and distribution expense reflects increased advertising and  promotional costs associated with new product introductions. The company also added several salespeople to the organization to increase market coverage. As a percentage of net sales, selling and distribution expenses increased to 12.2% in 2003  from 12.0% in 2002. Net sales at the International Distribution Division increased  by $6.5 million or 18.1% to $42.7 million. The majority of sales growth internationally came from China, Australia and the  United Kingdom. Growth in the China and Australia market reflects increased restaurant openings of major restaurant chain customers as they expand internationally. Sales to the general market in China have also increased as the economy in that country continues to expand. Sales into the United Kingdom  have increased due to greater penetration of that market  resulting from the addition of a company owned distribution  operation in that country, which was purchased as part of the Blodgett acquisition in December 2001. General and administrative expenses increased to $21.2 million in 2003 from $20.6 million in 2002. The net increase  in general and administrative expenses includes increases in  incentive compensation associated with improved financial performance of the company and higher pension costs associated with expanded benefits, offset in part by a reduction in bad  debt expense resulting from improved credit experience. As a percentage of net sales, general and administrative expenses  were 8.8% in 2003 as compared to 8.7% in 2002. Intercompany sales eliminations represent sales of product amongst the Cooking Systems Group operations and from the Cooking Systems Group operations to the International Distribution Division. The sales elimination increased by $5.2 million to $29.9 million reflecting the increase in purchases of equipment by the International Distribution Division from the Cooking Systems Group due to increased sales volumes. INCOME FROM OPERATIONS. Income from operations increased $5.3 million or 17.8% to $35.0 million in fiscal 2003 from $29.7 million in fiscal 2002. The increase in operating income reflects the higher net sales and gross profit. NON-OPERATING EXPENSES. Non-operating expenses decreased  by $14.7 million to $6.2 million in 2003 from $20.9 million in 2002. The $14.7 million reduction in non-operating expenses includes a $5.3 million reduction in interest expense resulting from the repayment of high interest notes due to the Maytag asso- ciated with the Blodgett acquisition and generally lower average debt balances, a $9.1 million expense reduction associated  with non-recurring debt extinguishment costs incurred in 2002 pertaining to the company’s refinancing of its debt, a $0.5 million reduction in other net expenses, which is primarily comprised of foreign exchange gains and losses, and a $0.2 million reduction  in gains associated with acquisition related financing derivatives. GROSS PROFIT. Gross profit increased by $7.4 million to $85.9 million in fiscal 2003 from $78.5 million in 2002 as a result of increased sales volume and improvements in the gross margin  rate, which increased to 35.4% in 2003 from 33.4% in 2002. The improvement in the gross margin rate resulted from several factors, including the following: INCOME TAXES. The company recorded a net tax provision of $10.1 million in fiscal 2003 at an effective rate of 35.1% as compared to a provision of $2.7 million at an effective rate of 30.8% in the prior year. The lower effective rate in the prior year reflects the benefit of a tax deduction for the write-off of an investment in a foreign subsidiary. Total cash and cash equivalents increased by $0.1 million to  $3.8 million at January 1, 2005 from $3.7 million at January 3, 2004. Net borrowings increased to $123.7 million at January 1, 2005 from $56.5 million at January 3, 2004. OPERATING ACTIVITIES. Net cash provided by operating activities amounted to $18.5 million as compared to $29.8 million in the prior year. Net cash provided from operating activities includes $8.0 million of cash used to repurchase 271,000 stock options from the company’s former Chairman and members of his family SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by $2.0 million to $50.8 million in 2003 from $48.8 million in 2002. Selling and distribution expenses increased to $29.6 million  in 2003 from $28.2 million in 2002. The increase in selling  8 MIDDLEBY CORPORATION AND SUBSIDIARIES Financial Condition and Liquidity  • Cost reduction initiatives including the shift of component  part manufacturing to low cost manufacturers, which included the company’s Philippine based manufacturing facility. The company also realized benefits of certain cost reductions from key supplier negotiations utilizing increased purchasing leverage resulting from the company’s 2001 acquisition of Blodgett. • Increasing international sales, which tend to result in higher overall gross margins for the combined company due to  the distribution margin earned on international sales. As the company maintains its own international infrastructure it  earns the markup on these sales in addition to the manufac- turing margin. • An improving mix of product sales driven by higher margins  on newly introduced products which tend to be more cost  efficient to manufacture due to standardization of product platforms and improvements in product design. In addition, the company has discontinued or replaced certain product lines, which had carried higher costs or lower margins.