AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 15, 2001
REGISTRATION NO.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MASTERCARD INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
2000 PURCHASE STREET
PURCHASE, NEW YORK 10577
(914) 249-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ROBERT W. SELANDER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MASTERCARD INTERNATIONAL INCORPORATED
2000 PURCHASE STREET
PURCHASE, NEW YORK 10577
(914) 249-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPIES TO:
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APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this registration statement becomes effective and after all
other conditions to the conversion and integration described herein have been
satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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CALCULATION OF REGISTRATION FEE
(1) The common stock of MasterCard Incorporated being registered is to be
offered in connection with the transactions described in this registration
statement in which common stock of MasterCard Incorporated will be issued in
exchange for (i) the equity rights associated with membership interests in
MasterCard International Incorporated and (ii) the capital stock of Europay
International S.A.
(2) Since no market for the common stock of MasterCard Incorporated exists, the
registration fee is calculated based on book value pursuant to Rule 457(f)
under the Securities Act of 1933.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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EXPLANATORY NOTE
The proxy statement-prospectus contained in this Registration Statement on
Form S-4 is intended to be used by the registrant in connection with:
- the exchange of the existing membership interests of MasterCard
International Incorporated in the conversion (as defined in the proxy
statement-prospectus) for shares of class A common stock and of class B
common stock of MasterCard Incorporated, the new holding company of
MasterCard International Incorporated, and class A membership interests
in MasterCard International Incorporated, a non-stock corporation and
subsidiary of MasterCard Incorporated; and
- the exchange of the capital stock of Europay International S.A. and
MasterCard/Europay U.K. Limited in the integration (as defined in the
proxy statement-prospectus) for shares of class A common stock and of
class B common stock of MasterCard Incorporated.
The underlying documents effecting the conversion and integration have not
yet been executed in their definitive form. Therefore, the terms of the
conversion and integration, the Agreement and Plan of Merger, the Share Exchange
and Integration Agreement, the Share Exchange Agreement and the organizational
documents of MasterCard Incorporated and MasterCard International Incorporated,
as described in this proxy statement-prospectus, may change. We expect that
definitive versions of all of these documents will be finalized before the end
of the third quarter of this year.
PROXY STATEMENT-PROSPECTUS
MASTERCARD INTERNATIONAL INCORPORATED
, 2001
Dear MasterCard International Principal Member:
You are invited to attend the special meeting of the principal members of
MasterCard International Incorporated to be held on , 2001, at 9:00
a.m., local time, at MasterCard International Incorporated's offices located at
2000 Purchase Street, Purchase, New York 10577. You are being asked to vote on a
proposed plan of conversion of MasterCard International Incorporated. This plan
was approved by your board of directors at a meeting held on February 8, 2001.
At that same meeting, your board of directors also approved the integration of
MasterCard International Incorporated and its European partner, Europay
International S.A. The conversion and the integration are important steps in
enhancing our position as an integrated, global organization that is able to
respond effectively to challenges and opportunities in today's fast-paced
payments industry.
The conversion will be accomplished through a merger. In the conversion,
each MasterCard International Incorporated principal member will receive shares
of class A and class B common stock of MasterCard Incorporated, a Delaware
holding company, and a class A membership interest in MasterCard International
Incorporated, a Delaware non-stock corporation and subsidiary of MasterCard
Incorporated. The ownership of the class A common stock and class B common stock
of MasterCard Incorporated will be distributed among member-stockholders in
accordance with the procedures described in the accompanying proxy statement-
prospectus. The class A membership interest will represent your continued rights
as a licensee to use MasterCard's brands, programs and services. European
members of MasterCard International Incorporated will hold the class B common
stock of MasterCard Incorporated through a trust, as described more fully in the
proxy statement-prospectus.
We encourage you to read the accompanying proxy statement-prospectus
carefully. For purposes of this letter and the proxy statement-prospectus, the
principal members of MasterCard International Incorporated are comprised of
MasterCard International Incorporated's principal, association and travelers
cheque members.
IN PARTICULAR, PLEASE READ THE SECTION OF THE PROXY STATEMENT-PROSPECTUS
ENTITLED "RISK FACTORS" FOR A DISCUSSION OF RISKS THAT YOU SHOULD CONSIDER IN
EVALUATING THE TRANSACTIONS DESCRIBED IN THE PROXY STATEMENT-PROSPECTUS.
The conversion plan requires the approval of at least a majority of the
votes cast at the special meeting of MasterCard International principal members
at which a quorum is present.
We do not have any current plans to list the class A or class B common
stock of MasterCard Incorporated on an exchange or other trading system.
Furthermore, transfers of both classes of common stock and class A membership
interests will be subject to restrictions that are described in the proxy
statement-prospectus.
It is important that as many of our principal members as possible be
present or represented by proxy at our special meeting of principal members to
be held on , 2001 to consider and approve the plan of conversion. I
look forward to seeing all of you who attend in person.
Sincerely,
ROBERT W. SELANDER
President and Chief Executive Officer
NEITHER THE U.S. SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED
IN CONNECTION WITH THE CONVERSION AND INTEGRATION, OR DETERMINED IF THE
ACCOMPANYING PROXY STATEMENT-PROSPECTUS IS ACCURATE OR ADEQUATE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This proxy statement-prospectus is dated , 2001, and was first
mailed to the principal members of MasterCard International Incorporated and the
shareholders of Europay International S.A. and MasterCard/Europay U.K. Limited
on or about , 2001.
[MASTERCARD LOGO]
MASTERCARD INTERNATIONAL INCORPORATED
2000 PURCHASE STREET
PURCHASE, NEW YORK 10577
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NOTICE OF SPECIAL MEETING OF PRINCIPAL MEMBERS
TO BE HELD ON , 2001
To the Principal Members of MasterCard International Incorporated:
The special meeting of principal members of MasterCard International
Incorporated will be held at 9:00 a.m., local time, on , 2001 at
MasterCard International Incorporated's offices located at 2000 Purchase Street,
Purchase, New York 10577 to consider and vote on a plan to convert MasterCard
International Incorporated to a private stock corporation. In particular, the
board of directors is asking you to consider and approve the merger of
MasterCard International Incorporated with MasterCard Merger Sub, Inc., a
wholly-owned subsidiary of MasterCard Incorporated formed solely for the purpose
of completing the merger. MasterCard International Incorporated will survive
this merger and become a subsidiary of MasterCard Incorporated. In the
conversion, each MasterCard International Incorporated principal member will
receive shares of class A and class B common stock of MasterCard Incorporated, a
Delaware holding company, and a class A membership interest in MasterCard
International Incorporated, a Delaware non-stock corporation and subsidiary of
MasterCard Incorporated. The class A membership interest will represent your
continued rights as a licensee to use MasterCard's brands, programs and
services. For purposes of this notice and the accompanying proxy
statement-prospectus, the principal members of MasterCard International
Incorporated are comprised of MasterCard International Incorporated's principal,
association and travelers cheque members. European members of MasterCard
International Incorporated will hold the class B common stock of MasterCard
Incorporated through a trust, as described more fully in the accompanying proxy
statement-prospectus.
We will not transact any other business at the special meeting.
The close of business on , 2001 has been fixed as the record
date for determining those members entitled to vote at the special meeting and
any adjournments or postponements of the meeting. A list of eligible members of
record as of the close of business on the record date will be available at the
special meeting for examination by any member or the member's attorney or agent.
Please note that by delivering a proxy to vote at the special meeting, you are
also granting a proxy voting in favor of any adjournments of the special
meeting.
Whether or not you plan to attend the special meeting, please sign, date
and return the enclosed proxy card in the accompanying postage-paid envelope. If
you attend the meeting, you may vote in person, which will revoke any signed
proxy you have already submitted. You may also revoke your proxy at any time
before the meeting by notifying us in writing.
MasterCard International Incorporated must receive your proxy card by 5:00
p.m., New York time, on , 2001.
By Order of the Board of Directors,
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NOAH J. HANFT
Secretary
, 2001
Purchase, New York
YOUR VOTE IS VERY IMPORTANT. PLEASE COMPLETE, SIGN, DATE AND PROMPTLY
RETURN THE ENCLOSED PROXY CARD IN THE ENVELOPE PROVIDED.
THE BOARD OF DIRECTORS OF MASTERCARD INTERNATIONAL INCORPORATED RECOMMENDS
THAT MEMBERS VOTE FOR APPROVAL OF THE CONVERSION PLAN.
TABLE OF CONTENTS
Annex A -- Agreement and Plan of Merger
Annex B -- Share Exchange and Integration Agreement
Annex C -- Share Exchange Agreement
Annex D -- Trust Deed Relating to the Class B Common Stock of MasterCard
Incorporated
Annex E -- Amended and Restated Certificate of Incorporation of MasterCard
Incorporated
Annex F -- Amended and Restated Bylaws of MasterCard Incorporated
Annex G -- Amended and Restated Certificate of Incorporation of MasterCard
International Incorporated
Annex H -- Amended and Restated Bylaws of MasterCard International Incorporated
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i
In this proxy statement-prospectus, when we refer to:
- "MasterCard International" we mean MasterCard International Incorporated;
- "MasterCard Incorporated" we mean the proposed new holding company of
MasterCard International under the conversion, as described below;
- "MasterCard" we mean the MasterCard trademark or the business conducted
by MasterCard International prior to the conversion and integration and
by MasterCard Incorporated (through its principal subsidiary, MasterCard
International) following the conversion and integration;
- "Europay" or "Europay International" we mean Europay International S.A.,
which through the integration, as described below, will be acquired by
MasterCard Incorporated, if the conditions to the integration are
satisfied or waived;
- "MasterCard International members" or "members" we mean the principal and
affiliate members of MasterCard International;
- "MEPUK" we mean MasterCard/Europay U.K. Limited;
- "principal member" we mean principal, association and travelers cheque
members of MasterCard International; and
- the terms "we," "our" or similar terms, we mean MasterCard Incorporated
or MasterCard International, as the context requires.
The registered trademarks of MasterCard International include MasterCard(R)
and Cirrus(R). Maestro(R) is a registered trademark of Maestro International
Incorporated and Mondex(R) is a registered trademark of Mondex International
Limited. The registered trademarks of Europay International and its subsidiaries
are Eurocard(R), ec eurocheque(R), ec Pictogram(R), Clip(R) and etc euro
travellers cheque(R). Upon completion of the conversion and integration, all of
these trademarks will be the property of MasterCard Incorporated or its
subsidiaries. Other trademarks used in this proxy statement-prospectus are the
property of their respective owners.
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As of August 13, 2001, the exchange rate between U.S. dollars and euros was
1.11 euros per U.S. dollar. As of June 30, 2001 and December 31, 2000, the
period end exchange rate between U.S. dollars and euros was 1.18 and 1.07 euros
per U.S. dollar, respectively, while the average exchange rate for the six month
period ended June 30, 2001 and the year ended December 31, 2000 was 1.12 and
1.11 euros per U.S. dollar, respectively. The exchange rates referred to above
are based on the noon buying rate in New York City for cable transfers in euros
as certified for customs purposes by the Federal Reserve Bank of New York. We
make no representation that the dollar or euro amounts referred to in this proxy
statement-prospectus could have been or could in the future be converted into
euros or dollars, as the case may be, at any particular rate or at all.
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You should rely only on the information contained in this proxy
statement-prospectus or to which we have referred you. We have not authorized
anyone to provide you with information that is different. Information on the Web
sites of MasterCard International and Europay International is not part of this
document. This proxy statement-prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted. The information in this
proxy statement-prospectus may be accurate only as of the date of this proxy
statement-prospectus.
ii
QUESTIONS AND ANSWERS ABOUT THE CONVERSION
Q. WHAT IS THE CONVERSION?
A. The conversion refers to the process by which MasterCard International will
merge with a subsidiary of MasterCard Incorporated, a newly formed stock
holding company. After the conversion, MasterCard International will continue
as a non-stock corporation and will be a subsidiary of MasterCard
Incorporated. As a result of the conversion, MasterCard Incorporated will
hold the only class B membership interest in MasterCard International,
entitling MasterCard Incorporated to substantially all voting power, and all
economic rights, in MasterCard International. In addition, the current
principal members of MasterCard International will hold the class A
membership interests in MasterCard International and the common stock of
MasterCard Incorporated. A diagram showing the structure of MasterCard
Incorporated and MasterCard International after the conversion and
integration (described below) can be found on page 11.
Q. WHAT WILL HAPPEN TO MY MASTERCARD INTERNATIONAL MEMBERSHIP IN THE CONVERSION?
A. In the conversion, each principal member of MasterCard International will
receive shares of class A and class B common stock of MasterCard
Incorporated, representing that member's equity interest in MasterCard
Incorporated, and a class A membership interest in MasterCard International,
representing that member's continued rights to use MasterCard's brands,
programs and services under the member's current MasterCard license. See
"Comparison of Rights of MasterCard International Members Before and After
the Conversion and Integration." The shares of class B common stock
attributable to European members of MasterCard International in the
conversion will be held by a trust for their benefit. See "The
Integration -- The Class B Common Stock Trust."
Q. WHAT ARE THE REASONS FOR THE CONVERSION?
A. We believe that the conversion will enhance the value of our business and our
future opportunities by aligning more closely the interests of MasterCard and
our member-stockholders and providing a more flexible structure to respond to
opportunities in the marketplace. In particular, we believe the conversion
will help enhance our member-stockholders' commitment to MasterCard because
their relative shareholdings in MasterCard Incorporated may increase as they
increase their MasterCard business. For more information, see "The
Conversion -- Reasons for the Conversion," and "Risk Factors -- Risks
Relating to the Conversion."
Q. WHY IS MASTERCARD INTERNATIONAL BEING REORGANIZED AS A TWO-TIERED HOLDING
COMPANY?
A. The proposed structure will give MasterCard many of the advantages of a stock
corporation at the holding company level, while enabling it to maintain the
flexibility of a membership association in governing the operations of its
global payments programs at the subsidiary level. As is typical of a holding
company structure, the holding company, MasterCard Incorporated, will control
the voting power of its operating subsidiary, MasterCard International, with
regard to nearly all items that currently require a vote of MasterCard
International's members.
Q. WILL I CONTINUE TO HAVE VOTING RIGHTS?
A. Yes. As a stockholder of MasterCard Incorporated, you will be able to vote on
all matters submitted to the stockholders for a vote, including the election
of the board of directors, and extraordinary transactions, such as a merger,
consolidation or sale of all or substantially all of the assets or
dissolution of MasterCard Incorporated. Each share of class A and class B
common stock will be entitled to one vote. Each stockholder, together with
its affiliates, will be subject to a 7% voting cap in the election of
directors regardless of the number of shares owned. For more information, see
"Description of Capital Stock of MasterCard Incorporated."
The board of directors of MasterCard International will be identical to the
board of directors of MasterCard Incorporated. In addition, you will continue
to be able to vote on proposed changes to Article I (Membership) of the
bylaws of MasterCard International, which will require the approval of the
holders of at least two-thirds of the voting power held by the class A
members, but you will no longer be entitled to vote directly with respect to
any other amendments of the charter or bylaws of MasterCard International.
See "Comparison of Rights
1
of MasterCard International Members Before and After the Conversion and
Integration."
Q. ARE THERE ANY RESTRICTIONS ON MY ABILITY TO SELL MY SHARES OF CLASS A OR
CLASS B COMMON STOCK OR MY CLASS A MEMBERSHIP INTEREST?
A. Yes. Shares of MasterCard Incorporated class A or class B common stock cannot
be transferred for three years after the conversion except in connection with
a sale of all or substantially all of the stockholder's card portfolio. After
three years, each stockholder must maintain an ownership percentage of
outstanding common stock not less than 75% nor more than 125% of that
stockholder's most recent global proxy calculation. The global proxy
calculation is determined by a formula specified in the share exchange and
integration agreement. If you do not satisfy these ownership requirements
based on the annual calculation of the global proxy, you may be required to
purchase or sell shares of MasterCard Incorporated.
In addition, class A and class B common stock will be permitted to be traded
only among institutions holding class A membership interests in MasterCard
International. No stockholder, together with its affiliates, may own more
than 15% of the outstanding voting stock of MasterCard Incorporated.
Class A membership interests, like your existing membership interests, are
not transferable. For more information, see "Description of Capital Stock of
MasterCard Incorporated -- Transfer Restrictions."
Q. WILL THE CONVERSION AFFECT THE RULES FOR QUALIFICATION AS A MEMBER OF
MASTERCARD INTERNATIONAL?
A. No. The rules for the qualification of members of MasterCard International
following the conversion will be the same as the current rules for the
qualification of members of MasterCard International.
Q. WHAT ARE THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE CONVERSION?
A. The conversion and integration should be treated as a single, integrated
series of transactions for U.S. federal income tax purposes. We, our
principal members and the Europay and MEPUK shareholders should not recognize
any gain or loss for U.S. federal income tax purposes to the extent that our
principal members and the shareholders of Europay and MEPUK are treated for
U.S. federal income tax purposes as having received shares of MasterCard
Incorporated stock in exchange for property, except that our principal
members and the shareholders of Europay and MEPUK may recognize imputed
interest income upon the receipt of additional MasterCard Incorporated stock
at the end of the three year transition period or thereafter pursuant to the
integration agreement. We have requested that the Internal Revenue Service
issue a ruling on key aspects of the conversion and integration, and we
expect to receive a response before the end of this year. Principal members
and Europay and MEPUK shareholders should consult their own tax advisors
regarding the U.S. federal, as well as any state, local or non-U.S., tax
consequences to them of the conversion and integration. For more information,
see "Federal Income Tax Consequences of the Conversion and the Integration."
Q. WHAT ARE THE ACCOUNTING IMPLICATIONS OF THE CONVERSION?
A. Members should consult their financial advisors regarding the potential
accounting implications of the conversion to them.
Q. WHEN WILL THE CONVERSION BE COMPLETED?
A. The conversion will be completed as soon as practicable after the conditions
to the conversion are satisfied, including approval of the plan of conversion
by the members, the expiration or termination of any waiting periods under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
rules and regulations promulgated thereunder, which we refer to together as
the HSR Act, and approval of European antitrust authorities. We anticipate
that these conditions will be satisfied and that the conversion will be
completed in the fourth quarter of this year or in the first quarter of 2002.
Members should consult their advisors to determine whether they are required
to make any filings under the HSR Act.
Q. WHAT WILL HAPPEN IF THE MEMBERS DO NOT APPROVE THE PLAN OF CONVERSION?
A. If the members do not approve the plan of conversion, or if the conversion is
not completed for any reason, the board of directors of MasterCard
International presently intends to continue to operate MasterCard
International in its cur-
2
rent form. Completion of the conversion is a condition to the integration. If
the conversion does not occur for any reason, MasterCard International will
not be able to proceed with the integration.
Q. WILL THE CONVERSION OCCUR EVEN IF THE INTEGRATION WITH EUROPAY IS NOT
COMPLETED?
A. No, not in its present form. We will not proceed with the conversion in its
present form if the integration will not also be completed. The board of
directors of MasterCard International may, however, determine in the future
that a conversion in some form is in the best interests of MasterCard
International and its members. If so, MasterCard International would, at that
time, seek member approval for that transaction.
Q. WHAT ARE MY RIGHTS IF I VOTE AGAINST THE PLAN OF CONVERSION, BUT THE PLAN OF
CONVERSION PASSES ANYWAY?
A. You are not entitled to rights of appraisal or similar rights for any matter
to be acted on at the meeting.
Q. WHAT VOTE IS REQUIRED FOR THE PLAN OF CONVERSION PROPOSAL TO PASS?
A. The proposal requires the affirmative vote of a majority of the votes cast at
the MasterCard International special meeting at which a quorum is present,
either in person or by proxy.
Q. WHAT DO I NEED TO DO NOW?
A. After carefully reading and considering the information contained in this
proxy statement-prospectus, please indicate on your proxy card how you want
to vote and mail your signed and dated form in the enclosed return envelope
as soon as possible.
Q. WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A. Just send in a later-dated, signed proxy card to the Secretary of MasterCard
International before the special meeting or attend the meeting in person and
vote.
Q. WHO CAN HELP ANSWER MY QUESTIONS?
A. If you have more questions about this proxy statement-prospectus you should
contact:
MasterCard International Incorporated
2000 Purchase Street
Purchase, New York 10577
Attention: Noah J. Hanft
Secretary
Telephone: (914) 249-2000
Facsimile: (914) 249-4262
or Georgeson Shareholder Communications Inc.
17 State Street
10th Floor
New York, New York 10004
Telephone: (212) 440-9800
Facsimile: (212) 440-9009
QUESTIONS AND ANSWERS ABOUT THE INTEGRATION
Q. WHAT IS THE INTEGRATION?
A. The integration refers to the acquisition of Europay by MasterCard
Incorporated and the combination of the businesses of Europay and MasterCard
International. In connection with the integration, Europay's shareholders,
other than MasterCard International and MEPUK, will exchange their shares of
Europay capital stock for shares of class A common stock and class B common
stock of MasterCard Incorporated. In a related transaction, shareholders of
MEPUK will exchange their shares of MEPUK capital stock for shares of class A
common stock and class B common stock of MasterCard Incorporated. Upon
completion of the conversion and integration, the European principal members
of MasterCard International, including the former MEPUK shareholders, will
own 33 1/3% of the outstanding capital stock of MasterCard Incorporated and
the non-European principal members will own 66 2/3%, and, as an integral
component of the conversion and integration, the shares of class A and class
B common stock of MasterCard Incorporated will be reallocated within each of
the European and non-European shareholder groups in accordance with the new
global proxy calculation described in this proxy statement-prospectus. In
addition, these share allocations will be subject to adjustment at the end of
a three-year transition period following the closing of the conversion and
integration. The shares of class B common stock attributable to European
members of MasterCard International and the shareholders of Europay and MEPUK
in the integration will be held by a trust for their benefit. See "The
Integration -- The Class B Common Stock Trust."
3
For a summary of the integration, see "The Integration" and "Share Allocation
and the Global Proxy." For a description of the related share exchange
proposed for shareholders of MEPUK, see "The Integration -- MEPUK."
Q. WHAT ARE THE REASONS FOR THE INTEGRATION?
A. The integration will allow MasterCard and Europay to form an integrated,
global company with a single management team and governance structure.
Accordingly, we expect that MasterCard Incorporated will be able to respond
more effectively to the challenges and opportunities in today's fast-paced
global payments industry than either MasterCard International or Europay
could separately. We expect that the integration will combine MasterCard
International's strengths in global brand building, transaction processing
and marketing consulting services with Europay's strengths in debit, mobile
commerce and chip-based card programs. As a result, we anticipate that we
will be able to manage our collective brands and combined companies more
effectively, take advantage of many potential operating synergies between the
two companies and reduce costs and thereby improve profitability. For more
information, see "The Integration -- Reasons for the Integration," and "Risk
Factors -- Risks Related to the Integration."
Q. ARE MASTERCARD INTERNATIONAL PRINCIPAL MEMBERS BEING ASKED TO APPROVE THE
INTEGRATION OF MASTERCARD AND EUROPAY?
A. Approval by the members of MasterCard International is not required for the
integration of MasterCard and Europay. However, approval of the members is
required for the plan of conversion, which is a condition for the
integration. Elements of the integration will determine the amount of shares
you will receive in the plan of conversion.
Q. HOW MANY SHARES OF MASTERCARD INCORPORATED WILL I RECEIVE?
A. Features of both the conversion and integration will determine the number of
shares of MasterCard Incorporated you receive. For more information, see
"Share Allocation and the Global Proxy."
Q. WHAT ARE THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE INTEGRATION?
A. The conversion and integration should be treated as a single, integrated
series of transactions for U.S. federal income tax purposes. We, our
principal members and the Europay and MEPUK shareholders should not recognize
any gain or loss for U.S. federal income tax purposes to the extent that our
principal members and the shareholders of Europay and MEPUK are treated for
U.S. federal income tax purposes as having received shares of MasterCard
Incorporated stock in exchange for property, except that our principal
members and the shareholders of Europay and MEPUK may recognize imputed
interest income upon the receipt of additional MasterCard Incorporated stock
at the end of the three year transition period or thereafter pursuant to the
integration agreement. We have requested that the Internal Revenue Service
issue a ruling on key aspects of the conversion and integration, and we
expect to receive a response before the end of this year. Principal members
and Europay and MEPUK shareholders should consult their own tax advisors
regarding the U.S. federal, as well as any state, local or non-U.S., tax
consequences to them of the conversion and integration. For more information,
see "Federal Income Tax Consequences of the Conversion and the Integration."
Q. WHAT ARE THE ACCOUNTING IMPLICATIONS OF THE INTEGRATION?
A. Members should consult their financial advisors regarding the potential
accounting implications of the integration to them.
Q. WHAT ARE THE CONDITIONS TO THE INTEGRATION?
A. The integration will not occur if the conversion is not also completed. In
addition, the integration is subject to customary closing conditions, among
others. For more information, see "The Integration -- Conditions to Closing
of the Integration."
Q. WHEN WILL THE INTEGRATION BE COMPLETED?
A. If the conditions to the integration have been satisfied or waived, we expect
to close the integration immediately after the completion of the conversion.
4
Q. WHAT APPROVALS MUST EUROPAY OBTAIN BEFORE PROCEEDING WITH THE INTEGRATION?
A. Europay's board of directors has already approved the integration. However,
before proceeding with the integration, Europay shareholders, other than
MasterCard International and MEPUK, must agree to exchange their shares in
Europay in accordance with the share exchange and integration agreement.
MEPUK shareholders must agree to exchange their shares in MEPUK in accordance
with a related share exchange agreement, which we refer to as the MEPUK
agreement.
5
SUMMARY
This summary highlights information contained elsewhere in this proxy
statement-prospectus. This summary does not contain all of the information you
should consider with regard to the transactions described in this proxy
statement-prospectus. You should read this summary together with the entire
proxy statement-prospectus, including MasterCard International's and Europay's
financial statements and the notes to those statements, carefully. See "Where
You Can Find More Information." We have included page references parenthetically
to direct you to more complete descriptions of the topics presented in this
summary.
MASTERCARD INTERNATIONAL (PAGE 59)
General
MasterCard International is a leading global payment solutions company
owned by over 1,500 financial institutions worldwide that participate directly
in the business of MasterCard International as its principal members. We manage
a family of well-known, widely accepted payment card brands including
MasterCard, Maestro and Cirrus on behalf of these members and approximately
13,500 affiliate members that participate indirectly in our business. We license
our brands to members, provide a sophisticated set of information and
transaction processing services to members and establish and enforce rules and
standards surrounding the use of cards carrying our brands. We also undertake a
variety of marketing activities designed to maintain and enhance the value of
our brands. As an industry leader in technological innovation, we are developing
highly secure, efficient payment programs for electronic and mobile commerce
applications and helping members launch chip-based card programs in countries
throughout the world.
On a global scale, we process transactions denominated in more than 180
currencies. In 2000, our gross dollar volume ("GDV"), which represents gross
spending (purchases and cash disbursements) on MasterCard-branded cards for
goods and services, including balance transfers and convenience checks,
increased 18% to $858 billion from $726 billion in 1999. At the end of 2000, the
total number of MasterCard cards in circulation worldwide as reported by our
members was 438 million, a 16% increase from 1999, reflecting strong performance
in a number of countries. In addition, our members estimate that cards carrying
MasterCard brands were accepted at over 21 million locations around the world at
the end of 2000.
Our revenue is comprised of operations fees and member assessments.
Operations fees represent user fees for authorization, clearing, settlement and
other member services that facilitate transaction and information management
among our members on a global basis. Member assessments are based principally
upon the GDV of transactions generated by MasterCard-branded cards. In addition
to transaction processing and brand building, we also provide a growing set of
marketing and technology consulting, card enhancement and loyalty rewards
support, and information-based performance analysis services to our members. We
do not issue cards, set fees or determine the interest rates that cardholders
are charged for use of their cards. In addition, we do not solicit merchants to
accept MasterCard cards or establish the discount rate that merchants are
charged for card acceptance. These matters are the responsibility of our
members.
Business Strategy
MasterCard's mission is to add value to our members by working to ensure
that our payment programs become the world's best and most preferred way to pay.
To this end, we seek to build superior brands that provide high quality,
technologically sophisticated and widely accessible payment solutions for
consumers and businesses worldwide. We have adopted the following corporate
strategy to fulfill our mission:
- we intend to focus on key financial institutions and countries to
increase our share, while offering best-in-class services to all of our
members;
- we will continue to work to strengthen MasterCard's brands, technology
and acceptance network;
- we intend to continue to differentiate MasterCard from our competition by
developing innovative payment solutions and customized professional
services; and
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- we intend to integrate with Europay to form a single global company that
combines the separate strengths of MasterCard International and Europay
and allows our brands to be managed more effectively.
EUROPAY INTERNATIONAL (PAGE 87)
Europay International is a leading payment solutions company in Europe.
Headquartered in Waterloo, Belgium, Europay is owned and controlled by European
financial institutions and serves approximately 1,200 principal members, who
participate directly in its card business, and approximately 2,700 affiliate
members, who participate in Europay's card business indirectly through a
principal member. Europay offers its member financial institutions a full range
of payment programs and services, including ec eurocheque, Maestro, Cirrus and
Eurocard-MasterCard, which they in turn can provide to their
customers -- cardholders and retailers.
Europay's mission is to be its members' preferred partner in providing
innovative payments solutions by offering a tailored range of programs and
support services to enable its members to maximize the return on their payment
system investment. Europay's primary role is to license the above brands to its
members, provide a sophisticated set of information processing and transaction
delivery services to members and establish and enforce rules and standards
surrounding the use of payment cards carrying the brands. Europay also engages
in a variety of marketing activities designed to maintain and enhance the value
of the brands, and plays a leading role in the development of new technologies
aimed at facilitating and expanding electronic and mobile commerce.
Europay has a long-standing strategic alliance with MasterCard, originating
with Eurocard International's alliance with Interbank Card Association,
MasterCard International's predecessor, in 1968 and enhanced by more recent
agreements. Europay has been granted exclusive licensing rights in Europe for
certain MasterCard brands and is responsible for the marketing of these brands
and transaction processing throughout Europe. In addition, Europay and
MasterCard are equal partners in Maestro International, a joint venture which
oversees the global development of the Maestro debit service.
SHARE ALLOCATION AND THE GLOBAL PROXY (PAGE 43)
In connection with the conversion and integration, the current principal
members of MasterCard International will receive shares of class A common stock
and class B common stock of MasterCard Incorporated and class A membership
interests in MasterCard International. In the conversion, each principal member
of MasterCard International, including each MasterCard International principal
member in Europe, will receive a number of shares of class A and class B common
stock of MasterCard Incorporated that is proportional to the percentage of the
total voting power of MasterCard International that such member held in
accordance with the historic global proxy formula in effect for the period ended
September 30, 2000. In the integration, each shareholder of Europay and MEPUK
(other than MasterCard International) will receive a specified number of shares
of class A and class B common stock of MasterCard Incorporated in exchange for
its Europay or MEPUK shares, as the case may be. At the closing of the
conversion and integration, the shareholders of Europay and MEPUK will be
principal members of MasterCard in Europe. Accordingly, the shares issued in the
integration, together with the shares issued in the conversion to MasterCard's
principal members in Europe, will result in European member-stockholders
receiving shares of class A and class B common stock that together represent
33 1/3% of all of the shares of class A common stock and class B common stock
together outstanding upon the closing of the conversion and integration.
Non-European member-stockholders will hold the remaining shares of class A and
class B common stock, representing 66 2/3% of all shares outstanding.
Immediately thereafter and as an integral component of the conversion and
integration, shares of common stock will initially be reallocated within each of
the European and non-European member-stockholder groups in accordance with the
new global proxy formula based on the 12 month period ended December 31, 2000,
as described in this proxy statement-prospectus.
The global proxy calculation is determined by a formula specified in the
share exchange and integration agreement, and represents an approximation of
each member's proportionate share of MasterCard International's total
transaction volume and revenues. In connection with the conversion and
integration, the global
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proxy calculation will be adjusted from the historic formula that takes into
account only revenue from MasterCard transactions to a new formula that includes
transaction volume and revenue earned in connection with MasterCard, Cirrus and
Maestro cards.
Three years after completion of the conversion and integration, all class B
common stock, except a limited number of shares relating to ec Pictogram, will
be converted into class A common stock. At that time, shares will be
reallocated, with European members receiving between 26% and 44% of the total
common stock then outstanding, based in part on the aggregate global proxy
calculation of European members, and the remainder being allocated to the
non-European members. Shares of common stock will then be allocated to each
member on the basis of each member's global proxy calculation in effect at that
time. The class B shares not converted into class A shares will by their terms
become non-voting, and are subject to conversion and reallocation after an
additional two-year period. For more information, see "Share Allocation and the
Global Proxy."
The shares of class B common stock attributable to European members of
MasterCard International and the shareholders of Europay and MEPUK in the
conversion and integration will be held by a trust for their benefit. Upon the
conclusion of the three year transition period and thereafter, the class B
common stock will be released from the trust and converted into class A common
stock to be distributed to the stockholders entitled thereto. The trust will
terminate upon the final distribution of the class B common stock. For more
information, see "The Integration -- The Class B Common Stock Trust."
In addition to class A and class B shares, class C shares will be
authorized by the MasterCard Incorporated charter, but will not be issued in
connection with the conversion and integration.
TRANSFER RESTRICTIONS (PAGE 112)
No stockholder of MasterCard Incorporated, together with its affiliates,
may own more than 15% of MasterCard Incorporated's outstanding voting stock. For
three years after completion of the conversion and integration, no transfer of
class A or class B common stock will be permitted except in connection with the
sale of all or substantially all of a stockholder's card portfolio. After three
years, transfers are permitted among stockholders who also own a class A
membership interest in MasterCard International, subject to the requirement that
each stockholder maintain an ownership percentage of outstanding class A and
class B (if any) common stock not less than 75% nor more than 125% of that
stockholder's most recent global proxy calculation. Stockholders may be required
to purchase or sell shares of MasterCard Incorporated in order to satisfy these
requirements. Any sale of MasterCard Incorporated shares would ordinarily
constitute a taxable transaction. Class C shares may or may not be subject to
transfer restrictions. For a description of restrictions on the transfer of
MasterCard Incorporated common stock, see "Description of Capital Stock of
MasterCard Incorporated -- Transfer Restrictions."
CONVERSION OF MASTERCARD INTERNATIONAL (PAGE 29)
The conversion will be accomplished by the following steps:
- MasterCard International will merge with a wholly-owned subsidiary of
MasterCard Incorporated, named MasterCard Merger Sub, Inc. MasterCard
Incorporated is a newly formed, stock holding company organized under
Delaware law. MasterCard International will survive this merger and
become a subsidiary of MasterCard Incorporated.
- Each issued and outstanding principal membership interest in MasterCard
International will be automatically converted by virtue of the merger
into a class A membership interest of MasterCard International and a
specified number of shares of class A common stock and class B common
stock of MasterCard Incorporated. The class A membership in MasterCard
International will continue each member's right to use MasterCard
International's brands, programs and services under the member's current
MasterCard license.
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- MasterCard Incorporated will be issued the sole outstanding class B
membership interest in MasterCard International. The class B membership
interest will entitle MasterCard Incorporated to substantially all of the
voting power, and all economic rights, in MasterCard International.
MasterCard Incorporated's stockholders will participate indirectly in the
voting power and economic rights associated with the class B membership
interest through their ownership of the common stock of MasterCard
Incorporated.
The conversion will not take place unless:
- it is approved by a majority vote of MasterCard International principal
members; and
- the conditions to the integration (other than completion of the
conversion) of MasterCard and Europay have been satisfied or waived.
For a description of the material terms of the conversion, see "The
Conversion."
REASONS FOR THE CONVERSION (PAGE 30)
We believe that conversion will enhance the value of the MasterCard
enterprise by:
- aligning more closely the interests of MasterCard and our
member-stockholders and helping to enhance our member-stockholders'
commitment to MasterCard;
- providing a more flexible structure to respond to opportunities in the
marketplace;
- resulting in greater financial transparency for our member-stockholders;
and
- making it easier, if desired, for MasterCard Incorporated to raise
financing in the public securities markets.
For more information, see "The Conversion -- Reasons for the Conversion,"
and "Risk Factors -- Risks Related to the Conversion."
THE INTEGRATION (PAGE 33)
MasterCard Incorporated and MasterCard International intend to enter into
an integration agreement with Europay that provides for MasterCard Incorporated
to acquire, directly and indirectly, Europay's capital stock in exchange for
shares of class A and class B common stock of MasterCard Incorporated. Following
the integration, Europay will become a consolidated subsidiary of MasterCard
Incorporated. As a result, Europe, like MasterCard's other regions, will be
managed by a regional board of directors that operates under delegated authority
from MasterCard's global board of directors. For a description of the material
terms of the transaction with Europay, see "The Integration."
REASONS FOR THE INTEGRATION (PAGE 35)
The integration will allow MasterCard and Europay to form an integrated,
global company with a single management team and governance structure.
Accordingly, we expect that MasterCard Incorporated will be able to respond more
effectively to the challenges and opportunities in today's fast-paced global
payments industry than either MasterCard International or Europay could
separately. MasterCard and Europay are expected to benefit from the integration
through the establishment of:
- one global management team and governance structure;
- improved delivery of customized relationship management and professional
services to customers in all key regions, including Europe; and
- synergies to reduce costs and improve service, thereby improving
profitability.
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The integration will allow MasterCard to:
- establish a more consistent global marketing message, particularly in
Europe, that is intended to increase MasterCard's presence in Europe and
thereby make the European region more attractive to all MasterCard
members; and
- take advantage of Europay's expertise in debit and chip cards and mobile
commerce.
For Europay, the integration represents the opportunity to merge with a
well-capitalized industry leader and, as a result, to leverage its own strengths
based on the broader resources of the MasterCard brand and organization.
Integration with MasterCard provides the opportunity for European members to:
- participate in the MasterCard system on a much more significant scale
than they currently do;
- utilize MasterCard's expertise in brand building and customer-centered
service; and
- utilize MasterCard's marketing consulting, internet and corporate product
management expertise.
For more information, see "The Integration -- Reasons for the Integration,"
and "Risk Factors -- Risks Related to the Integration."
STRUCTURE OF MASTERCARD FOLLOWING THE CONVERSION AND INTEGRATION
The diagrams below show the approximate ownership structure of MasterCard
and Europay before and after the conversion and integration. In addition to the
information set forth below, MasterCard International owns a 15% interest in
EPSS, Europay's transaction processing subsidiary, of which Europay owns the
remainder.
BEFORE CONVERSION AND INTEGRATION
Diagram showing (1) Non-European Members owning 93% of MasterCard
International, (2) European Members owning 7% of MasterCard International and
87 3/4% of Europay International and (3) MasterCard International owning 12 1/4%
of Europay International.
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IMMEDIATELY AFTER CONVERSION AND INTEGRATION
Diagram showing (1) Non-European Members owning 66 2/3% of MasterCard
Incorporated and class A membership interests in MasterCard International, (2)
European Members owning 33-1/3% of MasterCard Incorporated and class A
membership interests in MasterCard International and (3) MasterCard Incorporated
owning 100% of Europay International and the class B membership interest in
MasterCard International.
THREE YEARS AFTER CONVERSION AND INTEGRATION
Diagram showing (1) Non-European Members owning 56%-74% of MasterCard
Incorporated and class A membership interests in MasterCard International, (2)
European Members owning 26%-44% of MasterCard Incorporated and class A
membership interests in MasterCard International and (3) MasterCard Incorporated
owning 100% of Europay International and the class B membership interest in
MasterCard International.
* The percentages indicated include the class B common stock held in trust for
the European members. The terms of the trust provide for the pass-through of
voting rights and dividends relating to the class B common stock to those
members. See "The Integration -- The Class B Common Stock Trust."
** Assumes each Europay shareholder agrees to exchange its shares of Europay,
and each shareholder of MEPUK agrees to exchange its shares of MEPUK, for
common stock of MasterCard Incorporated as described in this proxy
statement-prospectus. MasterCard Incorporated will own Europay shares
directly and indirectly through MasterCard International and MEPUK.
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BOARDS OF DIRECTORS FOLLOWING THE CONVERSION AND INTEGRATION (PAGE 29)
The directors and executive officers of MasterCard Incorporated after the
conversion and integration will be the same as the directors and executive
officers of MasterCard International before the conversion and integration
except for the addition of two voting directors who will be affiliated with
European members and the addition of Dr. Peter Hoch, currently Chief Executive
Officer of Europay, who will be President of MasterCard's Europe region and a
non-voting director. The board of directors of MasterCard Incorporated will
initially consist of 18 voting members -- six from the U.S., six from Europe,
three from Asia/Pacific, one from Canada, one from Latin America and the
Caribbean and the President and Chief Executive Officer. The directors will be
elected by the stockholders subject to a voting cap and a limit on the number of
representatives that may come from any single region.
The certificate of incorporation of MasterCard International requires that
MasterCard Incorporated, as the sole class B member, elect its directors to
serve as the directors of MasterCard International.
In addition to the board of directors, there will be a regional board for
each of MasterCard's six operating regions. For a discussion of the regional
boards and their governance rights, see "The Conversion -- Effects of the
Conversion."
BOARD OF DIRECTORS' AND PRINCIPAL MEMBERS' APPROVAL OF THE CONVERSION AND THE
INTEGRATION (PAGE 31)
On February 8, 2001, the board of directors of MasterCard International
approved resolutions recommending the conversion and integration to MasterCard
International's principal members. Approval at a special meeting of principal
members at which a quorum is present of at least a majority of the votes cast is
required to complete the plan of conversion. On February 12, 2001, the board of
directors of Europay also approved resolutions recommending the integration to
Europay's shareholders. However, approval by the principal members of MasterCard
International is not required to complete the integration. If the plan of
conversion is approved and the conditions to the integration are satisfied or
waived, we will proceed with the conversion and integration.
THE BOARD OF DIRECTORS OF MASTERCARD INTERNATIONAL RECOMMENDS THAT MEMBERS VOTE
FOR APPROVAL OF THE PLAN OF CONVERSION.
Principal members of MasterCard International who are represented on
MasterCard International's board of directors are entitled to exercise votes
representing approximately 32% of the votes entitled to be cast on the proposal
regarding the plan of conversion.
ABSENCE OF APPRAISAL OR DISSENTERS' RIGHTS
Members who object to the conversion will have no appraisal or dissenters'
rights under applicable law.
OVERVIEW OF THE MERGER AGREEMENT EFFECTING THE CONVERSION (PAGE 31)
The conversion will be effected pursuant to the Agreement and Plan of
Merger to be entered into among MasterCard Incorporated, MasterCard
International and MasterCard Merger Sub, Inc., which we refer to as the merger
agreement. Under the merger agreement, each issued and outstanding principal
membership interest in MasterCard International will be automatically converted
by virtue of the merger into a class A membership interest of MasterCard
International and a specified number of shares of class A common stock and class
B common stock of MasterCard Incorporated. The number of shares of class A and
class B common stock of MasterCard Incorporated that a principal member receives
in the merger will be proportional to the percentage of the total voting power
of MasterCard International that such member held in accordance with the
historic global proxy formula in effect for the period ended September 30, 2000.
Upon completion of the conversion and integration and as an integral component
thereof, the shares of class A common stock and class B common stock of
MasterCard Incorporated will initially be reallocated within each of the
European and non-European member-stockholder groups in accordance with the new
global proxy formula based on the 12 month period ended December 31, 2000.
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Shares of class A and class B common stock are fully paid, non-assessable
voting equity interests in MasterCard Incorporated and vote together as a single
class on all matters. Class A membership interests in MasterCard International
represent the members' continued rights to use MasterCard's brands, programs and
services under the members' current MasterCard license. For more information on
the allocation of shares, see "Share Allocation and the Global Proxy." The
shares of class B common stock attributable to European members of MasterCard
International in the conversion will be held by a trust for their benefit. See
"The Integration -- The Class B Common Stock Trust."
In addition, under the merger agreement, MasterCard Incorporated will
receive one class B membership interest in MasterCard International and become
the sole principal member of MasterCard International for most matters subject
to a vote of members.
The merger will not close, and your membership interest will not be
exchanged as described above, unless a majority of the votes cast at the special
meeting at which a quorum is present approve the plan of conversion and the
merger agreement. For more information, see "The Conversion -- The Merger
Agreement Effecting the Conversion."
OVERVIEW OF THE INTEGRATION AGREEMENT (PAGE 36)
The integration will be accomplished pursuant to the Share Exchange and
Integration Agreement to be entered into by MasterCard Incorporated, MasterCard
International and Europay International, which we refer to as the integration
agreement. The integration agreement provides for the following:
- the exchange of shares of Europay and MEPUK for specified numbers of
shares of class A common stock and class B common stock of MasterCard
Incorporated through (i) individual share exchange agreements between
MasterCard Incorporated, MasterCard International and each Europay
shareholder (other than MasterCard International and MEPUK), which we
refer to collectively as the share exchange agreement, and (ii) the MEPUK
agreement;
- three years following the completion of the integration, the conversion
of the class B common stock, other than a limited number of shares
relating to ec Pictogram (if any), into class A common stock, and the
reallocation of the class A common stock among the stockholders; and
- restrictions on the conduct of business of each of MasterCard
International and Europay prior to the closing of the integration.
The integration agreement also provides, as an integral component of the
conversion and integration, that the shares of class A and class B common stock
of MasterCard Incorporated issued to members will initially be reallocated
within each of the European and non-European member-stockholder groups in
accordance with the new global proxy formula based on the 12 month period ended
December 31, 2000, as described in this proxy statement-prospectus. For more
information on the allocation of shares, see "Share Allocation and the Global
Proxy." See also "The Integration -- The Integration Agreement."
The shares of class B common stock attributable to European members of
MasterCard International and the shareholders of Europay and MEPUK in the
integration will be held by a trust for their benefit. See "The
Integration -- The Class B Common Stock Trust."
FORWARD-LOOKING STATEMENTS (PAGE 26)
Statements in this proxy statement-prospectus include forward-looking
statements that involve risks and uncertainties. Actual results may differ
materially from those expressed in forward-looking statements, depending on a
variety of factors discussed more fully in this proxy statement-prospectus. You
should carefully review all information, including the financial statements and
the notes to the financial statements included in this proxy
statement-prospectus.
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RISK FACTORS (PAGE 17)
You should carefully consider all of the information provided in this proxy
statement-prospectus and, in particular, you should evaluate the specific
factors described under "Risk Factors" on page 17 for a description of the risks
associated with the conversion and integration.
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MASTERCARD SUMMARY CONSOLIDATED FINANCIAL AND OTHER INFORMATION
The following table sets forth summary consolidated financial and other
information for MasterCard for each of the three years in the period ended
December 31, 2000 and as of the end of each such fiscal year, and as of and for
the six months ended June 30, 2001 and June 30, 2000, and selected unaudited pro
forma financial data for the year ended December 31, 2000 and as of and for the
six months ended June 30, 2001. The summary consolidated financial data as of
December 31, 2000 and December 31, 1999 and for the fiscal years ended December
31, 2000, December 31, 1999 and December 31, 1998 have been derived from the
audited consolidated financial statements of MasterCard International included
elsewhere in this proxy statement-prospectus. The summary consolidated financial
data as of December 31, 1998 has been derived from the audited consolidated
financial statements of MasterCard International that have not been included in
this proxy statement-prospectus. The summary consolidated financial data for the
six months ended June 30, 2001 and June 30, 2000 and as of June 30, 2001 and
June 30, 2000 have been derived from the unaudited consolidated financial
statements of MasterCard International, which in the opinion of management
include all adjustments, consisting only of normal recurring adjustments, that
are necessary for a fair statement of the results of operations and financial
position of MasterCard International for the periods and at the dates presented.
The results of operations for the six months ended June 30, 2001 are not
necessarily indicative of the results to be expected for the full year. The pro
forma adjustments are based upon available information and certain assumptions
that management believes are reasonable. The information set forth below should
be read in conjunction with "MasterCard Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Consolidated Financial
Statements of MasterCard International and the notes thereto, and other
financial information, including the pro forma combined financial information,
included in this proxy statement-prospectus.
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EUROPAY SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The summary historical consolidated financial data set forth below for
Europay for the year ended December 31, 2000 and as of December 31, 2000 has
been derived from Europay's audited consolidated financial statements and
related notes which were prepared in accordance with accounting principles
generally accepted in Belgium ("Belgian GAAP"). The consolidated financial
statements have been audited by PricewaterhouseCoopers Reviseurs d'Entreprises,
independent accountants, as stated in their report included elsewhere in this
proxy statement-prospectus and should be read in conjunction with their report.
The summary historical consolidated financial data set forth below for Europay
for the two years ended December 31, 1999 and 1998 and as of December 31, 1999
have been derived from Europay's unaudited consolidated financial statements and
related notes which were prepared in accordance with Belgian GAAP and are
included elsewhere in this proxy statement-prospectus.
The financial data in the tables below has been derived from Europay's
audited and unaudited consolidated financial statements in accordance with
Belgian GAAP, which differs in certain significant respects from accounting
principles generally accepted in the United States of America ("U.S. GAAP").
