Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

For the three months ended April 30, 2012, the Company incurred a pre-tax loss of $4,817,000 on net sales of $23,668,000 compared to a pre-tax loss of $5,372,000 on net sales of $24,256,000 in the same period last year.

Net sales for the three months ended April 30, 2012 decreased by $588,000, a 2.4% decrease, compared to the same period last year. This decrease was the result of a reduction in unit volume, offset by a modest increase in selling prices. The Company began the quarter with a backlog that was approximately $3.2 million (18.4%) less than at the start of the first quarter last year. Unit volume continues to be adversely impacted by the funded status of public schools. Incoming orders for the quarter increased by approximately 3.5% compared to the comparable quarter of the prior year. Backlog at April 30, 2012 decreased by approximately 3.7% compared to April 30, 2011.

As discussed more fully in the Form 10-K for the fiscal year ended January 31, 2012 ("Form 10-K"), the Company implemented a voluntary early retirement program in the third quarter of 2011 in an effort to bring its cost structure in line with decreased revenues. Combined with normal attrition of employees that were not replaced, the Company began the first quarter of 2012 with 21% fewer employees than at the beginning of the first quarter of 2011. The reduction in headcount was concentrated in manufacturing, and included both direct labor and indirect positions. It is the intent of the Company to meet the seasonal demand for production and distribution through more aggressive use of temporary seasonal workers. During the first quarter, the Company reduced production levels by approximately 25% compared to the first quarter last year. This had an adverse impact on factory overhead absorption, but due to reduced levels of spending, the unabsorbed overhead variance only increased by approximately $100,000. Because the Company started the year with lower levels of inventory, and because the Company produced less inventory during the first quarter of 2012 compared to the first quarter of 2011, inventory levels at April 30, 2012 were approximately $11.6 million or 22.5% lower than at April 30, 2011. Order rates for the first quarter of 2012 were approximately 3.5% greater than the first quarter of the prior year. If order rates continue to exceed the prior year, the Company will be required to hire additional temporary workers and increase production levels during the second and third quarters of 2012.

Gross margin as a percentage of sales increased to 29.4% for the three months ended April 30, 2012 compared to 27.9% in the same period last year. The improvement in gross margin was attributable to an increase in selling prices, a reduction in factory spending as discussed above, offset by a reduction in manufacturing overhead absorption.

Selling, general and administrative expenses for the three months ended April 30, 2012, decreased by approximately $407,000 compared to the same period last year, and decreased as a percentage of sales by 0.5%. The decrease in selling, general and administrative expenses was attributable to the reduction in headcount from the early retirement program and attrition offset slightly by increased retirement plan expenses. The reduction in headcount was primarily in warehouse, G&A, and sales overhead positions. The size of the direct sales force and sales related expenditures was largely unaffected by the prior's year restructuring activities.

In the first quarter of 2012 the Company did not record an income tax benefit. During the fourth quarter of 2011 the Company established a valuation allowance on the majority of deferred tax assets. Because of this valuation allowance the effective income tax expense / (benefit) is expected to be relatively low, with income tax expense / (benefit) being primarily attributable to alternative minimum taxes combined with income and franchise taxes required by various states.

Interest expense increased by approximately $41,000 for the three months ended April 30, 2012, compared to the same period last year. The increase was primarily due to higher average loan balances under the Company's credit facility with PNC Bank, National Association ("PNC").

Liquidity and Capital Resources

Accounts receivable werelower at April 30, 2012 than at April 30, 2011, due to a slight reduction in sales and a slight reduction in days sales outstanding. The Company traditionally builds large quantities of inventory during the first quarter of each fiscal year in anticipation of seasonally high summer shipments. The Company started the current fiscal year with nearly $7,600,000 less inventory than in the prior year. During the quarter, the Company increased inventory by approximately $12,120,000 compared to January 31, 2012. This increase was less than the $16,130,000 increase in 2011, and because the Company started the year with substantially less inventory, at the end of the first quarter inventory was approximately $11,600,000 less compared to April 30, 2011. The increase in inventory during the first quarter of 2012 compared to January 31, 2012, was financed through the Company's credit facility with PNC.

Borrowings under the Company's revolving line of credit with PNC at April 30, 2012, decreased by approximately $875,000 compared to borrowings under the Wells Fargo Bank line of credit at April 30, 2011, primarily due to decreased levels of inventory. The Company established a goal of limiting capital spending to less than $3,000,000 for fiscal year 2012, which is less than the Company's anticipated depreciation expense. Capital spending for the three months ended April 30, 2012 was $325,000 compared to $803,000 for the same period last year. Capital expenditures are being financed through the Company's credit facility with PNC and operating cash flow.

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Net cash used in operating activities for the three months ended April 30, 2012, was $7,394,000 compared to $12,243,000 for the same period last year. The decrease in cash used was primarily attributable to a reduction in the amount of inventory produced, and increase in the collection of receivables, a decrease in the pre-tax loss for the quarter and a decrease in accounts payable and accrued liabilities.

The Company believes that cash flows from operations, together with the Company's unused borrowing capacity under its revolving line of credit with PNC will be sufficient to fund the Company's debt service requirements, capital expenditures and working capital needs for the next twelve months. Approximately $11,311,000 was available for borrowing as of April 30, 2012.

Off Balance Sheet Arrangements

During the three months ended April 30, 2012, there were no material changes in the Company's off balance sheet arrangements or contractual obligations and commercial commitments from those disclosed in the Company's Form 10-K for the fiscal year ended January 31, 2012.

Critical Accounting Policies and Estimates

The Company's critical accounting policies are outlined in its Form 10-K. There have been no changes in the quarter ended April 30, 2012.

Forward-Looking Statements

From time to time, including in this Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2012, the Company or its representatives have made and may make forward-looking statements, orally or in writing, including those contained herein. Such forward-looking statements may be included in, without limitation, reports to stockholders, press releases, oral statements made with the approval of an authorized executive officer of the Company and filings with the Securities and Exchange Commission. The words or phrases "anticipates," "expects," "will continue," "believes," "estimates," "projects," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The results contemplated by the Company's forward-looking statements are subject to certain risks and uncertainties that could cause actual results to vary materially from anticipated results, including without limitation, availability of funding for educational institutions, availability and cost of materials, especially steel, availability and cost of labor, demand for the Company's products, competitive conditions affecting selling prices and margins, capital costs and general economic conditions. Such risks and uncertainties are discussed in more detail in the Company's Form 10-K.

The Company's forward-looking statements represent its judgment only on the dates such statements were made. By making any forward-looking statements, the Company assumes no duty to update them to reflect new, changed or unanticipated events or circumstances.