Management's Discussion and Analysis of Financial Condition and Results of Operations

Other

Year 2000 Issues - Recent Accounting Standards

Year 2000 Issues
Overview. As the Year 2000 approaches, all companies that use computers must address "Year 2000" issues. Year 2000 issues result from the past practice in the computer industry of using two digits rather than four to identify the applicable year. This practice can create breakdowns or erroneous results when computers perform operations involving years later than 1999.

The Company's State of Readiness. The Company has devised and commenced an extensive compliance plan with the objective of bringing all of the Company's information technology (IT) systems and non-IT systems into Year 2000 compliance by the end of the second quarter of fiscal year 1999. The Company has divided its systems into
(i) critical systems, consisting of IT systems, and
(ii) non-critical systems, consisting of a mixture of IT and non-IT systems. Each system will be evaluated and brought into compliance in five phases:

• Phase I: Awareness - Prepare and present comprehensive report to management
  
  
• Phase II: Assessment - Identify and evaluate all systems for Year 2000 compliance
  
  
• Phase III: Compliance - Complete necessary Year 2000 modifications
  
  
• Phase IV: Testing - Test all modified systems for Year 2000 compliance
  
  
• Phase V: Implementation - Return Year 2000 compliant systems to daily operation
  

Phase I has been completed. Additionally, all of the Company's critical systems have completed Phase II and 60% were found to be compliant or made to be compliant by completing Phases III through V. The remaining 40% of the Company's critical systems have commenced Phase III through Phase V, and the Company anticipates that these systems will be brought into compliance by the end of the second quarter of fiscal 1999.

Fifty percent of the Company's noncritical systems have completed Phase II and were either found to be compliant or were brought into compliance by completing Phases III through V. The Company anticipates that the remaining noncritical systems will be evaluated and brought into compliance by the end of the second quarter of fiscal 1999.

In addition, the Company has distributed surveys to all of its significant vendors, financial institutions and insurers to determine the extent to which their failure to resolve their Year 2000 issues could affect the Company's operations. The Company has received 68% of the surveys, none of which indicated significant problems. The Company expects to complete its evaluation of third parties' compliance by the end of February 1999.

The Costs Involved. Because many of the Company's computer systems have been replaced in recent years as part of the Company's ongoing goal to maintain state of the art technology, the Company's Year 2000 compliance costs have been relatively low. To date, the Company has incurred expenses of approximately $75,000 for external consultants, software and hardware applications in implementing its compliance plan. The Company does not separately track the internal costs incurred for the Year 2000 project. Such costs are principally payroll-related costs for the Company's information technology group. Management estimates that the total external cost to be incurred by the Company to complete its compliance plan will be approximately $175,000. All costs related to the Year 2000 compliance plan are included in the Information Systems budget and are based on management's best estimates. There can be no guarantee that actual results will not differ from those estimated or that such difference will not be material.

Risks. If the Company is not successful in its efforts to bring its systems into Year 2000 compliance:

• The Company's ability to procure merchandise in a timely and cost-effective manner may be impaired.
  
  
• Daily business procedures may be delayed due to the use of manual procedures.
  
  
• Some business procedures may be interrupted if no alternative methodology is available.
  

Each of these items could have a material adverse effect on the Company's operations.

The Company has no guarantee that the systems of third parties will be brought into compliance on a timely basis. The noncompliance of a third party's system could have a material adverse effect on the Company's operations.

The Company's Contingency Plan. Although the Company believes that its Year 2000 compliance plan is adequate to achieve full system operation on a timely basis, the Company is in the process of developing a contingency plan to address the possibility of the Company's and third parties' noncompliance. The Company anticipates completing its contingency plan by the end of June 1999.

Year 2000 Issues - Recent Accounting Standards

Recent Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," is required to be implemented in the first quarter of the Company's fiscal year 1999. SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," is required to be implemented during the Company's fiscal year ending October 31, 1999 and SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," is required to be implemented in the first quarter of the Company's fiscal year 2000. The effect of these pronouncements on the Company's consolidated financial condition and results of operations is not expected to be material.