These differences have a material effect on net income and the composition of
shareholder's equity and are summarized in Note 22 to the Consolidated Financial
Statements of Europay included elsewhere in this proxy statement-prospectus.
This table should be read in conjunction with the "Europay Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of Europay and the related notes included
elsewhere in this proxy statement-prospectus.
Since its inception, Europay has not declared or paid any dividends.
---------------
(1) Prior year balances have been translated from Belgian francs into euros
using the fixed exchange rate on January 1, 1999 of BEF 40.3399 per euro.
See Note 3 to the Consolidated Financial Statements of Europay included
elsewhere in this proxy statement-prospectus.
(2) Europay acts as an agent on behalf of MasterCard for the billing and
collection of inter-regional transactions with members. Europay does not
bear risk and rewards of ownership related to these transactions and
therefore, revenue is reported net under U.S. GAAP. See Note 22 to the
Consolidated Financial Statements of Europay included elsewhere in this
proxy statement-prospectus.
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RISK FACTORS
You should carefully consider the following risk factors, as well as the
other information contained in this proxy statement-prospectus, regarding our
business, the conversion and the integration before deciding whether to vote on
the conversion, if you are a MasterCard member, or execute the share exchange
agreement, if you are a Europay shareholder.
RISKS RELATED TO OUR BUSINESS GENERALLY
IF WE ARE UNABLE TO MAINTAIN OUR RELATIONSHIPS WITH OUR MEMBERS, OR IF OUR
MEMBERS ARE UNABLE TO MAINTAIN THEIR RELATIONSHIPS WITH CARDHOLDERS OR THE
MERCHANTS WHO ACCEPT OUR CARDS FOR PAYMENT, OUR BUSINESS MAY BE ADVERSELY
AFFECTED.
We are and will continue to be significantly dependent on a number of third
party relationships, principally our relationships with our issuing and
acquiring members and their further relationships with cardholders and
merchants, to support our programs and services. Most of our relationships with
our members are not exclusive and may be terminated at the convenience of our
members. We cannot assure you that our members will not reassess their
commitments to us at any time in the future or that they will not develop their
own competitive services. In particular, the payments industry is currently
undergoing significant consolidations and the merger of one or more of our
members with financial institutions aligned with our competitors could have a
material adverse impact on our business and prospects.
We may not be able to maintain or form new relationships with card issuers,
card acquirers, technology providers, transaction processors, merchants or
others who provide products and services that are important to our success.
Accordingly, we cannot assure you that our existing or prospective relationships
will result in sustained business relationships or the generation of significant
revenues.
We do not issue cards, set fees or determine the interest rates (if
applicable) charged to cardholders carrying MasterCard-branded cards. Each
MasterCard issuing member is responsible for determining these and most other
competitive card features. In addition, we do not solicit merchants or establish
the discount rate that merchants are charged for card acceptance, which are
responsibilities of our acquiring members. As a result, much of our business
depends on the continued success and competitiveness of our members. In turn,
our members' success is dependent upon a variety of factors over which we have
little or no influence. In addition, if our members become financially unstable,
we may lose the revenue that we generate by charging them operations fees and
assessments.
We rely on the continuing expansion of merchant acceptance of our brands of
cards. Although it is our business strategy to invest in strengthening our
brands and aggressively expanding our acceptance network, there can be no
guarantee that our efforts in these areas will continue to be successful. If the
rate of merchant acceptance growth slows or reverses itself, our business could
suffer.
OUR OPERATING RESULTS MAY SUFFER BECAUSE OF SUBSTANTIAL AND INCREASINGLY INTENSE
COMPETITION WORLDWIDE IN THE GLOBAL PAYMENTS INDUSTRY.
The global payments industry is highly competitive. We compete with all
forms of payment including cash, checks and electronic forms of payment. Among
general purpose payment cards, we encounter constant and intense competition
from systems such as Visa and its related brands (including Plus, Electron and
Interlink), American Express, and JCB. In specific countries, we face
significant competition from other competitors such as Discover/Novus, Interac,
Bancard and EFTPOS. We also encounter competition from businesses such as retail
stores and petroleum (gasoline) companies that issue their own private-label
cards, as well as from regional Automated Teller Machine ("ATM") networks such
as NYCE, Concord/EFS and others. We also compete against new entrants that have
developed alternative payment systems that can reduce the dollar value charged
on our cards or the number of transactions for which our cards are used.
Some of our competitors have, or may develop, substantially greater
financial and other resources than we have, may offer a wider range of programs
and services than we offer or may use more effective advertising and marketing
strategies to achieve broader brand recognition or merchant acceptance than we
have. Within the
17
global general purpose card industry, we believe that Visa has approximately
twice our purchase volume. In addition, American Express, Discover/Novus and
others control proprietary end-to-end payments systems in which they extend
credit and charge privileges to consumers and businesses and establish
relationships directly with merchants (in our case, both of these functions are
the responsibility of our members). These end-to-end systems provide our
competitors with certain competitive advantages that we do not enjoy. We may not
continue to be able to compete effectively against these threats, and, as a
result, our revenues or income may decline. One or more of our members could
also seek to merge with, or acquire, one of our competitors, and any such
transaction could have a material adverse impact on our business and prospects.
IF WE ARE NOT ABLE TO KEEP UP WITH THE RAPID TECHNOLOGICAL DEVELOPMENTS IN OUR
INDUSTRY TO PROVIDE MEMBERS, MERCHANTS AND CARDHOLDERS WITH NEW AND INNOVATIVE
PAYMENT PROGRAMS AND SERVICES, THE USE OF MASTERCARD-BRANDED CARDS COULD
DECLINE, WHICH WOULD REDUCE OUR REVENUES AND INCOME.
The payment card industry is subject to rapid and significant technological
changes, such as continuing developments of alternative technologies in the
areas of smart cards, electronic commerce and mobile commerce, among others. We
cannot predict the effect of technological changes on our business. We rely in
part on third parties, including some of our competitors and potential
competitors, for the development of and access to new technologies. We expect
that new services and technologies applicable to the payments industry will
continue to emerge, and these new services and technologies may be superior to
or render obsolete the technologies we currently use in our card programs and
services. Our future success will depend, in part, on our ability to adapt to,
or develop, technological changes and evolving industry standards and to provide
end to end payment solutions for our members. We may be unable to obtain access
to new technologies on acceptable terms or at all, and this may cause us to be
unable to offer card programs and services competitively.
In many circumstances we believe that the payment card industry should
create, and we are working to forge, industry standards to allow for the
compatibility of various card programs and technologies. The industry, however,
may not set standards on a timely basis or at all, or we may develop a program
or technology that is not adapted as an industry standard. These risks could
have a material adverse effect on our revenues and income.
IF OUR TRANSACTION PROCESSING SYSTEMS ARE DISRUPTED OR WE ARE UNABLE TO PROCESS
TRANSACTIONS EFFECTIVELY OR EFFICIENTLY OR AT ALL, OUR REVENUES OR INCOME WOULD
BE MATERIALLY REDUCED.
Our transaction authorization, clearing and settlement systems may
experience service interruptions as a result of fire, natural disasters, power
loss, disruptions in long distance or local telecommunications access, or the
accidental or intentional actions of others. Nearly all of our transaction
processing systems are operated out of a single facility, supported by a
separate back-up facility. A natural disaster or other problem at our primary
and/or back-up facilities or our other owned or leased facilities could
interrupt our services. Additionally, we rely on third party service providers,
such as AT&T, for the timely transmission of information across our global data
transportation network. If a service provider fails to provide the
communications capacity or services we require, as a result of natural disaster,
operational disruption or any other reason, the failure could interrupt our
services and adversely affect our revenues and income.
A BREACH OF OUR SYSTEMS' SECURITY COULD ADVERSELY IMPACT OUR BUSINESS.
Our security protection measures, including the security of transaction
information processed on our systems, may not be sufficient to prevent a
disruption of our computer systems as a result of fraud or for other reasons.
Unauthorized use of our network could potentially jeopardize the security of
confidential information stored in our computer systems or transmitted by our
members. These factors may result in liabilities for us or our members, and
could reduce our revenues and income.
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IN EVERY MASTERCARD CARD TRANSACTION, THERE IS A RISK THAT THE ISSUING OR
ACQUIRING MEMBER WILL DEFAULT IN ITS PAYMENT OBLIGATIONS. BECAUSE WE GUARANTEE
THE SETTLEMENT OBLIGATIONS OF OUR PRINCIPAL MEMBERS, ONE OR MORE DEFAULTS COULD
EXPOSE US TO SIGNIFICANT LOSSES.
As a secondary obligor for certain card obligations among principal
members, we are exposed to settlement risk from our members. Settlement exposure
materializes when an issuer or acquirer fails to fund daily settlement
obligations due to technical reasons, liquidity shortfall or other reasons. For
any member, our settlement exposure is comprised of the estimated dollar value
of issuing and chargeback transactions that we would need to fund in order to
satisfy the member's MasterCard related obligations to other members. If a
principal member is unable to fulfill its settlement obligations to other
members, we may bear the loss. Accordingly, one or more member defaults could
expose us to significant losses and reduce our revenues and income. See
"Business of MasterCard International -- Payment Services -- Transaction
Processing -- Member Risk Management."
COMPETITION FOR HIGHLY SKILLED PERSONNEL IS INTENSE AND THE SUCCESS OF OUR
BUSINESS DEPENDS ON OUR ABILITY TO ATTRACT, RETAIN AND MOTIVATE KEY PERSONNEL.
Our future success depends on our continuing ability to attract, retain and
motivate highly skilled employees in a competitive labor market. In the past,
our inability to provide stock-based compensation has complicated our efforts to
attract and retain highly qualified employees, and we may not be successful in
doing so in the future. If we do not succeed in attracting sufficient new
personnel or retaining and motivating our current personnel, our ability to
provide our programs and services in a competitive manner could diminish, which
could have a material adverse effect on our business.
CHANGES IN GENERAL ECONOMIC CONDITIONS, ESPECIALLY INTEREST RATES AND BUSINESS
CYCLES, MAY AFFECT OUR INCOME AND REVENUES SIGNIFICANTLY.
The payment card industry is heavily dependent upon the overall level of
consumer spending. As a result, any substantial deterioration in general
economic conditions, particularly in the United States, or increases in interest
rates in key countries in which we operate, may adversely affect our financial
performance.
Furthermore, our business is somewhat seasonal in nature, with the fourth
quarter typically representing a proportionally greater percentage of annual
revenue from operations. A downturn in general economic conditions or consumer
spending may result in a negative impact on our revenues or income.
MASTERCARD CANNOT PREDICT THE OUTCOME OR IMPACT OF ANTITRUST CLAIMS BY THE U.S.
DEPARTMENT OF JUSTICE.
In October 1998, the United States Department of Justice (the "DOJ") filed
suit against MasterCard International, Visa U.S.A., Inc. and Visa International
Corp. in the U.S. District Court for the Southern District of New York alleging
that both MasterCard's and Visa's governance structure and policies violated
U.S. federal antitrust laws. First, the DOJ claimed that "dual
governance" -- the situation where a financial institution has a representative
on the board of directors of MasterCard or Visa while a portion of its card
portfolio is issued under the brand of the other association -- was
anti-competitive and acted to limit innovation within the payment card industry.
At the same time, the DOJ conceded that "dual issuance" -- a term describing the
structure of the bank card industry in the United States in which a single
financial institution can issue both MasterCard and Visa-branded cards -- was
pro-competitive. Second, the DOJ challenged MasterCard's Competitive Programs
Policy ("CPP") and a Visa bylaw provision that prohibit financial institutions
participating in the respective associations from issuing competing proprietary
payment cards (such as American Express or Discover). The DOJ alleged that
MasterCard's CPP and Visa's bylaw provision acted to restrain competition. A
bench trial concerning the DOJ's allegations was concluded on August 22, 2000.
In response to the judge's request for a proposed remedy, the DOJ submitted a
proposed order that, if implemented, would require MasterCard to repeal the CPP
and Visa to repeal its bylaw. The government's proposed order also would require
all financial institutions with representatives on any governing MasterCard
board or committee (defined as any body having decision-making authority or
access to competitively sensitive information with respect to MasterCard, unless
the activities of that board or committee relate solely to activities outside
the United States) to (i) with regard to new issuance, issue general purpose
cards bearing MasterCard brands exclusively, and (ii) ensure that by 2003 at
least 80% of
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each such institution's total issuing volume in the United States and globally
is derived from MasterCard-branded cards. The proposed order would impose
parallel requirements on Visa, and would also require that financial
institutions that have signed long-term member agreements with MasterCard or
Visa have a two-year period to exercise termination rights related to those
agreements. As of the date of this proxy statement-prospectus, no decision has
been rendered in the trial.
MasterCard cannot predict the impact that the resolution of this matter
will have on our results of operations, financial position or cash flows,
although an adverse result could have a material adverse effect on our business,
prospects and financial condition. If the CPP is repealed, American Express and
potentially other systems are expected to seek to enter into issuing
relationships with our members, which may have an adverse impact on our
competitive position. If dual governance is eliminated, it is possible that some
of our largest members may seek to align themselves with Visa, which has
substantially greater transaction volume than we do. Any realignment of this
nature could have a significant adverse impact on our business, financial
condition and prospects. See "Business of MasterCard International -- Legal
Proceedings -- Department of Justice Antitrust Litigation."
MASTERCARD CANNOT PREDICT THE OUTCOME OR IMPACT OF A PUTATIVE CLASS ACTION
LAWSUIT BY U.S. MERCHANTS AGAINST MASTERCARD.
Commencing in October 1996, several putative class action suits were
brought by a number of U.S. merchants -- including Wal-Mart Stores, Inc., Sears
Roebuck & Co., Inc., The Limited Inc. and Safeway, Inc. -- against MasterCard
International and Visa U.S.A., Inc. challenging certain aspects of the payment
card industry under U.S. federal antitrust law. Those suits where later
consolidated in the U.S. District Court for the Eastern District of New York.
The plaintiffs challenge MasterCard's "Honor All Cards" rule (and a similar Visa
rule), which ensures universal acceptance for consumers by requiring merchants
who accept MasterCard cards to accept for payment every validly presented
MasterCard card. Plaintiffs claim that MasterCard and Visa unlawfully have tied
acceptance of debit cards to acceptance of credit cards. In essence, the
merchants desire the ability to reject off-line, signature-based debit
transactions (for example, MasterCard card transactions) in favor of other
payment forms, including on-line, PIN-based debit transactions (for example,
Maestro or regional ATM network transactions) which generally impose lower
transaction costs for merchants. The plaintiffs also claim that MasterCard and
Visa have conspired to monopolize what they characterize as the point-of-sale
debit card market, thereby suppressing the growth of regional networks such as
ATM payment systems. Plaintiffs allege that the plaintiff class has been forced
to pay unlawfully high prices for debit and credit card transactions as a result
of the alleged tying arrangement and monopolization practices. There are related
consumer class actions pending in two state courts that have been stayed pending
developments in this matter.
On February 22, 2000, the district court granted the plaintiffs' motion for
class certification. MasterCard and Visa promptly petitioned for an appeal. The
Second Circuit Court of Appeals agreed to consider the appeal of the grant of
class certification, and a hearing before that court on the appeal was held in
February 2001. As of the date of this proxy statement-prospectus, the parties
are awaiting a decision of the Second Circuit. Motions seeking summary judgment
have been filed by both sides and fully briefed in the district court.
Currently, no argument date for summary judgment has been set pending the
resolution of the appeal of the class certification decision and no trial date
has been set.
Based upon publicly available information, the plaintiffs previously have
asserted damage claims in this litigation of approximately $8 billion, before
any trebling under U.S. federal antitrust law. More recent published reports
place the plaintiffs' damage claims at approximately $50 billion. In addition,
the plaintiffs' damage claims could be materially higher than these amounts as a
result of the passage of time and substantive changes in the theory of damages
presented by the plaintiffs.
MasterCard believes that it is not currently possible to estimate the
impact, if any, that the ultimate resolution of this matter will have on
MasterCard's results of operations, financial position or cash flows. However,
an adverse result could have a material adverse effect on our business,
prospects and financial condition. See "Business of MasterCard
International -- Legal Proceedings -- Merchant Antitrust Litigation."
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BECAUSE WE HAVE SIGNIFICANT INTERNATIONAL OPERATIONS, WE FACE ADDITIONAL RISKS
RELATED TO GLOBAL POLITICAL AND ECONOMIC CONDITIONS.
We operate in and intend to expand our business further in countries
throughout the world, including through our integration with Europay. We cannot
be sure that we will be able to broaden our global operations in a
cost-effective manner or compete effectively in all of our targeted countries.
There are risks inherent in conducting business internationally, any of which
could adversely affect our operations, including:
- unexpected changes in regulatory requirements;
- challenges in staffing and managing foreign operations;
- reliance on foreign third party service providers;
- differing technology standards;
- employment laws and practices in foreign countries;
- weaker intellectual property protections in certain countries;
- political, social and economic instability;
- foreign exchange restrictions and price controls;
- costs of services tailored to specific markets; and
- potentially adverse tax consequences.
If these risks materialize, they could have a material adverse effect on
our business. We cannot assure you that we will continue to develop and
implement effective policies and strategies in each location where we do
business.
ADVERSE CURRENCY FLUCTUATIONS AND FOREIGN EXCHANGE CONTROLS COULD DECREASE
REVENUES WE RECEIVE FROM OUR INTERNATIONAL OPERATIONS.
During 2000, approximately 33% of our revenues were generated from
activities outside the United States. The U.S. dollar is the functional currency
of MasterCard's business. Some of the revenues we generate outside the United
States are therefore subject to unpredictable and indeterminate fluctuations if
the values of international currencies change relative to the U.S. dollar.
Resulting exchange gains and losses are included in our net income. Our risk
management activities provide protection with respect to adverse changes in the
value of only a limited number of currencies. Furthermore, we may become subject
to exchange control regulations that might restrict or prohibit the conversion
of our revenue currencies into U.S. dollars. The occurrence of any of these
factors could have a material adverse effect on our business.
RISKS RELATED TO EUROPAY
IF EUROPAY'S MEMBERS ARE UNABLE TO COMPLETE THE TIMELY MIGRATION OF THEIR ATM
NETWORKS TO ACCOMMODATE THE INTRODUCTION OF EURO NOTES AND COINS, OR IF
MERCHANTS ARE UNABLE TO COMPLETE THE TIMELY MIGRATION OF THEIR POINT-OF-SALE
TERMINALS TO ACCOMMODATE EURO-BASED TRANSACTIONS, TRANSACTION VOLUMES MAY
DECREASE AND EUROPAY'S REVENUES MAY DECLINE.
As part of Europe's migration to a single currency, euro notes and coins
will be introduced in twelve European countries on January 1, 2002. We cannot
assure you that Europay's members will successfully migrate their ATM networks,
or that merchants will successfully migrate their point-of-sale terminals, to
accommodate the introduction of the euro. If Europay members are unable to
accommodate demand for euro notes and coins at their ATMs, or if merchants are
unable to accommodate euro-based transactions at their point-of-sale terminals,
during the transition period following January 1, 2002, transaction volumes may
decrease and Europay's revenues may decline.
EUROPAY'S BUSINESS MAY BE ADVERSELY IMPACTED IF THE EUROPEAN COMMISSION RULES
THAT MULTILATERAL INTERCHANGE FEES VIOLATE EUROPEAN COMMUNITY COMPETITION RULES.
In September 2000, the European Commission issued a "Statement of
Objections" challenging Visa International's multilateral interchange fee
("MIF") under European Community competition rules. The MIF is a fee that is
paid by the merchant bank, or the "acquirer", to the cardholder bank, or the
"issuer",
21
when a payment is made to a merchant using a payment card. The amount of the MIF
is set by the payment card system as a default fee that will only apply where
the issuer and the acquirer cannot agree on a bilateral interchange fee.
Interchange fees represent a sharing of payment system costs. Among other
elements, interchange fees cover the processing costs of payment card
transactions as well as the costs of the payment guarantee delivered by the
issuer.
Although Europay is not an addressee of the Statement of Objections, its
rules also contain a MIF scheme. Europay has therefore requested that the
European Commission issue a Statement of Objections in its own case should the
European Commission have objections to the Europay MIF. However, the European
Commission has to date elected to treat the Visa International case as the
"leading" payment card case and has not issued a separate Statement of
Objections challenging Europay's MIF.
The European Commission announced on August 10, 2001 its intention to take
a favorable view of Visa's MIF in light of certain changes proposed by Visa,
most notably a reduction in the level of fees. On August 11, 2001, the European
Commission published a notice containing the details of these changes and
invited interested third parties to submit their views to the European
Commission, after which it will issue a formal decision. Assuming the European
Commission does not change its position, the decision would exempt Visa's
modified MIF.
The European Commission's decision in the Visa case would be addressed only
to Visa and would not cover Europay's MIF. However, following its decision in
the Visa case, the European Commission may decide to issue a Statement of
Objections challenging Europay's MIF or enter into negotiations with Europay
seeking changes to Europay's MIF. Alternatively, if the European Commission is
satisfied that Europay's MIF does not need to be modified, it could issue an
exemption or a comfort letter with respect to Europay's MIF. Because the MIF
constitutes an essential element of Europay's payment scheme, changes to it
could significantly impact Europay's members. At this time, it is not possible
to determine what actions the European Commission will take with respect to
Europay's MIF, and therefore the financial impact that any changes would have on
Europay cannot be estimated. In addition, even if the European Commission does
not formally challenge Europay's MIF, private parties could use the decision in
the Visa case to challenge Europay's MIF before national courts or national
competition authorities. See "Business of Europay International -- Legal
Proceedings -- Multilateral Interchange Fee."
EUROPAY'S TAX RETURNS FOR 1997 AND 1998 ARE CURRENTLY BEING INVESTIGATED BY THE
BELGIAN TAX AUTHORITIES, WHICH MAY RESULT IN SIGNIFICANT ADDITIONAL TAX
LIABILITIES AND PENALTIES.
In April 1999, the Belgian tax authorities initiated an investigation of
Europay's tax returns for 1997 and 1998. In June 2001, Europay received a notice
from the Belgian tax authorities challenging Europay's deduction of certain
card-based incentive program costs, which could result in an additional tax
liability of up to approximately E16.3 million, including possible penalties and
interest accrued to December 31, 2000. If Europay's deduction of such costs in
1999 and 2000 is similarly challenged, this could result in a further additional
tax liability of up to approximately E9.5 million, including possible penalties.
Although Europay believes that it has reasonable and meritorious arguments in
favor of its characterization of these deductions and intends to respond
vigorously to the notice, Europay cannot predict the outcome of this matter or
any additional matters raised by the Belgian tax authorities in their
investigation.
RISKS RELATED TO THE CONVERSION
THERE IS NO EXISTING MARKET FOR OUR COMMON STOCK AND WE DO NOT KNOW IF ONE WILL
DEVELOP TO PROVIDE YOU WITH ADEQUATE LIQUIDITY, PARTICULARLY GIVEN THE
SIGNIFICANT RESTRICTIONS ON TRANSFER AND OWNERSHIP TO WHICH THE COMMON STOCK
WILL BE SUBJECT.
There is currently no existing market for our class A or class B common
stock, and we do not currently anticipate that our class A or class B common
stock will be listed on any securities exchange or quoted on any automated
quotation systems or electronic communications network.
Furthermore, the shares of class A and class B common stock that will be
issued in connection with the conversion and integration are subject to
significant ownership and transfer restrictions. Following the conversion and
integration, only holders of class A membership interests in MasterCard
International may own or purchase
22
shares of class A and class B common stock of MasterCard Incorporated. If your
status as a principal member terminates for any reason within three years of the
conversion and integration, MasterCard Incorporated will redeem your shares for
their par value of $.01 per share. If your principal membership terminates more
than three years after the conversion, MasterCard Incorporated will have the
right to redeem your shares for their book value based on MasterCard
Incorporated's financial statements most recently filed with the Securities and
Exchange Commission. If MasterCard Incorporated does not redeem your shares, you
will be required to offer the unpurchased shares to other stockholders in
accordance with procedures to be established by the board of directors. No
stockholder, together with its affiliates, may own more than 15% of MasterCard
Incorporated's outstanding voting stock. In addition, you will not be permitted
to transfer any of your shares for a period of three years after the conversion
and integration unless you sell all or substantially all of your MasterCard card
portfolio, and the class B common stock of European members of MasterCard
International will be held in trust prior to being converted to class A common
stock. After three years, no stockholder may own common stock representing more
than 125% or less than 75% of that stockholder's most recent global proxy
calculation. Stockholders may be required to purchase or sell shares of
MasterCard Incorporated in order to satisfy these requirements within 12 months
of receipt of notice from MasterCard Incorporated that such purchase or sale is
required. Any sales of shares would ordinarily constitute taxable transactions.
Due to the absence of listing on an exchange or quotation on a system or
network for our class A and class B common stock and the significant
restrictions on transfer to which our class A and class B common stock will be
subject, we anticipate that only a limited trading market for our class A and
class B common stock will exist following the three year transition period after
the conversion and integration.
THE VOTING POWER REPRESENTED BY YOUR SHARES OF MASTERCARD INCORPORATED COMMON
STOCK MAY BE LIMITED BECAUSE OWNERSHIP OF A SIGNIFICANT PERCENTAGE OF OUR COMMON
STOCK WILL BE CONCENTRATED IN A FEW OF OUR LARGEST STOCKHOLDERS.
Upon completion of the conversion and integration with Europay, we expect
that two of our member-stockholders will own over 5% of our outstanding common
stock. Although our certificate of incorporation and bylaws contain ownership
and voting restrictions and require a supermajority vote on a number of matters
voted upon by stockholders or directors, our largest member-stockholders will
continue to have a significant influence over our business.
MOST OF OUR DIRECTORS ARE AFFILIATED WITH OUR MEMBERS AND, THEREFORE, MAY HAVE
INTERESTS DIFFERENT FROM THOSE OF MASTERCARD OR OTHER MEMBERS.
Other than Mr. Selander, our President and Chief Executive Officer, each of
our voting directors is affiliated with one of our members. Those directors who
are affiliated with our members will have fiduciary duties to MasterCard and its
stockholders, but will also have obligations to the companies with which they
are affiliated. This may result in a greater likelihood of directors having an
interest in matters under consideration and may make decision-making more
difficult.
OUR ORGANIZATIONAL DOCUMENTS AND APPLICABLE LAW CONTAIN PROVISIONS THAT MAY MAKE
A CHANGE OF CONTROL MORE DIFFICULT.
There are a number of provisions, including the limitations on stock
transfer, the 15% cap on ownership of MasterCard Incorporated voting stock by
any single stockholder together with its affiliates, supermajority voting
requirements and limitations on the ability of stockholders to call a special
meeting in our certificate of incorporation and bylaws that may prevent or
discourage takeovers or business combinations that our stockholders might
otherwise consider to be in their best interests.
THE BOARD OF DIRECTORS OF MASTERCARD INCORPORATED WILL BE REQUIRED TO ACT ON
BEHALF OF THE STOCKHOLDERS OF MASTERCARD INCORPORATED.
The board of directors of MasterCard Incorporated will be required under
Delaware law to make decisions and take actions designed to maximize profits and
stockholder value. Initially, the members of MasterCard International and the
stockholders of MasterCard Incorporated will be the same. It is possible that,
in the future, shares of common stock could be issued to persons who are not
members of MasterCard International. If that
23
were to happen, then the stockholder and member groups would diverge and the
board of MasterCard Incorporated would be required by its fiduciary duties to
act in the best interest of the stockholders. These interests may not always be
consistent with the interests of members of MasterCard International.
THE INTERNAL REVENUE SERVICE MAY TREAT A PORTION OF THE MASTERCARD INCORPORATED
SHARES RECEIVED BY A PRINCIPAL MEMBER OF MASTERCARD INTERNATIONAL OR A
SHAREHOLDER OF EUROPAY OR MEPUK AS TAXABLE INCOME.
The conversion and integration should be treated as a single, integrated
series of transactions for U.S. federal income tax purposes. We, our principal
members and the Europay and MEPUK shareholders should not recognize any gain or
loss for U.S. federal income tax purposes to the extent that our principal
members and the shareholders of Europay and MEPUK are treated for U.S. federal
income tax purposes as having received shares of MasterCard Incorporated stock
in exchange for property, except that our principal members and the shareholders
of Europay and MEPUK may recognize imputed interest income upon the receipt of
additional MasterCard Incorporated stock at the end of the three year transition
period or thereafter pursuant to the integration agreement. To the extent,
however, that the percentage interest in MasterCard Incorporated ultimately
allocated to a principal member of MasterCard International or to a shareholder
of Europay or MEPUK exceeds the percentage interest of the member or shareholder
immediately after the closing of the conversion and the integration (in each
case, immediately before any reallocation of MasterCard Incorporated shares),
the IRS may decline to treat the excess as having been received in exchange for
property. In that event, a principal member of MasterCard International or a
shareholder of Europay or MEPUK could be required to recognize income to the
extent of the excess.
We have requested that the Internal Revenue Service issue a ruling on key
aspects of the conversion and integration, and we expect to receive a response
before the end of this year. Receipt of the ruling is not a condition to the
closing of the conversion and the integration. An IRS ruling is generally
binding on the IRS, but may, under certain circumstances, be revoked or
retroactively modified.
Principal members and Europay and MEPUK shareholders should consult their
own tax advisors regarding the U.S. federal, as well as any state, local or
non-U.S., tax consequences to them of the conversion and integration. For more
information, see "Federal Income Tax Consequences of the Conversion and the
Integration."
MEMBERS AND SHAREHOLDERS MAY INCUR TAX LIABILITIES IN JURISDICTIONS OUTSIDE THE
UNITED STATES IN CONNECTION WITH THE CONVERSION AND INTEGRATION.
Principal members and Europay and MEPUK shareholders may be required to
recognize gain or loss in connection with the conversion and integration in
jurisdictions outside the United States. Members and shareholders should consult
their local tax advisors regarding the potential non-U.S. tax consequences of
the conversion and integration.
THE CONVERSION MAY IN THE FUTURE FACILITATE STRATEGIC TRANSACTIONS WHICH MAY
REDUCE THE INFLUENCE OF MEMBERS.
As a result of the conversion, MasterCard Incorporated will be better
positioned to engage in future capital raising activities and strategic
transactions such as mergers and acquisitions. Transactions of this type would
likely involve issuing or selling equity interests in MasterCard Incorporated to
non-members. While the bylaws of MasterCard Incorporated provide that class A
and class B common stock may be held only by class A members of MasterCard
International, the certificate of incorporation of MasterCard Incorporated also
provides that class C common stock may be issued to non-members, provided that
the approval of two-thirds or 75% of the board of directors is obtained,
depending on the circumstances. If these approvals are granted, MasterCard
Incorporated may issue voting shares of class C common stock to persons who are
not members of MasterCard International. In this case, the influence of members
over the affairs of MasterCard Incorporated would be reduced.
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RISKS RELATED TO THE INTEGRATION
MASTERCARD MAY FAIL TO COMPLETE THE CONVERSION AND INTEGRATION WITH EUROPAY OR,
IF THE CONVERSION AND INTEGRATION ARE COMPLETED, MAY FAIL TO REALIZE THE
ANTICIPATED BENEFITS OF THE CONVERSION AND INTEGRATION WITH EUROPAY.
Immediately after completion of the conversion, we expect to complete the
purchase of all of the outstanding Europay capital stock that we do not
currently own. The completion of the integration of Europay with MasterCard is
conditioned upon the satisfaction of several conditions contained in the
integration agreement, including that each Europay shareholder other than
MasterCard International and MEPUK agrees to exchange its Europay shares for
shares of MasterCard Incorporated. If any of the conditions is not satisfied or
waived, we will be unable to complete the integration.
Furthermore, even if we do complete the conversion and integration, our
success will depend, in part, on the ability of MasterCard and Europay to
coordinate and integrate our operations and business enterprises and realize the
anticipated growth opportunities and synergies from combining the two companies.
We cannot assure you that we will be able to integrate these businesses in an
efficient and timely manner to realize the growth opportunities and synergies we
currently expect.
THE INTEGRATION MAY BE SUBJECT TO ADVERSE REGULATORY CONDITIONS.
Before the integration may be completed, various approvals must be obtained
from, or notifications submitted to, competition, antitrust and other regulatory
authorities in the United States and other countries. The governmental entities
from which approvals are required may impose conditions on the completion of the
integration or require changes to the terms of the integration. These conditions
or changes could have the effect of delaying or preventing completion of the
integration or imposing additional costs on or limiting the revenues of
MasterCard Incorporated, any of which may have a material adverse effect on our
business and prospects following the integration.
EUROPEAN MEMBER-STOCKHOLDERS WILL BE ALLOCATED AN INCREASED PERCENTAGE OF
MASTERCARD INCORPORATED'S COMMON STOCK IN CONNECTION WITH THE CONVERSION AND
INTEGRATION.
Currently, European members of MasterCard International control
approximately 7.0% of the total voting power of MasterCard International.
Immediately following the conversion and integration, the European members of
MasterCard International will be allocated one-third of MasterCard
Incorporated's common stock (including the class B common stock held in trust),
even if those members would be entitled to less voting stock if calculated
solely in accordance with the new global proxy. See "Share Allocation and The
Global Proxy -- The Global Proxy" and "-- The Initial Allocation of Shares." In
addition, at the end of the three-year transition period when the shares of
common stock of MasterCard Incorporated are reallocated, European members are
entitled to receive at least 26% of the outstanding class A and class B common
stock of MasterCard Incorporated (including any class B common stock held in
trust), even if in accordance with the new global proxy they would have been
entitled to a smaller percentage of the outstanding common stock. Under other
circumstances, European members could receive up to 44% of the outstanding
common stock of MasterCard Incorporated at the end of the transition period. See
"Share Allocation and the Global Proxy -- Reallocation of Shares at the
Conclusion of the Transition Period." As a result of these provisions, the
equity stake of non-European members of MasterCard International in MasterCard
Incorporated will be significantly diluted when compared to their current
percentage of the total voting power of MasterCard International.
25
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This proxy statement-prospectus contains forward-looking statements, which
may be identified by the words "believe," "expect," "anticipate," "intend,"
"aim," "will" and similar words. These statements are contained throughout this
proxy statement-prospectus including in the sections titled "Questions and
Answers About the Conversion," "Questions and Answers About the Integration,"
"Summary," "The Conversion," "The Integration," "Business of MasterCard
International," "MasterCard Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business of Europay International" and
"Europay Management's Discussion and Analysis of Financial Conditions and
Results of Operations." These statements relate to our future prospects,
developments and business strategies. Many factors and uncertainties relating to
our operations and business environment, all of which are difficult to predict
and many of which are outside of our control, influence whether any
forward-looking statements can or will be achieved. Any one of those factors
could cause our actual results to differ materially from those expressed or
implied in writing in any forward-looking statements made by us or on our
behalf.
We list below the principal factors we believe are important to our
business, the conversion and the integration and that could cause actual results
to differ from our expectations. We caution you that although these factors are
important, this list should not be considered as exhaustive or as an admission
regarding the adequacy of the disclosure:
- our relationships with our member financial institutions;
- substantial and increasingly intense competition worldwide in the current
or future global payments industry and consolidation in the payments
industry;
- technological developments in the global payment card industry;
- potential disruptions of our transaction processing computer systems by
natural disaster or otherwise;
- potential breach of our systems' security;
- risk of settlement default by our members;
- our ability to attract, retain and motivate key personnel;
- general economic conditions, especially interest rates and business
cycles;
- the outcome or impact of putative antitrust claims by the U.S. Department
of Justice;
- the outcome or impact of a putative antitrust class action lawsuit by
U.S. merchants;
- risks related to global political and economic conditions;
- currency fluctuations and foreign exchange controls;
- the ability of European members and merchants to accommodate the
introduction of the euro;
- the outcome or impact of European Commission proceedings against Visa's
multilateral interchange fee;
- the consequences of the investigation of Europay's 1997 and 1998 tax
returns by the Belgian tax authorities;
- lack of an existing market for our common stock, particularly given the
significant restrictions on transfer and ownership to which the common
stock will be subject;
- concentration of ownership of our common stock in a few of our largest
stockholders;
- affiliation of most of our directors with our members;
- restrictions on a change of control contained in our organizational
documents and applicable law;
- the potential for reduced influence of members in the future;
- adverse tax consequences; and
- failure to complete the integration with Europay or failure to realize
the anticipated benefits of the integration with Europay.
26
THE SPECIAL MEETING
PROXY STATEMENT-PROSPECTUS
This proxy statement-prospectus is being furnished to principal members of
MasterCard International in connection with the solicitation of proxies by
MasterCard International's board of directors in connection with the proposed
plan of conversion.
This proxy statement-prospectus is first being furnished to principal
members of MasterCard International on or about , 2001.
DATE, TIME AND PLACE OF THE SPECIAL MEETING
The special meeting is scheduled to be held as follows:
, 2001
9:00 a.m., local time
MasterCard International Incorporated
2000 Purchase Street
Purchase, New York 10577
PURPOSES OF THE SPECIAL MEETING
At the MasterCard International special meeting, the principal members of
MasterCard International will be asked to approve a plan of conversion that will
convert MasterCard International into a non-stock corporation that is a
subsidiary of a stock holding company, MasterCard Incorporated. Under the plan,
MasterCard Merger Sub, Inc., a wholly-owned subsidiary of MasterCard
Incorporated, will merge with and into MasterCard International according to the
terms of the merger agreement and each MasterCard International principal member
will receive shares of class A common stock and class B common stock of
MasterCard Incorporated, a Delaware stock holding company, and a class A
membership interest in MasterCard International, a Delaware non-stock
corporation and subsidiary of MasterCard Incorporated. As an integral component
of the conversion and integration, the shares of class A common stock and class
B common stock of MasterCard Incorporated will initially be reallocated within
each of the European and non-European member-stockholder groups in accordance
with the new global proxy formula based on the 12 month period ended December
31, 2000. European members of MasterCard International will hold their shares of
class B common stock of MasterCard Incorporated through a trust. The shares of
class A common stock and class B common stock will represent your equity
interest in MasterCard Incorporated. The class A membership interest will
represent your continued rights as a licensee to use MasterCard's brands,
programs and services.
We will not transact any other business at the special meeting.
RECORD DATE; VOTES REQUIRED FOR APPROVAL
The MasterCard International board of directors has fixed the close of
business on , 2001, as the record date for the determination of the
MasterCard International principal members entitled to notice of and to vote at
the MasterCard International special meeting. On , 2001, there were
principal members entitled to notice of and to vote at the special meeting.
Principal members affiliated with MasterCard International directors are
entitled to exercise votes representing approximately 32% of the votes entitled
to be cast on the conversion. The conversion requires the affirmative vote of a
majority of the votes cast at the MasterCard International special meeting at
which a quorum is present. Under the MasterCard International bylaws, the
presence, either in person or by proxy, of principal members representing a
majority of the votes eligible to be cast constitutes a quorum.
VOTING PROCEDURES
If a principal member attends the MasterCard International special meeting
in person or sends a representative to the meeting with a signed and notarized
proxy, that member may vote or its representative may vote on its behalf.
However, since many principal members may be unable to attend the MasterCard
International special meeting, those members can ensure that their votes are
cast at the meeting by signing
27
and dating the enclosed proxy card and returning it in the envelope provided.
When a proxy card is returned properly signed and dated, the vote of the
MasterCard International principal member will be cast in accordance with the
instructions on the proxy card. If a principal member does not return a signed
proxy card or attend the meeting in person or by representative and vote, no
vote will be cast on behalf of that member.
Principal members are urged to mark the box on the proxy card to indicate
how their vote is to be cast. If a member returns a signed proxy card but does
not indicate on the proxy card how it wishes to vote, the vote represented by
the proxy card will be cast "FOR" the proposed conversion.
Any MasterCard International principal member who executes and returns a
proxy card may revoke the proxy at any time before it is voted by:
- notifying in writing Noah J. Hanft, Secretary of MasterCard
International, at 2000 Purchase Street, Purchase, New York, 10577;
- executing and returning a subsequent proxy; or
- appearing in person or by representative with a signed proxy and voting
at the MasterCard International special meeting.
Attendance in person or by representative at the MasterCard International
special meeting will not in and of itself constitute revocation of a proxy.
SOLICITATION OF PROXIES
MasterCard International will bear the costs of solicitation of proxies,
including the cost of preparing, printing and mailing this proxy
statement-prospectus. In addition to the solicitation of proxies by use of the
mails, proxies may be solicited from MasterCard International members by
directors, officers, employees and agents of MasterCard International in person
or by telephone, facsimile or other appropriate means of communication. We have
engaged Georgeson Shareholder Communications Inc. to solicit proxies on behalf
of MasterCard International. The anticipated cost of Georgeson Shareholder's
services is estimated to be approximately $120,000. No additional compensation,
except for reimbursement of reasonable out-of-pocket expenses, will be paid to
directors, officers and employees of MasterCard International in connection with
the solicitation. Any questions or requests for assistance regarding this proxy
statement-prospectus and related proxy materials may be directed to:
MasterCard International Incorporated
Attention: Office of the Corporate Secretary
2000 Purchase Street
Purchase, New York 10577
Attention: Noah J. Hanft
Telephone: (914) 249-2000
Facsimile: (914) 249-4262
or Georgeson Shareholder Communications Inc.
17 State Street
10th Floor
New York, New York 10004
Telephone: (212) 440-9800
Facsimile: (212) 440-9009
OTHER MATTERS
Pursuant to the current bylaws of MasterCard International, no other
business or matter other than the conversion transaction indicated above may be
properly presented at the special meeting. Copies of MasterCard International's
bylaws are available to members free of charge upon request to the Secretary of
MasterCard International at the address given above.
28
THE CONVERSION
OVERVIEW OF THE CONVERSION
The conversion refers to the process by which MasterCard International will
merge with a subsidiary of MasterCard Incorporated, a newly formed stock holding
company. After the conversion, MasterCard International will continue as a
non-stock corporation and the principal operating subsidiary of MasterCard
Incorporated, which will own the sole class B membership interest of MasterCard
International. In the conversion, each principal member of MasterCard
International will receive shares of class A common stock and class B common
stock of MasterCard Incorporated representing that member's equity interest in
MasterCard Incorporated, and a class A membership interest in MasterCard
International representing that member's continued rights as a licensee to use
MasterCard's brands, programs and services. MasterCard International's rules and
standards will not be affected by the conversion and integration.
We expect that the conversion will be completed as soon as practicable
after the conditions to conversion are satisfied, including approval of the
conversion by the members, the expiration or termination of any waiting period
under the HSR Act and approval of European antitrust authorities. We anticipate
that these conditions will be satisfied and that the conversion will be
completed in the fourth quarter of 2001 or the first quarter of 2002.
EFFECTS OF THE CONVERSION
As a stockholder of MasterCard Incorporated, you will have the right to
vote on all matters submitted to the stockholders for a vote, including the
election of the board of directors, and extraordinary transactions, such as a
merger, consolidation, or sale of all or substantially all of the assets or
dissolution of MasterCard Incorporated. In any vote for the election of
directors, no stockholder, together with its affiliates, will be entitled to
vote more than 7% of the outstanding shares that are entitled to vote in that
election.
The board of directors of MasterCard International is required to be the
same as the board of directors of MasterCard Incorporated. You will have the
right to vote on proposed changes to Article I (Membership) of the bylaws of
MasterCard International, but you will no longer be entitled to vote with
respect to any other amendments of the charter or bylaws of MasterCard
International. The rules for the qualification of members of MasterCard
International will be the same as the current rules for the qualification of
members of MasterCard International.
The directors and executive officers of MasterCard Incorporated after the
conversion and integration will be the same as the directors and executive
officers of MasterCard International before the conversion except for the
addition of two voting directors who will be affiliated with European members
and the addition of Dr. Peter Hoch, currently Chief Executive Officer of
Europay, who will be President of MasterCard's Europe region and a non-voting
director. The bylaws of MasterCard Incorporated provide that during the three
year transition period following the closing of the conversion and integration:
- one-third of the members of MasterCard Incorporated's board of directors
will be representatives of MasterCard Incorporated's European
stockholders;
- one-third of the members of MasterCard Incorporated's board of directors
will be representatives of MasterCard Incorporated's U.S. stockholders;
- the President and Chief Executive Officer of MasterCard Incorporated will
be a director; and
- the remaining directors will be apportioned among the other regions in
accordance with the percentage of common stock owned by the stockholders
of those regions.
After the three-year transition period, the President and Chief Executive
Officer will continue to be a director and all other directors will be
apportioned among the regions according to each region's respective share of the
aggregate vote. The integration agreement provides that the allocation of
one-third of the board seats to Europe during the transition period may not be
altered.
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The board of directors of MasterCard Incorporated will initially consist of
18 voting members -- six from the U.S., six from Europe, three from
Asia/Pacific, one from Canada, one from Latin America and the Caribbean and the
President and Chief Executive Officer. The directors will be elected by the
class A and class B stockholders, voting together as a single class (so long as
the class B shares are entitled to vote), with each share entitled to one vote,
subject to the following limitations:
- no more than two representatives from any member (including its
affiliates and affiliate members) may sit on the board of directors;
- no single stockholder, together with its affiliates, may exercise more
than 7% of the voting power in any election of directors; and
- no more than one-third of the board of directors may be representatives
from a single region.
In addition to the MasterCard Incorporated board of directors, there will
be a regional board for each of MasterCard's six operating regions:
Asia/Pacific, Canada, Europe, Latin America and the Caribbean, Middle
East/Africa and the United States. Each of the regional boards will be elected
by the members from that region. Decisions to establish or eliminate a regional
board or overrule one of its decisions must be approved by a two-thirds majority
vote of the board of directors. In addition, all of the regions will have a
regional president, who will be selected by the President and Chief Executive
Officer of MasterCard Incorporated in concurrence with the regional board (or
otherwise with a two-thirds majority of the global board of directors).
MasterCard Incorporated will also establish a Debit Advisory Board to provide
guidance with respect to the ongoing development of MasterCard's debit programs.
The powers and responsibilities of the regional boards following the conversion
and integration are expected to be substantially similar to the powers and
responsibilities of those boards before the conversion and integration.
For a description of the supermajority requirements necessary to revise
these governance arrangements, see "Comparison of Rights of MasterCard
International Members Before and After the Conversion and Integration -- Vote on
Extraordinary Transactions/Supermajority Voting Provisions."
REASONS FOR THE CONVERSION
By creating a new holding company, MasterCard Incorporated, which will own
MasterCard International, we expect to realize many of the advantages of a stock
corporation at the holding company level, while maintaining the flexibility of a
membership association in governing the operations of our global payments
programs at the subsidiary level. As is typical of a holding company structure,
the holding company, MasterCard Incorporated, will control the voting power of
its operating subsidiary, MasterCard International, with regard to all items
that require a vote of MasterCard International's members, except for amendments
to Article I (Membership) of the bylaws.
We believe that the conversion will enhance the value of our business and
our future opportunities by providing us some of the benefits of being a public
company. Specifically, we believe that the conversion will:
- align more closely the interests of MasterCard and our
member-stockholders. As member-stockholders increase their MasterCard
business, their relative shareholdings in MasterCard Incorporated may
increase;
- provide a more flexible structure to respond to opportunities in the
marketplace, for example, by permitting us to complete the integration
with Europay more efficiently since Europay already has capital stock
outstanding or by permitting us to use our class C common stock as
acquisition currency in future acquisitions;
- result in greater financial transparency for our member-stockholders,
since after the conversion MasterCard Incorporated will report financial
and business information on a quarterly basis in accordance with
Securities and Exchange Commission rules and regulations; and
30
- make it easier, if desired, for MasterCard Incorporated to raise
financing in the public securities markets to fund technological
innovations and other projects since MasterCard Incorporated will be a
public reporting company.
BOARD OF DIRECTORS' AND PRINCIPAL MEMBERS' APPROVAL
On February 8, 2001, the board of directors of MasterCard International
approved resolutions recommending the conversion to MasterCard International's
members. Approval at the special meeting of at least a majority of votes cast is
required to complete the plan of conversion; the quorum for the special meeting
is the presence in person or by proxy of members representing a majority of the
votes eligible to be cast. Notwithstanding member approval, however, the plan of
conversion will not be completed if the integration will not also be completed.
THE BOARD OF DIRECTORS OF MASTERCARD INTERNATIONAL RECOMMENDS THAT MEMBERS
VOTE FOR APPROVAL OF THE PLAN OF CONVERSION.
THE MERGER AGREEMENT EFFECTING THE CONVERSION
We summarize below the material terms and other provisions of the merger
agreement. The description is not complete, and we refer you to the merger
agreement, which is contained in Annex A of this proxy statement-prospectus and
which we have filed as an exhibit to the registration statement of which this
proxy statement-prospectus is a part.
CONVERSION OF MEMBERSHIP INTERESTS
The conversion will be effected pursuant to the Agreement and Plan of
Merger to be entered into among MasterCard Incorporated, MasterCard
International and MasterCard Merger Sub, Inc., which we refer to as the merger
agreement. The merger agreement provides for the merger of MasterCard
International and MasterCard Merger Sub, Inc. under Delaware law, with
MasterCard International being the surviving entity. Under the merger agreement,
each issued and outstanding principal membership interest in MasterCard
International will be automatically converted by virtue of the merger into a
class A membership interest of MasterCard International and a specified number
of shares of class A common stock and class B common stock of MasterCard
Incorporated. The number of shares of class A and class B common stock of
MasterCard Incorporated that a principal member receives in the merger will be
proportional to the percentage of the total voting power of MasterCard
International that such member held in accordance with the historic global proxy
formula in effect for the period ended September 30, 2000. Upon completion of
the conversion and integration and as an integral component thereof, the shares
of class A common stock and class B common stock of MasterCard Incorporated will
initially be reallocated within each of the European and non-European
member-stockholder groups in accordance with the new global proxy formula based
on the 12 month period ended December 31, 2000.
Class A and class B common stock are fully paid, non-assessable voting
equity interests in MasterCard Incorporated. The class A membership interest in
MasterCard International represents the member's continued rights as a licensee
to use MasterCard's brands, programs and services and participate in the
MasterCard system. For a description of the allocation of shares resulting from
the conversion and integration, see "Share Allocation and the Global Proxy."
Under the merger agreement, MasterCard Incorporated will receive the sole
outstanding class B membership interest in MasterCard International, which will
entitle MasterCard Incorporated to substantially all of the voting power, and
all economic rights, in MasterCard International. MasterCard Incorporated's
stockholders will participate indirectly in the voting power of, and economic
rights associated with, the class B membership interest through their ownership
of the class A and class B common stock of MasterCard Incorporated.
31
The shares of class B common stock attributable to European members of
MasterCard International in the conversion will be held by a trust for their
benefit. See "The Integration -- The Class B Common Stock Trust."
The merger will not close, and your existing membership interest will not
be modified as described above, unless a majority of the votes cast at the
special meeting at which a quorum is present approve the conversion and the
merger agreement. The board of directors of each of MasterCard Incorporated,
MasterCard International and MasterCard Merger Sub, Inc. may terminate the
merger agreement at any time prior to the conversion whether before or after the
approval of the members of MasterCard International.
APPLICATION OF THE SECURITIES LAWS TO SHARES RECEIVED
As a result of the conversion, stockholders of MasterCard Incorporated will
be subject to various provisions of the U.S. federal securities laws. Pursuant
to Rule 10b-5 under the Securities Exchange Act of 1934, as amended, which we
refer to as the Exchange Act, all stockholders will be prohibited from trading
MasterCard Incorporated shares while in possession of any material, non-public
information about MasterCard Incorporated. In addition, certain significant
stockholders of MasterCard Incorporated may be required to file public reports
with respect to their stockholdings. Other reporting obligations may also apply.
Responsibility for compliance with these laws will reside with the applicable
stockholder, not MasterCard Incorporated.
ACCOUNTING TREATMENT OF THE CONVERSION
We anticipate that upon our conversion to a stock corporation, our retained
earnings will be reallocated to capital stock and additional paid-in capital on
issuance of common stock to members in exchange for their member interests. This
treatment is consistent with accounting for demutualizations in accordance with
accounting principles generally accepted in the United States.
With respect to the manner in which they account for their equity interest
in MasterCard, members should consult their financial advisors regarding the
potential accounting implications of the conversion.
32
THE INTEGRATION
OVERVIEW OF THE INTEGRATION
The integration refers to the acquisition of Europay by MasterCard
Incorporated and the integration of the businesses of Europay and MasterCard
International. In the integration, Europay's shareholders other than MasterCard
International and MEPUK will exchange their Europay shares (and shareholders of
MEPUK will exchange their MEPUK shares) for shares of class A common stock and
class B common stock of MasterCard Incorporated. The shares of class B common
stock attributable to European members of MasterCard International and the
shareholders of Europay and MEPUK in the integration will be held by a trust for
their benefit. See "-- The Class B Common Stock Trust." For a description of the
allocation of shares resulting from the conversion and integration, see "Share
Allocation and the Global Proxy."
BACKGROUND OF THE INTEGRATION
MasterCard International has a long-standing relationship with Europay,
originating with Eurocard International's alliance with Interbank Card
Association, MasterCard's predecessor, in 1968. In 1996, MasterCard
International and Europay entered into an alliance agreement under which
MasterCard International delegated to Europay the authority to manage the
MasterCard brand in Europe and to process the licensing of MasterCard's brands
to European financial institutions. MasterCard International and Europay are
also partners in Maestro International, a joint venture established in 1992 to
oversee the global development of the Maestro debit service, and entered into an
agreement regarding the Maestro brand in 1997 to further strengthen their
cooperation in this area. Each of MasterCard International and Europay own a 50%
interest in Maestro International Incorporated, a Delaware corporation which
owns the Maestro brand. MasterCard International currently owns approximately
12.25% of the capital stock of Europay and 15.0% of the capital stock of
European Payment Systems Services (EPSS), Europay's transaction processing
subsidiary. In addition, European members currently own approximately 7.0% of
the total voting power, and related economic rights, of MasterCard
International.
As the MasterCard-Europay relationship developed, the managements of the
organizations came to believe that they could significantly enhance the value of
their alliance if they more fully integrated their organizations and focused
their combined efforts on promoting a core set of global brands and services. In
November 1999, a subcommittee of the MasterCard International board of directors
authorized management to retain the services of Mercer Consulting to advise the
board on revisions to MasterCard's corporate governance structure. Among other
things, the board charged Mercer with the task of evaluating the existing
MasterCard/Europay alliance. During a period of five months, representatives of
Mercer met with members of the management teams of both parties and members of
their respective boards of directors. The purpose of these meetings was to
gather information about the working relationship of the parties and to assess
whether improvements could and should be made.
At a meeting of MasterCard International's board held on March 23, 2000,
representatives of Mercer reported that, while the relationship between
MasterCard International and Europay under the alliance agreement was generally
positive, the parties would be better served by combining their organizations,
aligning their interests more directly, focusing their considerable combined
resources on promoting MasterCard's core brands and eliminating duplicative
functions.
On March 23, 2000, the MasterCard International board authorized the
formation of a committee consisting of Donald L. Boudreau, MasterCard
International's then Chairman, and Robert W. Pearce, a director, to enter into
preliminary discussions about the possibility of integrating the organizations.
On April 13, 2000, the board of directors of Europay designated a counterpart
committee consisting of Dr. Kurt Richolt, Europay's then Chairman, Dr. Wolfgang
Klein, then a director of Europay, and Baldomero Falcones Jaquotot, a director
of Europay and MasterCard International. Dr. Klein served on Europay's
negotiating committee until November 2000. Robert Selander, MasterCard
International's President and Chief Executive Officer, and Peter Hoch, Europay's
Chief Executive Officer, also participated in the discussions to assist the
respective committees as needed.
33
During the next 16 months, the negotiating committees of MasterCard
International and Europay met in person or by telephone a number of times to
discuss a possible combination of the MasterCard International and Europay
businesses. They discussed a wide range of strategic and operational issues,
with a particular focus on the following:
- the valuations of the organizations on a stand-alone and combined basis;
- ways of measuring the relative contribution of the European members of
MasterCard International to the business of the combined company;
- the merits of a global proxy formula that recognized contributions to
MasterCard International's gross dollar volume and gross acquiring volume
compared to a formula that was strictly revenue-based;
- the composition of the board of directors of the combined organization;
- the level of authority that should be delegated to the regional boards
and management;
- the types of fundamental corporate matters that should not be changed
without the approval of a supermajority of the board of directors or
stockholders;
- limitations on the assessability of memberships;
- the benefits and detriments associated with converting MasterCard
International to a stock corporation; and
- the merits of a holding company structure.
In July 2000, the boards of directors of MasterCard International and
Europay reviewed the progress that had been achieved by the negotiating
committees. At these meetings, representatives of Mercer presented a report
summarizing the work of the negotiating committees to date. At its July 27, 2000
meeting, the MasterCard International board authorized the MasterCard
negotiating committee to continue its work.
The negotiating teams continued to meet periodically after the board
meetings in July 2000 to discuss the proposed transactions and to draft a
preliminary term sheet. During this time, representatives from Donaldson, Lufkin
& Jenrette (subsequently Credit Suisse First Boston), MasterCard International's
financial advisor, and Merrill Lynch & Co., Europay's financial advisor,
assisted the negotiating teams in analyzing the companies. The Europay
negotiating team advised the MasterCard International team that the Europay
shareholders strongly favored a stock conversion and viewed it as a critical
part of the overall transaction.
At a meeting of the MasterCard International board held in November 2000,
members of the MasterCard International negotiating team and representatives
from Mercer reported that the two sides had made substantial progress. The
Mercer representatives made a presentation to the board concerning the latest
draft of the term sheet. The board engaged in a discussion about particular
aspects of the proposed terms. The board authorized the negotiating team to
proceed with the negotiations and to engage in a formal due diligence
investigation of Europay. Europay would undertake a similar investigation of
MasterCard International.
The parties began their respective due diligence investigations in December
2000. The parties' due diligence covered financial, accounting, operational,
legal, human resources and other areas. Diligence was performed both on-site, at
the other party's principal offices, and off-site. The diligence process
continued for approximately two months.
Subsequent to MasterCard International's November board meeting, the
MasterCard International and Europay negotiating teams held several more
in-person and telephonic meetings in advance of special Europay and MasterCard
International board meetings called for February 2000. In addition, during this
time the parties substantially completed their respective due diligence
investigations and analyses.
A special meeting of the MasterCard International board was held on
February 8, 2001 for the purpose of considering and approving the term sheet. At
this meeting, representatives of Mercer made a presentation about the changes
made to the term sheet since the November board meeting. MasterCard
International's Chief Financial Officer made a presentation regarding the
financial, valuation, tax and accounting aspects of
34
the integration and the stock conversion. A representative of MasterCard
International's due diligence team presented the findings of the diligence
investigation. MasterCard International's senior executive in charge of
technology made a presentation regarding plans for integrating the technology
systems of the two companies. The board adopted resolutions recommending the
conversion and integration to MasterCard International's members and approving
the term sheet, and authorized the MasterCard International negotiating team to
seek to finalize negotiations with Europay. The board also authorized the
conversion of MasterCard International to a stock corporation.
On February 12, 2001, the board of directors of Europay approved
resolutions recommending the integration to Europay's shareholders.
During the months of February through May 2001, counsel for MasterCard
International and Europay prepared definitive documentation to effect the
conversion and integration. Numerous telephone conversations and meetings were
held among representatives of MasterCard International and Europay and their
legal advisors for the purpose of negotiating the definitive agreements.
Forms of agreements were provided to the MasterCard International and
MasterCard Incorporated boards in advance of a special meeting called for May
16, 2001. At this meeting, the MasterCard International and MasterCard
Incorporated boards approved the forms of agreements and authorized management
to file the registration statement of which this proxy statement-prospectus
forms a part with the Securities and Exchange Commission. Subsequently, the
managements of MasterCard and Europay finalized the definitive agreements and
prepared the registration statement for filing.
REASONS FOR THE INTEGRATION
The integration represents the opportunity for MasterCard to enhance its
global scope and payment programs by acquiring an important partner that
operates in a desirable region of the world and has demonstrated success in
several key business functions. Specifically:
- In 2000, the Europe region represented approximately 22.5% of
MasterCard's worldwide gross dollar volume, not including Maestro and
Cirrus transactions.
- European countries are among the largest and most sophisticated payments
markets in the world and represent a significant portion of the global
payments industry.
- Europay has demonstrated expertise in chip and debit programs and
services, and in the ongoing development of new mobile commerce payment
applications.
The integration will also give MasterCard the opportunity to:
- Establish a more consistent global marketing message, particularly in
Europe, that is intended to increase MasterCard's presence in Europe and
thereby make the Europe region more attractive to all MasterCard
members. Following completion of the integration, MasterCard will be
better able to coordinate European marketing programs, enabling us to
build our brands in Europe in concert with our global brand-building
efforts. We expect that this increased coordination, combined with
improved productivity, faster time to market and greater emphasis on
customized solutions for members, should strengthen the presence of the
MasterCard family of brands both in Europe and around the world.
- Take advantage of Europay's expertise in debit and chip cards and mobile
commerce. Europay and Maestro have established in Europe a significant
leadership in the debit and chip card arenas as well as in mobile
commerce. Given the increasing use by cardholders globally of these
applications, the skills and knowledge already present at Europay in
these areas will represent a key strength for MasterCard, permitting the
development of new business solutions.
The integration represents the opportunity for Europay to merge with a
well-capitalized industry leader and, as a result, to leverage its own strengths
based on the broader resources of the MasterCard brand and organization. For
European members of the combined company, integration with MasterCard provides
additional opportunities to succeed in an increasingly competitive global
business, in which size, an existing
35
network of members, and the ability to develop quickly new and profitable
products and services will likely differentiate successful competitors.
In particular, the integration with MasterCard provides European members
with the opportunity to:
- Participate in the MasterCard system on a much more significant scale
than they currently do. After the conversion and integration, the
European members will participate in MasterCard Incorporated as holders
initially of 33 1/3% of its outstanding common stock, subject to change
after the transition period, as more fully described in "Share Allocation
and the Global Proxy."
- Utilize MasterCard's expertise in brand building and customer-centered
service. Following completion of the integration, MasterCard's marketing
team will coordinate with members and staff in the new Europe region to
enhance brand-building efforts in that region. This is expected to result
in increased brand awareness and higher usage and acceptance levels,
making the European region stronger for all MasterCard members.
Furthermore, European members will benefit from the reallocation of
MasterCard's resources to deliver more customized relationship management
and professional services.
- Utilize MasterCard's expertise in marketing consulting, Internet and
corporate expertise. The integration will permit Europay to take
advantage of MasterCard's marketing consulting expertise to further
advance the European credit business. In addition, joining MasterCard's
Internet experience with Europay's strengths in chip and mobile commerce
should lead to the development of more electronic business solutions.
Finally, Europay will be able to draw on the corporate resources of the
larger MasterCard organization.
To both MasterCard and Europay, the integration represents the opportunity
to merge separate businesses into one organization, with the resulting
opportunity to develop a stronger, combined operation and to:
- Establish a global management team and governance structure. The
integration of the companies will provide an opportunity for a more
cohesive and consistent global governance and management structure, which
is currently divided among the MasterCard, Europay and Maestro
organizations, each of which has separate governance requirements.
Integrating MasterCard and Europay is also expected to result in a more
rapid time to market for products due to enhanced decision-making and
coordinated product development and management.
- Establish improved delivery of customized relationship management and
professional services. As a result of the integration, we hope that the
combined company will be in a position to deliver to European members
more customized relationship management and professional services, such
as marketing and operations consulting, to foster the growth and
profitability of existing businesses and to facilitate the establishment
of new payments programs and applications. In addition, we expect to join
the technology operations of MasterCard and Europay to improve the
flexibility, speed of change, interoperability and productivity of
services provided to members, as well as to reduce costs. Finally,
standardizing MasterCard's and Europay's programs and services should
improve and make more consistent the quality of services delivered to
members.
- Achieve personnel and system synergies. By combining the two companies,
a greater pool of key personnel resources should be available to maintain
and enhance our competitive advantages, including a wider array of
customer, product and regional knowledge; technologies; marketing support
and research; and stronger financial resources. In addition, we expect
that, by integrating the two companies, we will be able to realize cost
savings from integrating our transaction processing systems, eliminating
overlapping staff functions and programs and by taking advantages of
economies of scale.
THE INTEGRATION AGREEMENT
We summarize below the material terms and other provisions of the
integration agreement. The description is not complete, and we refer you to the
integration agreement, which is contained in Annex B of
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this proxy statement-prospectus and which we have filed as an exhibit to the
registration statement of which this proxy statement-prospectus is a part.
EXCHANGE AND ALLOCATION OF SHARES
The integration will be made pursuant to the Share Exchange and Integration
Agreement to be entered into by MasterCard Incorporated, MasterCard
International and Europay International, which we refer to as the integration
agreement. In connection with the integration agreement, each shareholder of
Europay (other than MasterCard International and MEPUK) will enter into the
separate share exchange agreement with MasterCard Incorporated and MasterCard
International, pursuant to which it will exchange its Europay shares for a
specified number of shares of class A common stock and class B common stock of
MasterCard Incorporated. In addition, the shareholders of MEPUK will enter into
the MEPUK agreement with MasterCard Incorporated and MasterCard International as
described under the heading "-- MEPUK" below, pursuant to which they will
exchange their MEPUK shares for a specified number of shares of class A common
stock and class B common stock of MasterCard Incorporated. The integration
agreement also provides, as an integral component of the conversion and
integration, that the shares of class A and class B common stock of MasterCard
Incorporated issued to the principal members of MasterCard International and the
shareholders of Europay and MEPUK will initially be reallocated within each of
the European and non-European member-stockholder groups in accordance with the
new global proxy calculation described herein.
The integration agreement defines how the European members of MasterCard,
including those members that are not shareholders of Europay, and the
non-European members of MasterCard, will be treated in the conversion and the
integration. For a description of the allocation of shares resulting from the
conversion and integration, see "Share Allocation and the Global Proxy."
The shares of class B common stock attributable to European members of
MasterCard International and the shareholders of Europay and MEPUK in the
integration will be held by a trust for their benefit. See "-- The Class B
Common Stock Trust."
CONDUCT OF BUSINESS PRIOR TO CLOSING OF INTEGRATION
From the date of the integration agreement until the closing of the
integration, each of MasterCard Incorporated, MasterCard International and
Europay have agreed to conduct their respective businesses in the ordinary
course, consistent with past practice, and, among other things, to take all
commercially reasonable steps and to act in good faith in cooperation with the
other party to obtain all necessary government approvals. The parties also have
agreed to the restrictions summarized below.
Europay has agreed that, except as may be required by law, unless
previously disclosed to MasterCard International or agreed to by MasterCard
Incorporated, it and its subsidiaries will not, and will not enter into an
agreement to, among other things:
- increase the compensation of its officers, employees or consultants whose
compensation is, or after giving effect to any change, would be, $100,000
or more;
- issue or sell any shares of its capital stock or its other equity
interests;
- declare or pay any dividend or other distribution on its capital stock or
its other equity interests or redeem or purchase any of its capital stock
or its other equity interests;
- incur net new debt exceeding E15 million or prepaying any existing debt;
- make capital expenditures or commitments exceeding E15 million.
MasterCard Incorporated and MasterCard International have agreed that they
and their subsidiaries will not:
- liquidate or dissolve themselves;
37
- declare or pay any dividend or other distribution on its capital stock or
other equity interests or redeem or purchase any capital stock or other
equity interests; or
- engage in a material business combination transaction unless it has been
disclosed in this proxy statement-prospectus.
CONDITIONS TO CLOSING OF THE INTEGRATION
MasterCard Incorporated's and MasterCard International's obligations, on
the one hand, and Europay's obligations, on the other hand, to complete the
integration are subject to satisfaction, or waiver by the other side, of the
following conditions:
- each party's representations and warranties must be true on the date of
the closing of the integration;
- each party must have performed or complied with each of its respective
agreements contained in the integration agreement;
- there must not be, on the date of closing of the integration, any order
or law prohibiting the closing of the integration or conversion or any
action or proceeding to prohibit the integration before any governmental
and regulatory authority, and all required consents and approvals with
any governmental or regulatory authorities, in form and substance
reasonably satisfactory to the other party, must have been obtained;
- all consents or waivers to the performance by the parties to the
integration agreement of their respective obligations under the
integration agreement and all consents or waivers relating to contracts
of the parties must be obtained in form and substance reasonably
satisfactory to the other party;
- the registration statement of which this proxy statement-prospectus forms
a part must have been declared effective by the Securities and Exchange
Commission and must not be subject to any stop order or proceeding by the
Securities and Exchange Commission relating to a stop order; and
- each party must have had delivered to the other opinions of counsel,
officer's certificates, revised charter and bylaws and tax rulings from
relevant tax authorities or related opinions of tax counsel, in each
case, as specified in the integration agreement.
In addition, MasterCard Incorporated's and MasterCard International's
obligations to complete the integration are subject to the satisfaction by
Europay, or the waiver by MasterCard Incorporated and MasterCard International,
of the following additional conditions:
- the board of directors of Europay must have resigned, effective as of the
date of the closing of the integration;
- certain of the European members must have entered into an intellectual
property assignment agreement, as specified in the integration agreement,
confirming that Europay is the sole owner of the intellectual property
rights associated with its brands;
- each shareholder of Europay (other than MEPUK) must have entered into the
share exchange agreement with MasterCard Incorporated and MasterCard
International, as specified in the integration agreement, to transfer its
shares of Europay capital stock to MasterCard Incorporated in exchange
for class A common stock and class B common stock of MasterCard
Incorporated, as summarized above, and the MEPUK agreement described
under the caption "-- MEPUK" below must have been entered into; and
- a satisfactory U.S. tax opinion from counsel or Internal Revenue Service
ruling must have been received by MasterCard Incorporated.
Finally, Europay's obligation to complete the integration is subject to the
satisfaction or waiver of the following additional conditions:
- the merger agreement must have been executed; and
38
- satisfactory tax opinions or rulings from applicable taxing authorities
with respect to the tax consequences of the conversion and integration in
certain non-U.S. jurisdictions must have been received.
The form of the share exchange agreement referred to above is an exhibit to
the integration agreement, which is contained in Annex B to this proxy
statement-prospectus. We have also separately filed the form of share exchange
agreement as Annex C to this proxy statement-prospectus.
POST-CLOSING COVENANTS
After the closing of the integration, the parties to the integration
agreement agree that:
- MasterCard Incorporated will initiate and maintain a Global Center of
Excellence in Waterloo, Belgium as the primary focus of global debit
activities for three years, so long as it is commercially reasonable to
do so;
- MasterCard Incorporated will initiate a Global Center of Excellence for
mobile commerce and chip products in Waterloo, Belgium for three years,
so long as it is commercially reasonable to do so;
- MasterCard will not prohibit the use of Eurocard as a program name so
long as it is used in a manner consistent with any rules of MasterCard
concerning the use of program names;
- subject to the approval of the appropriate internal divisions, the
parties intend that members will not experience any adverse impact on
pricing or service levels as a result of a technical convergence; and
- marketing support to the Eurocard brand in connection with its
sponsorship of European football will continue until the European
Football Championships in 2004.
TERMINATION
The parties to the integration agreement may terminate it on any of the
following bases:
- by mutual agreement of the parties for any reason;
- in the event of a material breach by Europay, on the one hand, or
MasterCard Incorporated and MasterCard International, on the other hand,
that is not cured within five business days following notice of the
breach or on notice by one party that the satisfaction of its obligations
under the integration agreement has become impossible or impracticable
despite the use of commercially reasonable efforts; and
- at any time after March 31, 2002 if the closing of the integration has
not occurred and this failure is not a result of a breach of the
integration agreement by the terminating party.
ALLOCATION OF LIABILITY FOR BREACH
The bylaws of MasterCard International provide that losses and liabilities
resulting from a breach of the representations and warranties of MasterCard
Incorporated, MasterCard International or Europay contained in the integration
agreement will be distributed equitably among MasterCard's six regions as an
expense. However, losses and liabilities related to a breach by either of
MasterCard Incorporated or MasterCard International of its representations and
warranties in the integration agreement exceeding $21 million in the aggregate
will be allocated solely to regions other than Europe. Conversely, losses and
liabilities related to a breach by Europay of its representations and warranties
in the integration agreement exceeding $7 million in the aggregate will be
allocated solely to Europe.
SUPERMAJORITY VOTING PROVISIONS
After completion of the conversion and integration, approval of at least
75% of the directors present at a meeting at which a quorum is present and, in
certain cases, the holders of a majority of the outstanding class A
39
common stock and class B common stock voting together as a single class (so long
as the class B common stock has voting rights) will be required to, among other
things:
- alter MasterCard Incorporated's status as a stock corporation;
- amend the certificate of incorporation of MasterCard Incorporated to
authorize MasterCard Incorporated to issue stock other than the class A,
B or C common stock;
- sell, lease or exchange all or substantially all of MasterCard
Incorporated's assets;
- approve the sale, lease or exchange of all or substantially all of the
assets of MasterCard International;
- engage in a business combination (merger or consolidation) involving
MasterCard Incorporated or MasterCard International;
- undertake an initial public offering;
- amend the MasterCard International certificate of incorporation to allow
MasterCard International to issue capital stock, to create additional
classes of membership interests in MasterCard International, to subject
the property of the members of MasterCard International to the
obligations of MasterCard International or to subject non-U.S. programs
to the satisfaction of any liabilities arising from the current DOJ and
merchant antitrust litigations in the United States;
- amend the provisions of the MasterCard International bylaws relating to
special assessments that may be imposed upon the members of MasterCard
International;
- make any modification to the bylaw provision stating the proportion of
directors to come from each region;
- alter MasterCard International's board seating methodology;
- change the definition of the global proxy calculation;
- raise the limitation on voting for directors applicable to stockholders
and their affiliates to greater than 15% of the outstanding voting stock
entitled to be voted;
- approve the issuance of voting class C common stock or class C common
stock that, together with all other issuances of class C common stock
made during the immediately preceding two years, represents greater than
5% of the total number of shares of class A and class B common stock
outstanding prior to the issuance; and
- modify any of these supermajority requirements.
After completion of the conversion and integration, the following actions,
among others, will require approval of at least 66 2/3% of the directors present
at a meeting at which a quorum is present:
- establishing or eliminating regional boards;
- modifying MasterCard's internal regional cost allocation methodology;
- modifying the bylaw provision setting forth the overall size of the
MasterCard Incorporated board of directors;
- approving the issuance of shares of class C common stock;
- permitting a stockholder's ownership level to exceed 15%;
- permitting the issuance of shares of class A or class B common stock of
MasterCard Incorporated in excess of the number of shares to which a
stockholder would be entitled under the global proxy;
- deciding to overrule a decision taken by a regional board that was
permitted to be taken in accordance with the bylaws;
40
- deciding to overrule a recommendation made by the Debit Advisory Board
that was permitted to be taken in accordance with the bylaws; and
- modifying any of these supermajority requirements.
More detailed supermajority voting provisions are contained in the
certificates of incorporation and bylaws of each of MasterCard Incorporated and
MasterCard International. See "Description of Capital Stock of MasterCard
Incorporated" and "Comparison of Rights of MasterCard International Members
Before and After the Conversion and Integration."
MEPUK
One of the shareholders of Europay is MasterCard/Europay U.K. Limited
("MEPUK"), a company formed by certain financial institutions in the United
Kingdom for the purpose of holding their shares in Europay. In lieu of the share
exchange procedures described elsewhere in this proxy statement-prospectus, the
shareholders of MEPUK will enter into a related share exchange agreement with
MasterCard Incorporated and MasterCard International pursuant to which they will
exchange all their MEPUK shares for shares of common stock of MasterCard
Incorporated. As a result of this transaction, MEPUK will become a wholly-owned
subsidiary of MasterCard Incorporated and will continue to hold shares of
Europay.
On or before the closing of the integration, MEPUK will distribute to its
shareholders or otherwise cause to be discharged any and all assets and
liabilities of MEPUK, other than its shares in Europay. In the MEPUK agreement,
the MEPUK shareholders will further agree to indemnify MasterCard Incorporated
and MasterCard International for any liabilities incurred by MEPUK, or arising
with respect to activities undertaken by MEPUK, in the period up to and
including the closing of the integration. MasterCard Incorporated will also
agree to distribute to the MEPUK shareholders, net of any taxes or liabilities,
any assets of MEPUK (other than the Europay shares) not distributed prior to the
closing of the integration.
The MEPUK agreement is filed as an exhibit to the registration statement of
which this proxy statement-prospectus forms a part.
THE CLASS B COMMON STOCK TRUST
The shares of class B common stock attributable to European members of
MasterCard International and the shareholders of Europay and MEPUK in the
conversion and integration will be held by a trust to be established in the
United Kingdom for their benefit. The terms of the trust provide that the voting
rights associated with the class B common stock will be passed through to the
stockholders entitled thereto on a pro rata basis. Similarly, the trust will
distribute any dividends received with respect to the class B common stock to
the European stockholders entitled thereto on a pro rata basis.
Upon the conclusion of the three year transition period and thereafter, the
class B common stock will be released from the trust and converted into class A
common stock to be distributed to the stockholders entitled thereto. The trust
will terminate upon the final distribution of the class B common stock.
The trust deed relating to the class B common stock trust is included in
this proxy statement-prospectus as Annex D.
BRAND MIGRATION
MasterCard Incorporated, MasterCard International and/or Europay intend to
enter into one or more brand migration agreements with principal members in
Europe, including EKS in Germany, pursuant to which, among other things,
MasterCard and Europay will provide support for marketing initiatives designed
to migrate all uses of the Eurocard-MasterCard brand mark on cards, acceptance
decals, advertising and other materials to the MasterCard brand mark.
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ACCOUNTING TREATMENT OF THE INTEGRATION
We anticipate that the integration will be accounted for under the purchase
method of accounting in accordance with accounting principles generally accepted
in the United States. The excess of purchase price over the fair value of
tangible and identifiable intangible assets less liabilities will be recorded as
goodwill. Goodwill and other intangible assets resulting from the integration
that have indefinite useful lives will not be amortized, but will be tested for
impairment at least annually.
With respect to the manner in which they account for their equity interest
in MasterCard, members should consult their financial advisors regarding the
potential accounting implications of the integration.
REGULATORY MATTERS RELATING TO THE INTEGRATION
We set forth below descriptions of the European jurisdictions that must be
notified of the integration and that may require regulatory approval before we
can complete the integration.
Within the European Union, transactions falling under the European
Commission's merger regulations require prior notification and regulatory
approval. The proposed integration amounts to a concentration within the meaning
of the European Commission merger regulations because it will entail a change of
control of Europay. However, because the consolidated worldwide revenue of
MasterCard and Europay is below the threshold stipulated by the regulations,
prior notification and regulatory approval will not be required at the European
Commission level. Notwithstanding this, Europay has informed the European
Commission of the integration for informational purposes.
A number of countries within the European Union require notification and
prior regulatory approval depending upon whether the national merger control
thresholds are met or not. National merger control thresholds can relate to the
national and worldwide revenues of the parties and/or to their market share in
the country in question, with thresholds for market share ranging from 20% to
35%. National notification will be necessary in Germany and Finland on the basis
of revenue and in Spain and Greece on the basis of national market share. If the
regulatory authorities in any of these countries determine that the conversion
and integration present an issue under applicable competition law, they may
delay, impose conditions on or prevent completion of the conversion and
integration.
The consummation of both the conversion and the integration may also be
subject to the expiration or termination of all waiting periods for which
filings will be made with the U.S. antitrust agencies under the HSR Act, in
connection with both transactions. Certain members of MasterCard International
and certain shareholders of Europay that receive shares of MasterCard
Incorporated in the transactions may be required to make filings under the HSR
Act if the fair market value of their MasterCard Incorporated shares exceeds $50
million and they do not intend to hold those shares solely for investment
purposes. Members should consult their advisors to determine whether they are
required to make any filings under the HSR Act.
42
SHARE ALLOCATION AND THE GLOBAL PROXY
INTRODUCTION
Since the mid 1990s, the global proxy formula used by MasterCard
International to allocate voting power at annual meetings of members has been
based solely on revenue received by MasterCard International on MasterCard
transactions. In connection with the conversion and integration, MasterCard
Incorporated will migrate to a new global proxy formula designed to take a more
comprehensive, balanced account of the contributions of member-stockholders to
MasterCard's business. In particular, the new global proxy calculation will
measure each member-stockholder's contribution to three key elements of
MasterCard's business -- gross dollar volume ("GDV"), gross acquiring volume
("GAV") and revenue -- and will also account for revenue and volume earned in
connection with MasterCard, Maestro and Cirrus-branded cards. Revenue will
account for one half, and GDV and GAV will each account for one fourth, of the
new global proxy calculation.
The new global proxy calculation will be used for three purposes. First, in
conjunction with the apportionment of MasterCard Incorporated shares between
members within Europe and members outside of Europe described below, it will be
used to determine the allocation of shares to member-stockholders upon the
closing of the conversion and integration. This will take the form of a
reallocation of shares using the new global proxy calculation immediately
following, and as an integral component of, the conversion and integration.
Second, it will be used to determine the reallocation of MasterCard Incorporated
shares among member-stockholders at the end of the three-year transition period
following the closing of the conversion and integration, also in conjunction
with the apportionment of shares between Europe and non-Europe described below.
Finally, it will be used on an ongoing basis to determine the maximum number of
shares of MasterCard Incorporated that a member-stockholder may own and the
minimum number of shares of MasterCard Incorporated that a member-stockholder
will be required to own.
In connection with the initial allocation of shares, the relevant period
for calculating the new global proxy will be the 12 month period ended December
31, 2000. (In contrast, the last global proxy using the historical, revenue-only
formula was calculated for the 12 month period ended September 30, 2000.) All
subsequent calculations of the new global proxy will be made on the basis of
each successive 12 month period beginning on the first business day of the
fiscal quarter following the closing of the conversion and integration. All
global proxy calculations will be made on an accrual basis of accounting. (In
contrast, the historical global proxy formula was calculated on a cash basis of
accounting). The board of directors of MasterCard Incorporated is empowered to
establish a record date in connection with each global proxy calculation for
purposes of determining the stockholders of record whose GDV, GAV and revenue
will be included in determining the relevant global proxy. For the initial
allocation of shares, the record date will be the closing date of the conversion
and integration.
The new global proxy formula and the regional apportionment of shares are
described in the integration agreement and in the by-laws of MasterCard
Incorporated. Matters relating to the ec Pictogram shares are described
principally in the integration agreement.
CONSISTENT WITH THE HISTORICAL GLOBAL PROXY CALCULATION, THE NEW GLOBAL
PROXY FORMULA WILL ONLY TAKE ACCOUNT OF REVENUES AND VOLUMES CONTRIBUTED BY
PRINCIPAL MEMBERS OF MASTERCARD INTERNATIONAL, INCLUDING AFFILIATE MEMBERS WHO
PARTICIPATE INDIRECTLY IN THE MASTERCARD BUSINESS THROUGH PRINCIPAL MEMBERS.
AFFILIATE MEMBERS WILL NOT RECEIVE ANY SHARES IN THE CONVERSION AND INTEGRATION,
BUT PRINCIPAL MEMBERS OF MASTERCARD INTERNATIONAL WILL RECEIVE SHARES BASED ON
THE NEW GLOBAL PROXY FORMULA THAT REFLECTS REVENUES AND VOLUMES CONTRIBUTED BY
THEIR RESPECTIVE AFFILIATES. FINANCIAL INSTITUTIONS THAT ARE MEMBERS OF MAESTRO
INTERNATIONAL INCORPORATED OR CIRRUS SYSTEMS, INC. BUT ARE NOT ALSO PRINCIPAL
MEMBERS OR AFFILIATES OF PRINCIPAL MEMBERS OF MASTERCARD INTERNATIONAL WILL NOT
RECEIVE ANY SHARES IN THE CONVERSION AND INTEGRATION BUT WILL BE ELIGIBLE TO
RECEIVE SHARES AT THE CONCLUSION OF THE TRANSITION PERIOD IF THEY APPLY FOR, AND
ARE GRANTED, PRINCIPAL MEMBERSHIP IN MASTERCARD INTERNATIONAL DURING THE
TRANSITION PERIOD.
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THE GLOBAL PROXY
The Formula. For each member-stockholder (other than a travelers cheque
member), the global proxy calculation will be equal to the sum obtained by
adding (A) .25 multiplied by a fraction, the numerator of which is the
member-stockholder's GDV and the denominator of which is MasterCard
Incorporated's total GDV attributable to all member-stockholders, plus (B) .25
multiplied by a fraction, the numerator of which is the member-stockholder's GAV
and the denominator of which is MasterCard Incorporated's total GAV attributable
to all member-stockholders, plus (C) .50 multiplied by a fraction, the numerator
of which is the revenues paid by the member-stockholder to MasterCard
Incorporated and its subsidiaries and the denominator of which is the revenues
paid by all member-stockholders to MasterCard Incorporated and its subsidiaries,
in each case for the applicable period. Only actual, as opposed to estimated,
GDV, GAV and revenues paid will be considered for purposes of the global proxy
calculation. In addition, for purposes of the global proxy calculation:
- GDV. GDV means processed and non-processed issued volumes (including
domestic and international retail purchases, cash transactions,
convenience checks, on-us transactions, intra-processor transactions,
local use only transactions and balance and commercial funds transfers)
that occur as a result of one or more of (A) a transaction involving any
one of MasterCard Incorporated's brands (e.g., MasterCard, Eurocard,
Maestro, Cirrus and ec Pictogram) or (B) a non-MasterCard branded
transaction involving a card that includes any one of MasterCard
Incorporated's brand logos as well as other payment brand logos, provided
that such other payment brands are not in direct competition with any
MasterCard brands as determined by MasterCard Incorporated.
- GAV. GAV means processed and non-processed acquired volumes (including
domestic and international retail purchases, cash transactions, on-us
transactions, intra-processor transactions and local use only
transactions) that occur as a result of one or more of (A) a transaction
involving any one of MasterCard Incorporated's brands (e.g., MasterCard,
Eurocard, Maestro, Cirrus and ec Pictogram) or (B) a non-MasterCard
branded transaction involving a card that includes any one of MasterCard
Incorporated's brand logos as well as other payment brand logos, provided
that such other payment brands are not in direct competition with any
MasterCard brands as determined by MasterCard Incorporated.
- Revenue. Revenues paid for a particular member-stockholder are, for any
period, all revenues of MasterCard Incorporated on a consolidated basis,
calculated in accordance with U.S. GAAP, that are generated by the
activities of that member-stockholder, other than (1) any fees or other
charges associated with the termination of that member-stockholder's
membership in MasterCard International, (2) integration-related
assessments paid by that member-stockholder, (3) other fees and charges
paid by that member-stockholder in its capacity as a member of MasterCard
International if those fees and charges were imposed on less than all of
the members of MasterCard International (except for fees and charges
pertaining to business development, ordinary course of business and other
matters deemed to be includable by the management of MasterCard
International in management's sole discretion) and (4) fines and
penalties paid by that member-stockholder (except as determined
includable in the sole discretion of the management of MasterCard
International). For purposes of the initial allocation of shares
associated with the closing of the conversion and integration, MasterCard
intends generally to include fines and penalties in the calculation of
revenues paid, except for termination fees.
GDV and GAV Volume Weightings. In calculating GDV and GAV, each
member-stockholder's volume must be broken into four categories, each of which
is weighted differently for purposes of the calculation, as described below. The
weighted categories are designed to reflect the relative value of different
activities to MasterCard's overall business, and provide the highest recognition
to transactions that are fully assessed by MasterCard based on volume. Volumes
attributable to transactions involving only card-based assessments are accorded
relatively lower weight. Volumes are included in the global proxy calculation
whether they are assessed directly or the cards to which they relate are subject
to card fee assessments of the type contemplated by the applicable category of
volume. In addition, for each global proxy calculation performed prior to the
44
expiration of the transition period, volumes in the following categories will be
included even if they are not subject to volume-based or card fee assessments.
- Volumes Weighted at 100%. All of the following volumes are weighted at
100% of actual volume: (1) volumes on cards carrying the MasterCard brand
that are subject to volume-based assessments or non de minimis,
meaningful card fee assessments, (2) Maestro and Cirrus processed debit
volumes and (3) Maestro and Cirrus stand-alone debit assessed volumes so
long as Maestro, a brand representing a stored value application that is
permitted to be used by members of MasterCard International and/or Cirrus
is the sole acceptance brand on the card and the assessments are non de
minimis.
- Volumes Weighted at 75%. All of the following volumes are weighted at
75% of actual volume: ec Pictogram volumes converted to Maestro volumes
as the sole acceptance debit brand with bona fide, non de minimis
volume-based or card fee assessments and other similar debit volumes with
bona fide, non de minimis volume-based or card fee assessments; provided,
in each case, that there exists a binding commitment to remove the ec
Pictogram brand logo and all other payment brand logos, other than the
Maestro brand logo or the logo of a brand representing a stored value
application that is permitted to be used by members of MasterCard
International, on the cards within five years of the first fiscal quarter
beginning after the fiscal quarter in which the closing of the conversion
and integration occurs.
- Sliding Scale of Weightings for Certain Regional Debit Volumes. Volumes
for regional debit brands owned solely by MasterCard Incorporated on
cards that include a Maestro and/or Cirrus logo are weighted at the
following percentages for the period indicated; provided that such cards
are subject to non de minimis volume-based or card fee assessments; and
provided, further, that for calculations for the last year of the
transition period through the year ending on the two year anniversary of
the end of the transition period, there is a binding written commitment
to remove all payment brand logos, including ec Pictogram, other than the
Maestro brand logo or the logo of a brand representing a stored value
application that is permitted to be used by members of MasterCard
International, on the cards within five years of the first fiscal quarter
beginning after the fiscal quarter in which the closing of the conversion
and integration occurs:
- 10% of such volumes for all calculations until the last year of the
transition period;
- 40% of such volumes for the last year of the transition period;
- 30% of such volumes for the year ending on the one-year anniversary of
the end of the transition period;
- 20% of such volumes for the year ending on the two-year anniversary of
the end of the transition period; and
- 10% of such volumes for subsequent years.
- Volumes Weighted at 1%. Volumes for regional debit brands not owned by
MasterCard Incorporated on cards that include a Maestro and/or Cirrus
brand logo (provided that such cards are subject to non de minimis
volume-based or card fee assessments) and volumes for balance and
commercial funds transfers are weighted at 1%.
Currency Conversion. In performing the global proxy calculation, all
currency conversions, to the extent necessary, will be based on the average
exchange rate during the twenty-day period ending on the day prior to the
applicable measurement date, which we refer to as the average currency
conversion rate, provided that during the transition period and for the two
years thereafter the average currency conversion rate shall be $.9565 U.S. = 1
euro for so long as 1 euro is not less than $.9065 U.S. and not greater than
$1.0065 U.S. In the event that the average currency conversion rate does not
fall within this range, the rate to convert euros to U.S. dollars will be the
average currency conversion rate adjusted by the difference between such average
currency conversion rate and the upper or lower limit of the range, as
applicable.
45
Travelers Cheques. MasterCard International's travelers cheque members
will calculate the numerator of their respective global proxies using 100% of
revenues paid by them to MasterCard Incorporated and its subsidiaries in
connection with their travelers cheque programs, but will not account for GDV or
GAV in connection with their global proxy calculations.
THE INITIAL ALLOCATION OF SHARES
The allocation of shares of MasterCard Incorporated to each
member-stockholder upon the closing of the conversion and integration will be
determined in accordance with the detailed procedures described in the merger
agreement, the integration agreement and the by-laws of MasterCard Incorporated.
Shares Issued in the Conversion. In the conversion, each principal member
of MasterCard International, including each MasterCard principal member in
Europe, will receive a number of shares of class A and class B common stock of
MasterCard Incorporated that is proportional to the percentage of the total
voting power of MasterCard International that such member held in accordance
with the historic proxy formula in effect for the period ended September 30,
2000.
Shares Issued in the Integration. In the integration, each shareholder of
Europay and MEPUK will receive a number of shares of class A and class B common
stock of MasterCard Incorporated in exchange for its shares of Europay or MEPUK,
as the case may be, as specified in the share exchange agreement and MEPUK
agreement, respectively. Shares of class A and class B common stock issued by
MasterCard Incorporated to shareholders of Europay and MEPUK in the integration
will have the result of diluting current non-European members' ownership from
approximately 93% of MasterCard International before the conversion and
integration to 66 2/3% of MasterCard Incorporated after the conversion and
integration.
Initial Reallocation of Shares Pursuant to the Global Proxy
Calculation. At the closing of the conversion and integration, the shareholders
of Europay and MEPUK will be principal members of MasterCard in Europe.
Accordingly, the share issuances described above in connection with the
conversion and integration will produce in the aggregate two pools of shares,
one for European member-stockholders and the other for non-European
member-stockholders. As an integral component of the conversion and integration,
the integration agreement provides that the shares of class A and class B common
stock will then initially be reallocated within each of the European and
non-European pools of shares in accordance with the new global proxy formula. In
Europe, each member-stockholder will be entitled to a percentage of the European
shares equivalent to the percentage that its aggregate GDV, GAV and revenue
represents of the total GDV, GAV and revenue for Europe, using the methodology
of the new global proxy. Similarly, outside of Europe, each member-stockholder
will be entitled to a percentage of the non-European shares equivalent to the
percentage that its aggregate GDV, GAV and revenue represents of the total GDV,
GAV and revenue outside of Europe, using the methodology of the new global
proxy.
Member-stockholders can estimate the aggregate number of class A and class
B shares of MasterCard Incorporated to be allocated to them at the closing of
the conversion and integration using their own GDV, GAV and revenue data and the
following figures:
For the 12 months ended December 31, 2000:
Aggregate European GDV: $
Aggregate European GAV: $
Aggregate European Revenue: $
Aggregate non-European GDV: $
Aggregate non-European GAV: $
Aggregate non-European Revenue: $
46
For principal members other than travelers cheque members, the formula to
be applied with these figures is as follows:
For purposes of this calculation, European members should use the aggregate
European figures and non-European members should use the aggregate non-European
figures. This formula produces a percentage that can be multiplied by the number
of shares in the applicable pool of shares to derive an estimate of the number
of shares to be received in the conversion and integration. A description of the
total number of shares allocated to each pool is provided below. MasterCard
Incorporated will provide each member-stockholder with the actual number of
shares of class A and class B common stock to be issued to it in the conversion
and integration in a separate statement distributed contemporaneously with this
proxy statement-prospectus.
For members outside Europe, 84% of the shares received will be in the form
of class A common stock and 16% of the shares received will be in the form of
class B common stock. For European members, 84% of the shares received will be
in the form of class A common stock and the remaining 16% of the shares will be
in the form of class B common stock held by a trust for their benefit. In
addition, in terms of MasterCard Incorporated's total outstanding shares, the
shares issued in the conversion and integration will result in European
member-stockholders receiving shares of class A and class B common stock that
together represent 33 1/3% of all of the shares of class A common stock and
class B common stock together outstanding upon completion of the transactions.
The shares of class A common stock issued to the European member-stockholders
will represent 28%, and the shares of class B common stock held by a trust for
the benefit of the European member-stockholders will represent 5 1/3%, of the
respective total number of shares of class A common stock and class B common
stock combined outstanding upon the completion of the conversion and
integration. The remaining class A and class B common stock, representing in the
aggregate 66 2/3% of the class A and class B common stock combined outstanding,
will be held by the non-European member-stockholders of MasterCard. The shares
of class A common stock issued to the non-European member-stockholders will
represent 56%, and the shares of class B common stock issued to the non-European
member-stockholders will represent 10 2/3%, of the total number of shares of
class A common stock and class B common stock combined outstanding upon the
completion of the conversion and integration.
Accordingly, immediately after the closing of the conversion and
integration, shares of MasterCard Incorporated class A and class B common stock
will be allocated as follows:
For the purposes of the global proxy calculation, European
member-stockholders constitute those member-stockholders whose revenue and
volume is generated from activity from and in Europe. Europe is defined to
include the following countries: Albania, Andorra, Armenia, Austria, Azerbaijan,
Belarus, Belgium, Bosnia-Herzegovina, Bulgaria, Channel Islands, Croatia,
Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Georgia, Germany,
Gibraltar, Greece, Hungary, Iceland, Ireland, Israel, Italy, Kazakhstan,
Kyrgyzstan, Latvia, Liechtenstein, Lithuania, Luxembourg, Macedonia (former
Yugoslav Republic), Malta, Moldova, Monaco, Netherlands, Norway, Poland,
Portugal, Romania, Russian Federation, San Marino, Slovakia, Slovenia, Spain,
Sweden, Switzerland, Tajikistan, Turkey, Turkmenistan, Ukraine, United Kingdom,
Uzbekistan, Vatican City and Yugoslavia (Serbia and Montenegro).
47
REALLOCATION OF SHARES AT THE CONCLUSION OF THE TRANSITION PERIOD
During the three year transition period after the closing of the conversion
and integration, the member-stockholders will be entitled to the class A and
class B common stock that they held as of the closing of the transaction,
regardless of changes in the respective global proxy calculations of those
member-stockholders during the transition period, provided that they remain as
members of MasterCard International and do not sell all or substantially all of
their MasterCard card portfolios. Financial institutions that become principal
members of MasterCard International after the period of the global proxy
calculation used in connection with the initial allocation of shares will be
eligible to be allocated shares at the end of the transition period in
accordance with procedures to be determined by the board of directors. Until
shares are allocated, those financial institutions will not be entitled to vote
at any meetings of stockholders of MasterCard Incorporated.
The reallocation of shares of MasterCard Incorporated at the conclusion of
the three year transition period will be determined according to a multi-step
process. First, the number of class B shares that constitute ec Pictogram shares
will be determined in accordance with the process described below. Second, the
class B shares of European members (other than ec Pictogram shares) will be
released from the trust and converted into class A shares on a one-for-one
basis, and the converted class A common stock will be distributed to the
European members according to their respective entitlements. Third, all class A
shares will be reapportioned between Europe and non-Europe using the procedures
described below. Fourth, each member-stockholder will be allocated class A
shares according to the global proxy, again calculated on both a European and
non-European basis, as described in more detail below.
ec Pictogram Shares. ec Pictogram shares are class B shares that do not
convert to class A shares at the conclusion of the transition period. Instead,
ec Pictogram shares will convert to class A shares on the second anniversary of
the end of the transition period. During that two-year period, ec Pictogram
shares will continue to be held in trust for the benefit of the European
member-stockholders and will not be reallocated to member-stockholders outside
of Europe. This additional two-year holding period is designed to recognize that
additional time may be needed before the transaction volumes associated with ec
Pictogram, a regional debit program owned by Europay, can be converted to
Maestro volumes. All class B shares representing ec Pictogram shares become
non-voting at the end of the transition period when the other class B shares
convert to class A shares.
The number of ec Pictogram shares will be calculated at the end of the
transition period according to the following procedures:
- The aggregate global proxy calculation of Europe during the third year of
the transition period will be determined.
- Then, a simulated global proxy will be calculated assuming that certain
ec Pictogram transactions are converted to Maestro transactions as of the
beginning of the third year of the transition period. Because Maestro
transactions are accorded a higher GDV and GAV weighting than ec
Pictogram transactions, the simulated result is likely to be higher than
the actual European aggregate global proxy calculation. ec Pictogram
transactions will be accorded a higher weighting in the simulated proxy
if they are associated with binding contracts to convert to Maestro
within a two-year period following the end of the transition period.
- The difference between the actual global proxy and the simulated global
proxy results described above, measured in terms of a percentage of the
outstanding class A common stock and class B common stock of MasterCard
Incorporated, will determine the number of shares of class B common stock
that constitutes the ec Pictogram shares. If the simulated global proxy
is equal to or less than the actual global proxy (as measured), there
will be no ec Pictogram shares.
- Notwithstanding the preceding paragraph, ec Pictogram shares cannot
exceed 5 1/3% of the total shares of MasterCard Incorporated then
outstanding. In addition, ec Pictogram shares will be reduced by a
percentage equal to the percentage of any over-apportionment of shares to
Europe in connection with the thresholds described below under the
heading "-- Reapportionment of Shares Between Europe and Non-Europe."
48
At the conclusion of the transition period, the ec Pictogram shares will
continue to be held in trust for the benefit of the member-stockholders with ec
Pictogram volumes on a pro rata basis, according to each member-stockholder's
proportion of overall ec Pictogram volumes. See "The Integration -- The Class B
Common Stock Trust."
Reapportionment of Class A Shares Between Europe and Non-Europe. At the
end of the three-year transition period, MasterCard Incorporated will determine
the global proxy calculation of all member-stockholders (calculated on a single
worldwide basis) for the last 12 months of the transition period. The European
member-stockholders will be entitled to more or fewer class A shares depending
upon their aggregate global proxy calculation, and the non-European
member-stockholders will be entitled to the remaining class A shares. The
purpose of the reapportionment is to permit the final allocation of shares of
MasterCard Incorporated to be based on the relative aggregate global proxy
calculations of the European and non-European areas during the last year of the
transition period. Specifically:
- Europe Less than or Equal to 26%. If the global proxy calculation
indicates that European member-stockholders in the aggregate represent
26% or less of the worldwide global proxy calculation for the last year
of the transition period, then the European member-stockholders will be
entitled to an allocation of shares of class A common stock that
represents 26% of the number of shares of outstanding class A common
stock and class B common stock.
- Europe Greater than 26% but Less than or Equal to 28%. If the global
proxy calculation indicates that European member-stockholders in the
aggregate represent greater than 26% but less than or equal to 28% of the
worldwide global proxy calculation for the last year of the transition
period, then the European member-stockholders will be entitled to an
allocation of shares of class A common stock that represents 28% of the
number of shares of outstanding class A common stock and class B common
stock.
- Europe Greater than 28%. If the global proxy calculation indicates that
European member-stockholders in the aggregate represent greater than 28%
of the worldwide global proxy calculation for the last year of the
transition period, then the European member-stockholders will be entitled
to an allocation of shares of class A common stock that is equal in
percentage terms to their aggregate global proxy calculation for the last
year of the transition period, up to a maximum amount, when taken
together with any ec Pictogram shares, of 44% of the number of shares of
outstanding class A common stock and class B common stock.
Because of the conversion of the class B common stock at the end of the
transition period, the only class B common stock outstanding at the time of this
calculation will be the ec Pictogram shares, if any. In the reapportionment,
stockholders of MasterCard Incorporated whose initial share allocations decrease
will return shares initially allocated to them to MasterCard Incorporated, which
will deliver those shares to stockholders whose initial share allocations
increase.
Each Member-Stockholder's Global Proxy Calculation. As in the case of the
allocation of shares at closing, the apportionment of class A shares between
Europe and non-Europe described above will produce two pools of class A shares,
one for European member-stockholders and the other for non-European member-
stockholders. The allocation of class A shares within each pool will be
determined according to the global proxy calculated on a regional basis for the
last year of the transition period, as described above under the heading "-- The
Initial Allocation of Shares -- Initial Reallocation of Shares Pursuant to the
Global Proxy Calculation."
CONVERSION AND REALLOCATION OF EC PICTOGRAM SHARES
At the end of the additional two-year holding period, all ec Pictogram
shares will be released from the trust and converted to class A shares, and the
class A shares will then be subject to reallocation. European
member-stockholders with ec Pictogram volumes that have converted to Maestro
volumes will be entitled to some or all of those class A shares depending upon
the percentage of ec Pictogram volumes that have actually been converted to
Maestro by that time. Non-European member-stockholders will be entitled to the
balance, which will be distributed to those member-stockholders in accordance
with the new global proxy formula based on the 12 month period ending at the end
of the additional two-year holding period. Any reallocation of
49
class A shares resulting from the conversion of ec Pictogram shares will be
effected by a return of shares to MasterCard Incorporated and delivery of shares
by MasterCard Incorporated.
GLOBAL PROXY CALCULATION FOLLOWING THE TRANSITION PERIOD AND CONVERSION OF THE
EC PICTOGRAM SHARES
Following the transition period and the conversion of the ec Pictogram
shares to class A voting shares, the global proxy calculation will be performed
on an individual member-stockholder basis according to the procedures described
above under the heading "-- The Global Proxy." The European and non-European
areas will cease to have any significance in connection with the determination
of the global proxy. After the transition period, member-stockholders will be
required to maintain an ownership percentage of MasterCard's outstanding common
stock of not less than 75% nor more than 125% of that member-stockholder's most
recent global proxy calculation.
50
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
combine the historical consolidated balance sheets and statements of income of
MasterCard International and Europay and give pro forma effect to the conversion
and integration.
We are providing the following information to aid you in your analysis of
the financial aspects of the conversion and integration. We derived this
information from the separate audited financial statements of MasterCard
International for the year ended December 31, 2000, the audited financial
statements of Europay for the year ended December 31, 2000, and the unaudited
financial statements of each of MasterCard International and Europay for the six
months ended June 30, 2001. The information is only a summary and you should
read it in conjunction with our historical financial statements and related
notes contained elsewhere in this proxy statement-prospectus.
MasterCard International's integration with Europay has been accounted for
using the purchase method of accounting and accordingly the purchase price has
been allocated to the tangible and identifiable intangible assets acquired and
liabilities assumed on the basis of their fair values on June 30, 2001. The fair
value of Europay as at June 30, 2001 was determined based upon an independent
appraisal obtained by MasterCard International. Identifiable intangible assets
other than goodwill were estimated in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations". The purchase
price in excess of tangible and identifiable intangible assets acquired and
liabilities assumed has been allocated to goodwill. In accordance with SFAS No.
142, "Goodwill and Other Intangible Assets," goodwill and other intangible
assets resulting from the integration that have indefinite useful lives will not
be amortized.
The unaudited pro forma condensed combined statements of income assume that
the conversion and integration were effected on January 1, 2000. The unaudited
pro forma condensed combined balance sheet assumes that the conversion and
integration were effected on June 30, 2001.
The unaudited pro forma combined financial information is presented for
illustrative purposes only. No separate pro forma adjustment is required for the
integration of MEPUK as it will have no assets or liabilities other than shares
in Europay at the close of the transaction. You should not rely on the pro forma
combined financial information as being indicative of the historical results
that would have been achieved had the companies always been consolidated or the
future results that the combined company will achieve after the conversion and
integration.
51
MASTERCARD INCORPORATED
UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
See notes to unaudited pro forma combined income statements.
52
NOTES TO UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS (IN THOUSANDS)
(1) Euro amounts are translated into U.S. dollars based on a conversion rate of
1.1158 and 1.1071 euros per U.S. dollar, the average exchange rates between
U.S. dollars and euros for the six month period ended June 30, 2001 and the
year ended December 31, 2000, respectively.
(2) The pro forma financial statements have been prepared to reflect the
conversion of MasterCard International from a member-based organization to a
stock company and the integration of Europay, MEPUK and MasterCard. No
separate pro forma adjustment is required for the integration of MEPUK as it
will have no assets or liabilities other than shares in Europay at the close
of the transaction. Pro forma adjustments are made to reflect:
(A) the elimination of inter-company revenues and expenses between
MasterCard and Europay.
(B) the change in annual depreciation resulting from adjustments made to
the estimated useful lives of property acquired (ranging from three to
thirty years), based upon an independent appraisal.
(C) additional annual amortization of certain intangible assets resulting
from the acquisition consisting primarily of software and other
technology-related intangibles and trademarks, which are being
amortized over their estimated useful lives ranging from three to five
years. Amortization for the year ended December 31, 2000 was calculated
in accordance with current accounting principles generally accepted in
the United States of America. In accordance with SFAS No. 142, goodwill
and other intangible assets resulting from the integration that have
indefinite useful lives will not be amortized.
(D) the income tax effect of the pro forma adjustments. This is calculated
using a 40% tax rate.
(E) the elimination of the reduction on Europay's income statement of the
minority interest in EPSS held by MasterCard.
(F) the consolidation of Maestro and EMV Co., entities under the control of
the combined company.
(G) the issuance of stock by MasterCard to its members.
(H) net income attributable to European and non-European
members-stockholders before and after integration with Europay (dollars
in millions):
--------------------
(a) The net income (pre-integration) attributable to non-European members
of MasterCard is approximately 93% of MasterCard's net income and
approximately 15% of Europay's net income.
(b) The net income (pre-integration) attributable to European members of
MasterCard is approximately 7% of MasterCard's net income and
approximately 85% of Europay's net income.
(c) Decreased consolidated net income is primarily due to additional
amortization of intangible assets.
53
MASTERCARD INCORPORATED
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 2001
(IN THOUSANDS)
See notes to unaudited pro forma combined balance sheet.
54
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET (IN THOUSANDS EXCEPT PER
SHARE DATA)
(1) Euro amounts are translated into U.S. dollars based on a conversion rate of
1.1809 euros per U.S. dollar, the period end exchange rate between U.S.
dollars and euros as of June 30, 2001.
(2) The pro forma financial statements have been prepared to reflect the
conversion of MasterCard from a member-based organization to a stock company
and the integration of Europay, MEPUK and MasterCard. No separate pro forma
adjustment is required for the integration of MEPUK as it will have no
assets or liabilities other than shares in Europay at the close of the
transaction. Pro forma adjustments are made to reflect:
(A) intangible assets arising out of the preliminary allocation of purchase
price as follows:
Total intangible assets amount to $263,710 and consist of goodwill and
other intangible assets including customer relationships of $214,560;
software and other technology-related intangibles of $35,150; and
trademarks, tradenames and brand names of $14,000. See Note 2(C) to
the Notes to the Unaudited Pro Forma Combined Income Statements for
amortization period.
(B) the elimination of inter-company balances between MasterCard and
Europay.
(C) the elimination of MasterCard's historical investment of $4,407 for 15%
of Europay.
(D) the consolidation of Maestro International and EMV Co., entities under
the control of the combined company.
(E) acquisition related costs including the costs of acquiring and
eliminating certain Europay brands and logos totaling $39,700;
professional fees relating to the transaction totaling $12,200;
severance costs for Europay employees totaling $10,000; costs of
eliminating redundant European computer systems totaling $6,400; $8,000
relating to certain other acquisition liabilities; and other
miscellaneous costs totaling approximately $2,600. (see Note 2(A)).
(F) the elimination of the reduction on Europay's balance sheet of the
minority interest in EPSS held by MasterCard.
(G) the conversion of MasterCard International from a member-based
institution to a stock corporation and the issuance of 100 million
shares of class A and class B common stock of MasterCard Incorporated
at a par value of $.01 per share to the MasterCard International
members and the Europay and MEPUK shareholders.
(H) the elimination of Europay's pre-acquisition retained earnings and
paid-in-capital.
55
CAPITALIZATION
The following table sets forth the capitalization of MasterCard
Incorporated as of June 30, 2001 on:
- an actual basis for MasterCard International; and
- a pro forma basis for MasterCard Incorporated giving effect to the
proposed conversion and integration with Europay International.
The table should be read in conjunction with "Unaudited Pro Forma Combined
Financial Statements" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for each of MasterCard International and
Europay included elsewhere in this proxy statement-prospectus. There has been no
change to our capitalization since June 30, 2001, other than the impact of
current earnings subsequent to June 30, 2001, that would result in a material
change to the pro forma capitalization set forth below.
---------------
(1) The pro forma data reflects such adjustments as are necessary, in the
opinion of management, for a fair presentation of the results of operations
and stockholders' equity of MasterCard Incorporated on a pro forma basis.
For further detail, see "Unaudited Pro Forma Combined Financial Statements."
56
OVERVIEW OF THE GLOBAL PAYMENTS INDUSTRY
The global payments industry consists of all forms of payment including:
- Paper -- personal checks, cash, money orders, official checks, travelers
cheques and other paper-based means of transferring value;
- Cards -- credit cards, charge cards, debit cards (including ATM cards),
stored value cards and other types of cards; and
- Other Electronic -- wire transfers, electronic benefits transfers and
preauthorized payments such as Automated Clearing House ("ACH") payments,
among others.
The market for global payments is vast. Worldwide private consumption,
which measures the market value of goods and services purchased by households
and includes certain housing, public sector and non-profit expenditures, was
approximately $18 trillion in 1998, according to the World Development
Indicators Book 2000. Within the United States, Nilson Reports estimates that
the U.S payments industry completed nearly 105.5 billion transactions valued at
nearly $4,863 billion in 1999. According to Nilson, there were 77.8 billion
paper transactions, 26.1 billion card transactions and 1.6 billion electronic
transactions in the U.S. in 1999, valued at approximately $3,342 billion, $1,355
billion and $166 billion, respectively.
We believe that the percentage of overall payment transactions conducted
with cards has increased in recent years compared to paper forms of payment such
as cash and checks. We expect this trend to continue. The relative growth of
card-based forms of payment is the result of a number of factors, including:
- the expansion of card acceptance networks (including MasterCard's);
- the development of new channels for conducting commercial transactions,
such as the Internet and mobile commerce applications, that favor
card-based forms of payment;
- the introduction of globally accepted debit cards usable at the point of
sale, and the growth in popularity of debit cards generally;
- the development of rewards programs to encourage card usage in certain
countries; and
- the growing use of cards by corporations and small businesses for travel,
purchasing, fleet management and other functions.
The most common card-based forms of payment are general purpose cards,
which are payment cards carrying logos that permit widespread usage of the cards
within countries, regions or around the world. The primary general purpose card
brands include the MasterCard family of brands (MasterCard, Maestro and Cirrus);
Eurocard; Visa and its related brands (including Plus, Electron and Interlink);
American Express; JCB; Diner's Club; and Discover/Novus. In 1999, general
purpose cards were used worldwide in approximately 32.7 billion transactions
with a GDV of nearly $2,684 billion, an increase of 17.2% and 13.5%,
respectively, over the number of transactions and GDV recorded in 1998. GDV is
the dollar value of all spending on cards during a given period and is
calculated by adding purchase and cash disbursement volume (including, in each
case, balance transfers and convenience checks). In addition, the total number
of general purpose cards in circulation in 1999 was approximately 1.24 billion,
an increase of 9.0% over the number of cards in circulation in 1998. The
preceding figures exclude on-line debit programs such as Maestro, which are
general purpose cards that typically access a deposit account (as opposed to a
line of credit) and use a Personal Identification Number ("PIN") as the primary
method for verifying cardholders. In addition, regional or country-specific
debit programs or ATM networks, such as NYCE, Concord/EFS and others in the
United States, Interac in Canada or EFTPOS in Australia, are properly included
in the general purpose card category, although the preceding figures also
exclude these programs.
In addition to general purpose cards, private label cards comprise a
significant portion of all card-based forms of payment. Typically, private label
cards are issued by a merchant (such as a department store or gasoline
(petroleum) retailer) and can be used only at the issuing merchant's locations.
57
A number of MasterCard's competitors -- including American Express, JCB and
Discover/Novus -- operate proprietary systems in which they generally issue the
cards bearing their brands and "acquire" transactions from the merchants who
accept their cards for payment. These competitors set their own credit policies
and practices and the competitive terms of the cards they issue. In contrast,
MasterCard is an open bankcard association, as is Visa. MasterCard is owned by
financial institutions that issue cards with global acceptance and/or acquire
transactions on behalf of merchants who accept those cards for payment.
MasterCard is not a financial institution that issues cards or contracts with
merchants to accept cards for payment.
In most countries throughout the world, including the United States,
financial institutions typically issue both MasterCard- and Visa-branded payment
cards. This structure is known as "duality." In some countries, however,
particularly Canada, card issuers are "non-dual," meaning that they issue either
MasterCard or Visa payment cards, but not both. Issuance of MasterCard and Visa
debit cards is generally non-dual in the United States as well because of a Visa
rule mandating debit exclusivity.
As the result of consolidation in the banking industry, we expect that the
number of financial institutions that issue MasterCard cards will decline,
resulting in fewer active member financial institutions for MasterCard. However,
MasterCard's remaining members are expected to become correspondingly larger and
more global in scope.
58
BUSINESS OF MASTERCARD INTERNATIONAL
After the conversion, MasterCard International will be a subsidiary of
MasterCard Incorporated and the principal members of MasterCard International
will own the common stock of MasterCard Incorporated. The following discussion
of the business of MasterCard International describes the business that will be
conducted by MasterCard Incorporated through MasterCard International after the
conversion.
MasterCard International is a leading global payment solutions company
owned by over 1,500 financial institutions worldwide, which are principal
members that participate directly in the business of MasterCard International.
We manage a family of well-known, widely accepted payment card brands including
MasterCard, Maestro and Cirrus on behalf of these members and approximately
13,500 affiliate members that participate indirectly in our business. We license
our brands to members, provide a sophisticated set of information and
transaction processing services to members and establish and enforce rules and
standards surrounding the use of cards carrying our brands. We also undertake a
variety of marketing activities designed to maintain and enhance the value of
our brands. As an industry leader in technological innovation, we are developing
highly secure, efficient payment programs for electronic and mobile commerce
applications and helping members launch chip-based card programs in countries
throughout the world.
On a global scale, we process transactions denominated in more than 180
currencies. In 2000, our GDV, which represents gross spending (purchases and
cash disbursements) on MasterCard-branded cards for goods and services,
including balance transfers and convenience checks, increased 18% to $857.7
billion from $725.6 billion in 1999. At the end of 2000, the total number of
MasterCard cards in circulation worldwide as reported by our members was 438
million, a 16% increase from 1999, reflecting strong performance in a number of
countries. In addition, our members estimate that cards carrying MasterCard
brands were accepted at over 21 million locations around the world at the end of
2000.
Our revenue is comprised of operations fees and member assessments.
Operations fees represent user fees for authorization, clearing, settlement and
other member services that facilitate transaction and information management
among our members on a global basis. Member assessments are based principally
upon the GDV of transactions generated by MasterCard-branded cards. We refer to
the financial institutions that issue our cards as "issuers" and those that
enroll merchants into programs to accept our cards as "acquirers." We refer to
these institutions collectively as "MasterCard licensed financial institutions"
or "members." We use the terms "MasterCard-branded cards," "MasterCard brands"
and similar terms to refer to all cards carrying our brands, including
MasterCard, Maestro, Cirrus and Mondex, unless the context requires otherwise.
We provide the following services to our members:
- Payment Services. We provide transaction processing (primarily
authorization, clearing and settlement) services for our members via a
sophisticated, proprietary, worldwide computer and telecommunications
network. Using our transaction processing services, MasterCard members
facilitate payment transactions between cardholders and merchants
throughout the world, providing merchants with an efficient and secure
payment option and consumers with a convenient payment vehicle accepted
worldwide. We also provide a growing set of marketing and technology
consulting, card enhancement and loyalty rewards support, and
information-based performance analysis services to our members. We do not
issue cards, set fees or determine the interest rates that cardholders
are charged for use of their cards. Issuers have the responsibility for
determining these and most other competitive card features. In addition,
we do not solicit merchants or establish the discount rate that merchants
are charged for card acceptance, which are responsibilities of acquirers.
- Brand Building. We manage and promote our global brands for the benefit
of all MasterCard members through umbrella advertising, promotional and
sponsorship initiatives. We also promote our global brands by encouraging
affinity and co-branded cards and merchant acceptance initiatives.
- Rulemaking and Enforcement. We adopt and enforce rules applicable to all
MasterCard members relating to a variety of topics where common
procedures and standards are needed to ensure the smooth, equitable and
secure functioning of our system.
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We were established in 1966 when a group of banks with proprietary or
regional card systems formed the Interbank Card Association ("ICA"). In 1968,
ICA began to develop a global network by forming associations and alliances with
banks outside the United States. In 1969, ICA acquired exclusive rights to the
"MasterCharge" name and the interlocking circles device for its members. After
over a decade of expansion, ICA changed its name and the name of its trademarks
to MasterCard to reflect its growth into a broad payment services company. We
acquired Cirrus in 1988. We acquired an interest in Europay's predecessor,
EuroCard, in 1985, and together with Europay launched Maestro as the world's
first global, on-line, point-of-sale debit network in 1992. Today, we continue
to develop the presence of our brands around the world.
Because our business is global in scope, we have structured our
organization to be sensitive to the requirements of the regions and countries in
which we operate. Our global board of directors has delegated authority over a
variety of matters, including certain rulemaking, enforcement and fee-setting
decisions and advertising and marketing activities, to regional boards of
directors covering each of the United States, Canada, Latin America and the
Caribbean, Middle East/Africa, and Asia/Pacific. We also provide member services
on a regional basis. In Europe, our business is currently operated through
alliance agreements with Europay, which manages licensing and marketing for the
MasterCard family of brands. Following the conversion and integration, our
business in Europe will be operated through a European regional board of
directors with authority like other regional boards of directors.
BUSINESS STRATEGY
MasterCard's mission is to add value to our members by working to ensure
that our payment programs become the world's best and preferred way to pay. To
this end, we seek to build superior brands that provide high quality,
technologically sophisticated, widely accessible payment solutions for consumers
and businesses worldwide. We have adopted the following corporate strategy to
fulfill our mission.
WE INTEND TO FOCUS ON KEY FINANCIAL INSTITUTIONS AND COUNTRIES TO INCREASE OUR
SHARE, WHILE OFFERING BEST-IN-CLASS SERVICES TO ALL OF OUR MEMBERS.
Our strategy is to be a global payment solutions company focused strongly
on our customers -- our members. We believe that we can profitably grow share by
focusing increased, customized attention on the financial institutions that are
the largest participants in the MasterCard business and on countries that are
vital to our continued success because of their size or growth prospects. To
this end, we have entered into customized agreements with members around the
globe, which allow us to support the individual needs of these members in
exchange for significant business commitments to MasterCard. We intend to focus
on entering into further customized agreements with our key members globally in
2001. At the same time, our strategy is to continue to provide best-in-class
service to all our members, irrespective of their size. To this end, we have
established dedicated account management teams for key members and teams for
other members on a regional basis. We are also redeploying significant cost
savings achieved as a result of our corporate "process change" initiative into
higher value-added, customer-focused activities. From a regional perspective, we
have identified key countries in which to target our brand-building and program
development efforts, and will continue to make significant marketing,
promotional and program development investments in these countries in 2001.
WE WILL CONTINUE TO WORK TO STRENGTHEN MASTERCARD'S BRANDS, TECHNOLOGY AND
ACCEPTANCE NETWORK.
In light of strong competition in the payments industry, our strategy is to
continually invest in strengthening our brands, technology and acceptance
network. We will continue to leverage our popular "Priceless" advertising
campaign, as well as our sponsorship of major sporting events such as World Cup
2002, the Professional Golf Association Tour, Major League Baseball and the
Jordan Grand Prix Formula One racing team, to increase awareness of our brands
in countries throughout the world. For consumers, we have positioned the
MasterCard brand as "The Best Way to Pay for Everything that Matters"(TM), and
our global advertising and marketing activities will continue to stress this
message to drive activation, usage and retention of cards carrying our brands.
We also will seek increasingly to integrate our brand building efforts with our
development of payment solutions in specific countries. With respect to our
technical infrastructure, we are
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three years into the implementation of our "Systems Enhancement Strategy," which
is designed to substantially upgrade our core authorization, clearing and
settlement systems to enhance their reliability, functionality and flexibility,
and to reduce transaction processing costs. We also will continue aggressively
to expand the number of merchant locations that accept our brands, in order to
maintain the unsurpassed acceptance of MasterCard-branded cards. In 2001, we
will focus on acceptance initiatives within merchant categories that have not
traditionally accepted cards for payment, and on expanding participation in our
successful recurring payments programs.
WE INTEND TO CONTINUE TO DIFFERENTIATE MASTERCARD FROM OUR COMPETITION BY
DEVELOPING INNOVATIVE PAYMENT SOLUTIONS AND CUSTOMIZED PROFESSIONAL SERVICES.
Our strategy is to provide a full range of innovative payment solutions in
a rapidly evolving industry. To this end, we are continuing to make significant
investments to support our members' initiatives in the areas of electronic and
mobile commerce, and we will continue to expand our capabilities in connection
with corporate and pre-paid programs. We also seek continually to use technology
to enhance our members' satisfaction with our core transaction processing
services. We intend to continue our significant efforts to facilitate the
introduction of chip-based or "smart" cards in countries throughout the world.
Smart cards can offer greater security and are more open to customization than
existing magnetic stripe cards, allowing our members to keep pace with changes
in technology. As of December 31, 2000, approximately 31 million MasterCard-
branded smart cards were issued worldwide. In addition, we provide a growing set
of marketing, operations and technology consulting, card enhancement and loyalty
rewards support, and information-based performance analysis services to our
members on an optional, fee-for-services basis. We intend to focus on expanding
the range and scope of these professional services in order to enhance our
ability to provide customized services to members.
WE INTEND TO INTEGRATE WITH EUROPAY TO FORM A SINGLE GLOBAL COMPANY THAT
COMBINES THE SEPARATE STRENGTHS OF MASTERCARD AND EUROPAY AND ALLOWS OUR BRANDS
TO BE MANAGED MORE EFFECTIVELY.
In 2001, our plan is to conclude the integration of MasterCard and Europay
to create a single, cohesive, global organization that will manage the continued
growth of our brands. In a rapidly evolving marketplace, we need to position
ourselves to respond better to competitive and technological trends and to
increase our responsiveness to the unique requirements of our members in Europe.
We expect the integration with Europay to allow us to improve efficiency,
eliminate duplication and costs associated with a two company structure, and
coordinate marketing and brand-building initiatives more closely. We also expect
that integration will provide us with greater access to a global pool of talent,
permit us to benefit fully from Europay's expertise in chip-based cards, debit
programs and mobile commerce, and allow us to expand MasterCard's professional
services and Internet-related businesses in Europe.
PAYMENT SERVICES
We provide payment card transaction processing services to our members
through a sophisticated, proprietary, worldwide computer and telecommunications
system.
TRANSACTION PROCESSING
Authorization, Clearing and Settlement. The objective of the
authorization, clearing and settlement process is to facilitate the movement of
transaction data and funds among members on a global basis in a timely and
efficient manner. Together, the clearing and settlement processes are often
referred to as "interchange."
Authorization is the process by which a transaction is approved by the
issuer or, in certain circumstances, by MasterCard or others on behalf of the
issuer in accordance with the issuer's instructions. We processed over 6.1
billion authorizations in 2000. The MasterCard authorization system is a
worldwide network designed to facilitate the authorization needs of MasterCard
members, and is devised for the near-instantaneous transmission of card account
data and authorization results among issuers, acquirers and other transaction
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processors or networks. In a typical transaction, the merchant or acquirer
requests authorization for the transaction from the issuer and permission is
given or denied by the issuer based on cardholder account status. Depending on
the type of card and transaction value, the relevant authorization criterion may
vary. In limited instances, MasterCard will provide stand-in authorization, or
authorization on behalf of the issuer, when the issuer is not signed on to our
system or cannot be contacted within an established time frame. Typically, our
global data transport network, which we refer to as Banknet, routes the
authorization requests and responses between issuers and acquirers in less than
one quarter of one second (250 milliseconds), with a reliability rate of over
99.7% and an availability rate in excess of 99.99%. Our rules, which vary across
regions, establish the circumstances under which merchants and acquirers must
seek authorization of transactions.
Clearing is the exchange of financial transaction information between the
issuer and the acquirer after a transaction has been completed. MasterCard
transactions are generally "cleared" through our centralized processing system,
known as INET, and the related information is typically routed among members via
our Banknet data transport network. Clearing involves the movement of
transaction data from the acquirer to MasterCard, where individual transactions
are sorted and forwarded to the appropriate issuer for posting to cardholder
accounts. Each transaction is valued according to our established rules. Data
can be submitted 24-hours per day, seven days a week, and there are multiple
clearing cycles each day. Data transmission is provided on every U.S. banking
business day to facilitate the member settlement process.
Once transactions have been authorized and cleared, MasterCard provides
services in connection with the "settlement" of the transaction -- that is, the
exchange of funds along with associated fees. Settlement is provided through our
Settlement Account Management system, or SAM. Once clearing is complete, a daily
reconciliation is provided to each member, detailing the net amounts by clearing
cycle and a final settlement position. The actual exchange of funds takes place
between a clearing bank chosen by the member and approved by MasterCard and one
of MasterCard's settlement banks. If the member is in a net debit position, its
clearing bank transfers funds to MasterCard's settlement bank; the opposite
occurs if the member is in a net credit position. In most cases, member
settlement occurs in U.S. dollars in accordance with established rules, although
we offer non-U.S. dollar settlement to our members electing to receive or pay in
other selected currencies.
We also operate the MasterCard Debit Switch ("MDS"), which supports
processing for Cirrus and most Maestro transactions. The MDS switches financial
messages between acquiring and issuing members, provides transaction and
statistical reporting and performs clearing and settlement between members and
other debit transaction processing networks. Unlike the authorization and
clearing processes described above, which involve the exchange of transaction
data in two discrete messages (once for authorization and again for clearing),
the MDS generally operates as a "single message" system in which clearing occurs
simultaneously with the initial authorization request.
Operations and Systems. We provide transaction processing services through
our primary operations facility located in St. Louis, Missouri. Our services are
available 24 hours per day, 365 days per year. In the event our main facility
becomes disabled, we have a back-up system located at a separate facility in
Lake Success, New York. We successfully relocated our primary operations center
to a new state-of-the-art transaction processing facility in O'Fallon, Missouri
in the second quarter of 2001, and expect to complete our operations staff
relocation to this facility by the fourth quarter of 2001. Our transaction
processing facilities have redundant power supplies to help protect against loss
of data during a power failure. In addition, our systems contain back-up
processes and redundancies to ensure continued operation in the event that a
process or operation stops unexpectedly. We consistently maintain systems
availability at a rate in excess of 99.99%.
Systems Enhancement Strategy. We are three years into our five year
Systems Enhancement Strategy ("SES") program, which is designed to upgrade our
core processing systems to increase flexibility, achieve operating efficiencies,
improve time-to-market for new services and reduce transaction costs.
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As part of the SES program, we have:
- migrated our Banknet global data transport network to a "virtual private
network" ("VPN") in conjunction with AT&T. Our VPN enhancements have
significantly reduced transaction processing times and costs and enhanced
data security for members;
- replaced computer hardware with state-of-the art systems and improved our
stand-in authorization systems to increase capacity and improve member
risk management; and
- consolidated settlement functions across all MasterCard brands with
enhanced settlement advisement and currency management systems.
We are also in the process of introducing, among other things, a new
clearing system to replace INET called the Global Clearing Management System.
This system is intended to be more flexible than its predecessor and to support
a richer set of transaction data.
Member Risk Management. As a secondary obligor for certain card
obligations among principal members, we are exposed to member credit risk. Our
legal exposure is limited to our approximately 1,500 principal members. These
members directly participate in MasterCard activities and are responsible for
the settlement and other activities of, and must provide a performance guarantee
with respect to, affiliate members (numbering approximately 13,500 in total).
Generally, principal members must meet minimum rating agency requirements. If
principal members are not rated, they must meet minimum credit standards to
avoid maintaining cash collateral accounts or providing financial guarantees.
To minimize the contingent risk to MasterCard of a member failure, we
monitor members' activities, perform traditional credit risk analysis of
members' financial strength, evaluate members' economic operating environments
and monitor compliance with our rules and standards. If the financial condition
of a member or the state of a national economy in which a member operates
indicates that a member may not be able to satisfy its settlement obligations to
other members, we may require the member to post collateral and provide
guarantees sufficient to cover our potential exposure in event of such member's
failure. When collateral is required, the amount is generally equal to the
member's credit risk exposure. If an issuing bank is potentially unable to meet
its obligations to us, we can block authorization of transactions and ultimately
terminate membership.
Our principal member credit risk is settlement exposure, which materializes
when an issuer or acquirer fails to fund settlement obligations. For liquidity
protection in the event of member settlement failure, we have established a $1.2
billion committed credit facility, which is subject to annual renewal. In
addition, we have the right to assess all or a portion of our members for
reimbursement for settlement losses, member credit losses or any other operating
losses. For a description of our assessment rights following the conversion and
integration, see "Comparison of Rights of MasterCard International Members
Before and After the Conversion and Integration -- Fees, Expenses and
Assessments."
For a description of the settlement and other risks attributable to our
travelers' cheque business, see Note 9 to the audited Consolidated Financial
Statements of MasterCard International.
Anti-Fraud Initiatives. We are continually developing programs and systems
to aid our members and merchants in detecting and preventing the fraudulent use
of cards carrying our brands. Our most basic anti-fraud initiative is a "warning
bulletin" that we prepare, sell and distribute to members showing invalid and
other recently terminated account numbers. This bulletin is sold and distributed
electronically to members in the United States and is produced in both paper and
electronic format for members outside the United States. In addition, our Member
Protection Program provides, among other things, a daily report to all card
issuers identifying accounts with unusual activity based on the number or size
of transactions.
We have a number of other sophisticated prevention initiatives targeted at
fraudulent cardholder activity. As one example, our System to Avoid Fraud
Effectively (SAFE) program compiles member-submitted data regarding fraudulent
transactions into reports designed to help issuers and acquirers improve fraud
detection and prevention. In addition, our Risk Finder system helps members to
predict fraud and reduce losses by evaluating transactions using a number of
variables. Through our MasterCard Alerts on-line program, we
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facilitate communications among members and law enforcement officials with
respect to fraudulent activities on a worldwide basis.
We also target fraudulent activity at the merchant level. Through our
Merchant Profiles program, we identify high risk merchants with significant
fraud-related transaction activity and encourage these merchants to implement
fraud control procedures. Our Member Alert to Control High-Risk
Merchants -- MATCH(TM) program is a tool designed to assist acquirers to assess
risk before signing a merchant into their MasterCard acceptance programs. MATCH
contains an updated file of merchants terminated for cause by members or
otherwise classified as a special risk. In addition, our Merchant Audit Program
audits merchants worldwide once per month, assessing each merchant's fraud to
sales ratio. When the ratio exceeds 4% for two consecutive months in a six-month
period, the merchant is placed on a special watch. When the ratio exceeds 8% for
the same period, acquiring members have the option to terminate the relevant
merchant agreement or process all fraudulent activity chargebacks against the
merchant for a minimum period of one year. We have also implemented the Common
Points of Purchase Program, which helps identify merchants that knowingly or
unknowingly may have facilitated the compromise of cardholder account data.
One of the strongest barriers to increasing electronic commerce is consumer
fear for the security of Internet-based transactions. To address this concern,
we have developed the Secure Electronic Transaction ("SET") protocol for
safeguarding personal information contained on consumers' payment cards. SET
uses a digital certificate and encryption software to store account and
transaction information as a means of securing Internet transactions. MasterCard
is a founding member of SET Co., a consortium of leading companies established
to encourage the widespread adoption of the SET security specifications. SET has
been adopted in many countries outside of the United States. In addition to SET,
MasterCard is developing the Secure Payment Application (SPA) to protect account
numbers and authenticate cardholders in electronic and mobile commerce
transactions.
MasterCard RPPS. MasterCard's Remote Payment and Presentment Service
("RPPS"), launched in 1987, is an electronic payment processing service for
remote banking services in the United States and Canada. RPPS provides routing,
clearing and settlement services between service providers supporting consumer
bill payment services (for example, in connection with personal computer-based
home banking) and billers. RPPS transmits over 12 million payments valued at
approximately $6 billion per month, and represents one of the largest networks
for the processing of consumer-to-business electronic payments in the United
States.
OTHER PAYMENT SERVICES
In addition to transaction processing, we provide a growing set of
marketing and technology consulting, card enhancement and loyalty rewards
support, and information-based performance analysis services to our members.
These services are generally provided on an optional, fee-for-services basis, or
may be provided to members in connection with customized support agreements.
Marketing Consulting. Our global marketing consulting group provides
customized consulting to members in the area of cardholder marketing, including
acquisition, portfolio management and loyalty consulting designed to help expand
our members' businesses. Among other things, we undertake strategic reviews of
our members' marketing activities, help members to launch new programs and enter
new regional markets, develop strategic plans, assist members to build
relationships with selected business partners and undertake extensive research.
We also develop innovative marketing communications programs (such as direct
mail packages, telephone scripts and Internet and television advertisements) to
improve our members' ability to acquire card accounts and to stimulate
activation of these accounts. In addition, we undertake a range of portfolio
segmentation, database marketing and loyalty consulting projects that assist
members to better target their cardholders' unique characteristics and
requirements, helping to improve acquisition and retention of accounts. We
consult with respect to all MasterCard card programs and in all regions of the
world.
Operations Consulting. We have leveraged our significant technical
expertise to provide technology-based consulting services to members. Through
these services, our experienced operations staff assist members to analyze key
operations trends and best industry practices to improve their overall service
levels and business
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performance. Our operations consultants provide advice principally in connection
with testing practices, program management and change management activities. We
also provide consulting services to members regarding risk management and
security issues.
Card Enhancement Services. Our worldwide cardholder services group
develops, manages and markets a range of services to members globally to support
the features that are offered in connection with certain of our card programs.
These services include lost and stolen card reporting, emergency card
replacement, emergency cash advance, concierge and travel assistance services.
In conjunction with a licensed insurance company, we also support our members'
purchase assurance, extended warranty, collision/damage waiver and other
insurance-based enhancements.
Loyalty Rewards Program Services. Our loyalty rewards services group
provides members with comprehensive support of their card-based loyalty rewards
programs. We have developed a proprietary software program, which we use to
track, accumulate and redeem points for cardholders participating in member
rewards programs that use our services. Through arrangements with leading travel
service providers and rewards vendors, we have established a dedicated call
center in St. Louis that accepts cardholder calls to redeem points, answer
customer service inquiries, and book travel arrangements.
Information/Performance Analysis Services. We provide a sophisticated set
of software and online decision-support tools to our members and others. These
tools rely on aggregated transaction information captured in our clearing and
settlement systems to permit members to analyze the performance of their card
portfolios and to take action to improve the revenue potential of their
businesses. We also provide decision-support tools that allow members to
identify, track and evaluate their performance in areas such as authorizations,
fraud detection and response, quality and chargeback processing. These tools are
principally available in the United States, although we intend to increasingly
offer them to members on a global basis where possible.
Many of our decision support tools are provided to members through
MasterCard OnLiNE(TM) , our online messaging system that allows members to
conduct a wide range of business with MasterCard through Internet, dial-up, VPN
or other connections. In addition to accessing some of the tools described
above, members can use MasterCard OnLiNE to obtain new card program approvals,
submit periodic statistical performance information, assist in processing
chargebacks and receive alerts about fraudulent transaction activity and related
information. MasterCard's recently launched on-line information initiative,
called MasterCard eService, provides members with access through MasterCard
OnLiNE to most MasterCard publications, manuals and bulletins as well as
operations forms, information releases and on-line research tools.
BRAND BUILDING
MARKETING ACTIVITIES
For cardholders, the MasterCard brand stands for "The Best Way to Pay for
Everything that Matters(TM)." Our approach to marketing activities combines
advertising, sponsorships and promotions as part of an integrated package
designed to increase consumer awareness of MasterCard and to drive activation,
usage and retention of cards carrying our brands. We also seek to tailor our
global marketing messages so that they are optimized for use in individual
countries, while maintaining a common global theme.
Advertising. Our advertising plays a critical role in building brand
visibility, usage and loyalty among cardholders globally. Our award-winning
"Priceless" advertising campaign launched in the United States in 1997 and has
run in more than 36 languages across 80 countries. We believe the "Priceless"
campaign represents one of the most successful and flexible global advertising
campaigns in use today. The campaign promotes MasterCard's universal acceptance
and usage benefits that permit cardholders to pay for what they need, when they
need it, and provides MasterCard with a consistent, recognizable message that
supports our brand positioning.
Sponsorships. We seek to increase brand awareness and preference, and to
encourage card usage and loyalty, by sponsoring a variety of sports properties
that support the "Priceless" campaign and MasterCard brand positioning. Our
sports sponsorships constitute unique assets that help build the MasterCard
brand,
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while supporting the business of our members and relationships with key
customers. In soccer, MasterCard is the exclusive payment system sponsor of the
FIFA World Cup, which we believe is the single largest sporting event in the
world. We also sponsor other leading soccer events, such as the FIFA Women's
World Cup and the FIFA World Youth Championship, as well as both the regional
and club championships of Copa America and Copa Libertadores in Latin America,
and, through Europay, the European Championship and UEFA Champions League in
Europe.
Our ten year global investment in soccer is complemented by other global
and regional sports sponsorships. Globally, we sponsor the Jordan Grand Prix
Formula One racing team, part of the prestigious Formula One auto racing
circuit. In golf, we are an international sponsor and the preferred card of the
PGA Tour, the Senior PGA Tour, the PGA of America, the British Open, the
MasterCard Championship Tournament held in Hawaii, and the MasterCard Colonial
Tournament held in Texas.
In North America, we have made major sponsorship investments in baseball,
ice hockey and figure skating. In baseball, we are the preferred card of Major
League Baseball and a sponsor of both the All-Star Game and the World Series. We
have also established separate marketing and sponsorship agreements with nine
major league baseball teams. In hockey, we are the preferred card and a sponsor
of the National Hockey League, the National Hockey League Players Association
and the Canadian Hockey League. We also sponsor a number of specific
hockey-related events including the NHL All-Star Weekend, the Stanley Cup
Finals, the MasterCard Memorial Cup and the MasterCard Quebec Major Junior
Hockey League All-Star Game. In figure skating, we sponsored the 2001 World
Figure Skating Championships and other events, including the Skate Canada
Organization and the MasterCard Skate Canada International Competition.
Promotions. In order to increase usage of our cards, we sponsor frequent
promotions on a regional and national basis. These promotions typically provide
cardholders with a discount, rebate or other special offer, or an entry into a
sweepstakes or contest, in connection with the use of a MasterCard-branded card.
In the United States, we sponsor MasterCard Exclusives(TM), a collection of
promotional programs and select merchant offers that members can insert into
their cardholder statements to drive card usage; MasterCard Exclusives
Online(TM), a permission-based email and Internet web site program providing
cardholders with access to exclusive merchant offers; and periodic national
sweepstakes promotions, which typically coincide with peak spending periods such
as Christmas or the summer travel season. These promotions are prominently
featured on our Internet site, mastercard.com, which contains a variety of
materials targeted to consumers.
MERCHANT ACCEPTANCE INITIATIVES
At the end of 2000, our members estimate that cards carrying MasterCard
brands were accepted at over 21 million locations around the world. Our 2000
results were part of a longer-term trend of substantially increasing MasterCard
card acceptance. Between 1997 and 2000, our members estimate that the number of
MasterCard acceptance locations worldwide increased by over 35%.
Our acceptance strategy is to maintain the unsurpassed acceptance of
MasterCard-branded cards by continuing our aggressive efforts to expand the
number of merchant locations worldwide where cardholders can use our cards. Our
acceptance efforts are focused on three core initiatives. First, we seek to
increase the number of payment channels where MasterCard cards are accepted,
such as by introducing MasterCard card acceptance in connection with Internet,
mobile commerce and interactive television payment applications. Second, we seek
to increase the categories of merchants that accept our cards. In recent years,
payment card acceptance has increased in a number of merchant categories that
were previously averse to accepting payment cards, such as utilities, doctors
offices and supermarkets. In the United States, we are focused presently on
expanding acceptance in fast food restaurants and in connection with public
sector payments (including in connection with taxes, fees, fines and tolls),
among other categories. Outside the United States, where payment card acceptance
is growing more rapidly than inside the U.S., we are working to support enhanced
card acceptance for electronic commerce, public sector and recurring payments.
Third, we seek to increase usage of our cards at selected merchants by
sponsoring a range of special offers, sweepstakes, contests and other
promotional programs from time to time. We also enter into brand preference
agreements with
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merchants, in connection with which merchants commit to expressing their
preference for MasterCard-branded cards when accepting payments from consumers.
Our acceptance initiatives are primarily designed to educate merchants
about the benefits and features of accepting MasterCard-branded cards for
payment. We also support technical initiatives designed to make card acceptance
more attractive for specific merchants, such as our Quick Payment Service, which
reduces authorization times and enhances the availability of MasterCard card
acceptance for fast food restaurants and other merchants where rapid
transactions are required. We are presently working on efforts to support radio
frequency identification devices, which are designed to facilitate card
acceptance at merchants with dispersed points of interaction with consumers,
such as food delivery outlets.
Finally, we view recurring payments as a significant opportunity to expand
MasterCard card acceptance in the United States, and are sponsoring initiatives
to encourage consumers to make recurring bill payments in a variety of
categories -- including telephone, cable, utilities and insurance -- on their
MasterCard-branded cards.
CO-BRANDED/AFFINITY CARDS
We provide research, marketing support and financial assistance to our
members and their partners in connection with the launch and marketing of
co-branded and affinity card programs. Co-branded cards are payment cards
bearing the logos or other insignia of an issuer and a marketing partner, often
a retail merchant. Affinity cards are similar to co-branded cards except that
the issuer's marketing partner is typically a charity or similar organization,
and a portion of consumer spending on the affinity card is generally allocated
to support the charity. MasterCard has supported a number of leading co-branded
and affinity card programs in the automobile, mass merchandise retailing and
other segments.
RULE MAKING AND ENFORCEMENT
Membership in MasterCard is open to banks and other regulated and
supervised financial institutions. Applicants for membership must be approved by
a regional MasterCard board of directors. In general, MasterCard staff grant
licenses by territory. To be approved as a member, an applicant must be able to
perform all obligations required of members. Credit reviews are conducted on all
new members prior to admission, and are updated periodically.
In exchange for licenses to use our brands, members agree to comply with
our by-laws, policies, rules and operating regulations ("Standards"). We are the
governing body that establishes and enforces the Standards. The Standards relate
to such matters as:
- membership eligibility and financial soundness criteria;
- the design and features of cards;
- the use of MasterCard trademarks;
- the standards and features applicable to certain card programs;
- transaction and other reporting requirements;
- transaction processing obligations and the use of third-party service
providers;
- merchant acquiring activities, including acceptance standards applicable
to merchants;
- cash disbursements;
- fees;
- guaranteed settlement, member failures and allocation of losses; and
- termination of membership.
To ensure that members conform to the Standards, we run an extensive range
of compliance and other programs including reviewing all card programs proposed
to be issued by members and requiring members to
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undergo an annual audit by an independent certified public accountant (or
similar examination by a regulatory authority). Except as specifically described
in this proxy statement-prospectus, the Standards will not be effected by the
conversion or integration.
In connection with enforcement of the Standards, MasterCard regulates
disputes between members relating to specific transactions. For example, after a
transaction is presented to an issuer, the issuer may determine that the
transaction may be invalid for a variety of reasons, including fraud. If the
issuer believes there is a defect in a transaction, the issuer may return, or
chargeback, the transaction to the acquirer. MasterCard enforces rules relating
to chargebacks and acts as an arbitrator of last resort with respect to
chargeback disputes.
