VIE. As a result, there was no impact on the Company's financial statements in 2003.

In accordance with SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets" ("the Statements"), goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests. Impairment assessments were performed at the end of the second quarter of 2002 on goodwill recorded at each of the operating entities. The assessment resulted in an impairment charge of $362,000 of goodwill, $201,000 in the Metals Segment and $161,000 in the Colors Segment. The write-down was recorded as a one-time after-tax charge of $235,000, or $.04 per share, which was recorded as a restatement in the first quarter of 2002 reflecting the cumulative effect of a change in accounting principle. The impairment assessment was updated through 2003 year-end on the remaining goodwill related to the acquisition of Manufacturers Chemicals and no further write-down was considered necessary.

Accounting For The Impairment Of Long-lived Assets . In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective for fiscal years beginning after December 15, 2001. During the fourth quarter of 2003, the Company completed an impairment assessment on the plant and equipment located at Greensboro, North Carolina. Pigment sales to the textile industry out of the Greensboro plant have declined, especially in the last six months of 2003 and as a result the plant has become underutilized generating operating losses over the last six months of 2003, primarily because of deteriorating market conditions in the textile industry. After completing an analysis of the business at the site and exploring other options that were available, it became apparent that the facility could not adequately recover the fixed costs related to the facility under current business conditions. This resulted in the recording of a $490,000 impairment loss in the fourth quarter of 2003 on the plant and equipment. The impairment loss was calculated based on the excess of the carrying amount of the long-lived assets over their fair value. Management utilized its best estimate to determine fair values including market conditions, experience in acquiring and disposing of similar plant and equipment, and estimates of future cash flows, to test for recoverability of the long-lived assets. During the second quarter of 2002, the Company completed an impairment assessment on the plant and equipment located at Spartanburg, South Carolina. The Spartanburg plant was substantially underutilized and generating operating losses, primarily because of deteriorating market conditions. The Company began experiencing certain indications that the operations at this site were deteriorating further, including the unexpected loss of anticipated dye business, increases in pricing pressure from competitors, and reductions in expected revenues in the specialty chemical t olling business. As a result, the Company revised its business plans and projections to better reflect what management believed were current market conditions. After completing an analysis of the business at the site and exploring other options that were available, it became apparent that the facility could not adequately recover the fixed costs related to the facility under current business conditions. This resulted in the recording in the second quarter of 2002 of a $2,267,000 impairment loss on the plant and equipment, $1,786,000 related to the Colors Segment and $481,000 to the Specialty Chemicals Segment. The impairment loss was calculated as described above. The impairment assessments at Spartanburg were updated through the 2003 year-end which resulted in the recording of an additional write-down of $191,000 in the fourth quarter of 2003 against plant and equipment utilized by the Colors Segment's liquid dye business, which is currently being sold (see below).

Other Special Charges. As a result of the continuing downward trends in the textile industry and poor financial performance of the Colors Segment, the Company began at the end of the fourth quarter of 2003 downsizing its dye business servicing the textile industry. The Company has entered into an agreement, which is expected to close before the end of March 2004, to sell the Segment's liquid dye business composed of vat, sulfur, liquid disperse and liquid reactive dyes with annual sales of approximately $4,500,000. Several customers and related products serviced by the Segment's remaining textile dye business have been rationalized. In the fourth quarter of 2003, a $290,000 inventory charge was recorded to cost of goods sold to write down inventories related to discontinuing affected product lines. As discussed above, the Colors Segment's pigment business located in Greensboro, North Carolina, experienced a significant downturn in textile business during the last six months of 2003. As a result of lost business, mainly from customers closing their operations, the location accumulated excessive inventories with few or no customers available to systematically sell or blend off the inventory. As a result a $481,000 inventory charge was recorded to cost of goods sold in the fourth quarter of 2003. In the second quarter of 2002 inventory charges of $2,471,000 were recorded to cost of goods sold, $1,800,000 for the Colors Segment and $671,000 for the Metals Segment. The Company has historically sold off excess inventory slowly to avoid distressed pricing that would be required to dispose of the excess inventory more quickly. With the price erosion that occurred over the first six months of 2002 and weak business conditions that existed, excess inventories were not reduced as much as planned. Therefore, excess inventories were written down to reflect management's estimate of the market values. As further discussed in Note I, a $97,000 environmental charge was accrued in the second quarte r of 2002 in the Colors Segment to provide for a proposed settlement of a claim related to shipment of waste to an outside waste disposal site during the 1980s.

During 2002, the Company sold its investment in Ta Chen International Corp. for $701,000, realizing a pretax gain of $418,000. The Company also sold the remaining shares of its investment in SpanAmerica for $285,000, realizing a pretax gain of $87,000.

During 2001, the Company received $245,000 from the sale of a portion of its SpanAmerica investment, realizing a pre-tax gain of $68,000.

Investments in equity securities consisted of the following:

The unrealized appreciation of the investments were recorded as other comprehensive income included in shareholders' equity, net of deferred income taxes.

All the Company's investments were classified as available for sale.

Property, plant and equipment consist of the following:

Deferred charges consist of the following:

On July 26, 2002, the Company entered into a new Credit Agreement with a new lender to provide a $19,000,000 line of credit expiring on July 25, 2004, and refinanced the Company's notes payable and long-term debt replacing the existing bank indebtedness. On July 24, 2003, the agreement was amended, increasing the borrowing amount to $23,000,000, primarily under the existing terms, and extending the expiration date to July 25, 2006. Current interest rates are prime plus .25 percent or LIBOR plus 2.75 percent, and can vary based on EBITDA performance from prime to prime plus .75 percent and LIBOR plus 2.50 percent to LIBOR plus 3.25 percent. The Company has the option of electing to borrow portions of the outstanding loan balance under the LIBOR plus 2.50 rate, and has had $10,000,000 subject to that rate since July 28, 2003. The rates at January 3, 2004 were 4.0 percent for borrowings based on the prime rate, and 3.6631 percent for borrowings based on the LIBOR rate . Borrowings under the Agreement are limited to a borrowing base calculation including eligible accounts receivable, inventories, and cash surrender value of the Company's life insurance as defined in the Agreement. As of January 3, 2004, the amount available for borrowing was $23,000,000 of which $18,761,000 was borrowed leaving $4,239,000 of availability.

Borrowings under the Credit Agreement are collateralized by accounts receivable, inventory, cash surrender value of life insurance and the equipment located at the Manufacturers Chemicals and Bristol Metals plants. Covenants include, among others, maintaining certain EBITDA and tangible net worth amounts, and prohibit the payment of dividends.

Average borrowings outstanding during fiscal 2003, 2002 and 2001 were $14,923,000, $14,178,000 and $14,966,000 with weighted average interest rates of 3.82 percent, 5.41 percent and 5.47 percent, respectively. The Company made interest payments of $747,000 in 2003, $668,000 in 2002 and $957,000 in 2001. At January 3, 2004, the Company was in violation of its earnings covenant for which the Company received a waiver from the lender.

Accrued expenses consist of the following: