American Express 1998 Annual Report Download - page 25

through 1999.*We are currently on schedule to meet
these goals. With respect to systems maintained by the
Company, the first three phases referred to above have
been substantially completed for both Millenniax and
Business T. In addition, remediation of critical systems
is substantially complete. As of December 31, 1998, for
Millenniax, the remediation/decommission, testing and
implementation phases for critical and non-critical systems
in total are 82%, 75% and 60% complete, respectively.
For Business T, such phases are 85%, 70% and 69%
complete, respectively. Certain critical systems have already
been made Y2K compliant, such as the Worldwide
Credit Authorization System, and we have completed
testing of the global point of sale infrastructure. As a
result, we have begun issuing Year 2000 dated charge and
credit cards.
Our most commonly used methodology for reme-
diation is the sliding window. Once an application/system
has been remediated, we apply specific types of tests, such
as stress, regression, unit, future date and baseline to
ensure that the remediation process has achieved Y2K
compliance while maintaining the fundamental data pro-
cessing integrity of the particular system. To assist with
remediation and testing, we are using various standardized
tools obtained from a variety of vendors.
The Company’s cumulative costs since inception
of the Y2K initiatives were $383 million through
December 31, 1998 and are estimated to be in the range
of $135-$160 million for the remainder through 2000.*
These include both remediation costs and costs related to
replacements that were or will be required as a result of
Y2K. These costs, which are expensed as incurred, relate
to both Millenniax and Business T, and have not had, nor
are they expected to have, a material adverse impact on the
Company’s results of operations or financial condition.*
Costs related to Millenniax, which represent most of the
total Y2K costs of the Company, are managed by and
included in the Corporate and Other segment; costs
related to Business T are included in the business seg-
ments. Y2K costs related to Millenniax represent 14%,
6% and 1% of the AET budget for the years 1998, 1999
and 2000, respectively. The Company has not deferred
other critical technology projects or investment spending
as a result of Y2K. However, because the Company must
continually prioritize the allocation of finite financial and
human resources, certain non-critical spending initiatives
have been deferred.
The Company’s major businesses are heavily depen-
dent upon internal computer systems, and all have
significant interaction with systems of third parties, both
domestically and internationally. The Company is work-
ing with key external parties, including merchants, clients,
counterparties, vendors, exchanges, utilities, suppliers,
agents and regulatory agencies to mitigate the potential
risks to us of Y2K. The failure of external parties to
resolve their own Y2K issues in a timely manner could
result in a material financial risk to the Company. As part
of our overall compliance program, the Company is
actively communicating with third parties through face-
to-face meetings and correspondence, on an ongoing basis,
to ascertain their state of readiness. Although numerous
third parties have indicated to us in writing that they are
addressing their Y2K issues on a timely basis, the readi-
ness of third parties overall varies across the spectrum.
Because the Company’s Y2K compliance is dependent on
key third parties being compliant on a timely basis, there
can be no assurances that the Company’s efforts alone will
resolve all Y2K issues.
At this point, the Company is in the process of per-
forming an assessment of reasonably likely Y2K systems
failures and related consequences. The Company is also
preparing specific Y2K contingency plans for all key
American Express business units to mitigate the potential
impact of such failures. This effort is a full-scale initiative
that includes both internal and external experts under the
guidance of a Company-wide steering committee. Our
contingency plans, which will be based in part on an
assessment of the magnitude and probability of potential
risks, will primarily focus on proactive steps to prevent
Y2K failures from occurring, or if they should occur, to
detect them quickly, minimize their impact and expedite
their repair. The Y2K contingency plans will supplement
disaster recovery and business continuity plans already in
place, and are expected to include measures such as select-
ing alternative suppliers and channels of distribution, and
developing our own technology infrastructure in lieu of
those provided by third parties. Development of the Y2K
contingency plans is expected to be substantially complete
by the end of the first quarter of 1999, and will continue
to be refined throughout 1999 as additional information
related to our exposures is gathered.*
*Statements in this Y2K discussion marked with an
asterisk are forward-looking statements which are subject
to risks and uncertainties. Important factors that could
cause results to differ materially from these forward-
looking statements include, among other things, the
ability of the Company to successfully identify systems
containing two-digit codes, the nature and amount of
programming required to fix the affected systems, the
costs of labor and consultants related to such efforts, the
continued availability of such resources, and the ability
of third parties that interface with the Company to suc-
cessfully address their Y2K issues.
ACCOUNTING DEVELOPMENTS
In June 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 131, “Disclosures about Segments of an Enter-
prise and Related Information,” which was effective for fiscal
years beginning after December 15, 1997 and redefines how
operating segments are determined. The Company adopted
the provisions of SFAS No. 131 in the first quarter of 1998.
As a result, the Travelers Cheque Group, which had been
included in the Travel Related Services segment, is now
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