MASTERCARD PAYMENT PROGRAMS
MasterCard supports a wide range of payment solutions to enable our members
to design, package and implement programs targeted to the specific needs of
their consumer and corporate customers. While we permit regional variations in
the characteristics and features of our payment programs, all MasterCard cards
benefit from MasterCard's worldwide acceptance network and can be used to make
purchases or obtain cash wherever the relevant brand logos are displayed
indicating acceptance of our cards. The MasterCard acceptance network, together
with our Standards and the transaction processing services we provide, ensure
that all MasterCard payment programs are integrated into a network that
facilitates payments across the globe.
Our principal payment programs, which are facilitated through our
brands -- MasterCard, Maestro, Cirrus and Mondex -- are listed below:
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CONSUMER PROGRAMS
MasterCard administers a number of consumer credit programs that are
designed to meet the needs of our members for tailored, customized programs
addressed to specific consumer segments. Standard MasterCard cards are general
purpose credit cards targeted to consumers with basic needs for a credit card.
Gold MasterCard cards are targeted to consumers typically requiring a higher
line of credit or spending limit and one or more card enhancement services
associated with a card. Platinum MasterCard cards are generally targeted to more
upscale consumers and are offered with still higher minimum credit lines or
spending limits. Platinum MasterCard cards also provide a full range of card
enhancement services. World MasterCard cards are a highly flexible payment
program that combines the absence of a preset spending limit with the option to
revolve a designated portion of the charges made. These cards are targeted
principally for travel and entertainment use and are accompanied by
best-in-class enhancement services and loyalty rewards programs. All MasterCard
cards, including business/corporate cards discussed below, permit cardholders to
obtain cash from bank branches or through the MasterCard/Cirrus/Maestro ATM
network, as well as to make purchases at the point of sale.
The services provided in connection with all MasterCard credit cards
include lost/stolen card reporting, emergency card replacement and emergency
cash advance. MasterAssist(TM) enhancement services are provided in connection
with most Gold, Platinum and World MasterCard cards, as well as certain Standard
MasterCard cards, and include emergency travel assistance and referral services,
as well as retail-related insurance such as purchase protection and extended
warranty coverage. MasterRental(TM) vehicle rental insurance is also provided in
the United States in connection with all Gold, Platinum and World MasterCard
cards (MasterRental(TM) is a required benefit in Canada, but members can use
independent vendors to provide the service). In addition, concierge services and
airport lounge access are required benefits for World MasterCard cards in the
United States, and are typical features associated with most Platinum and World
MasterCard cards. Cardholders can access these and other services through
MasterCard Global Service(TM), a worldwide customer service program delivered
through a call center operated by MasterCard and accessible via a network of
country-specific, toll-free or collect telephone numbers.
MasterCard's rules also permit our members to issue "secured" MasterCard
cards, in which all or a portion of the cardholder's line of credit is secured
by collateral, typically a cash deposit made by the cardholder.
In addition, MasterCard supports a range of payment solutions that allow
our members to provide consumers with convenient access to funds on deposit in
checking, demand deposit and other accounts. Transactions processed on a debit
card generally withdraw available funds directly from a cardholder's account in
accordance with terms established by the issuer of the card, and in some cases
involve an extension of credit. MasterCard's debit programs may be branded with
the MasterCard, Maestro and/or Cirrus marks, and can be used to obtain cash in
bank branches or at ATMs. In addition, MasterCard- and Maestro-branded debit
cards may be used to make purchases at the point of sale. All MasterCard debit
programs are designed to enhance our members' programs and services by providing
consumers with greater access to their funds by leveraging the strengths of
MasterCard's extensive global acceptance network and the MasterCard/Cirrus/
Maestro ATM network. Debit cards carrying the MasterCard brand allow cardholders
to validate transactions at the point of sale either by signing a sales receipt
or, if the relevant card also bears a Maestro or regional ATM network mark and
the merchant has the necessary equipment, by entering a PIN at a terminal. Like
our consumer credit programs, we support Gold MasterCard debit cards and
Platinum MasterCard debit cards that members can offer as premium services to
cardholders. Members can also provide enhancement services and loyalty rewards
programs in connection with debit cards carrying our brands; in the United
States, all MasterCard debit cards benefit from the same core enhancements
available on MasterCard credit cards.
Maestro is MasterCard's leading online debit program, with more
participating issuers, cards and acceptance locations in more countries than any
other on-line debit brand. Typically, Maestro cards allow cardholders to verify
themselves by entering a PIN, although in certain countries, cardholders are
required to sign a sales receipt. Maestro cards are issued, and Maestro
transactions are processed, pursuant to a set of rules and procedures that are
separate from the rules applicable to MasterCard credit and debit transactions.
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International travel services including emergency cash disbursement, lost and
stolen card reporting as well as access to card issuers are available on an
optional basis to Maestro cardholders through Maestro Global Service from
MasterCard(TM).
We believe that the MasterCard/Cirrus/Maestro ATM Network is the world's
largest global ATM network, with more than 600,000 participating cash dispensing
locations around the globe. Any cardholder with a card bearing the MasterCard,
Maestro or Cirrus logo may use a network ATM to access funds on deposit in his
or her account or to take a cash advance (if a MasterCard credit card is used).
The network is available twenty four hours a day, seven days a week, 365 days a
year.
We make the Cirrus brand available to members to provide global cash access
through the MasterCard/ Cirrus/Maestro ATM Network for our members' proprietary
ATM cards. Cirrus transactions are validated by entering a PIN. As with Maestro
cards, Cirrus cards are issued and processed pursuant to a set of rules and
procedures that are separate from the rules applicable either to MasterCard or
Maestro transactions.
CORPORATE PAYMENT SOLUTIONS
MasterCard's corporate payment solutions assist corporations, mid-sized
companies, small businesses and public sector organizations to streamline their
payment processes, manage information and reduce administrative costs. We have a
long history of innovation in the corporate segment, having developed the first
business card issued by a financial institution, the first fleet card platform
and the first multi-purpose card.
Inherent in each corporate payment solution is a combination of rich
transaction data, purchasing controls and sophisticated reporting alternatives
that are customizable to the needs of the user. The MasterCard Corporate card is
designed to allow organizations to manage employee travel and entertainment
expenses. MasterCard Corporate Executive cards, marketed in such countries as
the United States, Canada, Chile and France, are targeted at senior executives
and offer increased spending limits, concierge services and worldwide, 24-hour
customer service. MasterCard Corporate Purchasing cards, marketed globally, are
designed to assist in the reengineering of the corporate purchasing process,
enhancing companies' financial controls while reducing administrative costs.
MasterCard Corporate Fleet cards provide companies with a way to manage the
expenses of a commercial fleet. Finally, the MasterCard Corporate Multi Card
provides customers with an integrated card that combines the functionality of
one or more of our MasterCard corporate programs -- travel, purchasing or
fleet -- into a single card or account, thereby reducing the costs of managing
multiple card programs. We also administer a variety of payment programs for
public sector entities that are similar to the travel, purchasing, fleet and
Multi cards offered to corporations.
The MasterCard BusinessCard and Executive BusinessCard, marketed globally,
are targeted at the small-business segment, offering cardholders the ability to
extend payments and separate business expenses from personal expenses.
MasterCard's Small Business Connections, currently offered in the United States,
Canada, and the United Kingdom, is a web-based community for small businesses.
It includes the Business Savings Club that offers discounts on products and
services, Business Bonuses, a rewards program, as well as Market Access, a
marketplace site where small businesses are able to buy and sell over the web.
A key driver of growth in corporate payment solutions, particularly outside
of the United States, is Smart Data Online, our web-based reporting tool.
Implemented in all regions of the world, Smart Data Online is a state-of-the-art
software product developed and supported by MasterCard. It is available in ten
languages and requires only a web browser to access. It allows organizations
ranging from small businesses to large corporations to display cardholder
statements, prepare management reports and integrate charge data into their
financial systems.
Recognizing the rapid growth in business-to-business electronic commerce,
MasterCard's Corporate Payment Solutions group has a team dedicated to the
development and deployment of an overall electronic business-to-business
strategy. Core to the strategy will be leveraging MasterCard's infrastructure
and ubiquitous brand to become the payment method of choice for both buyers and
sellers in electronic business-to-business transactions. As an example, we
recently launched the MasterCard Global Trading Program(TM),
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which expands the functionality of the MasterCard Purchasing card to become a
payment vehicle for cross border trade.
STORED VALUE PROGRAMS
Unlike debit, charge or credit programs -- where the consumer or
business/corporate customer is obligated to pay at the same time as, or later
than, the relevant transaction -- "stored value" programs involve a balance
account that is funded with monetary value prior to use. For MasterCard pre-paid
cards, this balance account is maintained on the issuer's or MasterCard's host
computer, and the account is accessed through a MasterCard-branded plastic
payment card using magnetic stripe technology. For travelers cheques, the
balance account is reflected in the value of the paper cheques "purchased" by a
consumer prior to use. For Mondex cards, the balance account is maintained in an
electronic "purse" application contained on a computer chip embedded into the
payment card itself.
Pre-paid. MasterCard's pre-paid card platform is a flexible tool that
permits our members to develop, launch and manage host-based, magnetic
stripe-enabled pre-paid card programs customized to the needs of unique consumer
segments. Pre-paid cards can be issued in connection with our MasterCard,
Maestro and/or Cirrus brands according to the issuing member's requirements, and
are accepted anywhere the relevant brand is accepted. There are a variety of
MasterCard-branded pre-paid card programs in operation in the United States,
Asia/Pacific and other regions. In the United States, we launched a MasterCard
gift card program in 2000 using our pre-paid card platform, which allows
consumers to purchase and replenish MasterCard-branded gift cards over the
Internet.
Travelers Cheques. Travelers cheques are a paper-based, prepaid form of
payment for use at the point of sale. MasterCard-branded travelers cheques,
which are available in a number of international currencies including the euro,
are refundable worldwide and can be replaced if lost or stolen.
MasterCard-branded travelers cheques are issued by a number of members around
the world. For a description of MasterCard's guarantee obligations relating to
travelers cheques, see Note 13 to the Consolidated Financial Statements of
MasterCard International.
Mondex. The Mondex electronic cash program, a chip-based, stored value
payment application, allows monetary value to be stored in an electronic "purse"
directly on Mondex-branded payment cards. Up to five currencies can be loaded on
a Mondex card at any one time. The value stored on a Mondex card can be used as
payment for goods or services at retailers who accept Mondex cards, or
transferred to other Mondex cards, using specialized card readers. Mondex cards
permit the immediate transfer of value to a merchant or between cards without
the transaction being authorized, cleared or settled through a central computer
system. Mondex cards are primarily marketed to consumers as a convenient,
technologically advanced and secure alternative to payment by cash or check,
principally in connection with low-value purchases. For merchants and banks,
Mondex cards can also reduce the risks and costs associated with processing cash
and check payments.
The Mondex purse application is commercialized through a franchise system
operated by Mondex International Limited ("MXI"). All MasterCard members have
the right to obtain licenses from franchisees of MXI to issue Mondex cards in
the countries in which they operate. To date, the Mondex purse application has
been franchised or directly licensed to financial institutions in most major
national markets. Full scale Mondex electronic cash programs have been
implemented in Hong Kong and in connection with a number of universities and an
Internet retailer in the United Kingdom and Venezuela. In addition, Mondex cards
are currently in pilot trials in Canada and New Zealand.
For a description of our investment in MXI, the owner and licensor of the
Mondex electronic cash program, see Note 11 to the Consolidated Financial
Statements of MasterCard International.
On June 29, 2001, MasterCard International acquired all of the outstanding
stock of MXI that it did not previously own. As a result of assuming full
ownership of MXI, MasterCard International now directly controls all of MXI's
operations and management. This transaction will not have a material impact on
the financial statements of MasterCard International. Through MXI, MasterCard
International presently expects to continue providing support to Mondex
franchisees and licensees, providing services to the MULTOS
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consortium (described below), and managing the Mondex electronic cash, security
and certificate authority applications.
GLOBAL E-BUSINESS AND EMERGING TECHNOLOGIES
Through our Global e-Business and Emerging Technologies group, MasterCard
is supporting innovation in the payments industry with a number of initiatives,
including developments in the areas of electronic commerce, mobile commerce and
smart cards. We seek to ensure that MasterCard-branded payment cards play an
important role in payment channels that are developing as a result of new
technologies (including the Internet, wireless channels and cable). We also seek
to develop payment programs that utilize these technologies (including, among
others, person-to-person payments, micropayments and payments via television
set-top boxes).
Electronic and Mobile Commerce. Our Global e-Business group seeks to
ensure that MasterCard cards can be securely and conveniently used for all kinds
of payments involving new or developing technologies, such as the Internet,
wireless devices, digital wallets, interactive television and personal digital
assistants. We are planning or developing MasterCard payment solutions in each
of these areas through alliances with electronic commerce vendors and service
providers. We are also participating in the establishment of industry standards
for both electronic and mobile commerce.
We are also working to develop mobile commerce standards and programs that
will allow consumers to securely conduct their financial transactions using a
variety of wireless devices. Mobile commerce is the term applied to online
financial transactions -- shopping or the electronic transfer of funds -- using
a mobile device. Our global mobile commerce team works with standards
organizations such as WAP, the Global Mobile Commerce Interoperability Group
(GMCIG), ETSI and others to establish wireless payment standards, and has
entered into alliances with Motorola, 724 Solutions, Sonera Smart Trust,
MobileWay and other members of the mobile commerce chain to develop secure
wireless payment solutions.
Smart Cards. We are working with our members to help them replace
traditional payment cards relying solely on magnetic stripe technology with
smart, or chip-enabled, payment cards. Smart cards provide for more secure
transactions and offer members the opportunity to provide their cardholders with
value-added, customized relationship services associated with the card. Smart
cards can perform many different functions, such as storing cardholders'
personal and purchasing information and allowing banks to provide individualized
rewards programs and merchants to offer personalized incentives. Additionally,
smart cards may offer greater security protections in certain circumstances than
magnetic stripe cards because electronic proof of a cardholder's identity is
carried on the smart card and encrypted before transmission to the issuer,
allowing secure purchases.
We provide an end-to-end strategy for helping our members migrate from
magnetic stripe cards to smart cards in a manner and timeframe that works best
for them. Our chip migratory strategy is based on two fundamental principles:
- ensuring that our chip programs work the same way around the globe; and
- providing choice in terms of which applications and operating systems are
available to our members.
To support the movement to chip-based cards, we have developed The Complete
Chip Solution(TM), a turnkey strategy for helping our members migrate their
MasterCard cards to a chip platform. The Complete Chip Solution is a support
program offering members a suite of payment applications for smart cards,
including debit, credit, stored value and digital identification, which can
operate on MULTOS(TM), Java(TM) and other smart card operating platforms. In
addition, we have developed M/Chip(TM), an integrated credit/debit application
that allows our members to issue chip-based MasterCard, Maestro, and
Cirrus-branded cards that are fully compatible with the EMV
(Europay-MasterCard-Visa) standard. We offer an M/Chip application specifically
designed for the MULTOS platform, and a platform neutral version of M/Chip for
JavaCard and proprietary chip operating systems. We also manage the Chip Vendor
Services Program, through which we coordinate MasterCard's chip strategies with
leading smart card vendors and assist members in implementing chip-based
programs.
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While our strategy is to allow members to choose their own operating system
for their chip programs, we (together with our Mondex affiliate) have played a
leading role in the development of MULTOS, an open, industry-controlled,
high-security, multi-application operating system for smart cards. With MULTOS,
members issuing smart cards are able to combine payment applications from any
service provider (such as credit, debit, stored value and loyalty programs) with
applications from outside the financial services industry (such as security or
storage of personal information). MULTOS is actively promoted by MAOSCO, a
consortium in which we play a significant role. We have also joined with Europay
and Visa to establish EMVCo, a joint working group created to facilitate the
introduction of chip technology in a global payments environment.
As of December 31, 2000, approximately 31 million MasterCard-branded smart
cards were issued worldwide. MYCAL, the fourth largest retailer in Japan,
successfully launched the first MasterCard smart card program using the MULTOS
operating system and M/Chip in 1998, and over one million cards were issued in
connection with this program in 1999. Significant chip migration activities are
now occurring in Brazil, the United Kingdom and other countries, and M/Chip
implementations are taking place in Japan, Korea and South Africa.
INTELLECTUAL PROPERTY
We own a number of valuable trademarks that are essential to our business,
including MasterCard and Cirrus. We own the Maestro trademark through our joint
venture with Europay. MXI owns the Mondex wordmark and we license the
interlocking circles device that, together with the wordmark, make up the Mondex
logo. Through license agreements with our member financial institutions, we
authorize the use of our trademarks in connection with our members' card issuing
and merchant acquiring businesses. Trademarks remain valid so long as they are
used properly for identification purposes, and we emphasize the correct use of
our trademarks both within our company and by our members. In addition, we own a
number of patents relating to payments solutions, transaction processing, smart
cards, security systems and other matters.
COMPETITION
MasterCard programs compete against all forms of payment, including
paper-based transactions (principally cash and checks) and electronic
transactions such as wire transfers and ACH payments. While we believe we have
gained share versus cash and checks in recent years, these forms of payment
still capture the largest overall percentage of worldwide transaction volume.
Within the general purpose payment card industry, we face substantial and
increasingly intense competition worldwide from systems such as Visa, American
Express and JCB, among others. In specific countries, we face significant
competition from other competitors such as Discover/Novus (United States),
Interac (Canada) and Bancard and EFTPOS (Australia). We also encounter
competition from businesses such as retail stores and petroleum (gasoline)
companies that issue their own payment cards, as well as from regional ATM
networks such as NYCE, Concord/EFS and others. Some of our competitors have
substantially greater capital and resources than we have.
In addition, we compete against new entrants that have developed
alternative payment systems, such as PayPal Inc., PayBox, Billpoint and others.
Among other things, these competitors provide Internet currencies that can be
used to buy and sell goods on-line, "virtual checking" programs that permit the
direct debit of consumer checking accounts for on-line payments, and services
that support payments to and from proprietary accounts for Internet, mobile
commerce and other applications. A number of these new entrants rely principally
on the Internet to support their services, and may enjoy lower costs than we do
as a result of our fixed transaction processing and data transport networks.
We also face competition from transaction processors such as First Data
Corporation, some of whom are seeking to build networks that link issuers
directly with point-of-sale devices for payment card transaction authorization
and processing services. These networks may threaten to disintermediate our own
transaction processing functions.
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We believe that the principal factors affecting our competitive position in
the global payments industry are:
- our relationships with our members;
- the relative prices of services and products offered;
- the acceptance base, reputation and brand recognition of the payment
cards;
- the quality of transaction processing;
- the number of issued cards and the extent of consumer and business
spending with the cards;
- the success of marketing and promotional campaigns;
- the integrity of our transaction processing systems and our guarantee of
our principal members' settlement obligations; and
- the ability to develop and implement new card programs, systems and
technologies in both physical and virtual environments.
For additional information on our competitive position, see "Overview of
the Global Payments Industry."
EMPLOYEES
As of June 30, 2001, we employed approximately 3,100 persons, of which
approximately 475 were employed outside the United States. We consider our
relationship with our employees to be good.
PROPERTIES
As of June 30, 2001, MasterCard and its subsidiaries owned or leased 44
properties. These facilities primarily consist of corporate and regional
headquarters offices, as well as our operations centers.
Our corporate headquarters is a three story, 472,600 square foot building
located at 2000 Purchase Street in Purchase, New York. We own the building and
there is no outstanding debt on the facility. Currently, MasterCard leases four
operations centers in St. Louis, Missouri, totaling 361,000 square feet. These
facilities are being replaced by a 528,000 square foot global technology and
operations center known as "Winghaven," which is currently under construction in
O'Fallon, Missouri. Certain areas of the facility have been occupied upon
completion. We plan to fully occupy the facility at the anticipated completion
date in the fourth quarter of 2001. The term of the lease on this new facility
is 10 years commencing on August 31, 1999.
In addition to our corporate headquarters and operations centers noted
above, MasterCard leases a total of 36 other facilities. These facilities
include the following: 32 regional or country offices, 3 operations centers, 1
public affairs office and 2 storage facilities. Included in these totals are 25
facilities outside of the United States. See Note 9 to the audited Consolidated
Financial Statements of MasterCard International.
We believe that our facilities are suitable and adequate for the business
that we currently conduct. However, we periodically review our space
requirements and may acquire new space to meet the needs of our business, or
consolidate and dispose of facilities that are no longer required.
LEGAL PROCEEDINGS
MasterCard is a party to litigation with respect to a variety of matters in
the ordinary course of business. Except as described below, MasterCard does not
believe that any litigation to which it is a party may have a material adverse
impact on our business or prospects.
DEPARTMENT OF JUSTICE ANTITRUST LITIGATION
In October 1998, the DOJ filed suit against MasterCard International, Visa
U.S.A., Inc. and Visa International Corp. in the U.S. District Court for the
Southern District of New York alleging that both MasterCard's and Visa's
governance structure and policies violated U.S. federal antitrust laws. First,
the DOJ
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claimed that "dual governance" -- the situation where a financial institution
has a representative on the board of directors of MasterCard or Visa while a
portion of its card portfolio is issued under the brand of the other
association -- was anti-competitive and acted to limit innovation within the
payment card industry. At the same time, the DOJ conceded that "dual
issuance" -- a term describing the structure of the bank card industry in the
United States in which a single financial institution can issue both MasterCard
and Visa-branded cards -- was pro-competitive. Second, the DOJ challenged
MasterCard's CPP and a Visa bylaw provision that prohibit financial institutions
participating in the respective associations from issuing competing proprietary
payment cards (such as American Express or Discover). The DOJ alleged that
MasterCard's CPP and Visa's bylaw provision acted to restrain competition.
MasterCard denies the DOJ's allegations and believes that both "dual
governance" and the CPP are pro-competitive and fully consistent with U.S.
federal antitrust law.
A bench trial concerning the DOJ's allegations was concluded on August 22,
2000. In response to the judge's request for a proposed remedy, the DOJ
submitted a proposed order that, if implemented, would require MasterCard to
repeal the CPP and Visa to repeal its bylaw. The government's proposed order
also would require all financial institutions with representatives on any
governing MasterCard board or committee (defined as any body having
decision-making authority or access to competitively sensitive information with
respect to MasterCard, unless the activities of that board or committee relate
solely to activities outside the United States) to (i) with regard to new
issuance, issue general purpose cards bearing MasterCard brands exclusively, and
(ii) ensure that by 2003 at least 80% of each such institution's total issuing
volume in the United States and globally is derived from MasterCard-branded
cards. The proposed order would impose parallel requirements on Visa, and would
also require that financial institutions that have signed long-term member
agreements with MasterCard or Visa have a two-year period to exercise
termination rights related to those agreements. MasterCard has objected to the
DOJ's proposed order and believes that the remedies reflected in the order are,
among other things, inconsistent with the evidence of intense competition
offered throughout the trial as well as the testimony of the DOJ's own expert
economist. As of the date of this proxy statement-prospectus, no decision has
been rendered in the trial.
MERCHANT ANTITRUST LITIGATION
Commencing in October 1996, several putative class action suits were
brought by a number of U.S. merchants -- including Wal-Mart Stores, Inc., Sears
Roebuck & Co., Inc., The Limited Inc. and Safeway, Inc. -- against MasterCard
International and Visa U.S.A., Inc. challenging certain aspects of the payment
card industry under U.S. federal antitrust law. Those suits were later
consolidated in the U.S. District Court for the Eastern District of New York.
The plaintiffs challenge MasterCard's "Honor All Cards" rule (and a similar Visa
rule), which ensures universal acceptance for consumers by requiring merchants
who accept MasterCard cards to accept for payment every validly presented
MasterCard card. Plaintiffs claim that MasterCard and Visa unlawfully have tied
acceptance of debit cards to acceptance of credit cards. In essence, the
merchants desire the ability to reject off-line, signature-based debit
transactions (for example, MasterCard card transactions) in favor of other
payment forms, including on-line, PIN-based debit transactions (for example,
Maestro or regional ATM network transactions) which generally impose lower
transaction costs for merchants. The plaintiffs also claim that MasterCard and
Visa have conspired to monopolize what they characterize as the point-of-sale
debit card market, thereby suppressing the growth of regional networks such as
ATM payment systems. Plaintiffs allege that the plaintiff class has been forced
to pay unlawfully high prices for debit and credit card transactions as a result
of the alleged tying arrangement and monopolization practices. There are related
consumer class actions pending in two state courts that have been stayed pending
developments in this matter.
MasterCard denies the merchant allegations and believes that the "Honor All
Cards" rule and MasterCard practices with respect to debit card programs in the
United States are pro-competitive and fully consistent with U.S. federal
antitrust law.
On February 22, 2000, the district court granted the plaintiffs' motion for
class certification. MasterCard and Visa promptly petitioned for an appeal. The
Second Circuit Court of Appeals agreed to consider the
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appeal of the grant of class certification, and a hearing before that court on
the appeal was held in February 2001. As of the date of this proxy
statement-prospectus, the parties are awaiting a decision of the Second Circuit.
Motions seeking summary judgment have been filed by both sides and fully briefed
in the district court. Currently, no argument date for summary judgment has been
set pending resolution of the appeal of the class certification decision and no
trial date has been set.
Based upon publicly available information, the plaintiffs previously have
asserted damage claims in this litigation of approximately $8 billion, before
any trebling under U.S. federal antitrust law. More recent published reports
place the plaintiffs' damage claims at approximately $50 billion. In addition,
the plaintiffs' damage claims could be materially higher than these amounts as a
result of the passage of time and substantive changes in the theory of damages
presented by the plaintiffs. MasterCard believes that it is not currently
possible to estimate the impact, if any, that the ultimate resolution of this
matter will have on MasterCard's results of operations, financial position or
cash flows.
CURRENCY CONVERSION LITIGATION
MasterCard, together with Visa U.S.A., Inc. and Visa International Corp.,
are defendants in two lawsuits that allege that MasterCard and Visa wrongfully
imposed an asserted one percent currency conversion "fee" on every credit card
transaction by U.S. MasterCard and Visa cardholders involving the purchase of
goods or services in a foreign country, and that such "fee" is an unfair,
unlawful and deceptive business practice. The first of these actions, Schwartz
v. Visa Int'l Corp., et al., was brought in the Superior Court of California in
February 2000, purportedly on behalf of the general public. The second action,
Senequier v. Visa Int'l Corp., et al. was commenced in January 2001 in the
Supreme Court of the State of New York and is a purported class action. A trial
date of March 18, 2002 has been set for the Schwartz matter. No trial date has
been set for the Senequier matter. Both these actions claim that the alleged fee
grossly exceeds any costs the defendants might incur in connection with currency
conversions relating to credit card transactions made in non-U.S. countries, is
not properly disclosed to cardholders and is part of an unreasonable restraint
on trade. Plaintiffs seek to prevent the defendants from continuing to engage
in, use or employ the alleged practice of charging and collecting the assessed
one percent currency conversion "fee" and from charging any type of purported
currency conversion "fee" without providing a clear, obvious and comprehensive
notice that a fee will be charged. Plaintiffs also request an order (1)
requiring defendants to fund a corrective advertising campaign; (2) awarding
restitution of the monies allegedly wrongfully acquired by imposing the
purported currency conversion "fee"; and (3) requiring disgorgement of monies
allegedly wrongfully obtained. The complaint asserts that, during the four-year
period that preceded the lawsuit, MasterCard collected approximately $200
million as a result of allegedly imposing the claimed one percent currency
conversion "fee." MasterCard denies these allegations.
MasterCard, Visa U.S.A., Inc., Visa International Corp., several member
banks including Citibank, Chase Manhattan Bank and Bank of America, and Diners
Club are defendants in a number of federal putative class actions that allege,
among other things, violations of federal antitrust laws based on the asserted
one percent currency conversion "fee." The complaints also allege violations of
the Truth-In-Lending Act against the member banks. Six of the actions, Ross, et
al. v. Visa U.S.A., Inc., et al., Kune v. Visa U.S.A., Inc., et al., Chatham v.
Visa U.S.A., Inc., et al., Steinlauf v. Visa U.S.A., Inc., et al., Finkelman v.
Visa U.S.A., Inc., et al., and Lipner v. Visa U.S.A., Inc., et al., were brought
in the United States District Court for the Eastern District of Pennsylvania in
2001. Five other actions, Cooper v. Visa U.S.A., Inc., et al., Ramsey v. Visa
U.S.A., Inc., et al., La Place v. Visa U.S.A., Inc., et al., Salvagio v. Visa
U.S.A., Inc., et al., and Javier, et al. v. Visa U.S.A., Inc. et al., were
brought in the United States District Court for the Northern District of
California in 2001. Five class actions, Wood v. Visa U.S.A., Inc., et al., Oshry
v. Visa U.S.A., Inc., et al., Inducon Park Assocs. Inc. v. Visa U.S.A., Inc., et
al., Matthews v. Visa U.S.A., Inc., et al. and Silberman et al. v. Visa U.S.A.,
Inc. were recently brought in the United States District Court for the Southern
District of New York. The plaintiffs in the Javier action have made a motion
before the judicial panel on multidistrict litigation to transfer the Javier and
Ross cases to a single district court and to consolidate those pending federal
actions. As against MasterCard, the plaintiffs seek damages for an alleged
conspiracy to fix and maintain prices in violation of the Sherman Antitrust Act.
The complaints allege that MasterCard's and Visa's system of dual governance
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inhibits competition between the associations and provides each association with
the ability and incentive to collude and fix the asserted currency conversion
"fee" in violation of antitrust laws. The Silberman action also alleges
violations of the Truth-in-Lending Act against MasterCard. MasterCard denies
these allegations.
MasterCard believes that it is not currently possible to estimate the
impact, if any, that the ultimate resolution of theses matters will have on its
results of operations, financial position or cash flows.
MARKET INFORMATION
There is no established public trading market for our common stock, and we
do not currently anticipate that our common stock will be listed on any
securities exchange or quoted on any automated quotations system or electronic
communications network.
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MASTERCARD SELECTED CONSOLIDATED FINANCIAL AND OTHER INFORMATION
The following table sets forth selected consolidated financial and other
information for MasterCard for each of the five years in the period ended
December 31, 2000 and as of the end of each such fiscal year, and as of and for
the six months ended June 30, 2001 and June 30, 2000 and selected unaudited pro
forma financial data for the year ended December 31, 2000 and as of and for the
six months ended June 30, 2001. The selected consolidated financial data as of
December 31, 2000 and December 31, 1999 and for the fiscal years ended December
31, 2000, December 31, 1999 and December 31, 1998 have been derived from the
audited consolidated financial statements of MasterCard International included
elsewhere in this proxy statement-prospectus. The selected consolidated
financial data as of December 31, 1998, December 31, 1997 and December 31, 1996
and for the fiscal years ended December 31, 1997 and December 31, 1996 have been
derived from the audited consolidated financial statements of MasterCard
International that have not been included in this proxy statement-prospectus.
The selected consolidated financial data for the six months ended June 30, 2001
and June 30, 2000 and as of June 30, 2001 and June 30, 2000 have been derived
from the unaudited consolidated financial statements of MasterCard
International, which in the opinion of management, include all adjustments,
consisting of only normal recurring adjustments, that are necessary for a fair
statement of the results of operations and financial position of MasterCard
International for the periods and at the dates presented. The results of
operations for the six months ended June 30, 2001 are not necessarily indicative
of the results to be expected for the full year. The pro forma adjustments are
based upon available information and certain assumptions that management
believes are reasonable. The information set forth below should be read in
conjunction with "MasterCard Management's Discussion and Analysis of Financial
Condition and Results of Operations," the consolidated financial statements of
MasterCard International and the notes thereto, and other financial information,
including the pro forma consolidated financial information, included elsewhere
in this proxy statement-prospectus.
---------------
(a) Includes a net gain of $8,162 recognized in conjunction with the sale of
MasterCard International's wholly owned subsidiary, Monetary Transfer
Systems L.L.C. ("MTS"), to Honor Technologies, Inc. and Honor Services, Inc.
in October 1997. MTS owned and operated the Bankmate(R) ATM and
point-of-sale debit network.
(b) Includes a net gain of $66,836 recognized in conjunction with MasterCard
International's sale of MasterCard Automated Point-of-Sale Processing
("MAPP") to National Data Corporation ("NDC") in April 1996. This agreement
included the formation of a new payment processing company called Global
Payments Systems L.L.C. ("GPS") which consisted of MAPP and NDC's payment
services, point-of-sale, and back-office services. Also included in net
income is $27,000 in net expense associated with an agreement with Access
Brand Ltd. to acquire the Access(R) brand and to collaboratively market the
MasterCard brand in the United Kingdom.
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MASTERCARD SELECTED STATISTICAL INFORMATION
The table below sets forth, for the year ended December 31, 2000, our GDV,
purchase volume and cash volume and the number of purchase transactions, cash
transactions, accounts and cards on a regional basis. For purposes of the table:
GDV represents purchase volume plus cash volume and includes the impact of
balance transfers and convenience checks; purchase volume means the aggregate
dollar amount of purchases made with MasterCard-branded cards for the relevant
period; and cash volume means the aggregate dollar amount of cash disbursements
obtained with MasterCard-branded cards for the relevant period. Maestro, Cirrus
and Mondex transactions are not included in the following table.
The data set forth in the GDV, Purchase Volume, Purchase Transactions, Cash
Volume and Cash Transactions columns below are derived from information provided
by the members of MasterCard International that is subject to logical and
statistical verification by MasterCard's Global Statistics Unit and
cross-checking against information provided by MasterCard's transaction
processing systems. The data set forth in the Accounts and Cards columns below
are derived from information provided by the members of MasterCard International
and certain limited logical and statistical verification by MasterCard's Global
Statistics Unit. A portion of the data set forth in the table below is
estimated.
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MASTERCARD MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
MasterCard's Consolidated Financial Statements and the accompanying notes
included elsewhere in this proxy statement-prospectus.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Revenue was $856 million for the six months ended June 30, 2001 compared to
$745 million for the six months ended June 30, 2000, an increase of $111 million
or 15%. Our revenue is comprised of operations fees and member assessments.
Operations fees represent user fees for authorization, clearing, settlement
and other member products and services that facilitate transaction and
information management among our members on a global basis. Operations fees were
$517 million for the six months ended June 30, 2001 compared to $457 million for
the six months ended June 30, 2000, an increase of $60 million or 13%. The
increase in operations fees was attributable partially to an 18% increase in the
number of transactions processed, offset by lower average pricing based on our
pricing structure, which rewards members with lower prices for incremental
volume.
Member assessments were $338 million for the six months ended June 30, 2001
compared to $288 million for the six months ended June 30, 2000, an increase of
$50 million or 17%. The increase in member assessments was attributable
primarily to a 13% increase in gross dollar volume ("GDV") between the periods,
which represents gross spending on MasterCard cards for goods and services as
well as cash disbursements. The growth in GDV was driven primarily by a 19%
increase in the number of MasterCard cards issued by members between the
periods. For the six months ended June 30, 2001, member assessments revenue
growth exceeded GDV growth due to a greater percentage of international volume
growth, which is assessed at higher rates. Furthermore, revenues increased as a
result of a shift in the prior year's balance transfer volume to retail sales
volume, for which we receive higher assessable revenues. Balance transfers
represent the movement of credit card balances by a cardholder from one account
to another account, held by a different institution. Increases in member
assessments in the first six months of 2001 were partially offset by lower
average pricing based on our pricing structure, which rewards members with
reduced prices for incremental volume.
Operating expenses were $701 million for the six months ended June 30, 2001
compared to $590 million for the six months ended June 30, 2000, an increase of
$111 million or 19%. Our operating expenses are comprised of general and
administrative, advertising and market development, depreciation and
amortization expenses.
General and administrative expenses consist primarily of personnel,
telecommunications, data processing, travel and professional fees. General and
administrative expenses were $394 million for the six months ended June 30, 2001
compared to $361 million for the six months ended June 30, 2000, an increase of
$33 million or 9%. This increase was primarily attributable to increases in
personnel costs of $30 million resulting from increases in headcount and
compensation. As a percentage of revenue, general and administrative expenses
declined from 48% to 46% for the six months ended June 30, 2000 and 2001,
respectively.
In the six months ended June 30, 2001, we made significant investments in
advertising and market development to support and build value in the MasterCard
family of brands, and to develop new and distinct programs to differentiate
ourselves from our competition. Advertising and market development expenses were
$274 million for the six months ended June 30, 2001 compared to $202 million for
the six months ended June 30, 2000, an increase of $72 million or 36%. This
increase was attributable primarily to additional costs of $23 million
associated with strong performance in card-based and other long-term member
incentive programs as well incremental merchant acceptance initiatives. The
increase was also attributable to increases in network television costs of $13
million associated with new media buys during the SuperBowl and the Grammy
Awards. Finally, our promotions and sponsorship fees increased $24 million
primarily as a result of incremental promotions in the six months ended June 30,
2001, such as the National Hockey League
80
Celebrity Cup Face-off, as well as increased contractual sponsorship fees
associated with the World Cup, Copa America, the National Hockey League, Major
League Baseball and PGA Golf organizations.
Depreciation expense was $18 million for the six months ended June 30, 2001
compared to $17 million for the six months ended June 30, 2000, an increase of
$1 million or 6%, primarily due to purchases of equipment in 2001.
Amortization expense was $15 million for the six months ended June 30, 2001
compared to $10 million for the six months ended June 30, 2000, an increase of
$5 million or 45%. This increase was primarily the result of additional
amortization of capitalized computer software, partially offset by a decrease in
the amortization of franchise rights in 2001 due to the write-down of Mondex
China Pte., Ltd. and Mondex India Pte., Ltd. and Mondex Asia Pte., Ltd.
franchise rights to their estimated fair value in 2000.
Other income and expense was $8 million for the six months ended June 30,
2001 compared to $7 million for the six months ended June 30, 2000, an increase
of $1 million or 11%. Other income and expense comprises primarily interest,
dividend and other investment income related to the portfolio of investments
held, as well as interest expense and minority interest. The increase in other
income and expense was primarily the result of additional investment income
associated with our available-for-sale portfolio of securities.
The effective tax rates for the six months ended June 30, 2001 and June 30,
2000 were 39.2% and 41.5%, respectively. The lower rate for the six months ended
June 30, 2001 was due to a larger amount of tax-exempt interest income than in
the six months ended June 30, 2000 and from the tax benefits of a realized
capital loss that occurred in the six months ended June 30, 2001.
As a result of the foregoing, our net income was $99 million for the six
months ended June 30, 2001 compared to $95 million for the six months ended June
30, 2000, an increase of $4 million or 4%.
In addition, EBITDA, which we define as operating earnings before interest,
taxes, depreciation and amortization, was $187 million for the six months ended
June 30, 2001 compared to $182 million for the six months ended June 30, 2000,
an increase of $5 million or 3%. EBITDA, as defined, is not intended to replace
generally accepted accounting principles, including such measures as net income,
operating income and cash flow. We believe that EBITDA enhances management's
ability to evaluate and direct its business.
On June 29, 2001, MasterCard International acquired all of the outstanding
stock of Mondex International Ltd. ("MXI") that it did not previously own. As a
result of assuming full ownership of MXI, MasterCard International now directly
controls all of MXI's operations and management. This transaction did not have a
material impact on the financial statements of MasterCard International.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenue was $1.571 billion for the year ended December 31, 2000 compared to
$1.389 billion for the year ended December 31, 1999, an increase of $182 million
or 13%.
Operations fees were $969 million for the year ended December 31, 2000
compared to $851 million for the year ended December 31, 1999, an increase of
$118 million or 14%. The increase in operations fees was attributable primarily
to an 18% increase in the number of transactions processed, which increased to
10 billion in 2000 compared to 8.5 billion in 1999. The increase in operations
fees was also the result of the introduction of new services and acceptance
programs, including the implementation of merchant investment fees that are
reinvested in acceptance initiatives. These fees generated $31 million in
additional revenue for the year ended December 31, 2000. Increases in operations
fees in 2000 were partially offset by lower average pricing based on our pricing
structure, which rewards members with lower prices for incremental volume.
Operations fee rebates provided to our members also increased $23 million from
1999 to 2000.
Member assessments were $602 million for the year ended December 31, 2000
compared to $538 million for the year ended December 31, 1999, an increase of
$64 million or 12%. The increase in member assessments was attributable
primarily to an increase in GDV between the periods. GDV was $858 billion for
the year ended December 31, 2000 compared to $726 billion for the year ended
December 31, 1999, an increase of $131 billion or 18%. The growth in GDV was
driven by many factors, one of which was an increase
81
in the number of MasterCard cards issued by members. At December 31, 2000, there
were 438 million MasterCard cards in circulation worldwide compared to 379
million at December 31, 1999, an increase of 59 million or 16%. In addition, the
average spending per card increased 3% between 1999 and 2000. The increase in
GDV was also a result of an increase in balance transfer volume, for which we do
not receive tiered member assessment revenue. Increases in member assessments in
2000 were partially offset by lower average pricing based on our pricing
structure, which rewards members with lower prices for incremental volume.
Member assessment rebates provided to our members also increased $29 million
from 1999 to 2000.
Operating expenses were $1.399 billion for the year ended December 31, 2000
compared to $1.274 billion for the year ended December 31, 1999, an increase of
$125 million or 10%.
General and administrative expenses were $743 million for the year ended
December 31, 2000 compared to $730 million for the year ended December 31, 1999,
an increase of $13 million or 2%. This increase was primarily attributable to
increases in personnel costs of $43 million resulting from increased headcount
and compensation increases between 1999 and 2000, offset by reduced professional
fees of $30 million resulting primarily from the delay in the merchant antitrust
litigation over the same period. In addition, asset impairments of approximately
$19 million and $18 million at December 31, 2000 and 1999, respectively, were
recorded to write-down certain investments. These write-downs were determined by
an impairment analysis prepared by management based on recoverability, primarily
of Mondex Asia Pte., Ltd. in 2000, and Mondex China Pte., Ltd. and Mondex India
Pte., Ltd. in 1999. As a percentage of revenue, general and administrative
expenses declined from 53% to 47% for the years ended December 31, 1999 and
2000, respectively.
In 2000, we made significant expenditures in advertising and market
development to support and build value in the MasterCard family of brands, and
to develop new and distinct programs to differentiate ourselves from our
competition. Advertising and market development expenses were $597 million for
the year ended December 31, 2000 compared to $491 million for the year ended
December 31, 1999, an increase of $106 million or 21%. This increase was
attributable primarily to additional costs of $59 million associated with card-
based and other long-term member incentive programs used to support and develop
customized card programs and other acceptance programs. The increase was also
attributable to increases in network television and print costs of $46 million,
which were associated with the expansion of our global advertising campaign in
many countries and in support of new payment channels, such as e-commerce and
pre-paid programs. Finally, the comparability between 2000 and 1999 was affected
by a $21 million reduction in member incentive accruals in 1999.
Depreciation expense was $35 million for the year ended December 31, 2000
compared to $32 million for the year ended December 31, 1999, an increase of $3
million or 10%. This increase was primarily attributable to depreciation
associated with our corporate headquarters building, which was purchased in
January 2000 for $70 million.
Amortization expense was $25 million for the year ended December 31, 2000
compared to $22 million for the year ended December 31, 1999, an increase of $3
million or 14%. This increase was primarily the result of additional
amortization of capitalized computer software, partially offset by decreases in
the amortization of franchise rights in 2000 due to the write-down of Mondex
China Pte., Ltd. and Mondex India Pte., Ltd. franchise rights to their estimated
fair value in 1999.
Other income and expense was $28 million for the year ended December 31,
2000 compared to $34 million for the year ended December 31, 1999, a decrease of
$6 million or 18%. The decrease in other income and expense was primarily the
result of minority interest, which reflects a decrease in the net loss
associated with Mondex Asia Pte., Ltd., a consolidated MasterCard subsidiary.
This decrease was partially offset by interest expense. Interest expense largely
comprises interest related to our $80 million subordinated debt issuance that
has been outstanding since 1998. See Note 9 of the audited Consolidated
Financial Statements of MasterCard International for additional information.
The effective tax rates for 2000 and 1999 were 41% and 42%, respectively.
The lower rate in 2000 was principally due to the effects of foreign taxes,
income and losses. In 2000 compared to 1999, we had greater taxable income
effectively taxed at a rate lower than the United States statutory rate.
82
As a result of the foregoing, our net income was $118 million for the year
ended December 31, 2000 compared to $86 million for the year ended December 31,
1999, an increase of $32 million or 37%.
In addition, EBITDA was $232 million for the year ended December 31, 2000
compared to $168 million for the year ended December 31, 1999, an increase of
$64 million or 38%. The EBITDA margin percentage was 15% in 2000 compared to 12%
in 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenue was $1.389 billion for the year ended December 31, 1999 compared to
$1.206 billion for the year ended December 31, 1998, an increase of $183 million
or 15%.
Operations fees were $851 million for the year ended December 31, 1999
compared to $737 million for the year ended December 31, 1998, an increase of
$114 million or 15%. The increase in operations fees was attributable primarily
to a 14% increase in the number of transactions processed, which increased to
8.5 billion in 1999 compared to 7.4 billion in 1998. Increases in operations
fees in 1999 were partially offset by lower average pricing based on our pricing
structure, which rewards members with lower prices for incremental volume.
Operations fee rebates provided to our members increased $13 million from 1998
to 1999.
Member assessments were $538 million for the year ended December 31, 1999
compared to $469 million for the year ended December 31, 1998, an increase of
$69 million or 15%. The increase in member assessments was attributable
primarily to an increase in GDV between the periods. GDV was $726 billion for
the year ended December 31, 1999 compared to $650 billion for the year ended
December 31, 1998, an increase of $75 billion or 12%. The growth in GDV was
driven by many factors, one of which was an increase in the number of MasterCard
cards issued by members. At December 31, 1999, there were 379 million MasterCard
cards in circulation worldwide compared to 357 million at December 31, 1998, an
increase of $22 million or 6%. In addition, the average spending per card
increased 5% between 1998 and 1999. The increase in GDV was also the result of
stronger financial performance in the Asia/Pacific region, which began to
recover from its economic crisis in 1998. In 1999, larger international volume
growth resulted in increased pricing and member assessment revenue which
exceeded the growth rate of GDV as compared to the prior year. The increases in
volume growth, and accordingly in member assessment revenue, were partially
offset by a lower domestic pricing structure, which rewards members with lower
prices for incremental volume. Member assessment rebates provided to our members
increased $12 million from 1998 to 1999.
Operating expenses were $1.274 billion for the year ended December 31, 1999
compared to $1.188 billion for the year ended December 31, 1998, an increase of
$86 million or 7%. This increase was primarily due to additional expenditures
for global brand building and member support, as well as investments in
personnel and technology.
General and administrative expenses were $730 million for the year ended
December 31, 1999 compared to $665 million for the year ended December 31, 1998,
an increase of $65 million or 10%. This increase was primarily attributable to
increases in personnel costs of $62 million resulting from increased headcount
and compensation increases and professional fees of $25 million resulting from
increased litigation expenses over the period primarily in connection with
developments in the DOJ and merchant antitrust litigations. These increases were
partially offset by other operating costs of $43 million primarily associated
with decreased costs related to the purchase of the MasterCard Debit Switch,
additional settlement reserves recorded in 1998 primarily due to the Asian
financial crisis and reduced costs related to publications. In addition, asset
impairments of $18 million at December 31, 1999, were recorded to write-down
investments primarily in Mondex China Pte., Ltd. and Mondex India Pte., Ltd. As
a percentage of revenue, general and administrative expenses declined from 55%
to 53% for the years ended December 31, 1998 and 1999, respectively.
Advertising and market development expenses were $491 million for the year
ended December 31, 1999 compared to $477 million for the year ended December 31,
1998, an increase of $14 million or 3%. The increase was attributable primarily
to additional advertising expense of $49 million associated with the expansion
of our global advertising campaign, which was launched in 1997. These increases
were partially
83
offset by decreased expenditures from the prior year largely due to a $21
million reduction in member incentive accruals in 1999.
Depreciation expense was $32 million for the year ended December 31, 1999
compared to $31 million for the year ended December 31, 1998, an increase of $1
million or 3%. This increase was attributable primarily to our continued
investment in new technology.
Amortization expense was $22 million for the year ended December 31, 1999
compared to $15 million for the year ended December 31, 1998, an increase of $6
million or 40%. This increase was primarily the result of additional
amortization expense associated with the capitalization of computer software in
accordance with Statement of Position ("SOP") 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" which was adopted in
1998. This increase was partially offset by decreased amortization expense in
1999 versus 1998 due to the write-down of Mondex China Pte., Ltd. and Mondex
India Pte., Ltd. franchise rights to their estimated fair value in 1999.
Other income and expense was $34 million for the year ended December 31,
1999 compared to $22 million for the year ended December 31, 1998, an increase
of $12 million or 54%. This increase was primarily the result of increases in
investment income and unrealized gains and losses on the portfolio of
investments held, as well as higher minority interest which reflects an increase
in the net loss associated with Mondex China Pte., Ltd. and Mondex India Pte.,
Ltd., consolidated MasterCard subsidiaries. These increases were partially
offset by increased interest expense in 1999 associated with our subordinated
debt issuance in 1998. The 1998 interest expense reflected a partial year of
expense for the subordinated debt issue versus a full year in 1999.
The effective tax rates for 1999 and 1998 were 42% and 40%, respectively.
The higher 1999 rate was principally due to substantially higher pretax income,
resulting in less tax-exempt income as a percentage of pretax income.
As a result of the foregoing, our net income was $86 million for the year
ended December 31, 1999 compared to $24 million for the year ended December 31,
1998, an increase of $62 million or 257%.
In addition, EBITDA was $168 million for the year ended December 31, 1999
compared to $64 million for the year ended December 31, 1998, an increase of
$104 million or 162%. The EBITDA margin percentage was 12% in 1999 compared to
5% in 1998.
LIQUIDITY AND CAPITAL RESOURCES
We need substantial capital resources and liquidity to fund our global
developments, to finance our capital expenditures and any future acquisitions
and to service the payments of principal and interest on our outstanding debt.
We expect that the cash generated from operations, working capital and our
borrowing capacity will be sufficient to meet our capital needs in 2001.
For the six months ended June 30, 2001, net cash provided by operating
activities was $84 million compared to $148 million for the six months ended
June 30, 2000. A lower amount of operating cash was generated primarily due to a
decrease in accrued legal expenses and an acceleration of payments associated
with member incentives. In addition, there was a decrease in accrued expenses in
connection with the implementation of a new financial accounting system in 2000,
which temporarily delayed payments. The smaller increase in deferred income
taxes was a result of increased recognition, for income tax purposes, of tax
deductible expenses that were recorded for financial reporting purposes in
earlier periods.
Net cash used in investing activities was $62 million and $213 million for
the six months ended June 30, 2001 and 2000, respectively. The decrease between
periods was primarily the result of reduced cash outlays for capital
expenditures and investment securities available-for-sale. The decrease in
capital expenditures was due principally to the purchase of our corporate
headquarters building located in Purchase, New York during the first quarter of
2000 for $70 million. Purchases of investment securities available-for-sale
decreased as a result of decreased funds from operating activities between
periods.
84
At December 31, 2000, net cash provided by operating activities was $250
million compared to $77 million and $130 million for the years ended December
31, 1999 and 1998, respectively. The significant increase in 2000 primarily
reflects an increase in net income and a larger increase in accounts payable and
accrued expenses, which was partially offset by increases in accounts
receivable. The increase in accounts payable and accrued expenses were primarily
driven by an increase in accrued expenses related to long-term member incentive
agreements and other expenses, primarily advertising. The increase in accounts
receivable was primarily due to increases in settlement and other member
receivables. The decrease from 1998 to 1999 reflects the impact of higher levels
of accounts receivable at year-end 1999, resulting from increased settlement
receivables and revenue, and decreased expenses related to accrued long-term
member incentive agreements and reserves.
Net cash (used in) provided by investing activities was $(318) million, $34
million and $(204) million for the years ended December 31, 2000, 1999 and 1998,
respectively. The decrease in 2000 was primarily the result of cash outlays for
capital expenditures and investments in securities available-for-sale. The
increase in capital expenditures was due principally to the purchase of our
corporate headquarters building located in Purchase, New York during the first
quarter of 2000 for $70 million. Investment securities available-for-sale
increased as a result of investments made with excess funds. The change between
1999 and 1998 reflected reduced purchases of investment securities
available-for-sale due to decreased cash provided by operating activities in
1999.
For the year ended December 31, 1998, net cash provided by financing
activities of $34 million was due primarily to our issuance of $80 million of
subordinated debt in June 1998, offset by loan principal and interest repayments
of $49 million associated with the borrowing from the MXI transaction. See Note
9 of the Consolidated Financial Statements of MasterCard International for
additional information.
Our financial position continues to reflect strong liquidity. Working
capital, consisting of current assets less current liabilities, was $442 million
at June 30, 2001, $362 million at December 31, 2000, and $312 million at
December 31, 1999, a working capital ratio of 2.1 to 1 compared to 1.8 to 1 and
1.7 to 1, respectively.
To facilitate liquidity management, we maintain a committed credit facility
from certain financial institutions, which we renew annually. Pursuant to this
facility, we have the right to borrow funds to provide liquidity for material
member settlement failures. On June 5, 2001, we renewed the facility for an
additional one year period and increased its amount to $1.2 billion, from $1.0
billion in the prior period. Facility adequacy is regularly reviewed and
increases are obtained as necessary. As of the date of this proxy statement-
prospectus we have not borrowed under this credit facility. In addition to the
committed credit facility, we can draw upon other sources of liquidity such as
emergency borrowings from members, special assessments, and member letters of
credit or guarantees.
ECONOMIC FLUCTUATIONS
Although we cannot precisely determine the impact of inflation on our
operations, we do not believe our operations have been significantly affected by
inflation. For the most part, we have utilized technology and operating
efficiencies to offset increased operating expenses. In addition, a portion of
our revenues is based upon a percentage of GDV processed, which partially
insulates operating margins on these revenues from the effects of inflation.
Portions of our business are seasonal. Our revenue is favorably affected by
progressively increased card purchasing volume throughout the year, particularly
in the fourth quarter during the holiday shopping period.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential for economic losses to be incurred on market
risk sensitive instruments arising from adverse changes in market indices such
as interest rates and foreign currency exchange rates. We have limited exposure
to market risk from changes in both interest rates and foreign exchange rates.
Management establishes and oversees implementation of board of director approved
policies governing our funding,
85
investments, and use of derivative financial instruments and monitors aggregate
risk exposures on an ongoing basis. There have been no material changes in our
market risk exposures at June 30, 2001 as compared to December 31, 2000 and
1999.
We enter into foreign exchange forward and swap contracts to minimize risk
associated with anticipated revenues and expenses and assets and liabilities
denominated in foreign currencies. This activity minimizes our exposure to
transaction gains and losses resulting from fluctuations of foreign currencies
against the U.S. dollar. The terms of the contracts are generally less than 18
months. At December 31, 2000 and 1999, foreign currency forward contracts were
both sold (with notional amounts of $43 million and $28 million, respectively)
and purchased (with notional amounts of $60 million and $67 million,
respectively) to manage a majority of anticipated cash flows in major overseas
markets for the subsequent year.
Our settlement activities may be subject to foreign exchange risk resulting
from foreign exchange rate fluctuations. This risk is limited to the extent that
setting the timing of the foreign exchange rate for financial transactions and
the clearing of settlement positions is typically one business day and is
limited to eleven stable transaction currencies. The remaining 173 transaction
currencies are settled in U.S. dollars or require local settlement netting
arrangements that eliminate our foreign exchange exposure.
Based on the year-end 2000 and 1999 foreign exchange positions, excluding
the currency and interest rate swap since they are no longer outstanding as of
2000, the effect of a hypothetical 10 percent strengthening of the U.S. dollar
is estimated to be a loss valued at $1 million and $3 million at December 31,
2000 and December 31, 1999, respectively.
Our interest sensitive assets are our debt instruments rated AA or above,
which primarily consist of fixed rate short and medium-term notes. With respect
to fixed maturities, our general policy is to invest in high quality securities,
while providing adequate liquidity and maintaining diversification to avoid
significant exposure. Based on the net present value of expected future cash
flows, a 100 basis point increase in interest rates, assuming a parallel shift
of the yield curve, would result in fair value changes and a related pre-tax
loss effect of $10 million and $3 million for 2000 and 1999, respectively.
Additionally, we own trading securities, which are composed of equity
securities held in connection with an executive compensation plan. The effect of
a hypothetical 10 percent change in market value would result in a $6 million
gain or loss for December 31, 2000 and December 31, 1999, respectively.
Offsetting gains or losses would be recorded in compensation expense.
At December 31, 2000, we had a $1.0 billion committed credit facility from
member banks to provide liquidity for material member settlement failures. A
variable rate is applied to the borrowing based on terms and conditions set
forth in the agreement. While we have never utilized this facility, it would be
subject to interest rate fluctuation.
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BUSINESS OF EUROPAY INTERNATIONAL
Europay is a leading payment solutions company in Europe. Headquartered in
Waterloo, Belgium, Europay is owned and controlled by European financial
institutions and serves approximately 1,200 principal members, who participate
directly in its card business, and approximately 2,700 affiliate members, who
participate in Europay's card business indirectly through a principal member.
Europay offers its member financial institutions a full range of payment
programs and services, including ec eurocheque, Maestro, Cirrus and
Eurocard-MasterCard, which they in turn can provide to their
customers -- cardholders and retailers.
Europay's mission is to be its members' preferred partner in providing
innovative payments solutions by offering a tailored range of programs and
support services to enable its members to maximize the return on their payment
system investment. Europay's primary role is to license the above brands to its
members, provide a sophisticated set of information processing and transaction
delivery services to members and establish and enforce rules and standards
surrounding the use of payment cards carrying the brands. Europay also engages
in a variety of marketing activities designed to maintain and enhance the value
of the brands, and plays a leading role in the development of new technologies
aimed at facilitating and expanding electronic and mobile commerce.
Europay has a long-standing strategic alliance with MasterCard, originating
with Eurocard International's alliance with Interbank Card Association,
MasterCard International's predecessor, in 1968 and enhanced by more recent
agreements. Europay has been granted exclusive licensing rights in Europe for
certain MasterCard brands and is responsible for the marketing of these brands
and transaction processing throughout Europe. MasterCard owns a 12.25% equity
interest in Europay and a 15% equity interest in European Payment Systems
Services (EPSS), Europay's transaction processing subsidiary. In addition,
Europay and MasterCard are equal partners in Maestro International, a joint
venture which oversees the global development of the Maestro debit service.
Europay's revenue is comprised principally of operations fees and
assessment fees charged to members. Operations fees represent user fees for
authorization, clearing, settlement, and other member services that facilitate
transaction and information management for Europay members on a global basis.
Member assessment fees are based principally upon the gross volume of
international transactions processed on Europay branded cards.
Europay provides the following services to its members:
- Credit Programs. Europay's credit programs include Eurocard-MasterCard
premium, standard and corporate cards, as well as affinity, co-branded,
and revolving credit cards. Europay recently launched the
Eurocard-MasterCard virtual card program in response to growing consumer
demand for payment solutions on the Internet and in other "remote"
environments where a physical card is not required to validate a
transaction. Europay is also playing a leading role in the migration of
credit payment programs to chip-based technologies.
- Debit Programs. Europay currently manages the Maestro brand in Europe.
Maestro is a leading online debit program with participating issuers,
cards and acceptance locations in 80 countries throughout the world.
Maestro cards are accepted both at the point of sale and at ATMs.
Europay's other debit programs include Cirrus, for use at ATMs worldwide,
ec Pictogram, for use at ATMs within Europe, and ec eurocheque, the
guaranteed paper cheque accepted at retailers throughout Europe and
around the Mediterranean sea. Europay is also playing a leading role in
the migration of debit payment programs to chip-based technologies.
- Pre-paid Programs. In response both to technological advances in the
area of pre-paid payment solutions, including mobile telephony, Internet
and pay-per-use television, and to their increasing popularity among
young customers, Europay has developed a number of pre-paid solutions for
use in the physical and virtual world, including Clip, a stored-value
card or electronic "purse." Europay recently introduced the Maestro
Pre-paid Card, a stored-value card accepted wherever Maestro cards are
accepted. In addition, Europay supports the euro travelers/Thomas
Cook/MasterCard travelers
87
cheque, a pre-paid, paper check distributed by Thomas Cook and available
in pre-determined denominations in major travel destination currencies
that can be replaced if lost or stolen.
- e-Business. e-Business presents Europay and its members with the
opportunity of developing new, more convenient payment solutions and
acceptance channels, such as mobile commerce. Europay seeks to increase
its share of the electronic commerce and mobile commerce payments market,
improve the profitability of members' electronic commerce and mobile
commerce transactions and support the development and implementation of
e-business solutions while controlling the risks of doing business in the
virtual world. A core challenge in this area is to develop security
solutions to address the perceived insecure nature of transactions
carried out over the Internet or wireless networks. Europay is currently
focused on four key areas to support its members:
- enhancing the security of online credit transactions;
- launching Maestro on the Internet and facilitating secure online debit
transactions;
- expanding existing acceptance channels and developing new acceptance
channels for Eurocard-MasterCard and Maestro, such as wireless devices;
and
- developing e-trust services such as digital signatures, secure messaging
and controlled access to on-line systems.
- Payment Services. Europay provides transaction processing services,
consisting primarily of authorization, clearing and settlement, for its
members via its own European Payment Systems Network, or EPS-Net. EPS-Net
is a telecommunications network for data transfer which operates 184
modules, or connection points, at 131 sites in 38 countries. EPS-Net
interfaces with the MasterCard BankNet network for worldwide retail
payment and ATM transaction interchange. Using Europay's transaction
processing services, Europay members facilitate payment transactions
between cardholders and merchants throughout Europe.
- Licensing and Rules. Members of Europay must enter into a license
agreement with respect to Europay programs and services to be offered by
the member. In addition, Europay adopts and enforces rules applicable to
all Europay members relating to a variety of topics where common
procedures and standards are needed to ensure the efficient, equitable
and secure functioning of its system. To ensure that members conform to
its rules, Europay runs an extensive range of compliance and other
programs including reviewing all card programs proposed to be issued by
members. Europay also approves applications for membership in MasterCard
in Europe under authority delegated to it by MasterCard International.
- Security. Europay is continually developing programs and systems to aid
its members and merchants in detecting and preventing the fraudulent use
of Europay branded cards. These include activities such as fraud
investigations and case management, information gathering, analysis and
dissemination, cooperation with domestic and international law
enforcement agencies, and compliance and audit programs for members and
merchants. In order to more effectively assess and respond to fraud
risks, Europay has risk services managers located in each of its regional
offices who promote and support these programs and services. In addition
to its anti-fraud initiatives, Europay provides its members with a
variety of risk management products and services, including security risk
management advice and training for members and law enforcement officials,
the dissemination of information to members relating to potential risks
to the Europay payment system, risk analysis in connection with the
development of new Europay programs and services, and the enforcement of
member compliance with minimum security standards through a mandated Risk
Assessment Management Program (RAMP). Europay also cooperates with other
payment schemes in identifying and addressing common fraud and security
threats.
- Brand Marketing and Sponsorship. Europay offers a fully integrated and
wide ranging marketing package to its member financial institutions.
Sponsorship of the Union of European Football Association (UEFA)
Champions League(TM) and the UEFA EURO 2000(TM) European soccer champion-
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ships along with the Eurocard-MasterCard and Maestro communications
campaigns are designed to transcend regional boundaries and increase the
attractiveness of, and loyalty to, Europay brands. These campaigns also
provide platforms for members to exploit their targeted sales strategies
and increase card acquisition and use.
Europay's origins stem from the mid-1960s, when Europe's modern payments
system began to take shape with the emergence of two principal payment solution
providers: ec eurocheque, a cheque guarantee and paper clearing system, and
Eurocard, a credit card-based payments system. Each of eurocheque and Eurocard
were owned by a separate consortium of European financial institutions, although
both groups included many of the same financial institutions.
By the mid-1980s, the development of magnetic stripe technology, enabling
the portable storage of bank and account information, service codes and security
measures, and the growing demand for an electronic infrastructure to support
magnetic stripe usage signaled the need for a more integrated payments solution.
In 1984, eurocheque began to engage in cross-border ATM transactions. In 1985,
Eurocard created its own electronic authorization and data clearing system. In
1989, eurocheque acquired a 15% equity interest in a new technology company
created to run the Eurocard electronic network, EPSS. By the late 1980s, the
maturing of the card industry and increasing demand for more sophisticated
products and programs convinced European member financial institutions to
combine eurocheque and Eurocard, including EPSS, into a single organization. In
1992, Europay International S.A., a Belgian corporation, was established
following the merger of eurocheque International S.C., eurocheque International
Holdings S.A. and Eurocard International S.A.
As of June 30, 2001, Europay employed approximately 638 persons. Europay's
owned and leased properties consist primarily of its corporate headquarters in
Waterloo, Belgium and ten regional offices located in London, England;
Frankfurt, Germany; Stockholm, Sweden; Madrid, Spain; Rome, Italy; Budapest,
Hungary; Prague, Czech Republic; Istanbul, Turkey; Warsaw, Poland; and Moscow,
Russia.
LEGAL PROCEEDINGS
Europay is a party to litigation with respect to a variety of matters in
the ordinary course of business. Except as described below, Europay does not
believe that any litigation to which it is a party may have a material adverse
impact on its business or prospects.
MULTILATERAL INTERCHANGE FEE
In September 2000, the European Commission issued a "Statement of
Objections" challenging Visa International's multilateral interchange fee
("MIF") under European Community competition rules. The MIF is a fee that is
paid by the merchant bank (the "acquirer") to the cardholder bank (the "issuer")
when a payment is made to a merchant using a payment card. The amount of the MIF
is set by the payment card system as a default fee that will only apply where
the issuer and the acquirer cannot agree on a bilateral interchange fee.
Interchange fees represent a sharing of payment system costs. Among other
elements, interchange fees cover the processing costs of payment card
transactions as well as the costs of the payment guarantee delivered by the
issuer.
Although Europay is not an addressee of the Statement of Objections, its
rules also contain a MIF scheme. Europay has therefore requested that the
European Commission issue a Statement of Objections in its own case should the
Commission have objections to the Europay MIF. However, the European Commission
has to date elected to treat the Visa International case as the "leading"
payment card case and has not issued a separate Statement of Objections
challenging Europay's MIF.
In its Statement of Objections, the European Commission took the view that
the MIF constitutes a "price-fixing" agreement between the banks participating
in the payment card system, and is tantamount to a "tying" arrangement since the
MIF covers both the processing costs of a payment card transaction and the costs
of the payment guarantee delivered by the issuers to the merchants, and thus
"forces" merchants to accept the payment guarantee. On this basis, the European
Commission argued that the MIF could not be exempted from European Community
competition rules and should be eliminated. Europay and MasterCard
89
disagreed with the European Commission's characterization of the MIF. In their
written submissions and at the February 2001 hearing, Europay and MasterCard
sought to demonstrate that (1) the MIF is not a restrictive price agreement but
a necessary and efficient mechanism for allocating the costs of a four-party
card payment system between issuers and acquirers, and (2) the payment guarantee
is essential to ensuring universal card usage, benefits merchants, and cannot be
unbundled.
The European Commission announced on August 10, 2001 its intention to take
a favorable view of Visa's MIF in light of certain changes proposed by Visa,
most notably a reduction in the level of fees. On August 11, 2001, the European
Commission published a notice containing the details of these changes and
invited interested third parties to submit their views to the European
Commission, after which it will issue a formal decision. Assuming the European
Commission does not change its position, the decision would exempt Visa's
modified MIF.
The European Commission's decision in the Visa case would be addressed only
to Visa and would not cover Europay's MIF. However, following its decision in
the Visa case, the European Commission may decide to issue a Statement of
Objections challenging Europay's MIF or enter into negotiations with Europay
seeking changes to Europay's MIF. Alternatively, if the European Commission is
satisfied that Europay's MIF does not need to be modified, it could issue an
exemption or a comfort letter with respect to Europay's MIF. Because the MIF
constitutes an essential element of Europay's payment scheme, changes to it
could significantly impact Europay's members. At this time, it is not possible
to determine what actions the European Commission will take with respect to
Europay's MIF, and therefore the financial impact that any changes would have on
Europay cannot be estimated. In addition, even if the European Commission does
not formally challenge Europay's MIF, private parties could use the decision in
the Visa case to challenge Europay's MIF before national courts or national
competition authorities.
INVESTIGATION BY BELGIAN TAX AUTHORITIES
In April 1999 the Belgian tax authorities initiated an investigation of
Europay's tax returns for 1997 and 1998. In June 2001, Europay received a notice
from the Belgian tax authorities challenging Europay's deduction of certain
card-based incentive program costs which could result in an additional tax
liability of up to approximately E16.3 million, including possible penalties and
interest accrued to December 31, 2000. If Europay's deduction of such costs in
1999 and 2000 is similarly challenged, this could result in a further additional
tax liability of up to approximately E9.5 million, including possible penalties.
Europay is required to respond to the notice by August 27, 2001 prior to
any assessment being levied by the tax authorities. Europay believes that it has
reasonable and meritorious arguments in favor of its characterization of these
deductions and intends to respond vigorously to the notice. However, Europay
cannot predict the outcome of this matter or any additional matters raised by
the Belgian tax authorities in their investigation.
In the event that Europay is unsuccessful in appealing the findings of the
Belgian tax authorities in their investigation, under certain circumstances
MasterCard International could, under its bylaws, levy an assessment upon its
European members for the additional tax liability to the extent that it,
together with other losses and liabilities arising out of the representations
and warranties of Europay in the draft integration agreement, exceeds $7 million
in the aggregate.
MARKET INFORMATION
There is no established public trading market for the common stock of
Europay International.
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EUROPAY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data set forth below for
Europay for the year ended December 31, 2000 and as of December 31, 2000 has
been derived from Europay's audited consolidated financial statements and
related notes which were prepared in accordance with Belgian GAAP. The
consolidated financial statements have been audited by PricewaterhouseCoopers
Reviseurs d'Entreprises, independent accountants, as stated in their report
included elsewhere in this proxy statement-prospectus and should be read in
conjunction with their report. The selected historical consolidated financial
data set forth below for Europay for the two years ended December 31, 1999 and
1998 and as of December 31, 1999 have been derived from Europay's unaudited
consolidated financial statements and related notes which were prepared in
accordance with Belgian GAAP and are included elsewhere in this proxy
statement-prospectus. The selected historical consolidated statement of income
data of Europay set forth below for the two years ended December 31, 1997 and
1996 and consolidated balance sheet data as of December 31, 1998, 1997 and 1996
have been derived from Europay's unaudited consolidated financial statements not
included in this proxy statement-prospectus.
The financial data in the tables below has been derived from Europay's
audited and unaudited consolidated financial statements in accordance with
Belgian GAAP, which differs in certain significant respects from U.S. GAAP.
These differences have a material effect on net income and the composition of
shareholder's equity and are summarized in Note 22 to the Consolidated Financial
Statements of Europay included elsewhere in this proxy statement-prospectus.
This table should be read in conjunction with the "Europay Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of Europay and the related notes included
elsewhere in this proxy statement-prospectus.
Since its inception, Europay has not declared or paid any dividends.
---------------
(1) Prior year balances have been translated from Belgian francs into euros
using the fixed exchange rate on January 1, 1999 of BEF 40.3399 per euro.
See Note 3 to the Consolidated Financial Statements of Europay included
elsewhere in this proxy statement-prospectus.
(2) Europay acts as an agent on behalf of MasterCard for the billing and
collection of inter-regional transactions with members. Europay does not
bear risk and rewards of ownership related to these transactions and
therefore, revenue is reported net under U.S. GAAP. See Note 22 to the
Consolidated Financial Statements of Europay included elsewhere in this
proxy statement-prospectus.
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EUROPAY MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Europay's financial statements and the accompanying notes included elsewhere in
this proxy statement-prospectus. Europay prepares its financial statements in
accordance with Belgian GAAP, which differs in certain significant respects from
U.S. GAAP. For an explanation of the material differences between Belgian GAAP
and U.S. GAAP, See Note 22 to the Consolidated Financial Statements of Europay.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenue consists of operations fees and assessment fees charged to members.
Total revenue was E364.8 million for the year ended December 31, 2000 compared
to E298.2 million for the year ended December 31, 1999, an increase of E66.6
million or 22%.
Operations fees represent user fees for authorization, clearing and
settlement and other member services. Operations fees increased E16.0 million,
or 11%, from E142.9 million for the year ended December 31, 1999 to E158.9
million for the year ended December 31, 2000. The increase in operations fees
was attributable primarily to increases in authorization and clearing
transactions processed of 26% and 33%, respectively, from 637 million
authorization and 678 million clearing transactions for the year ended December
31, 1999 to 802 million authorization and 903 million clearing transactions for
the year ended December 31, 2000.
Assessment fees represent primarily fees charged to issuers and acquirers
based on the gross euro volume of transactions (GEV), as well as card and
currency conversion fees charged to issuers. Assessment fees increased E36.8
million, or 22%, from E170.0 million for the year ended December 31, 1999 to
E206.8 million for the year ended December 31, 2000. This increase was
attributable primarily to the increase in GEV associated with the increase in
clearing transactions processed mentioned above as well as a 14% increase in the
total number of cards issued by members.
There was also a positive variance in the volume discount of E13.8 million
that offsets revenue, as in 2000 Europay began granting specific,
performance-based discounts under agreements with individual members rather than
an overall price discount to all members, which was the case in 1999. The total
of such member incentive discounts was E0.9 million in 2000.
Capitalization of intangible assets consists primarily of the
capitalization of internally developed software amounting to E7.6 million for
the year ended December 31, 2000.
Services and other goods consist primarily of MasterCard costs, marketing
and advertising expenses, professional fees, information technology costs, and
general, administrative, occupancy and travel costs. Services and other goods
increased E55.6 million, or 25%, from E226.8 million for the year ended December
31, 1999 to E282.4 million for the year ended December 31, 2000. This increase
was primarily due to increases in MasterCard costs and marketing, advertising
and sponsorship costs.
In accordance with the terms of its alliance agreement with MasterCard,
Europay is required to fund MasterCard's costs assigned to the Europe region
plus an agreed profit contribution. MasterCard invoices Europay in U.S. dollars
for approximately 99% of the Europe region charges. MasterCard costs increased
E20.7 million, or 25%, from E83.2 million for the year ended December 31, 1999
to E103.9 million for the year ended December 31, 2000. A 13.1% rise in the
average U.S. dollar to euro exchange rates utilized to record MasterCard U.S.
dollar charges in Europay's books of account from 1999 to 2000 accounted for
E12.5 million, or 61%, of the total increase. The balance of the increase was
due primarily to increases in the costs of global functions, products and
services provided to European members and the profit contribution, which were
partially offset by a decrease in global technology operation costs.
Marketing and advertising expenses increased E27.5 million, or 47%, from
E58.5 million for the year ended December 31, 1999 to E86.0 million for the year
ended December 31, 2000. This increase was primarily due to additional costs of
E11.4 million for member card issuance and acceptance incentives and brand
92
development programs, which reflects Europay's continuing efforts to build
issuance, acceptance and brand value, and an increase of E8.9 million for
extended sponsorship of the UEFA European soccer championships. Increased region
and country-specific marketing and advertising efforts, consumer brand and
advertising awareness studies conducted in Europe, pan-European coordination of
regional advertising agencies for the MasterCard advertising campaign and
increased card issuance and acceptance development efforts together accounted
for a further E6.8 million of the increase.
Remuneration, social security and pension costs amounted to E58.9 million
for the year ended December 31, 2000 compared to E50.7 million for the year
ended December 31, 1999, an increase of E8.2 million or 16%. This increase was
primarily attributable to an increase in salary expense and social security
costs related to increases in employee head count together with annual staff
performance salary increases and bonus payments made to management and staff for
meeting performance targets.
Depreciation and amortization expense was E11.1 million for the year ended
December 31, 2000 compared to E9.3 million for the year ended December 31, 1999,
an increase of E1.8 million or 20%. The increase in 2000 versus 1999 was
primarily due to Europay's continuing investment in information technology
equipment and expansion of buildings and facilities to accommodate increases in
staff and equipment as well as the capitalization of internally developed
software.
Financial income decreased E7.3 million, or 95%, from E7.7 million for the
year ended December 31, 1999 to E0.4 million for the year ended December 31,
2000. This decrease was primarily due to scaled back hedging activity in light
of the volatility of the euro to U.S. dollar exchange rate throughout 2000.
The E1.4 million provision for extraordinary liabilities and charges for
the year ended December 31, 2000 represented primarily employee severance
provisions.
The effective tax rates for 2000 and 1999 were 44% and 46%, respectively.
The variance with the statutory tax rate of 40% for both years was primarily due
to expenses that are partially or fully non-deductible under Belgian income tax
regulations, such as leased car costs, entertainment expenses incurred in
Belgium, and gifts.
As a result of the foregoing, Europay's net income increased to E9.7
million for the year ended December 31, 2000 compared to E7.9 million for the
year ended December 31, 1999. Net income attributable to the Europay Group
(Europay and its consolidated subsidiaries), reflecting after tax adjustments
for net income/(loss) from equity investments and minority interest, increased
to E9.3 million for the year ended December 31, 2000 compared to E7.6 million
for the year ended December 31, 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Total revenue was E298.2 million for the year ended December 31, 1999
compared to E245.5 million for the year ended December 31, 1998, an increase of
E52.7 million or 21%.
Operations fees increased E30.1 million, or 27%, from E112.8 million for
the year ended December 31, 1998 to E142.9 million for the year ended December
31, 1999. The increase in operations fees was attributable primarily to
increases in authorization and clearing transactions processed of 25% and 19%,
respectively, from 509 million authorization and 567 million clearing
transactions for the year ended December 31, 1998 to 637 million authorization
and 678 million clearing transactions for the year ended December 31, 1999. The
growth in operations fees also includes increases of E7.5 million in user pay
fees and E6.5 million in risk management fees. The increase in user pay fees
resulted primarily from the introduction of new services in 1999, including chip
card and terminal support services, upper market card services, a risk
assessment management program, and global services. The increase in risk
management fees, which represent fees charged for usage of fraud prevention
services such as stop-lists and warning bulletins used for card blockage, was
driven by increases in the number of credit cards in issue, fraud, and usage by
issuers of our stop-list and warning bulletin services.
Assessment fees increased E37.3 million, or 28%, from E132.7 million for
the year ended December 31, 1998 to E170.0 million for the year ended December
31, 1999. This increase was attributable primarily to the
93
increase in GEV associated with the increase in transactions processed mentioned
above, the introduction of a new currency conversion charge in 1999 and a 12%
increase in the total number of cards issued by members.
The increases in revenues described above were offset by a one-time volume
discount of E14.7 million granted to members in 1999 in response to competitive
pressures in the European market. There were no volume discounts granted in
1998.
Other operating income decreased by E10.2 million, or 91%, from E11.2
million for the year ended December 31, 1998 to E1.0 million for the year ended
December 31, 1999. This decrease was primarily attributable to E9.8 million of
non-recurring revenues from MasterCard for debit switch and chip development
cost sharing and marketing program funding, exhibition and other fees from a
European members' meeting and ticket sales for the 1998 World Cup in France.
Services and other goods consist primarily of MasterCard costs, marketing
and advertising expenses, professional fees, information technology costs, and
general, administrative, occupancy and travel costs. Services and other goods
increased E28.0 million, or 14%, from E198.8 million for the year ended December
31, 1998 to E226.8 million for the year ended December 31, 1999. This increase
was primarily due to increases in MasterCard costs, marketing advertising and
sponsorship expenses and professional fees.
MasterCard costs increased E18.1 million, or 28%, from E65.1 million for
the year ended December 31, 1998 to E83.2 million for the year ended December
31, 1999. This increase was primarily due to increases in the costs of global
functions, global technology operation costs, products and services provided to
European members and the profit contribution, coupled with a 3.7% rise in the
average U.S. dollar to euro exchange rates utilized to record MasterCard U.S.
dollar charges in Europay's books of account from 1998 to 1999.
Marketing and advertising expenses increased E4.3 million, or 8%, from
E54.2 million for the year ended December 31, 1998 to E58.5 million for the year
ended December 31, 1999. This increase was attributable primarily to E10.8
million of additional spending for developing Maestro card activation,
acceptance, communication, PIN migration and transaction service quality,
increases in region and country-specific marketing and advertising efforts and
expanded sponsorship of the UEFA European soccer championships. These increases
were offset by E6.7 million in cost reductions due mainly to a European members'
meeting that took place in 1998 but not in 1999, and a decrease in member
conversion costs to the new Europay-MasterCard brand.
Professional fees increased E5.8 million, or 21%, from E28.1 million for
the year ended December 31, 1998 to E33.9 million for the year ended December
31, 1999. This increase was attributable primarily to increased usage of
contractors and consultants in the areas of chip technology development and
migration, strategy, projects and member training programs.
Remuneration, social security and pension costs increased E9.7 million, or
24%, from E41.0 million for the year ended December 31, 1998 to E50.7 million
for the year ended December 31, 1999. This increase was primarily attributable
to an increase in salary expense and social security costs related to increases
in employee head count together with annual staff performance salary increases
and retention bonuses paid to information technology staff due to market demand.
Depreciation and amortization expense increased E1.0 million, or 12%, from
E8.3 million to E9.3 million in 1999. The increase in 1999 versus 1998 was
primarily due to Europay's continuing investment in information technology
equipment as well as an expansion of buildings and facilities to accommodate
increases in staff and equipment.
Financial income increased E7.6 million from E0.1 million in 1998 to E7.7
million in 1999. This increase was primarily due to a net gain of E5.5 million
on a 12-month forward exchange contract for the purchase of U.S. dollars, which
matured in December 1999. Europay bought this contract at the time of the
introduction of the euro in January 1999 to cover the currency exposure on the
U.S. dollar-based MasterCard costs noted above.
In 1998 Europay owned but no longer occupied its former premises located in
Brussels. In 1998 an independent valuation was made of the building, based on
which Europay made an impairment provision of
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E3.1 million to reflect a permanent diminution in the value of the building. In
July 1999 this building was sold at a loss of E0.1 million, which was included
in the net gain/(loss) on disposal of fixed assets in 1999.
The effective tax rates for 1999 and 1998 were 46% and 86%, respectively.
The higher rate for 1998 and the variance with the statutory tax rate of 40% for
1999 and 1998 were primarily due to expenses that are partially or fully
non-deductible under Belgian income tax regulations, such as leased car costs,
entertainment expenses and gifts.
As a result of the foregoing, our net income increased to E7.9 million in
1999 compared to E0.3 million in 1998. Net income attributable to the Europay
Group (Europay and its consolidated subsidiaries), reflecting after tax
adjustments for net income from equity investments and minority interest,
increased to E7.6 million in 1999 compared to E0.3 million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Europay expects that cash generated from operations, working capital and
its borrowing capacity will be sufficient to meet our operational and capital
needs in 2001.
Net cash provided by/(used in) operating activities for the year ended
December 31, 2000 was E62.1 million, as compared to E43.7 million and (E0.7)
million for the years ended December 31, 1999 and 1998, respectively. In
addition to the increase in net income before taxation, the E18.4 million
increase in 2000 was attributable primarily to a significant increase in other
amounts payable and a larger decrease in deferred soccer sponsorship charges,
offset by an increase in trade debtors attributable to the 22% increase in
revenues, an increase in other amounts receivable and a smaller increase in
suppliers versus 1999. The increase in other amounts payable was primarily due
to continuing increases in member settlement security deposits and member
settlement payables related to the introduction in 2000 of a same day settlement
service called "Euro D0" for euro-currency transactions. This new service
results in settlement receivables and payables arising from the two-day delay in
the settlement of issued and acquired transactions between euro-currency members
that settle on a same-day basis and non-euro currency members that settle two
days later. The increase in other amounts receivable was primarily due to member
settlement receivables related to the Euro D0 settlement service introduced in
2000, partially offset by a decrease in value added tax (VAT) receivable. The
E44.4 million increase in 1999 was attributable primarily to an increase in net
income before taxation, a decrease in trade debtors and deferred soccer
sponsorship charges versus increases in both in 1998 and a larger increase in
other amounts payable, partially offset by an increase in other amounts
receivable due mainly to two quarters of recoverable VAT receivable at the end
of 1999 rather than one, as was the case in 1998, and a smaller increase in
suppliers versus 1998. The decrease in trade debtors was attributable to
payments received on receivables from MasterCard and Maestro partially offset by
an increase in receivables from trade customers arising from the 16% increase in
revenues. The increase in other amounts payable was mainly due to the increase
of member settlement security deposits.
Net cash used in investing activities was E17.9 million, E16.8 million and
E13.2 million for the years ended December 31, 2000, 1999 and 1998,
respectively. The E1.1 million increase from 1999 to 2000 was principally due to
the capitalization of internally developed software for E7.6 million, offset by
the redemption of a short-term cash deposit for E7.0 million. The E3.6 million
increase from 1998 to 1999 was principally due to the investment in a short-term
cash deposit for E7.0 million, partially offset by proceeds from the sale of
Europay's former premises in Brussels of E3.8 million.
Net cash provided by/(used in) financing activities for the years ended
December 31, 2000, 1999 and 1998 was E34.8 million, (E19.4) million and E19.3
million, respectively. The E54.2 million increase from 1999 to 2000 was the
result of a E36.6 million net increase in the bank overdraft, which is primarily
attributable to Euro D0 settlement activity, and a E19.8 million payment on the
short-term bank loan that was required in 1999 with none in 2000. These
increases were partially offset by the reclassification of stockholder loans
totaling E2.5 million to other amounts payable in current liabilities as the
loans will be repaid in 2001. The (E38.7) million decrease from 1999 to 2000 was
attributable primarily to the 1999 repayment of a E19.8 million short-term bank
loan taken in 1998.
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Europay's financial position continues to reflect satisfactory liquidity.
Cash flow generated from operations provides a significant source of liquidity
to meet Europay's needs. Working capital, consisting of current assets less
current liabilities, was E4.8 million at December 31, 2000 and E3.4 million at
December 31, 1999. Europay has substantially no long-term debt. In addition,
Europay can draw upon other sources of liquidity, such as a E35 million credit
line for short term corporate cash requirements, a E40 million credit line to
cover day-to-day positions involved in member settlement activity, emergency
borrowings from members and special assessments. In addition, Europay may draw
on member settlement deposits, letters of credit and guarantees in connection
with certain member failures.
ECONOMIC FLUCTUATIONS
INFLATION
Due to the worldwide shortage of information technology skills, information
technology personnel costs are increasing faster than inflation. However, these
costs are to a great extent offset by productivity gains. Otherwise, Europay
does not believe inflation has a significant impact on its operations, as both
its costs and revenues will be impacted in a similar manner.
ECONOMIC GROWTH
Europay revenues depend heavily on cross-border transactions and volume,
which are influenced by card issuance, cardholder travel and expenditure
patterns. Cross-border travel, both business and leisure, is sensitive to the
economic context. High interest rates tend to discourage cardholder spending. A
slowdown of the economy will negatively impact cross-border traffic, and
therefore the growth of Europay's revenues. However, Europay has not identified
a clear correlation between GDP growth and card transactions. Europay believes
the reason for this is that the overriding drivers for transaction growth in the
last ten years have been (i) the growth of cards issued, with double digit
year-on-year growth, and (ii) a steady increase of the share of payments by card
versus other payment instruments (mainly cash and checks).
SEASONAL BUSINESS
Two seasonal patterns are evident in Europay's business. Cross-border card
transaction traffic shows a peak in the summer holiday months, with August being
the peak month, and domestic traffic shows a peak in December, which is
attributable to Christmas shopping.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential for economic losses to be incurred on market
risk sensitive instruments arising from adverse changes in market indices such
as interest rates and foreign currency exchange rates. Europay has exposure to
market risk arising from fluctuations in interest rates and foreign exchange
rates. Europay management's policy is to monitor Europay's foreign exchange risk
relating to the primary transaction currencies, specifically the U.S. dollar,
Swiss franc and pound sterling, and to budget annual expenditures in these
currencies based on forecasted euro exchange rates. Derivative financial
instruments are utilized to mitigate the risk associated with variances to the
forecasted exchange rate. In accordance with management policies, the finance
department has responsibility for monitoring and mitigating the exposure to
foreign exchange risk, including the use of derivative financial instruments. As
a result of changes in international settlement procedures implemented during
2000 to reduce the processing time for the clearing and settlement of credit
card transactions, Europay has increased risk exposure relating to fluctuations
in foreign currency exchange rates for the year ended December 31, 2000 as
compared to December 31, 1999.
Europay is primarily exposed to the foreign exchange risk arising from the
translation of foreign currency transactions into the euro. Based on Europay's
year end foreign exchange position, the effect of a ten percent weakening in the
value of the euro is estimated to be a loss of E20.3 million and E13.2 million
at December 31, 2000 and December 31, 1999, respectively.
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Included in the foreign exchange risk discussed above is Europay's exposure
to changes in the U.S. dollar versus euro exchange rate related to the
obligation under its alliance agreement with MasterCard. Europay utilizes
foreign currency option contracts to reduce the foreign exchange risk associated
with the U.S. dollar denominated anticipated expenses under this agreement.
These transactions seek to minimize the exposure of Europay to losses resulting
from a strengthening of the U.S. dollar against the euro. At December 31, 2000
Europay had outstanding purchased foreign currency option contracts with a
notional amount of E53.2 million. As of December 31, 2000, Europay's exposure
with respect to these foreign currency option contracts, assuming a ten percent
increase/(decrease) in the U.S dollar versus euro exchange rate, was (E1.3
million) and E3.7 million, respectively. There were no derivative contracts
outstanding as of December 31, 1999.
Europay utilizes written foreign currency option contracts to offset the
cost of hedging transactions. These instruments do not meet the requirements for
hedge accounting under U.S. GAAP and therefore are classified as trading
securities. Europay is exposed to the risk of loss on these contracts resulting
from movements in the U.S. dollar versus euro exchange rate. As of December 31,
2000, a ten percent increase in this exchange rate would result in a loss of
E4.8 million while a ten percent decrease in the exchange rate would generate a
loss of E1.9 million.
Europay's international settlement activities are subject to foreign
exchange risk resulting from foreign exchange rate fluctuations. This risk is
limited to the extent that the timing difference between the setting of the
foreign exchange rate for financial transactions and the clearing of settlement
positions is typically one business day and is limited to nine foreign
currencies plus the euro. The remaining 174 transaction currencies are settled
in one of these ten payment currencies. As of December 31, 2000, a ten percent
fluctuation of the exchange rate for these foreign settlement currencies would
result in a loss of E2.2 million. The majority of this exposure relates to the
settlement of Swiss francs, pound sterling and U.S. dollars. The risk of loss,
assuming a ten percent movement of the exchange rate, related to these
currencies as of December 31, 2000 was E0.5 million, E0.4 million and E1.1
million, respectively. As of December 31, 1999, there were no timing differences
between the setting of the foreign exchange rate for transactions and the
clearing of settlement positions. As a result there was no risk exposure to
fluctuations in the foreign currency exchange rates relating to international
settlement activities.
Europay has a E35 million credit line with a bank to cover short-term cash
needs. As of December 31, 2000 and December 31, 1999, no funding was obtained
from this credit line. Europay has limited market risk related to changes in
interest rates as borrowings and deposits are for relatively small amounts and
generally have a maturity of less than one month.
During 2001, Europay has obtained an additional E40 million credit line
from its principal bankers to cover the technical overdrafts created by the
introduction of same day settlement for the euro. On average, about E25 million
of this credit line is used. A variable rate is applied to the borrowing, based
on terms and conditions set forth in the agreement. While Europay is subject to
interest rate fluctuation on this credit line, an agreement was reached with the
members that the cost of this credit line can be recovered from the members.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of MasterCard Incorporated after the
conversion and integration will be the same as the directors and executive
officers of MasterCard International before the conversion and integration,
except for the addition of two voting directors affiliated with European members
and the addition of Dr. Peter Hoch, currently Chief Executive Officer of
Europay, who will be President of MasterCard's Europe region and a non-voting
director. The certificate of incorporation of MasterCard International requires
MasterCard Incorporated, as the sole class B member, to elect the directors of
MasterCard Incorporated to serve as the directors of MasterCard International.
MasterCard Incorporated will have a board comprised of 18 voting directors. The
two voting board positions that are currently vacant will be filled by persons
affiliated with European members who will be appointed by the existing board of
MasterCard Incorporated in its discretion. The terms of all directors expire at
the annual meeting of stockholders in 2002.
The following table sets forth certain information regarding the executive
officers and directors of MasterCard Incorporated and MasterCard International
after the conversion and integration.
BOARD OF DIRECTORS
Biographies of the directors of MasterCard Incorporated after the
conversion and integration are set forth below. All of the following persons are
currently directors or non-voting advisory directors of MasterCard
International. With the exception of Mr. Selander, the President and Chief
Executive Officer of MasterCard
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Incorporated, Mr. Boudreau, the Chairman Emeritus, and Mr. Hoch, the Chief
Executive Officer of Europay, all MasterCard Incorporated directors are
presently employees of members of MasterCard International.
Lance L. Weaver is a Senior Vice Chairman of MBNA America Bank, N.A. and
Chairman of the board of MasterCard Incorporated. Mr. Weaver was first elected
to the MasterCard International board of directors in 1997 and was elected
chairman of the board of MasterCard International in 2001. Before joining MBNA
America Bank in 1991, Mr. Weaver held various management positions with Wells
Fargo and Citicorp/ Citibank. He is director of MBNA America Bank and MBNA
Information Services. He also serves on the board of directors of the Christiana
Care Corporation and the Wilmington Renaissance Corporation. He is a member of
the Georgetown University Board of Regents and the Tower Hill School Board of
Trustees.
Baldomero Falcones Jaquotot is Director General of Banco Santander Central
Hispano and a member of its Executive Committee, and Vice Chairman of the board
of MasterCard International. He has been a member of the MasterCard
International board of directors since 1997. Mr. Falcones also serves as
Chairman of Sistemas Espanoles de Tarjetas Inteligentes (S.E.T.I.), Chairman of
Europay Espana, Chairman of Aquanima Holding, S.A. and Aquanima Iberica, S.A.
and as a director and a member of the Executive Committee of Europay
International S.A. He is a director of Union Fenosa, S.A., La Estrella, S.A. de
Seguros, Central Hispano Vida, S.A., Central Hispano Seguros Generales, S.A.,
Sistema 4B, S.A., Universia, S.A. and B2BF, S.A.
Donald L. Boudreau is Chairman Emeritus and a non-voting advisory director
of MasterCard Incorporated. Mr. Boudreau has served on the MasterCard
International board of directors since 1997 and was the Chairman of the
MasterCard International board of directors from April 1998 to March 2001. Mr.
Boudreau recently retired as a Vice Chairman of The Chase Manhattan Corporation
and The Chase Manhattan Bank, where he was a member of the Executive Committee.
Mr. Boudreau served in a variety of positions during his 40 year career at
Chase, and most recently was responsible for all of Chase's small and consumer
and middle market businesses. Mr. Boudreau is Chairman of the New York City
Blood Donor campaign, a member of the board of directors of the New York City
Blood Center, and a member of the board of trustees of the New York Presbyterian
Hospital, Pace University, the National Urban League and the United Way of
Tri-State.
Robert W. Selander will be President and Chief Executive Officer of
MasterCard Incorporated and presently holds the same position at MasterCard
International. Mr. Selander has served on the MasterCard International board of
directors since 1997. Prior to his election as President and Chief Executive
Officer of MasterCard International, Mr. Selander was an Executive Vice
President and President of the MasterCard International Europe, Middle
East/Africa and Canada regions. He also currently serves as a director of
Hartford Financial Services Group and Europay International. Before joining
MasterCard in 1994, Mr. Selander spent two decades with Citicorp/Citibank, N.A.
William F. Aldinger is the Chairman and Chief Executive Officer of
Household International. Mr. Aldinger was first elected to the MasterCard
International board of directors in 1998 and is a former member of MasterCard
International's U.S. region board of directors. Mr. Aldinger joined Household
International in 1994, and prior to that time served in various positions at
Wells Fargo Bank, including Vice Chairman. Mr. Aldinger is a member of the
boards of directors of Illinois Tool Works, Inc. and Evanston Northwestern
Healthcare. He is a member of the combined boards of directors of Children's
Memorial Medical Center/Children's Memorial Hospital and the Children's Memorial
Foundation located in Chicago. Mr. Aldinger is also a member of the board of
trustees of Northwestern University and the J.L. Kellogg Graduate School of
Management.
Hiroshi Arai is the Chairman of the Board of Orient Corporation, a position
he has held since 1999. Mr. Arai has been a member of the MasterCard
International board of directors since 1999 and is currently a member of
MasterCard International's Asia/Pacific region board of directors. Prior to
joining Orient Corporation in 1993, Mr. Arai was employed for forty years with
Dai-ichi Kangyo Bank, where he held various positions including Deputy
President.
David A. Coulter is Vice Chairman of J.P. Morgan Chase & Co. and head of
its retail and middle market business, as well as its Internet initiatives. Mr.
Coulter has been a member of MasterCard International's
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board of directors since 2001. Prior to the merger between J.P. Morgan and The
Chase Manhattan Corporation, Mr. Coulter was Vice Chairman of The Chase
Manhattan Corporation and The Chase Manhattan Bank. In 1999 and 2000, Mr.
Coulter was a partner of The Beacon Group. From 1996 to 1998, Mr. Coulter was
Chairman and Chief Executive Officer of BankAmerica Corporation. He is a
director of PG&E Corporation and Pacific Gas and Electric Company. Mr. Coulter
also serves on the boards of directors of the San Francisco Art Institute, the
Asia Society and the National Mentoring Partnership, and is a member of The
Business Council. He is also a trustee of Carnegie Mellon University and the
Public Policy Institute of California.
William R. P. Dalton is Chief Executive of HSBC Bank plc (formerly Midland
Bank plc) and a director of HSBC Holdings plc. Mr. Dalton was first elected to
the MasterCard International board of directors in 1998. Prior to joining HSBC
Bank plc, Mr. Dalton served as President and Chief Executive Officer of HSBC
Bank Canada. Mr. Dalton is Chairman of HSBC Asset Finance (UK) Limited and
Deputy Chairman of Merrill Lynch HSBC Limited and is also a director of HSBC
Investment Bank Holdings plc and Credit Commercial de France. He is President of
the Chartered Institute of Bankers and Chairman of Young Enterprise in the
United Kingdom. In addition, Mr. Dalton is a Fellow of the Institute of Canadian
Bankers and a Fellow of the Chartered Institute of Bankers.
Augusto M. Escalante Juanes is Deputy President, Consumer Product and
Marketing Areas, Banco Nacional de Mexico, S.A. Mr. Escalante Juanes was elected
to the MasterCard International board of directors in 2001 after having
previously served on the board from April 1998 to March 1999, and is currently
chairman of MasterCard International's Latin America and Caribbean region board
of directors. At Banco Nacional de Mexico, Mr. Escalante Juanes is responsible
for all consumer products, both deposit and credit, and all marketing and
advertising for the Financial Group of Banco Nacional de Mexico. He was
previously Deputy President, Bank Card and Electronic Services Area, and Deputy
President, Consumer Loans Area of Banco Nacional de Mexico.
Jan A.M. Hendrikx is Chief Executive Officer of EURO Kartensysteme. Mr.
Hendrikx was first elected to the MasterCard International board of directors in
2001. Mr. Hendrikx joined EURO Kartensysteme in 1997 as chief executive officer
and prior to that time served as a consultant for Gemini Consulting in London
and in senior positions in the European offices of Visa International and
Citibank. He has served on the Europay International board of directors since
1998.
Jean-Pierre Ledru is Senior Executive Vice President of Caisse Nationale de
Credit Agricole. He has served on the MasterCard International board of
directors since 1991. In addition, Mr. Ledru is Chairman of Cedicam, Chairman
and C.E.O. of Europay France, Chairman of Europay International, and Vice
Chairman of the Groupement des Cartes Bancaires. In addition, Mr. Ledru is
Executive Vice Chairman of BMS (Billetique Monetique Services) and a member of
the board of directors of AROP (Association pour le Rayonnement de l'Opera
National de Paris).
Norman C. McLuskie is a Director of The Royal Bank of Scotland Group plc,
The Royal Bank of Scotland plc and National Westminister Bank plc. Mr. McLuskie
was first elected to the MasterCard International board of directors in 2000.
Following the acquisition of Natwest by the Royal Bank of Scotland in March
2000, he was appointed Chief Executive of Retail Direct, a division of the Royal
Bank of Scotland Group encompassing its card and consumer finance businesses,
among others. Mr. McLuskie's other directorships include: Chairman of RoyScot
Financial Services Ltd, Chairman of RBS Advanta, Chairman of RBS Cards Ltd,
Chairman of the Trustees of the RBS Pension Fund, Chairman of Virgin Direct
Personal Finance Ltd, Deputy Chairman of Tesco Personal Finance and Director of
Worldpay Group plc. Mr. McLuskie is also Vice Chairman of Europay International.
John Francis Mulcahy is Head of Australian Financial Services Division,
Commonwealth Bank of Australia. He has served on the MasterCard International
board of directors since 1998 and is currently a member of MasterCard
International's Asia/Pacific region board of directors. Prior to joining the
Commonwealth Bank of Australia in 1995, Mr. Mulcahy was Chief Executive Officer
of Lend Lease Property Investment Services. He currently serves as a director of
IPAC Securities Limited, EDS Australia Pty. Limited and TCNZ Australia Pty
Limited.
100
Robert W. Pearce is President of Distribution in the Personal & Commercial
Client Group for Bank of Montreal. He has served on the MasterCard International
board of directors since 1999. He previously served as Executive Vice-President
of North American Electronic Banking Services for Bank of Montreal and was
responsible for Bank of Montreal's MasterCard Cardholder and Merchant Services
lines of business, Debit Card business, and Electronic Banking.
Robert B. Willumstad is Chief Executive Officer of Citigroup's Consumer
Group, overseeing its North American cards businesses, Citibanking North
America, CitiFinancial, Citigroup's Mortgage Banking business, Primerica
Financial Services, and its international consumer finance business, and has
product responsibility for global cards and its e-consumer unit that provides
Internet payment solutions and financial services offerings across all the
consumer businesses. Mr. Willumstad has served on the MasterCard International
board of directors since 1999. Mr. Willumstad was Vice Chairman of Travelers
Group prior to the merger between Citicorp and Travelers Group, where he has
been for fourteen years. Prior to joining Travelers Group, Mr. Willumstad served
in various positions with Chemical Bank for twenty years, last holding the
position of President of Chemical Technologies Corporation.
Mark H. Wright is President and Chief Executive Officer of USAA Federal
Savings Bank, and serves as Vice Chairman of USAA Federal Savings Bank's board
of directors. He also serves as Chairman of the Board of USAA Savings Bank. Mr.
Wright has been a member of the MasterCard International board of directors
since 1996, is chairman of the audit committee of MasterCard International's
board, and is currently a member of MasterCard International's U.S. region board
of directors. He is on the board of the Alamo Bowl in San Antonio. Mr. Wright
also serves as a trustee on the board of Our Lady of the Lake University in San
Antonio. Mr. Wright is a member and Vice President of the Thrift Institutions
Advisory Council appointed by the Federal Reserve Bank.
Ronald N. Zebeck is Chairman and Chief Executive Officer of Metris
Companies Inc., as well as Chief Executive Officer of Direct Merchants Credit
Card Bank. Mr. Zebeck has served on the MasterCard International board of
directors since 1997 and is currently a member of MasterCard International's
U.S. Region board of directors. Prior to joining Metris Companies Inc. in 1994,
Mr. Zebeck held various credit card related positions at Citicorp, Advanta and
General Motors.
EXECUTIVE OFFICERS
Biographies of the executive officers of MasterCard Incorporated and
MasterCard International after the conversion and integration other than Mr.
Selander are set forth below. Each of the following officers currently hold the
same position with MasterCard International before the conversion and
integration that they will hold in MasterCard Incorporated and MasterCard
International after the conversion and integration, except for Dr. Peter Hoch,
who is currently the Chief Executive Officer of Europay International.
Denise K. Fletcher will be Executive Vice President and Chief Financial
Officer of MasterCard Incorporated and a member of MasterCard's Executive
Management Group. Ms. Fletcher will be responsible for the corporate finance,
planning, audit, purchasing and new markets and investments functions at
MasterCard. Prior to joining MasterCard in 2000, Ms. Fletcher spent four years
as Senior Vice President and Chief Financial Officer of Bowne & Company, the
world's largest financial printer, with responsibility for finance and strategy.
She serves on the boards of directors of Girl Scouts USA and the YWCA of the
City of New York.
Noah J. Hanft will be Senior Vice President, General Counsel and Secretary
of MasterCard Incorporated. Mr. Hanft has served in various increasingly senior
legal positions at MasterCard since 1984, except for 1990 to 1993, when Mr.
Hanft was Senior Vice President and Assistant General Counsel at AT&T Universal
Card Services. Prior to joining MasterCard, Mr. Hanft was associated with the
intellectual property law firm of Ladas & Parry in New York.
Alan J. Heuer will be Senior Executive Vice President of MasterCard
Incorporated and a member of MasterCard's Executive Management Group. Mr. Heuer
will be responsible for MasterCard's Customer Group, which encompasses all
member relations, global marketing and consulting/cardholder services
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functions, as well as MasterCard's regional activities. Mr. Heuer joined
MasterCard in 1995. Prior to that time, Mr. Heuer served as Executive Vice
President, Retail Banking, for the Bank of New York.
Dr. Peter Hoch will be President of MasterCard's Europe region and a member
of MasterCard's Executive Management Group. Dr. Hoch will also be a non-voting,
advisory director of MasterCard Incorporated. Dr. Hoch was a Vice Chairman of
Europay International from 1992 until 2000, and became Europay's Chief Executive
Officer in November 2000. From 1984 to 1999, Dr. Hoch was a member of the board
of management of Hypo-Bank AG, responsible for information technology and
payment systems, among other things. He helped to oversee the merger between
Hypo-Bank and Bayerische Vereinsbank to form Hypo Vereinsbank, and served on the
management board of Hypo Vereinsbank in 1998 and 1999. Dr. Hoch is currently a
member of the board of directors of Giesecke & Devrient.
Jerry McElhatton will be Senior Executive Vice President of MasterCard
Incorporated and a member of MasterCard's Executive Management Group. Mr.
McElhatton will be responsible for MasterCard's Global Technology and Operations
group, which includes the St. Louis transaction processing facility. Before
joining MasterCard in 1994, Mr. McElhatton was President and Chief Executive
Officer of Dallas-based Payment Systems Technology & Consulting, Inc. Mr.
McElhatton currently serves on the board of directors of Ignite Sales, Inc. and
Mascon, a development firm based in India; the board of directors of St. Louis
University; the board of directors of the Regional Commerce and Growth
Association in St. Louis; the National Council for the Olin School of Business
of Washington University in St. Louis; and the boards of directors of Rainbow
Village in St. Louis and the United Way (St. Louis).
Michael W. Michl will be Executive Vice President of MasterCard
Incorporated and will be a member of MasterCard's Executive Management Group.
Mr. Michl will be responsible for MasterCard's Central Resources unit,
encompassing the communications, global human resources and corporate services
functions. Mr. Michl joined MasterCard in 1998 from Avon Products, where he was
Vice President of Human Resources.
Christopher D. Thom will be Senior Executive Vice President of MasterCard
Incorporated and a member of MasterCard's Executive Management Group. Mr. Thom
will be responsible for MasterCard's Global Development Group, which manages the
brand and program development functions at MasterCard, as well as MasterCard's
initiatives in the areas of electronic commerce, mobile commerce and chip-based
smart cards. Prior to joining MasterCard in 1995, Mr. Thom served in a variety
of positions at HSBC Group in the United Kingdom, including as general manager,
Strategic Development and general manager, Retail. In the latter position, Mr.
Thom was responsible for the core banking services and products delivered
through HSBC's branch network, as well as HSBC's card service, private banking
and other businesses. Mr. Thom is a director of Global Payment Systems LLC and
MXI.
Spencer Schwartz will be Senior Vice President and Controller for
MasterCard Incorporated. Mr. Schwartz will be primarily responsible for all
accounting and financial control functions at MasterCard. Prior to assuming the
Controller position for MasterCard International in 2000, Mr. Schwartz was the
Vice President of Taxation for MasterCard International. Before joining
MasterCard in 1996, Mr. Schwartz headed the tax department for Carl Zeiss, Inc.,
operated his own accounting and tax firm and held various positions with Price
Waterhouse.
COMMITTEES OF THE BOARD
The board of MasterCard Incorporated is authorized to designate from among
its members an executive committee, which will have all the authority of the
board of directors, and other committees. The Chairman of the board will be an
ex officio member of all committees. The board of MasterCard Incorporated will
have the same committees with the same functions and members as MasterCard
International had before the conversion. In addition, the board of MasterCard
Incorporated may appoint additional regular committees of the board of
MasterCard Incorporated. The committees of the board are described below.
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EXECUTIVE. The executive committee may exercise the authority of the board
of directors when the board is not in session, as permitted by law and the
bylaws of MasterCard Incorporated. At present, the board of MasterCard
Incorporated does not expect to appoint an executive committee.
AUDIT. The audit committee will assist the board of directors in
fulfilling its oversight responsibilities. Among other things, it will review
the activities, results and effectiveness of internal and external auditors,
confirm the independence of the external auditors and recommend to the board of
directors the appointment of the external auditors. The audit committee will
also review MasterCard Incorporated's key risks and controls and its quarterly
and annual financial statements. The members of the audit committee are expected
to be Messrs. Weaver, Wright, Boudreau, McLuskie, Pearce and Zebeck.
COMPENSATION. The compensation committee will establish the compensation
policies and criteria of the Chief Executive Officer and other executive
officers of MasterCard Incorporated. The members of the compensation committee
are expected to be Messrs. Weaver, Aldinger, Boudreau and Falcones.
NOMINATING. The nominating committee will consider and nominate
individuals to serve as directors of MasterCard Incorporated for approval by the
class A and class B stockholders at the annual meeting of stockholders, based
upon proposals made by each regional board of MasterCard Incorporated. The
members of the nominating committee are expected to be Messrs. Weaver, Aldinger,
Boudreau, Dalton, Falcones, Ledru and Willumstad.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table shows the before-tax compensation for the Chief
Executive Officer and the four next highest paid executive officers of
MasterCard International at the end of 2000, which we collectively refer to as
the named executive officers.
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(1) Amounts principally represent reimbursement for tax obligations in
connection with non-qualified retirement benefits.
(2) Includes $20,535 contributed as matching contributions under MasterCard
International's 401(k) plan for each named executive officer; company
contributions to both a non-qualified defined benefit and defined
contribution plan -- Annuity Bonus Plan (Mr. Selander -- $176,597; Mr.
Heuer -- $110,662; Mr. McElhatton -- $117,530; Mr. Thom -- $77,265; Mr.
Michl -- $9,150); the full amount of all premiums paid by MasterCard
International for executive life insurance coverage (Mr. Selander --
$32,232; Mr. Heuer -- $3,120; Mr. McElhatton -- $3,524; Mr. Thom -- $1,232;
Mr. Michl -- $1,928); company contributions to a deferred compensation
plan -- Rabbi Trust (Mr. Selander -- $150,000; Mr. McElhatton -- $200,000);
and cash payments in lieu of executive perquisites (Mr. Selander --
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$39,996; Mr. Heuer -- $40,000; Mr. McElhatton -- $34,169; Mr.
Thom -- $30,251; Mr. Michl -- $18,494).
LONG-TERM INCENTIVE PLAN-AWARDS IN FISCAL YEAR 2000
The following table lists grants of performance units in 2000 to the
executive officers named below:
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(1) The performance units were granted under MasterCard International's
Executive Incentive Plan. Each performance unit has a target value equal to
$100. The actual value of each unit will be calculated based on MasterCard
International's performance over a three-year period based on a combination
of qualitative and quantitative measures that include: improving profitable
share with key members in key markets, achieving corporate financial
targets, implementing corporate strategy, improving customer focus and value
added delivery and enhancing organizational capabilities. Each unit will be
valued at target ($100) if, on a weighted-average basis, target performance
is achieved for all of the performance measures. Each unit will be valued at
threshold ($50) if, on a weighted-average basis, threshold performance is
achieved. Each unit will be valued at maximum ($200) if, on a
weighted-average basis, maximum performance is achieved. For performance
between threshold and target or target and maximum, the value of the units
will increase on a straight line basis. The units will have no value if
performance is below threshold.
The performance units described in the preceding table are subject to the
following vesting schedule:
Upon completion of the three-year performance period, participants will
receive a payout equal to 80% of the award earned. The remaining 20% of the
award will be paid upon completion of two additional years of service, (i.e., 5
years of service in total). Participants who retire (with at least six months of
service during the performance period), die or become permanently disabled prior
to the end of the 3-year performance period and/or prior to the end of the
5-year performance period are eligible for 100% vesting of their units, and
receive a payout equal to the number of units granted for the period multiplied
by the per unit value determined by MasterCard. If a participant is terminated
for cause, all units will be forfeited. Upon any other termination, only
unvested units will be forfeited and vested units will be paid at the lower of
target or the most recent annual performance score.
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RETIREMENT BENEFITS
MASTERCARD ACCUMULATION PLAN (MAP)
Employees who participate in the MAP earn benefits under the MAP as soon as
they become an employee of MasterCard. Benefits generally vest after four years
of service. For each plan year after January 1, 2000, participants are credited
with a percentage of their compensation for the plan year in accordance with the
table below:
Compensation is defined as base pay plus annual incentive compensation.
These accounts also receive investment credits. Participants elect to allocate
their account balance prior to the start of each plan year, during open
enrollment, based on the following allocation options:
The annual investment credits on the Standard & Poor's 500 Account are
restricted to a minimum of 0% and a maximum of 15%. No election can be made for
plan years beginning after December 31, 2002. When a participant terminates
employment, the amount credited to the participant's account is paid in a lump
sum or converted into an annuity.
SUPPLEMENTAL RETIREMENT BENEFITS
Supplemental retirement benefits are provided to all named executive
officers and to certain other participants under various funded and unfunded
nonqualified plans. Benefits are provided to certain employees whose benefits
are limited by compensation or amount under applicable federal tax laws and
regulations. Designated employees may also receive an annual benefit at
retirement equal to a designated percentage of their final average base
compensation reduced by the amount of all benefits received under the MAP and
other qualified and nonqualified arrangements.
ESTIMATED ANNUAL RETIREMENT BENEFITS PAYABLE TO CERTAIN EXECUTIVE OFFICERS
The following table shows the estimated annual retirement benefits,
including supplemental retirement benefits under the plans applicable to the
individuals, which would be payable to each executive officer listed if he were
to retire at age 65 at his 2000 base salary and payments were made for the life
of each participant.
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(1) Assumes MAP and Annuity Bonus Plan account balance increases with annual
salary credits and interest credits projected at 6% per year.
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Included in the Estimated Annual Benefit in the table above is the MAP
Conversion Annuity, part of MasterCard's nonqualified defined benefit plan,
which was applicable to all executives with earnings exceeding the Internal
Revenue Code section 401(a)(17) limit. This annuity was designed to cover
certain early retirement subsidies applicable under the former pension plan to
all plan participants. The aggregate annuity for certain named executive
officers exceeded $100,000 (Mr. Selander -- $194,693, Mr. Heuer -- $136,696, Mr.
Thom -- $114,057, Mr. McElhatton -- $130,514).
401(K) SAVINGS PLAN
Employees who participate in the 401(k) plan may contribute from 2% to 6%
of base pay on a tax-deferred basis. In addition, after-tax contributions are
permitted, and employees may also contribute supplemental tax-deferred and
after-tax amounts from 1% to 5%. Internal Revenue Service limits apply to all
tax-deferred contributions. MasterCard matches employee contributions up to 6%
of pay at 217%. Employees must contribute to the 401(k) plan to receive matching
contributions. Matching contributions are 100% vested after 4 years of service
under a graded vesting schedule. Loans and certain types of withdrawals are
permitted.
COMPENSATION OF DIRECTORS
Members of the board of MasterCard Incorporated will receive the same
compensation as members of the board of MasterCard International before the
conversion as set forth below. The board of MasterCard Incorporated does not
intend to establish any compensation for members of the board of MasterCard
International.
In fiscal year 2000, directors who were not employees of MasterCard
International were paid an annual retainer of $25,000. In addition, the chairman
of the board received an annual retainer of $30,000. Non-employee directors also
received an annual retainer of $5,000 for serving as a chairperson of a standing
committee; a $1,500 meeting fee for attendance at global and regional board
meetings; a $1,000 meeting fee for attendance at committee meetings and a $500
meeting fee for telephonic meetings. In addition, customary expenses for
attending board and committee meetings were reimbursed.
Under the MasterCard Deferral Plan, up to 100% of non-employee director's
meeting fees and annual retainer may be deferred and invested among several
investment return options. In general, deferred amounts are not paid until after
the director retires from the board. The amounts are then paid, at the
director's option, either in a lump sum or in ten annual installments.
EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL ARRANGEMENTS
EMPLOYMENT AGREEMENTS
MasterCard International is party to an employment agreement with Mr.
Selander. Under the terms of the agreement, Mr. Selander's employment shall
automatically terminate if he: (1) retires or becomes eligible to receive
retirement benefits; (2) dies or (3) becomes disabled, as defined under the
agreement. In addition, both he and MasterCard can terminate the agreement for
any reason upon ninety (90) days' prior written notice. Further, the employment
agreement may be terminated by MasterCard for cause as defined under the
agreement. During the employment term, Mr. Selander is eligible to participate
in MasterCard's compensation, benefit and perquisite plans and arrangements on a
level commensurate with his position.
The agreement also provides that if Mr. Selander's employment is terminated
either by MasterCard other than for cause or by him for certain specified
reasons, he shall receive any earned, but unpaid base salary, a pro rata portion
of his target bonus through the date of termination and additional pay in the
form of base salary continuation, his average annual incentive bonus received
over the prior three years, and certain additional benefits payable for a period
of thirty-six (36) months, or recalculated to an amount equivalent to such
continued pay and benefits due to be received over a thirty-six (36) month
period, payable until he is eligible to retire, whichever period is longer. Mr.
Selander is also subject to non-competition and non-solicitation
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covenants for a minimum period of six (6) months, up to the full length of the
additional pay period, under certain circumstances.
Pursuant to the agreement, Mr. Selander is eligible for annual company
contributions of up to $150,000 to a rabbi trust or other tax deferred
investment vehicle. $50,000 of this amount is guaranteed and the remaining
$100,000 is based upon MasterCard attaining certain threshold and target
performance goals. Generally, the vested portion of the assets is payable at the
later of age 55 or his termination of employment.
CHANGE-IN-CONTROL ARRANGEMENTS
MasterCard recently approved a change in control agreement for certain of
its executive officers, including all of the named executive officers. Under the
agreement, if an executive officer's employment is terminated without "cause" or
for "good reason" (as defined in the plan) during the six-month period preceding
or the two-year period following a "change in control" of MasterCard
International, the executive will be entitled to the following:
- a severance payment equal to 2x average base salary and bonus (3x in the
case of the CEO), payable over a 24-month period (36 months in the case
of the CEO), subject to recalculation to be payable over the period until
the executive is eligible to retire (without any increase in the amount
payable);
- continued coverage under the executive's individual long-term disability
plan for the 24- or 36-month period;
- continued coverage in the medical, dental, hospitalization and vision
care plans for up to eighteen months;
- accelerated vesting of performance units granted prior to the change in
control under the executive incentive plan, with payout at 125% of
target;
- accelerated vesting of appreciation of share units granted under the
value appreciation plan;
- accelerated vesting of special award, nonqualified retirement and
deferred compensation benefits;
- lump sum payment equal to the value of unvested qualified plan benefits;
- outplacement assistance; and
- an excise tax gross-up for any taxes incurred as a result of Section 4999
of the Internal Revenue Code.
The executive would be subject to a covenant not to compete and not to
solicit employees for up to 24-months (36 in the case of the CEO).
For purposes of the plan, a "change in control" is defined as follows:
(a) as long as MasterCard International is a non-stock membership
corporation or it or any of its affiliates is a private share corporation,
if (1) at any time three members have become entitled to cast at least 45
percent of the votes eligible to be cast by all the members of MasterCard
International (or all the shareholders of such private share corporation)
on any issue, (2) at any time, a plan or agreement is approved by the
members or shareholders, as the case may be, to sell, transfer, assign,
lease or exchange substantially all of MasterCard International's (or such
private share corporations') assets, or (3) at any time, a plan is approved
by the members of MasterCard International (or the shareholders of such
private share corporation) for the sale or liquidation of MasterCard
International or such private share corporation. The foregoing
notwithstanding, a reorganization in which the members continue to have all
of the ownership rights in the continuing entity shall not in and of itself
be deemed a "change of control" under (2) and/or (3), and a reorganization
to convert MasterCard International from a membership to a stock company or
a transaction resulting in the integration of Europay and MasterCard
International shall not in and of itself constitute a "change of control;"
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(b) if MasterCard International becomes a stock corporation, the
approval of its stockholders of (1) any consolidation or merger in which it
is not the continuing or surviving corporation or pursuant to which shares
of stock would be converted into cash, securities or other property, other
than a merger in which the holders of stock immediately prior to the merger
will have the same proportionate ownership interest (i.e., still own 100%
of total) of common stock of the surviving corporation immediately after
the merger, (2) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or substantially
all of its assets, or (3) adoption of any plan or proposal for its
liquidation or dissolution;
(c) any "person" (as defined in Section 13(d) of the Securities
Exchange Act of 1934), other than MasterCard International or a subsidiary
or employee benefit plan or trust maintained by MasterCard International or
any of its subsidiaries, becoming (together with its "affiliates" and
"associates," as defined in Rule 12b-2 under the Exchange Act) the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of more than 25% of the stock outstanding at the
time, without the prior approval of the board of directors; or
(d) a majority of the voting directors proposed on a slate for
election by the members are rejected by a vote of those members.
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth certain information, as of the date immediately
following the completion of the conversion and integration, with respect to the
beneficial ownership of our class A common stock and class B common stock by
each person who is known by us to be the beneficial owner of more than 5% of any
class or series of our capital stock. None of the directors or executive
officers of MasterCard Incorporated will beneficially own any of our class A or
class B common stock following the conversion and integration. Each beneficial
owner of class A common stock and class B common stock has sole voting power and
sole investment power with respect to all of the class A and class B shares that
it owns. This table does not give effect to shares that may be acquired pursuant
to options because no shares may be so acquired within 60 days from the date of
this proxy statement-prospectus.
Information in the following table is estimated based on a current
calculation of the new global proxy formula and is subject to amendment. The
number of actual shares to be allocated to member-stockholders upon the closing
of the conversion and integration will be determined by MasterCard Incorporated
on the basis of the new global proxy formula. See "Share Allocation and the
Global Proxy."
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to an agreement, dated as of March 1, 1999, among MasterCard
International and Citibank, N.A., including certain of its affiliates, Citibank
has agreed, among other things, to increase, and then maintain, the overall
percentage of payment cards issued by Citibank that are MasterCard branded, in
exchange for certain pricing terms. MasterCard and Europay provide
authorization, clearing and settlement services in connection with transactions
for which Citibank or its affiliates act as issuer or acquirer. In addition,
Citibank uses several of MasterCard's fee-for-service products. A portion of
MasterCard International's $1.2 billion dollar credit facility is syndicated to
Citibank, N.A., for which Citibank and its affiliates receive a fee; Citibank is
the administrative agent of that facility and Salomon Smith Barney Inc., an
affiliate of Citibank, is the lead arranger and book manager of that facility.
Additional amounts are paid by MasterCard International for these services.
Another insurance affiliate of Citibank is a creditor of MasterCard
International in connection with a portion of the $149 million lease financing
for our O'Fallon, Missouri operations facility. In addition, Citibank and its
affiliates receive fees from MasterCard for cash management, asset management
and investment banking services. Citibank also acts as issuer of MasterCard's
corporate purchasing cards. For 2000, fees earned from Citibank, net of
contractual obligations under the agreement described above, were approximately
$130 million. Robert B. Willumstad, a member of our board of directors, is the
Chief Executive Officer of Citigroup's Global Consumer Group, an affiliate of
Citibank, N.A. As a result of the conversion and integration, Citibank, N.A.,
and its affiliates are expected to own approximately 6% of our class A and class
B common stock on a combined basis.
Pursuant to an agreement, dated as of July 1, 1999, between MasterCard and
The Chase Manhattan Bank, The Chase Manhattan Bank has agreed, among other
things, to continue to increase, and then maintain, the annual percentage of
payment cards issued by Chase that are MasterCard branded, in exchange for
certain pricing terms. MasterCard and Europay provide authorization, clearing
and settlement services in connection with transactions for which The Chase
Manhattan Bank or its affiliates act as issuer or acquirer. In addition, The
Chase Manhattan Bank uses several of MasterCard's fee-for-service products. A
portion of MasterCard International's $1.2 billion dollar credit facility is
syndicated to The Chase Manhattan Bank, for which the The Chase Manhattan Bank
receives a fee. In addition, The Chase Manhattan Bank and its affiliates receive
amounts from MasterCard for cash management services. The Chase Manhattan Bank
acts as issuer of MasterCard's corporate cards and provides a variety of banking
services for MasterCard employees pursuant to arrangements entered into with
MasterCard. MasterCard provides certain financial and other incentives to The
Chase Manhattan Bank for co-branded and affinity card programs issued by Chase.
For 2000, fees earned from The Chase Manhattan Bank, net of contractual
obligations under the agreement described above, were approximately $100
million. David A. Coulter, a member of our board of directors, is Vice Chairman
of J.P. Morgan Chase & Co., of which The Chase Manhattan Bank is an affiliate,
and Donald L. Boudreau, our Chairman Emeritus, is a former executive officer of
The Chase Manhattan Bank. As a result of the conversion and integration, The
Chase Manhattan Bank and its affiliates are expected to own approximately 5% of
our class A and class B common stock on a combined basis.
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DESCRIPTION OF CAPITAL STOCK OF MASTERCARD INCORPORATED
The following summary of MasterCard Incorporated's capital stock describes
the material terms of the stock. For a complete description, we refer you to
MasterCard Incorporated's charter and bylaws, which are attached as Annexes E
and F to this proxy statement-prospectus.
GENERAL
Capitalization. The authorized capital stock of MasterCard Incorporated
consists of:
- 275 million shares of class A common stock, par value $.01 per share;
- 25 million shares of class B common stock, par value $.01 per share; and
- 75 million shares of class C common stock, par value $.01 per share.
Immediately following the conversion and integration, 84 million shares of
class A common stock will be issued and outstanding, 16 million shares of class
B common stock will be issued and outstanding and no shares of class C common
stock will be issued and outstanding. MasterCard Incorporated may only issue the
class B common stock in connection with the transactions contemplated by the
integration agreement.
Transition Period Reallocation. Each share of class B common stock, except
shares that constitute ec Pictogram shares, will automatically be converted into
one share of class A common stock on the third anniversary of the first day of
the first fiscal quarter beginning after the fiscal quarter in which the closing
of the conversion and integration occurs. Shares of class B common stock that
are ec Pictogram shares will automatically be converted into one share of class
A common stock on the second anniversary of the day on which all of the other
shares of class B common stock were converted and some or all of these shares
will be allocated among the members of MasterCard responsible for ec Pictogram
volumes in accordance with the terms of the integration agreement. See "Share
Allocation and the Global Proxy."
Fractional Shares. No fractional shares of class A or class B common stock
will be issued or delivered by MasterCard Incorporated. Any fractional share
interests will be rounded to a whole share in such manner as the management of
MasterCard Incorporated may determine in its sole discretion.
VOTING RIGHTS, DIVIDEND RIGHTS AND LIQUIDATION RIGHTS
Voting Rights. Each holder of class A and class B common stock has the
right to cast one vote for each share of class A and class B common stock held
of record on all matters submitted to a vote of stockholders of MasterCard
Incorporated, including the election of directors, provided that in any vote for
the election of directors, no stockholder, together with its affiliates, will be
entitled to vote more than 7% of the shares that are entitled to vote in that
election. This provision may be altered by a majority vote of the MasterCard
Incorporated board of directors or by a majority of the holders of the class A
common stock and class B common stock voting together as a single class (so long
as the class B stock has voting rights). However, approval of at least 75% of
the directors present at a meeting at which a quorum is present is required to
raise the limitation on voting for directors to more than 15% of the shares that
are entitled to vote in the election of directors. The above provisions may be
amended only with the approval of 75% of the directors present at a meeting at
which a quorum is present and the approval of the holders of a majority of the
outstanding class A and class B common stock voting together as a single class
(so long as the class B stock has voting rights).
Dividend Rights. The holders of shares of class A and class B common stock
are entitled to share ratably in dividends or distributions, if, as and when
dividends or distributions are declared by the board of directors of MasterCard
Incorporated at its discretion. MasterCard Incorporated has no current plans to
pay cash dividends on the common stock.
Liquidation Rights. Upon dissolution, liquidation or winding-up of
MasterCard Incorporated, holders of class A and class B common stock are
entitled to share ratably in the net assets available for distribution to
stockholders after the payment of debts and other liabilities, subject to the
prior rights of any issued preferred shares.
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Other Rights. Other than as otherwise described herein, holders of class A
and class B common stock do not have any rights to purchase additional shares of
stock from MasterCard Incorporated, to have their common stock converted into or
exchanged for other securities (except for the conversion of class B shares into
class A shares as described above), to have their common stock repurchased by
MasterCard Incorporated or to receive a preferred return on their shares of
common stock.
Class C Common Stock. Shares of class C common stock may be issued from
time to time with voting powers, designations, preferences and other rights to
be determined by the MasterCard Incorporated board of directors, provided that
no shares of class C common stock may be entitled to voting rights, dividends or
rights to participate in the proceeds of a liquidation that are greater than the
corresponding rights of the class A common stock. The MasterCard Incorporated
certificate of incorporation provides that any issuance of class C common stock
requires the approval of two-thirds of the board of directors, and that any
issuance of voting class C common stock or class C common stock that, together
with all other issuances of class C common stock made during the immediately
preceding two years, represents greater than 5% of the total number of class A
shares and class B shares outstanding prior to the issuance requires the
approval of 75% of the board of directors. These provisions may be amended only
with the approval of 75% of the directors present at a meeting at which a quorum
is present and the approval of the holders of a majority of the outstanding
class A and class B common stock voting together as a single class (so long as
the class B stock has voting rights).
TRANSFER RESTRICTIONS
For three years following the conversion, no transfer of shares of common
stock and no assignment of the right to receive shares will be permitted except
in connection with a transfer of all or substantially all of the stockholder's
card portfolio. After three years, each stockholder must maintain an ownership
percentage of MasterCard Incorporated common stock that is no less than 75% and
no more than 125% of the stockholder's most recent global proxy calculation.
Stockholders may be required to purchase or sell shares of MasterCard
Incorporated in order to satisfy these requirements within 12 months of receipt
of notice from MasterCard Incorporated that such purchase or sale is required.
Any sales of shares would ordinarily constitute taxable transactions. In
addition:
- only class A members of MasterCard International may own shares of class
A and class B common stock of MasterCard Incorporated;
- unless otherwise approved by a two-thirds vote of the MasterCard
Incorporated board of directors, no stockholder together with its
affiliates may own more than 15% of the outstanding shares of voting
stock of MasterCard Incorporated; and
- the class B common stock of European members of MasterCard International
will be held in trust prior to being converted to class A common stock.
Following the three year transition period, MasterCard Incorporated intends
to facilitate trading of its common stock among class A members of MasterCard
International according to procedures to be established by the board of
directors of MasterCard Incorporated.
TRANSFER AGENT
Initially, MasterCard Incorporated will be the transfer agent and registrar
of the common stock.
LIMITATIONS ON A CHANGE OF CONTROL
We summarize below several provisions of our certificate of incorporation
and bylaws and the Delaware General Corporation Law. These provisions could have
the effect of delaying, deferring or preventing a change in control of
MasterCard Incorporated or deterring potential acquirers from making an offer to
our stockholders. This could be the case even though a majority of our
stockholders might benefit from such a change in control or offer. These
descriptions are not complete and we refer you to the documents that we have
filed as exhibits to this proxy statement-prospectus and to the Delaware General
Corporation Law.
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Supermajority Vote of the Board of Directors. Our certificate of
incorporation requires the approval of 75% of the directors present at a meeting
at which a quorum is present and the approval of the holders of a majority of
the outstanding class A and class B common stock voting together as a single
class (so long as the class B common stock has voting rights) to: alter our
status as a stock corporation; amend our certificate of incorporation to
authorize MasterCard Incorporated to issue stock other than class A, B or C
common stock; sell, lease or exchange all or substantially all of MasterCard
Incorporated's assets; approve the sale, lease or exchange of all or substantial
all of the assets of MasterCard International; engage in a business combination
(merger or consolidation) involving either MasterCard Incorporated or MasterCard
International; undertake an initial public offering; amend the MasterCard
International certificate of incorporation to allow MasterCard International to
issue capital stock, to create additional classes of membership interests in
MasterCard International, to subject the property of the members of MasterCard
International to the obligations of MasterCard International or to subject
non-U.S. programs to the satisfaction of any liabilities arising from the
current DOJ and merchant antitrust litigations in the United States; or amend
the provisions of the MasterCard International bylaws relating to special
assessments that may be imposed upon the members of MasterCard International.
Other provisions of the certificates of incorporation and by-laws of MasterCard
Incorporated and MasterCard International may be modified only if certain
supermajorities are achieved, and these provisions may have the effect of
deterring potential acquirors. See "Comparison of Rights of MasterCard
International Members Before and After the Conversion and Integration."
Ability to Call Special Meetings. Special meetings of MasterCard
Incorporated stockholders may be called at any time for any purpose by written
request of the chairman of the board of directors or the President and Chief
Executive Officer of MasterCard Incorporated. Special meetings may also be
called by the Secretary upon the written request of at least 33 1/3% of the
board of directors or the holders of at least 25% of the outstanding shares
entitled to vote on the action being proposed. Notice of a special meeting must
state the time, place and date of the meeting, the name of the person or persons
calling the meeting, the purpose for which the meeting is called and the means
of acceptable remote participation. The business transacted at the special
meeting is limited to the purpose described in the notice.
DELAWARE ANTI-TAKEOVER STATUTE
Under Section 203 of the business combination statute of Delaware law, a
corporation is prohibited from engaging in any business combination with an
interested stockholder who, together with its affiliates or associates, owns 15%
or more of the corporation's voting stock for a three year period following the
time the stockholder became an interested stockholder, unless:
- prior to the time the stockholder became an interested stockholder, the
board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming
an interested stockholder;
- the interested stockholder owned at least 85% of the voting stock of the
corporation, excluding specified shares, upon completion of the
transaction which resulted in the stockholder becoming an interested
stockholder; or
- at or subsequent to the time the stockholder became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized by the affirmative vote, at
an annual or special meeting and not by written consent, of at least
66 2/3% of the outstanding voting shares of the corporation, excluding
shares held by that interested stockholder.
A business combination generally includes:
- mergers, consolidations and sales or other dispositions of 10% or more of
the assets of a corporation to or with an interested stockholder;
- specified transactions resulting in the issuance or transfer to an
interested stockholder of any capital stock of the corporation or its
subsidiaries; and
- other transactions resulting in a disproportionate financial benefit to
an interested stockholder.
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The provisions of the Delaware business combination statute do not apply to
a corporation if, subject to certain requirements, the certificate of
incorporation or by-laws of the corporation contain a provision expressly
electing not to be governed by the provisions of the statute or the corporation
does not have voting stock listed on a national securities exchange, authorized
for quotation on an inter-dealer quotation system of a registered national
securities association or held of record by more than 2,000 stockholders.
Although MasterCard Incorporated does not plan to "opt out" of this
provision, Section 203 will not apply as long as we have fewer than 2,000
stockholders. In addition, the provision may not be meaningful as a result of
certain provisions of our certificate of incorporation and bylaws, including the
provision prohibiting stockholders from holding more than 15% of our outstanding
common stock.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS AND OFFICERS
Delaware law provides that a corporation may include in its certificate of
incorporation a provision limiting or eliminating the liability of its directors
to the corporation and its stockholders for monetary damages arising from a
breach of fiduciary duty, except for:
- a breach of the duty of loyalty to the corporation or its stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- payment of a dividend or the repurchase or redemption of stock in
violation of Delaware law; or
- any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation provides that, to the fullest extent
Delaware law permits the limitation or elimination of the liability of
directors, none of our directors will be liable to us or our stockholders for
monetary damages for breach of fiduciary duty as a director.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our bylaws require, among other things, that we indemnify our officers and
directors against all expenses, including attorney's fees, incurred in any
action, suit or proceeding by reason of the fact that the person is or was a
director, officer, employee or agent of MasterCard Incorporated. We are also
permitted to advance to the officers and directors all related expenses, subject
to reimbursement if it is determined subsequently that indemnification is not
permitted.
114
COMPARISON OF RIGHTS OF MASTERCARD INTERNATIONAL MEMBERS
BEFORE AND AFTER THE CONVERSION AND INTEGRATION
The rights of members are currently governed by the certificate of
incorporation, bylaws and rules of MasterCard International and the Delaware
General Corporation Law. On completion of the conversion and integration, the
rights of member-stockholders will be governed, regarding their ownership of
class A common stock and class B common stock, by the certificate of
incorporation and bylaws of MasterCard Incorporated and by the Delaware General
Corporation Law, and regarding their class A membership interest, by the revised
certificate of incorporation and bylaws of MasterCard International and by the
Delaware General Corporation Law.
We summarize below the principal differences between your current rights as
a member of MasterCard International, which is to say before the conversion and
integration, with what your rights will be as a stockholder of MasterCard
Incorporated and as a class A member of MasterCard International after the
conversion and integration. The following comparison is not complete and we
refer you to the certificate of incorporation and bylaws of MasterCard
Incorporated and MasterCard International, each of which will be adopted or
revised, as the case may be, on completion of the conversion and integration,
and which are contained as Annexes E, F, G and H of this proxy
statement-prospectus. We have also filed them as exhibits to the registration
statement of which this proxy statement-prospectus is a part.
The provisions of the bylaws of MasterCard International relating to a
member's (including an affiliate member's) participation in MasterCard's global
payments programs, as well as the Standards described under the heading
"Business of MasterCard International -- Rule Making and Enforcement," are
unchanged by the conversion and integration.
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FEDERAL INCOME TAX CONSEQUENCES OF THE CONVERSION
AND THE INTEGRATION
The following is a discussion of the material U.S. federal income tax
consequences of the conversion or the integration, or both, as the case may be,
to the principal members of MasterCard International, the shareholders of
Europay and MEPUK, MasterCard International and MasterCard Incorporated. Insofar
as it relates to matters of law and legal conclusions, this discussion
constitutes the opinion of Pillsbury Winthrop LLP, our special tax counsel.
This discussion does not address all U.S. federal income tax considerations
that may be relevant to a specific member of MasterCard International or
shareholder of Europay or MEPUK in light of its particular circumstances. This
discussion also does not address the special U.S. federal income tax rules that
may apply to certain members or shareholders (including insurance companies,
dealers or traders in securities or currencies, tax-exempt entities or persons
that "mark to market" their securities). Further, this discussion does not
address any state, local or non-U.S. tax consequences of the conversion or the
integration.
This discussion is based on the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury regulations promulgated under the Code, and
administrative rulings and pronouncements and judicial decisions, in each case
as of the date of this proxy statement-prospectus. All of these authorities are
subject to change, possibly with retroactive effect.
This discussion is also based on factual statements and representations
made by us in this proxy statement-prospectus, in a request for an Internal
Revenue Service ("IRS") private letter ruling, described below, and in a
separate representation letter addressed to Pillsbury Winthrop LLP.
WE URGE YOU TO CONSULT YOUR OWN TAX ADVISORS ABOUT THE PARTICULAR TAX
CONSEQUENCES OF THE CONVERSION OR THE INTEGRATION, OR BOTH, TO YOU, INCLUDING
THE EFFECTS OF U.S. FEDERAL, AS WELL AS ANY STATE, LOCAL OR NON-U.S. OR OTHER,
TAX LAWS.
Based on the foregoing, to the extent that the principal members of
MasterCard International and the shareholders of Europay and MEPUK are treated
for U.S. federal income tax purposes as having received shares of MasterCard
Incorporated stock in exchange for property, and except to the extent that a
portion of any additional shares of MasterCard Incorporated stock received by a
member or shareholder at the end of the three year transition period or
thereafter pursuant to the integration agreement is treated as imputed interest,
the material U.S. federal income tax consequences of the conversion or the
integration, or both, as the case may be, to the principal members of MasterCard
International, the shareholders of Europay and MEPUK, MasterCard International
and MasterCard Incorporated, should be as follows:
- Each principal member of MasterCard International should be treated as
having exchanged (A) the equity rights associated with its current
membership interest in MasterCard International for an interest in the
class B membership interest in MasterCard International and (B) its
rights to use MasterCard's brands, programs and services under its
current MasterCard license for a class A membership in MasterCard
International (collectively, the "recapitalization").
- Pursuant to the conversion, each principal member of MasterCard
International should be treated as having transferred its interest in the
class B membership interest in MasterCard International to MasterCard
Incorporated solely in exchange for shares of MasterCard Incorporated
class A and class B common stock.
- The equity rights associated with a current membership interest in
MasterCard International and the class B membership interest in
MasterCard International should each be treated as stock of MasterCard
International.
- Insofar as it relates to the deemed exchange of equity rights associated
with current membership interests in MasterCard International for an
interest in the class B membership interest in MasterCard International,
the recapitalization should qualify as a reorganization within the
meaning of Section 368(a)(1)(E) of the Code. MasterCard International
should be a party to a reorganization within the meaning of Section
368(b) of the Code.
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- No gain or loss should be recognized by a principal member of MasterCard
International as a result of the deemed exchange of the equity rights
associated with its current membership interest in MasterCard
International for an interest in the class B membership interest in
MasterCard International.
- No gain or loss should be recognized by a principal member of MasterCard
International as a result of the exchange of its rights to use
MasterCard's brands, programs and services under its current MasterCard
license for a class A membership in MasterCard International.
- The basis of a principal member of MasterCard International in its
interest in the class B membership interest in MasterCard International
should equal the member's basis in the equity rights associated with its
current membership interest in MasterCard International immediately
before the recapitalization.
- The holding period of a principal member of MasterCard International for
its interest in the class B membership interest in MasterCard
International should include the period during which the member held the
equity rights associated with its current membership interest in
MasterCard International, provided that those equity rights are held as a
capital asset on the date of the recapitalization.
- No gain or loss should be recognized by MasterCard International as a
result of the recapitalization.
- No gain or loss should be recognized by a principal member of MasterCard
International on the deemed transfer of its interest in the class B
membership interest in MasterCard International, or by a shareholder of
Europay or MEPUK on the transfer of its shares of Europay or MEPUK stock,
to MasterCard Incorporated in exchange for shares of MasterCard
Incorporated class A and class B common stock, taking into consideration
any surrender of shares, or any receipt of additional shares, of
MasterCard Incorporated class A or class B common stock as a result of a
reallocation of MasterCard Incorporated stock.
- No gain or loss should be recognized when shares of MasterCard
Incorporated class B common stock are converted to class A common stock.
- No gain or loss should be recognized by MasterCard Incorporated on the
receipt of the class B membership interest in MasterCard International
and the shares of Europay and MEPUK stock in exchange for shares of
MasterCard Incorporated class A and class B common stock.
- The basis of a principal member of MasterCard International or a
shareholder of Europay or MEPUK in the shares of MasterCard Incorporated
class A and class B common stock received should be the same as the basis
of the member in its deemed interest in the class B membership interest
or the shareholder in the shares of Europay or MEPUK stock, as the case
may be, immediately before the transfer.
- The holding period for the shares of MasterCard Incorporated class A and
class B common stock received by a principal member of MasterCard
International or a shareholder of Europay or MEPUK should include the
period during which the interest in the class B membership interest was
deemed held, or the shares of Europay or MEPUK stock were held, provided
that the interest in the class B membership interest is deemed held, or
the shares of Europay or MEPUK stock are held, as capital assets on the
date of the transfer.
A portion of any additional shares of MasterCard Incorporated stock
received by a principal member of MasterCard International or a shareholder of
Europay or MEPUK at the end of the three year transition period or thereafter
pursuant to the integration agreement should be treated as imputed interest as
to which the member or shareholder may be required to recognize income. The
amount treated as interest will be determined by discounting the fair market
value of the additional shares from the date of receipt back to the closing
date, using the applicable federal rate determined under Section 1274 of the
Code. If a member or shareholder is not a United States person for U.S. federal
income tax purposes, MasterCard Incorporated may be required to withhold U.S.
federal income tax at a rate of 30% or, if applicable, a lower treaty rate. You
should consult your own tax advisors regarding the possible recognition of
interest income on receipt of any
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additional shares, as well as the basis, holding period and withholding tax
consequences of receiving those shares.
On July 6, 2001, Pillsbury Winthrop LLP filed with the IRS on our behalf a
request for a private letter ruling concluding that the conversion and
integration will have the U.S. federal income tax consequences described in the
bullet-point paragraphs above. Because of the novelty and complexity of the
conversion and integration, it is unclear whether the IRS will issue a ruling in
the form requested. If the IRS issues a ruling in the form requested, the
material U.S. federal income tax consequences of the conversion and integration
will be as described in the bullet-point paragraphs above. To the extent,
however, that the percentage interest in MasterCard Incorporated ultimately
allocated to a principal member of MasterCard International or to a shareholder
of Europay or MEPUK exceeds the percentage interest of the member or shareholder
immediately after the closing of the conversion and the integration (in each
case, immediately before any reallocation of MasterCard Incorporated shares),
the IRS may decline to treat the excess as having been received in exchange for
property. In that event, a principal member of MasterCard International or a
shareholder of Europay or MEPUK could be required to recognize income to the
extent of the excess. A member or shareholder that is not a United States person
for U.S. federal income tax purposes would be required to recognize such income
only to the extent that the income was considered to be effectively connected
with a trade or business of the member or shareholder in the United States and,
if required by an applicable income tax treaty, as attributable to a permanent
establishment maintained by the member or shareholder in the United States.
An IRS private letter ruling is generally binding on the IRS, but may,
under certain circumstances, be revoked or retroactively modified.
BECAUSE OF THE COMPLEXITY OF THE TAX LAWS, AND BECAUSE THE TAX CONSEQUENCES
OF THE CONVERSION OR THE INTEGRATION, OR BOTH, AS THE CASE MAY BE, TO A
PRINCIPAL MEMBER OF MASTERCARD INTERNATIONAL OR A SHAREHOLDER OF EUROPAY OR
MEPUK MAY DIFFER FROM THOSE DESCRIBED ABOVE OR BE AFFECTED BY MATTERS NOT
DISCUSSED ABOVE, YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR ABOUT YOUR
PARTICULAR CIRCUMSTANCES AND ABOUT THE TAX CONSEQUENCES TO YOU OF THE CONVERSION
OR THE INTEGRATION, OR BOTH, AS THE CASE MAY BE, INCLUDING THE APPLICABILITY AND
EFFECT OF STATE, LOCAL AND NON-U.S. TAX LAWS, AND ANY PROPOSED CHANGES IN
APPLICABLE TAX LAWS.
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MATERIAL CONTRACTS BETWEEN MASTERCARD
INTERNATIONAL AND EUROPAY
We summarize below the material contracts between MasterCard International
and Europay before the conversion and integration. If the conversion and
integration are completed, these agreements will be terminated.
ALLIANCE AGREEMENT
MasterCard International and Europay are parties to an Alliance Agreement,
dated as of November 14, 1996, that provides for a broad alliance between the
two companies and sets forth the terms and conditions under which MasterCard
International and Europay agreed to improve the acceptance, visibility, brand
awareness and technological support of the MasterCard brand in Europe.
Under the Alliance Agreement, MasterCard International agreed to grant
Europay the exclusive right to elect new European members for the non-exclusive
use of the MasterCard brand marks in Europe and agreed to approve and execute
new member agreements and/or licenses on a non-exclusive basis for newly elected
European members and/or licensees for use of the MasterCard brand marks in
Europe.
MAESTRO AGREEMENT
MasterCard International and Europay are also parties to a Maestro
Agreement, dated as of June 19, 1997, that provides for the joint development,
promotion and management by MasterCard International and Europay of Maestro
International Incorporated. Maestro International Incorporated is 50% owned by
MasterCard International and 50% owned by Europay. Maestro International grants
licenses to use and to grant sublicenses for the Maestro brands to MasterCard
and Europay for each of the regions of the world.
LEGAL MATTERS
The validity of the common stock offered by this proxy statement-prospectus
will be passed upon for MasterCard Incorporated by Simpson Thacher & Bartlett,
New York, New York.
EXPERTS
The consolidated financial statements of MasterCard International and
subsidiaries as of December 31, 2000 and 1999 and for each of the three years in
the period ended December 31, 2000 included in this proxy statement-prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of Europay International S.A. and
subsidiaries as of December 31, 2000 and for the year then ended included in
this proxy statement-prospectus have been so included in reliance on the report
of PricewaterhouseCoopers Reviseurs d'Entreprises, independent accountants,
given on the authority of said firm as experts in accounting and auditing.
OTHER MATTERS
MasterCard International does not currently intend to bring any matters
other than those described in this proxy statement-prospectus before its special
meeting. Further, MasterCard International has no knowledge of any other matters
that may be introduced by other persons. If any other matters do properly come
before our special meeting or any adjournment or postponement of our special
meeting, the persons named in the enclosed proxy form will vote the proxies in
keeping with their judgment on such matters.
126
STOCKHOLDERS PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, as amended, stockholders may
present proper proposals for inclusion in a company's proxy statement and for
consideration at the next annual meeting of its stockholders by submitting their
proposals to the company in a timely manner.
MasterCard Incorporated will hold an annual meeting in the year 2002 only
if the conversion has already been completed. If the annual meeting is held,
stockholder proposals will be eligible for inclusion in MasterCard
Incorporated's proxy statement relating to the 2002 annual meeting of
stockholders if the stockholder proposals are received no later than November
15, 2001. To be considered for presentation at the MasterCard Incorporated
annual meeting, although not included in the proxy statement, proposals must be
received no later than February 1, 2002. All stockholder proposals should be
marked for the attention of Secretary, MasterCard Incorporated, 2000 Purchase
Street, Purchase, New York 10577.
WHERE YOU CAN FIND MORE INFORMATION
MasterCard International has filed with the Securities and Exchange
Commission a registration statement on Form S-4 under the Securities Act of 1933
with respect to the shares of common stock of MasterCard Incorporated being
offered in the conversion and integration. This proxy statement-prospectus,
which constitutes a part of the registration statement, does not contain all the
information set forth in the registration statement. Some items of information
are contained in exhibits to the registration statement, as permitted by the
rules and regulations of the Securities and Exchange Commission. Statements made
in this proxy statement-prospectus as to the content of any contract, agreement
or other document filed or incorporated by reference as an exhibit to the
registration statement are not necessarily complete. With respect to those
statements, you should refer to the corresponding exhibit for a more complete
description of the matter involved and read all statements in this proxy
statement-prospectus in light of that exhibit.
Following completion of the conversion, MasterCard International will be
required to file reports and other information with the Securities and Exchange
Commission on an ongoing basis. We intend to furnish holders of the common stock
of MasterCard Incorporated with annual reports containing audited financial
statements with a report thereon by MasterCard Incorporated's independent
certified public accountants.
MasterCard Incorporated filings are available to the public at the
Securities and Exchange Commission's web site at http://www.sec.gov.
127
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Members of
MasterCard International Incorporated:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, changes in
members' equity, and cash flows present fairly, in all material respects, the
financial position of MasterCard International Incorporated and its subsidiaries
at December 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
April 11, 2001
F-2
MASTERCARD INTERNATIONAL INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
MASTERCARD INTERNATIONAL INCORPORATED
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
MASTERCARD INTERNATIONAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
MASTERCARD INTERNATIONAL INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
MASTERCARD INTERNATIONAL INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
MASTERCARD INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. ORGANIZATION
Organization -- MasterCard International Incorporated ("MasterCard") is a
nonstock company, owned by certain of its member financial institutions and
incorporated under the laws of Delaware, United States of America. MasterCard
and its consolidated subsidiaries (the "Company") promote the interests of their
members by providing credit, debit, smart card, travelers cheque, electronic
cash, and Automated Teller Machine services, and by promoting the Company's
brands. The Company enters into transactions with its members in the normal
course of business, and operates a system for authorizing, clearing and settling
payment transactions among its members. The Company is governed by a global
board of directors, comprised principally of officers of member financial
institutions and of the President and Chief Executive Officer of the Company,
who are elected by the membership. The global board is responsible for managing
the business of the Company, including the approval of a budget that provides
for funding of operations and technology support, program and service
development, and strategy execution, among other things.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and basis of presentation -- The Company follows accounting
principles generally accepted in the United States of America. Certain prior
period amounts have been reclassified to conform to 2000 classifications.
The consolidated financial statements include the accounts of MasterCard
and its majority-owned subsidiaries. All significant intercompany transactions
are eliminated in consolidation. Investments in entities for which the equity
method of accounting is appropriate are reported as investments in affiliates on
the balance sheet. MasterCard's share of net earnings of these entities is
included in the consolidated statements of income. Investments in affiliates for
which the equity method is not appropriate are accounted for using historical
cost. Management evaluates all investments for impairment on an ongoing basis
primarily using cash flow analyses.
Use of estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and
liabilities, at the date of the financial statements, and the reported amounts
of revenue and expenses during the reporting periods. Actual results may differ
from these estimates.
Revenue recognition -- Revenues are recognized when services are performed
and when products are sold.
Advertising expense -- Advertising and promotional items are expensed at
the time the event occurs.
Cash and cash equivalents -- Cash and cash equivalents include certain
highly liquid investments with a maturity of three months or less from the date
of purchase. Such investments are recorded at cost, which approximates fair
value.
Investment securities -- The Company classifies debt securities as either
"held-to-maturity," "available-for-sale" or "trading" and equity securities as
"trading." Investments for which management has the intent, and the Company has
the ability, to hold them to maturity are carried at cost adjusted for
amortization of premium and accretion of discount. Amortization and accretion
are calculated principally using the interest method. Securities bought and held
primarily for the purpose of selling them in the near term are classified as
"trading" and reported at fair value. Changes in unrealized gains and losses on
"trading" securities are recognized in the consolidated statements of income.
Securities classified as "available-for-sale" are reported at fair value.
Changes in unrealized gains and losses for "available-for-sale" securities, net
of applicable taxes, are recorded as a separate component in the statement of
comprehensive income. Quoted market values, when
F-7
MASTERCARD INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
available, are used to determine the fair value of "available-for-sale"
securities. The Company also has publicly traded securities, which are connected
to an executive compensation plan. These securities are accounted for as trading
securities and carried at fair value. The specific identification method is used
to determine realized gains and losses. All net realized and unrealized gains
and losses on these securities are recognized in other income and expense and a
corresponding offset is recorded in compensation expense. Investment securities
are evaluated for permanent impairment on a periodic basis.
Property, plant and equipment -- Property, plant and equipment are stated
at cost less accumulated depreciation. Depreciation on computer equipment and
furniture and fixtures is computed under the straight-line method over the
related estimated useful lives of the assets, generally ranging from two to five
years. Amortization of leasehold improvements is computed under the
straight-line method, using the shorter of the estimated useful lives of the
improvements or the terms of the related leases. Capital leases are amortized
over the lives of the leases. Depreciation on buildings is calculated under the
straight-line method over an estimated useful life of 30 years.
On January 1, 1998, the Company adopted the provisions of Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." In accordance with the provisions of this statement,
eligible direct internal and external costs related to the application
development stage are capitalized and, upon completion of the project, are
amortized using the straight-line method over the estimated useful life of the
software, not to exceed three years.
Intangible assets -- Intangible assets are comprised of goodwill and other
intangibles. Intangible assets acquired in business combinations accounted for
by the purchase method of accounting are capitalized and amortized over their
expected useful life as a non-cash charge against future results of operations.
The Company amortizes goodwill on a straight-line method over an estimated
useful life, not to exceed twenty years. Other intangibles consist of
shareholder franchise rights which are being amortized on a straight-line basis
over their estimated useful lives, none of which exceed seven years. The
realizability of goodwill and other intangibles is evaluated on an ongoing basis
to determine the recoverability of carrying amounts. The evaluation, based on
various analyses including cash flow and profitability projections, addresses
the impact on the existing Company business. The evaluation necessarily involves
management judgment.
Derivative financial instruments -- The Company enters into foreign
exchange forward and swap contracts to minimize the risk of anticipated revenues
and expenses, and assets and liabilities denominated in foreign currencies. This
activity minimizes the Company's exposure to transaction gains and losses
resulting from fluctuations of foreign currencies against the U.S. dollar. The
terms of the forward contracts are generally less than 18 months. Foreign
exchange forward and swap contracts are recorded at fair value and any
unrealized gains and losses are recognized in income.
Income taxes -- The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes." In accordance with SFAS No. 109,
deferred tax assets and liabilities are established for the expected future tax
consequences of temporary differences between the carrying amounts and tax bases
of assets and liabilities using enacted tax rates. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amounts
expected to be realized.
Foreign currency translation -- The U.S. dollar is the functional currency
for the majority of MasterCard businesses except its Mondex International
operations, where the local currency is the functional currency. Where the U.S.
dollar is considered the functional currency, monetary assets and liabilities
are translated to U.S. dollars using current exchange rates in effect at the
balance sheet date; non-monetary assets and liabilities are translated at
historical exchange rates; and revenue and expense accounts are translated at a
weighted average exchange rate for the period. Resulting exchange gains and
losses are included in net income. For businesses where the local currency is
the functional currency, translation to U.S. dollars is
F-8
MASTERCARD INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
performed for balance sheet accounts using current exchange rates in effect at
the balance sheet date and for revenue and expense accounts using a weighted
average exchange rate for the period. Resulting translation adjustments are
reported as a component of other comprehensive income.
Pension and other postretirement plans -- The compensation cost of an
employee's pension benefit is recognized on the projected unit credit method
over the employee's approximate service period. The aggregate cost method is
utilized for funding purposes.
New accounting standards -- In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended in June 1999 by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," and in June 2000, by SFAS No. 138,
"Accounting for Derivative Instruments and Hedging Activities, an Amendment of
FASB Statement No. 133" (collectively, "SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities, including certain derivative instruments embedded in other
contracts. The statement requires that all derivatives be recognized in the
balance sheet, as either assets or as liabilities, and measured at fair value.
Additionally, changes in a derivative's fair value will be recognized in current
earnings unless specific hedge accounting criteria are met. For the Company,
SFAS No. 133 is effective January 1, 2001. The adoption of this pronouncement
did not have a material effect on the Company's consolidated financial
statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance related to revenue recognition and
disclosure in the financial statements. SAB 101, as amended by SAB 101A and SAB
101B, was required to be implemented in the Company's fourth quarter of 2000,
retroactive to the beginning of the year. It requires companies to report any
changes in revenue recognition as a cumulative change in accounting principle at
the time of implementation in accordance with Accounting Principles Board
Opinion 20, "Accounting Changes." The adoption of SAB 101 did not have a
material effect on the Company's financial position or results of operations.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," ("SFAS
No. 140") replacing FASB Statement No. 125. SFAS No. 140 revises the standard
for accounting and reporting for transfers and servicing of financial assets and
extinguishments of liabilities. The new standard is based on consistent
application of a financial-components approach that recognizes the financial and
servicing assets controlled and the liabilities incurred, derecognizes financial
assets when control has been surrendered and derecognizes liabilities when
extinguished. SFAS No. 140 provides consistent guidelines for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. The Company was required to adopt SFAS No. 140 by March 31, 2001.
SFAS No. 140 did not have a material impact on the Company's consolidated
financial statements.
3. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities
available-for-sale are as follows:
F-9
MASTERCARD INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
The maturity distribution based on contractual terms of investment
securities available-for-sale at December 31, 2000, is as follows:
The Company holds a 5.25 percent Missouri Development Bond due August 1,
2009, as an investment security held-to-maturity. The amortized cost of this
security was $8,050 and $8,775 at December 31, 2000 and 1999, respectively.
Principal and interest payments are received on a semi-annual basis with a final
maturity date of August 1, 2009. The fair market value of this security
approximates amortized cost.
Components of investment income are as follows for the years ended December
31:
F-10
MASTERCARD INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31:
For the years ended December 31, 2000, 1999 and 1998, depreciation and
amortization expense aggregated $52,951, $42,439 and $35,333, respectively.
Included in these amounts was $12,000, $5,774 and $523 in 2000, 1999 and 1998,
respectively, of amortization of capitalized software.
On January 12, 2000, MasterCard exercised its option to purchase the
corporate headquarters building in Purchase, New York, for $70,000, in
accordance with the provisions of its lease agreement.
5. INCOME TAXES
The income tax provision for the years ended December 31 is composed of the
following components:
For the year ended December 31, 2000, domestic operations contributed
approximately $214,000 to earnings before income taxes and foreign operations
resulted in a loss before income taxes of approximately $14,000.
F-11
MASTERCARD INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
The provision for income taxes differs from the amount of income tax
determined by applying the appropriate statutory U.S. federal income tax rate to
pretax income for the years ended December 31, as a result of the following:
Deferred tax assets and liabilities represent the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities. The net deferred tax asset at December 31 is
composed of the following:
The valuation allowance relates primarily to the ability to recognize tax
benefits associated with foreign operations. The valuation allowance was $3,602
at December 31, 1998. The valuation allowance increased in each year as a result
of additional foreign losses incurred during that year, the benefits of which
may not be recognized.
Cash paid for income taxes for the years ended December 31, 2000, 1999 and
1998 was $81,854, $83,406 and $35,029, respectively.
6. PENSION, SAVINGS PLAN AND OTHER BENEFITS
The Company has a trusteed, noncontributory defined benefit pension plan
covering substantially all of its employees. Prior to 2000, individual benefits
were based on years of service, average pay during the last five years of
employment and age at retirement. Effective January 1, 2000, the Company
converted the plan to a noncontributory cash balance plan. Participants are
credited with a percentage of their compensation for the plan year based on
completed years of service. The Company's funding policy is to contribute
annually an amount, based on actuarial present value computations, which
satisfies the U.S. Internal Revenue Service's funding standards.
F-12
MASTERCARD INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
At December 31, 2000 and 1999, a MasterCard member was the plan trustee.
Plan assets are invested in U.S. government and agency securities, corporate
debt instruments, common stocks, foreign investments and certain funds of the
plan's investment managers. Certain investments may be in corporate debt or
common stock of MasterCard members and certain funds may hold securities of
MasterCard members.
The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheet at December 31:
Net pension expense included the following components for the years ended
December 31:
Assumptions used to measure the accumulated and projected benefit
obligation included a weighted average discount rate of 7.75 percent for both
2000 and 1999. An assumed rate of increase in future compensation levels for
2000 and 1999 was 7.0 percent, and an expected long-term rate of return on plan
assets was 8.5 percent and 9.5 percent for 2000 and 1999, respectively.
F-13
MASTERCARD INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
The Company has an employee savings plan, whereby eligible employees may
contribute a portion of their base compensation and the Company contributes an
amount in excess of the participant's contribution. The Company's contribution
aggregated $17,180, $16,125 and $14,562 in 2000, 1999 and 1998, respectively.
Participating employees can invest contributions among several fund
alternatives. Certain of these funds may hold securities in MasterCard members.
The Company has a Value Appreciation Program ("VAP"), which is an incentive
program established in 1995. Annual awards were granted to VAP participants from
1995 through 1998, which entitled participants to the net appreciation on a
portfolio of securities of member banks. The plan states that participants vest
at a rate of 20% for each year of service. If a participant is not fully vested
and redeems their shares, the appreciation that he/she forfeits is returned to
MasterCard. In 1999, VAP was replaced by an Executive Incentive Plan
arrangement. Although contributions to VAP have been discontinued effective
1999, plan assets remain intact and participants are entitled to the net
appreciation on the plan assets in accordance with plan provisions. The
Company's liability at December 31, 2000 and 1999 related to VAP was $15,871 and
$18,978, respectively.
MasterCard's Executive Incentive Plan ("EIP"), effective January 1999, is a
performance unit plan, where a participant receives a grant of units with a
target value contingent on the achievement of MasterCard's long-term performance
goals. The end value of the units will vary based upon the level of performance
achieved. Earned incentive awards are paid in the form of cash. Employees who
are designated Senior Vice President or higher are eligible for participation in
any performance period provided they have achieved the minimum performance
evaluation rating and have been designated to the appropriate level by March 1
of the calendar year. The Compensation Committee and/or the President and Chief
Executive Officer may also designate any other employee as eligible to
participate in the plan.
Performance units were granted under the EIP with an actual value that will
be calculated based on the Company's performance over a three-year period. Each
unit will be valued at threshold ($50), target ($100) or maximum ($200) if, on a
weighted-average basis, threshold, target or maximum performance is achieved for
all of the performance measures. The units will have no value if performance is
below the threshold. Upon completion of the three-year performance period,
participants will receive a payout equal to 80% of the award earned. The
remaining 20% of the award will be paid upon completion of two additional years
of service. The performance units vest over a period of five years from the date
of grant. The Company's liability related to EIP at December 31, 2000 and
December 31, 1999 was $45,307 and $17,857, respectively.
7. POSTRETIREMENT HEALTH AND LIFE INSURANCE BENEFITS
MasterCard has a combined defined benefit/defined contribution plan for
providing postretirement medical, dental and life insurance benefits. The plan
provides each employee with a notional account, which grows with an annual
credit (twelve hundred dollars) and an interest credit (3%). Upon retirement,
the account is converted to a lifetime medical subsidy expressed as a percentage
of estimated future premiums. The medical account is MasterCard's contribution
toward medical coverage. MasterCard currently does not fund its retiree medical
obligation.
Regular full-time employees not eligible for grandfathering are eligible
for MasterCard's account plan after the earlier of the completion of 5 years of
vesting service or attainment of age 40. All active employees who, as of January
1, 1993, were 50 years old or age 45 with at least 10 years of vesting service
were grandfathered when the account-based plan was implemented. Full coverage is
provided for all grandfathered employees.
Effective July 1, 2001 MasterCard intends to modify certain provisions of
the current design based on certain business objectives. The new design better
aligns with MasterCard's account-based pension plan by
F-14
MASTERCARD INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
providing flat dollar annual contributions based upon employee service. The new
program does not apply to benefits applicable to former grandfathered employees
and also provides full coverage for career employees with proportionally less
for early retirees. A portion of MasterCard's retiree medical obligation becomes
funded when the new design is implemented as these accounts are vested and are
portable subaccounts within MasterCard's pension plan.
In adopting Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
MasterCard elected to defer and amortize the $11,592 transition obligation
through the year 2013.
The following table presents the status of the Company's postretirement
benefit plan at December 31:
The Company's postretirement benefit plan is currently unfunded. Net
periodic postretirement benefit cost for the years ended December 31, 2000, 1999
and 1998 included the following components:
Assumptions used in determining the postretirement defined benefit
obligation included a weighted average discount rate of 7.75 percent for both
2000 and 1999, and a rate of increase in future compensation levels of 7.0
percent for both 2000 and 1999.
For net postretirement benefit cost measurement purposes, an annual rate of
increase in the per capita cost of covered medical benefits of 8.0 percent was
assumed for 2000. The rate was assumed to decrease gradually to 6.0 percent by
2004 and remain at that level thereafter. Increasing (decreasing) the assumed
F-15
MASTERCARD INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
health care cost trend rates by 1.0 percent in each year would increase
(decrease) the accumulated postretirement defined benefit obligation and the
aggregate of the service and interest cost components of net periodic
postretirement benefit as follows:
8. DEBT
At December 31, 2000, the Company had a $1 billion ($742,500 at December
31, 1999) committed credit facility from banks, some of whom are members.
Pursuant to this facility, the Company has the right to borrow funds at a
variable rate calculated in accordance with the provisions of the agreement, to
provide liquidity for member settlement failures. As of December 31, 2000, the
Company has not borrowed under this credit facility. Commitment and other fees
associated with this credit facility totaled $1,279, $1,055 and $550 for each of
the years ended December 31, 2000, 1999 and 1998, respectively.
On June 30, 1998, the Company issued $80,000 in subordinated debt ("the
Notes") fixed at 6.67 percent per annum. The terms of the Notes require
MasterCard to repay the principal amount on June 30, 2008. The Company has the
option to prepay the Notes with a "make-whole" payment to the investors, if
market interest rates are lower at the time of prepayment. Interest expense
aggregated $5,336 for each of the years ended December 31, 2000 and 1999.
Interest expense for the year ended December 31, 1998 totaled $2,668.
Cash paid for interest during the years ended December 31, 2000, 1999 and
1998 was $5,750, $5,593 and $5,034, respectively. The fair value of subordinated
debt is estimated at $78,117 and $73,528 at December 31, 2000 and 1999,
respectively.
The terms of the borrowing facilities include various covenants including,
but not limited to, limitations on liens and the maintenance of minimum net
worth. The Company was in compliance with such covenants at December 31, 2000.
9. COMMITMENTS AND CONTINGENT LIABILITIES
On August 31, 1999, the Company entered into a ten-year operating lease
agreement for a global technology and operations center that will be constructed
in O'Fallon, Missouri. The lease may be extended for one ten-year term for
annual payments of $100 per year subject to the repayment of the principal on
the senior secured notes described below. The Company plans to occupy the
facility at the anticipated completion date in the fourth quarter of 2001. In
conjunction with the lease agreement, the owner of the property leased the land
to the MCI O'Fallon 1999 Trust. The Trust financed the operations center through
a combination of an equity investment and the issuance of 7.36 percent Series A
Senior Secured Notes in the amount of $149,380. In the event that additional
financing is needed to complete the facility, the Trust may issue its Series B
Senior Secured Notes in an aggregate amount not to exceed $5,000. Rent is
payable in amounts equal to interest payments on the Notes plus a return of 2.75
percent. The lease agreement permits the Company to purchase the facility upon
180 days notice at a purchase price equal to the aggregate outstanding principal
amount of the Series A Senior Secured Notes, including any accrued and unpaid
interest and investor equity, along with any accrued and unpaid amounts due to
the investor under the lease agreement. In conjunction with the lease agreement,
the Company executed a Guarantee of 85.73 percent of the Series A Senior Secured
Notes outstanding. Additionally, upon the occurrence of specific events of
default, the Company will guarantee repayment of the total outstanding principal
and interest on the Series A Senior Secured Notes.
F-16
MASTERCARD INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
Rental expense for office space aggregated approximately $16,254, $18,940
and $18,827 for the years ended December 31, 2000, 1999 and 1998, respectively.
Rental of computer equipment, communications lines, and office equipment
aggregated $31,064, $31,096 and $33,442 for the years ended December 31, 2000,
1999 and 1998, respectively.
The future minimum lease payments under non-cancellable operating leases at
December 31, 2000 are as follows:
On March 6, 1996, the Company entered into an agreement whereby a vendor
will design and monitor a virtual private network to support the Company's data
networking needs. At December 31, 2000, the remaining cost associated with this
agreement was approximately $40,600 to be paid over six years, subject to
certain termination provisions. Additionally, the agreement calls for certain
variable costs to be paid annually. The Company also leases certain
communications lines on a monthly basis. These are cancelable without penalty
upon 30 days' notice.
MasterCard has guaranteed the payment of settlement obligations between
members should a member institution fail to settle their transactions. See Note
13 for a description of settlement credit risk.
MasterCard has also guaranteed the payment of MasterCard branded travelers
cheques outstanding. MasterCard had outstanding travelers cheques of $1,480,279
and $1,676,771 at December 31, 2000 and 1999, respectively. MasterCard has
obtained an unlimited guarantee in the amount of $1,399,663 and $1,487,608 at
December 31, 2000 and 1999, respectively, from a financial institution in order
to cover most of the exposure of outstanding travelers cheques.
Maestro International Incorporated ("Maestro") was formed in July 1992 as a
joint venture of MasterCard and Europay International S.A. ("Europay"). Maestro
owns the Maestro name mark and uses the blue and red interlocking circle mark as
part of the Maestro logo, pursuant to a license from MasterCard. Europay is the
regional licensor for the Maestro brand in Europe, while MasterCard, through its
wholly owned subsidiaries, is the regional licensor for the Maestro brand
elsewhere in the world. Under the terms of their agreement, the Company is
required to reimburse Maestro for its share of net expenses.
10. LEGAL PROCEEDINGS
MasterCard is a party to litigation with respect to a variety of matters in
the ordinary course of business. Except as described below, MasterCard does not
believe that any litigation to which it is a party may have a material adverse
impact on the Company's business or prospects.
DEPARTMENT OF JUSTICE ANTITRUST LITIGATION
In October 1998, the United States Department of Justice ("DOJ") filed suit
against MasterCard, Visa U.S.A., Inc. and Visa International Corp. in the U.S.
District Court for the Southern District of New York alleging that both
MasterCard's and Visa's governance structure and policies violated U.S. federal
antitrust laws. First, the DOJ claimed that "dual governance" -- the situation
where a financial institution has a
F-17
MASTERCARD INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
representative on the board of directors of MasterCard or Visa while a portion
of its card portfolio is issued under the brand of the other association -- was
anti-competitive and acted to limit innovation within the payment card industry.
At the same time, the DOJ conceded that "dual issuance" -- a term describing the
structure of the bank card industry in the United States in which a single
financial institution can issue both MasterCard and Visa-branded cards -- was
pro-competitive. Second, the DOJ challenged MasterCard's Competitive Programs
Policy ("CPP") and a Visa bylaw provision that prohibit financial institutions
participating in the respective associations from issuing competing proprietary
payment cards (such as American Express or Discover). The DOJ alleged that the
CPP and bylaw provision acted to restrain competition.
MasterCard denies the DOJ's allegations and believes that both "dual
governance" and the CPP are pro-competitive and fully consistent with U.S.
federal antitrust law.
A bench trial concerning the DOJ's allegations was concluded on August 22,
2000. In response to the judge's request for a proposed remedy, the DOJ
submitted a proposed order that, if implemented, would require MasterCard to
repeal the CPP and Visa to repeal its bylaw. The government's proposed order
also would require all financial institutions with representatives on any
governing MasterCard board or committee (defined as any body having
decision-making authority or access to competitively sensitive information with
respect to MasterCard, unless the activities of that board or committee relate
solely to activities outside the United States) to (i) with regard to new
issuance, issue general purpose cards bearing MasterCard brands exclusively, and
(ii) ensure that by 2003 at least 80% of each such institution's total issuing
volume in the United States and globally is derived from MasterCard-branded
cards. The proposed order would impose parallel requirements on Visa, and would
also require that financial institutions that have signed long-term member
agreements with MasterCard or Visa have a two-year period to exercise
termination rights related to such agreements. MasterCard has objected to the
DOJ's proposed order and believes that the remedies reflected in the order are,
among other things, inconsistent with the evidence of intense competition
offered throughout the trial as well as the testimony of the DOJ's own expert
economist. As of December 31, 2000, no decision has been rendered in the trial.
MERCHANT ANTITRUST LITIGATION
Commencing in October 1996, several putative class action suits were
brought by a number of U.S. merchants -- including Wal-Mart Stores, Inc., Sears
Roebuck & Co., Inc., The Limited Inc. and Safeway, Inc. -- against MasterCard
and Visa U.S.A., Inc. challenging certain aspects of the payment card industry
under U.S. federal antitrust law. Those suits were later consolidated in the
U.S. District Court for the Eastern District of New York. The plaintiffs
challenge MasterCard's "Honor All Cards" rule (and a similar Visa rule), which
ensures universal card acceptance for consumers by requiring merchants who
accept MasterCard cards to accept for payment every validly presented MasterCard
card. Plaintiffs claim that MasterCard and Visa unlawfully have tied acceptance
of debit cards to acceptance of credit cards. In essence, the merchants desire
the ability to reject off-line, signature-based debit transactions (for example,
MasterCard card transactions) in favor of other payment forms, including
on-line, PIN-based debit transactions (for example, Maestro or regional ATM
network transactions) which generally impose lower transaction costs for
merchants. The plaintiffs also claim that MasterCard and Visa have conspired to
monopolize what they characterize as the point-of-sale debit card market,
thereby suppressing the growth of regional networks such as ATM payment systems.
Plaintiffs allege that the plaintiff class has been forced to pay unlawfully
high prices for debit and credit card transactions as a result of the alleged
tying arrangement and monopolization practices. There are related consumer class
actions pending in two state courts that have been stayed pending developments
in this matter.
F-18
MASTERCARD INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
MasterCard denies the merchant allegations and believes that the "Honor All
Cards" rule and MasterCard practices with respect to debit card programs in the
United States are pro-competitive and fully consistent with U.S. federal
antitrust law.
On February 22, 2000, the district court granted plaintiffs' motion for
class certification. MasterCard and Visa promptly appealed. The Second Circuit
Court of Appeals subsequently agreed to consider the appeal of the grant of
class certification. As of December 31, 2000, the parties were awaiting a
hearing before that court to consider the appeal. Motions seeking summary
judgment have been filed by both sides and fully briefed in the district court.
Currently, no argument date for summary judgment has been set pending resolution
of the appeal of the class certification decision and no trial date has been
set.
Management believes that it is not currently possible to estimate the
impact, if any, that the ultimate resolution of the DOJ and merchant antitrust
litigations will have on the Company's results. MasterCard's policy is to accrue
probable estimated legal fees in defending these claims.
11. MONDEX
On February 21, 1997, the Company completed a transaction with Mondex
International, Ltd. ("MXI") and MXI's shareholders. MXI, which is based in
London, England, owns and licenses to franchisees and to others the rights to
implement Mondex's "smart card" technology of which the initial use is in the
Mondex electronic cash system. The Company acquired a 51 percent interest in MXI
for $16,720 (L10,333) and agreed (i) to pay its proportionate share of fees
assessed by MXI in exchange for global support services and (ii) until February
20, 2002, to pay fees assessed against minority shareholders for global support
services up to L56,400 subject to certain adjustments primarily related to
franchise sales and the net present value of amounts paid under (i) above. With
respect to the amount paid pursuant to (ii), MasterCard members and others will
have the right to obtain licenses in regions in which they operate to
participate in the MXI electronic cash system and to participate in other
applications of the MXI technology in chip-based programs. The Company
recognized expense associated with MXI assessments of $25,771, $28,086 and
$32,370 in 2000, 1999 and 1998, respectively. Through subsequent investments in
affiliates, the Company obtained an incremental beneficial interest in MXI of
7.2 percent.
In the MXI transaction, MasterCard also paid $43,691(L27,000) in exchange
for a right to receive up to an equivalent amount from Mondex's sales of
franchise rights to exploit MXI technology in territories that remained unsold
at the time of the agreement. Such rights to proceeds from MXI franchise sales
are included in current and long-term assets in the consolidated balance sheet.
From the sale of franchises, MasterCard received $3,626, $18,993 and $9,848 in
2000, 1999 and 1998, respectively.
The MXI acquisition described above was accounted for as a purchase and,
accordingly, the results of MXI's operations have been included in the
consolidated financial statements since the date of acquisition. The excess of
purchase price over book value, which approximated fair value, was recorded as
an intangible asset. The investment is accounted for on a consolidated basis.
On October 22, 1997, the Company purchased a 51% ownership interest in
three regional Mondex Franchises, Mondex Asia Pte., Ltd. ("Mondex Asia"), Mondex
China Pte., Ltd. ("Mondex China"), and Mondex India Pte., Ltd. ("Mondex India")
for $24,511. These acquisitions were accounted for under the purchase method
and, accordingly, the results of acquired operations have been included in the
consolidated financial statements since the date of acquisition. The investments
are accounted for on a consolidated basis.
F-19
MASTERCARD INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
12. INTANGIBLE ASSETS
The following table sets forth net intangible assets at December 31:
Amortization expense related to intangible assets was $5,679, $9,508 and
$9,725 in 2000, 1999 and 1998, respectively.
In conjunction with the October 22, 1997 acquisition of a 51 percent
ownership interest in Mondex Asia, Mondex China and Mondex India, the Company
recorded shareholder franchise rights to develop and exploit the MXI technology
in 13 Asian countries. These rights, totaling $47,985, are being amortized on a
straight-line basis over seven years. During 2000 and 1999, the Company
evaluated the recoverability of these franchise rights. Government restrictions
and slower than expected development in these countries limit future cash
streams in the foreseeable future. Accordingly, the Company adjusted the
carrying value of franchise rights associated with Mondex Asia, Mondex China and
Mondex India resulting in an impairment loss of $8,609 and $15,334 for the years
ended December 31, 2000 and 1999, respectively.
The acquisition of MXI on February 21, 1997, resulted in approximately
$6,400 of goodwill, which was fully amortized over the three-year period ending
December 31, 1999.
The 1988 acquisition of Cirrus System, Inc. resulted in $22,048 of
goodwill, which is being amortized on a straight-line basis over 20 years.
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
On February 17, 1999, the Company entered into an interest rate swap with a
notional amount of $55,000 that matured on February 17, 2000. This swap paid a
floating rate of interest based upon the BMA Municipal Swap Index and received a
fixed rate of 3.24% in order to reduce interest rate risk on that portion of the
Company's short term municipal investment portfolio which earned a floating
rate.
On June 30, 1998, the Company entered into two foreign currency swaps
totaling L24,700 to hedge the Mondex franchise receivable which is denominated
in U.K. pounds sterling. One currency swap expired on June 30, 2000 (L4,000) and
the other currency swap was originally contracted to expire on June 30, 2001
(L20,700). The two contracts called for the sale of pounds sterling into U.S.
dollars at a rate of $1.665 to L1.0. On July 19, 2000, the Company elected to
terminate the remaining contract of L20,700. During 2000, the Company realized a
net gain of $1,385 as a result of the maturity and termination of these currency
swaps.
F-20
MASTERCARD INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
The notional amounts and estimated fair values of these contracts at
December 31 are as follows:
The Company's derivative financial instruments are subject to both credit
and market risk. Credit risk is the risk of loss due to failure of a
counterparty to perform its obligations in accordance with contractual terms.
Market risk is the potential change in an investment's value caused by
fluctuations in interest and currency exchange rates, equity and commodity
prices, credit spreads or other risk. Credit and market risk related to
derivative instruments were not material at December 31, 2000 and 1999. Foreign
exchange forward, option and swap contracts are not used for trading purposes.
The currencies underlying the forward exchange commitments consist
primarily of Australian dollars, Japanese yen, Canadian dollars, Singapore
dollars, Brazilian real and U.K. pounds sterling. The fair value of off-balance
sheet financial instruments generally reflects the estimated amounts that the
Company would receive or pay to terminate the contracts at the reporting date,
thereby taking into account the current unrealized gains or losses of
outstanding forward and option contracts.
Credit risk is the risk of loss due to the failure of a counterparty to
fulfill its contractual obligations. Credit risk is concentrated with members
who are principally in the financial services industry and is primarily related
to the Company's guarantee of qualifying settlement transactions between its
members and of foreign currency forward, option and swap contracts with members
as counterparties.
Settlement credit risk is the legal exposure due to the difference in
timing between payments made by and receipts due to MasterCard. A member's
settlement credit risk is estimated as the average daily card charges of the
member multiplied by the estimated maximum number of days that could elapse
between MasterCard's payment to the acquiring bank and receipt of funds from the
issuing bank.
To minimize its exposure to settlement credit risk, the Company has
established member risk standards. Members that are not in compliance with
established risk standards are required to provide collateral or other security
in the form of cash deposits, escrow accounts, letters of credit or bank
guarantees. MasterCard held collateral for legal settlement risk of $528,472 and
$114,933 and had unlimited guarantees estimated at $597,039 and $460,136 at
December 31, 2000 and December 31, 1999, respectively. MasterCard monitors its
credit risk portfolio on a regular basis to assess potential concentration risks
and to evaluate the adequacy of collateral on hand. MasterCard's member credit
exposure at December 31, 2000 and 1999, after consideration of collateral and
guarantees, amounted to $7,921,109 and $6,601,427, respectively. MasterCard
member credit exposure had concentrations of 58% and 55% in North America and
28% and 32% in Europe at December 31, 2000 and December 31, 1999, respectively.
The Company also reviews the credit worthiness of banks to consider the
appropriateness of establishing reserves for non-payment.
A significant portion of the Company's credit risk is concentrated in one
MasterCard travelers cheque issuer. MasterCard travelers cheques outstanding
issued by that issuer at December 31, 2000 and 1999 was $1,399,663 and
$1,487,608, respectively. MasterCard has obtained an unlimited guarantee from a
financial institution in order to mitigate its exposure to outstanding travelers
cheques for that issuer.
F-21
MASTERCARD INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
Generally, the Company does not obtain collateral related to forward,
option and swap contracts because of the high credit ratings of the
counterparties involved. The amount of accounting loss the Company would incur
if the counterparties failed completely to perform according to the terms of the
contracts is not material.
14. SEGMENT REPORTING
MasterCard has one reportable segment, "Payment Services." All of the
Company's activities are interrelated, and each activity is dependent upon and
supportive of the other. Accordingly, all significant operating decisions are
based upon analyses of MasterCard as one operating segment. The CEO has been
identified as the chief operating decision maker.
General information required by SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information," is disclosed in the consolidated
financial statements. There is no single customer that accounted for more than
10 percent of the Company's revenue.
The following geographic data represents revenues based on the geographic
locations of the Company's customers for each years ended:
MasterCard does not maintain or measure long-lived assets by geographical
location.
15. SUBSEQUENT EVENT
At a meeting on February 8, 2001, the Board of Directors of MasterCard
International approved a management recommendation to undertake a transaction to
integrate MasterCard and Europay International S.A. into a single global entity.
At the same meeting, the MasterCard Board authorized management to negotiate
with Europay and take all steps necessary to implement the integration
transaction.
F-22
MASTERCARD INTERNATIONAL INCORPORATED
UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
AS OF JUNE 30, 2001 AND DECEMBER 31, 2000 AND
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
F-23
MASTERCARD INTERNATIONAL INCORPORATED
CONSOLIDATED INTERIM STATEMENTS OF INCOME
(UNAUDITED)
The accompanying notes are an integral part of these consolidated interim
financial statements.
F-24
MASTERCARD INTERNATIONAL INCORPORATED
CONSOLIDATED INTERIM BALANCE SHEETS
(UNAUDITED)
The accompanying notes are an integral part of these consolidated interim
financial statements.
F-25
MASTERCARD INTERNATIONAL INCORPORATED
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(UNAUDITED)
The accompanying notes are an integral part of these consolidated interim
financial statements.
F-26
MASTERCARD INTERNATIONAL INCORPORATED
CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
MASTERCARD INTERNATIONAL INCORPORATED
CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(UNAUDITED)
The accompanying notes are an integral part of these consolidated interim
financial statements.
F-27
MASTERCARD INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements for the six months ended June 30,
2001 should be read in conjunction with the consolidated financial statements of
MasterCard International Incorporated ("MasterCard" or "the Company") for the
year ended December 31, 2000. Significant accounting policies disclosed therein
have not changed.
The consolidated financial statements for the six months ended June 30,
2001 and 2000 and as of June 30, 2001 are unaudited but in the opinion of
management include all adjustments (consisting only of normal recurring
adjustments) that are necessary for a fair statement of the Company's results of
operations and financial positions for the periods and dates presented. The
results of operations for the six months ended June 30, 2001 are not necessarily
indicative of the results to be expected for the full year. The year end balance
sheet is unaudited but has been derived from the Company's audited financial
statements.
All intercompany accounts and transactions have been eliminated in
consolidation.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
New accounting standards -- On June 29, 2001, the Financial Accounting
Standards Board ("FASB") unanimously approved Statements of Financial Accounting
Standards No. 141 ("SFAS 141"), "Business Combinations," and No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets."
SFAS 141 supercedes Accounting Principles Board Opinion ("APB") No. 16,
"Business Combinations." SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001
and establishes specific criteria for the recognition of intangible assets
separately from goodwill. The new standard also requires unallocated negative
goodwill to be written off immediately as an extraordinary gain (instead of
being deferred and amortized).
SFAS 142 supercedes APB No. 17, "Intangible Assets." SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
acquisition (i.e., the post-acquisition accounting). The provisions of SFAS 142
will generally be effective for fiscal years beginning after December 15, 2001.
SFAS 142 establishes that goodwill and indefinite lived intangible assets will
no longer be amortized and that goodwill should be tested for impairment at
least annually at the reporting unit level. The new standard also requires that
intangible assets deemed to have an indefinite life should be tested for
impairment at least annually, and the amortization period of intangible assets
with finite lives will no longer be limited to forty years. In accordance with
this standard, goodwill, acquired in a business combination for which the
acquisition date is after June 30, 2001, will not be amortized. SFAS 142 is not
expected to have a material impact on the Company's consolidated financial
statements in relation to goodwill and other intangible assets recorded as of
June 30, 2001.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended in June 1999 by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," and in June 2000, by SFAS No. 138,
"Accounting for Derivative Instruments and Hedging Activities, an Amendment of
FASB Statement No. 133" (collectively, "SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities, including certain derivative instruments embedded in other
contracts. The statement requires that all derivatives be recognized in the
balance sheet, as either assets or as liabilities, and measured at fair value.
Additionally, changes in a derivative's fair value will be recognized in current
earnings unless specific hedge accounting criteria are met. For the Company,
SFAS No. 133 was effective January 1, 2001. The adoption of SFAS No. 133 had no
significant effect on the Company's consolidated financial statements.
F-28
MASTERCARD INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
2. INVESTMENT SECURITIES
The amortized cost and fair value of investment securities
available-for-sale are as follows:
The maturity distribution based on contractual terms of investment
securities available-for-sale at June 30, 2001, is as follows:
The Company holds a 5.25 percent Missouri Development Bond, due August 1,
2009 as an investment security held-to-maturity. The amortized cost of this
security was $7,693 and $8,050 at June 30, 2001 and December 31, 2000,
respectively. Principal and interest payments are received on a semi-annual
basis with a final maturity date of August 1, 2009. The fair value of this
security approximates amortized cost.
3. COMMITMENTS AND CONTINGENCIES
On August 31, 1999, the Company entered into a ten-year operating lease
agreement for a global technology and operations center that is being
constructed in O'Fallon, Missouri. The lease may be extended for one ten-year
term for annual payments of $100 per year subject to the repayment of the
principal on the senior secured notes described below. Certain areas of the
facility have been occupied upon completion. The Company plans to fully occupy
the facility at the anticipated completion date in the fourth quarter of 2001.
In conjunction with the lease agreement, the owner of the property leased the
land to the MCI O'Fallon 1999 Trust (the "Trust"). The Trust financed the
operations center through a combination of an equity investment and the issuance
of 7.36 percent Series A Senior Secured Notes in the amount of $149,380. In the
event that additional financing is needed to complete the facility, the Trust
may issue its Series B Senior Secured Notes in an aggregate amount not to exceed
$5,000. Rent is payable in amounts equal to interest payments on the Notes plus
a return of 2.75 percent. The lease agreement permits the Company to purchase
the facility upon 180 days notice at a purchase price equal to the aggregate
outstanding principal amount of the Series A Senior Secured Notes, including any
accrued and unpaid interest and investor equity, along with any accrued and
unpaid amounts due to the investor under the lease agreement. In conjunction
with the lease agreement, the Company executed a guarantee of 85.73 percent of
the Series A Senior Secured Notes outstanding. Additionally, upon the occurrence
of specific events of default, the Company will guarantee repayment of the total
outstanding principal and interest on the Series A Senior Secured Notes.
F-29
MASTERCARD INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
On March 6, 1996, the Company entered into an agreement whereby a vendor
will design and monitor a virtual private network to support the Company's data
networking needs. At June 30, 2001, the remaining cost associated with this
agreement was approximately $32,497 to be paid over six years, subject to
certain termination provisions. Additionally, the agreement calls for certain
variable costs to be paid annually. The vendor provides telecommunication
services on a monthly basis. These services are cancelable without penalty upon
30 days notice.
MasterCard has guaranteed the payment of settlement obligations between
members should a member institution fail to settle their transactions. See Note
6 for a description of settlement credit risk.
MasterCard has also guaranteed the payment of MasterCard branded travelers
cheques outstanding. MasterCard had outstanding travelers cheques of $1,532,830
and $1,480,279 at June 30, 2001 and December 31, 2000, respectively. MasterCard
has obtained an unlimited guarantee in the amount of $1,458,514 and $1,399,663
at June 30, 2001 and December 31, 2000, respectively, from a financial
institution in order to cover most of the exposure of outstanding travelers
cheques.
4. LEGAL PROCEEDINGS
MasterCard is a party to litigation with respect to a variety of matters in
the ordinary course of business. Except as described below, MasterCard does not
believe that any litigation to which it is a party will have a material impact
on the Company's business or prospects.
As of the date of this proxy statement-prospectus, judgment in the DOJ
antitrust litigation remains outstanding. The parties are awaiting a decision of
the U.S. District Court judge.
A hearing before the Second Circuit Court of Appeals was held in February
2001 with respect to the appeal of the grant of class certification in the
merchant antitrust litigation. As of the date of this proxy
statement-prospectus, the parties are awaiting a decision of the Second Circuit.
Subsequent to December 31, 2000, there have been a number of developments
in certain litigations relating to MasterCard's currency conversion practices.
MasterCard, together with Visa U.S.A., Inc. and Visa International Corp., are
defendants in two lawsuits that allege that MasterCard and Visa wrongfully
imposed an asserted one percent currency conversion "fee" on every credit card
transaction by U.S. MasterCard and Visa cardholders involving the purchase of
goods or services in a foreign country, and that such "fee" is an unfair,
unlawful and deceptive business practice. The first of these actions, Schwartz
v. Visa Int'l Corp., et al., was brought in the Superior Court of California in
February 2000, purportedly on behalf of the general public. The second action,
Senequier v. Visa Int'l Corp., et al. was commenced in January 2001 in the
Supreme Court of the State of New York and is a purported class action. A trial
date of March 18, 2002 has been set for the Schwartz matter. No trial date has
been set for the Senequier matter. Both these actions claim that the alleged
"fee" grossly exceeds any costs the defendants might incur in connection with
currency conversions relating to credit card transactions made in non-U.S.
countries and is not properly disclosed to cardholders; the Senequier action
further claims that the alleged "fee" is part of an unreasonable restraint on
trade. Plaintiffs seek to prevent the defendants from continuing to engage in,
use or employ the alleged practice of charging and collecting the assessed one
percent currency conversion "fee" and from charging any type of purported
currency conversion "fee" without providing a clear, obvious and comprehensive
notice that a fee will be charged. Plaintiffs also request an order (1)
requiring defendants to fund a corrective advertising campaign; (2) awarding
restitution of the monies allegedly wrongfully acquired by imposing the
purported currency conversion "fee"; and (3) requiring disgorgement of monies
allegedly wrongfully obtained. The complaint asserts that, during the four-year
period that preceded the lawsuit, MasterCard collected approximately $200
F-30
MASTERCARD INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
million as a result of allegedly imposing the claimed one percent currency
conversion "fee." MasterCard denies these allegations.
MasterCard, Visa U.S.A., Inc., Visa International Corp., several member
banks including Citibank, Chase Manhattan Bank and Bank of America, and Diners
Club are defendants in a number of federal putative class actions that allege,
among other things, violations of federal antitrust laws based on the asserted
one percent currency conversion "fee." The complaints also allege violations of
the Truth-In-Lending Act against the member banks. Six of the actions, Ross, et
al. v. Visa U.S.A., Inc., et al., Kune v. Visa U.S.A., Inc., et al., Chatham v.
Visa U.S.A., Inc., et al., Steinlauf v. Visa U.S.A., Inc., et al., Finkelman v.
Visa U.S.A. Inc., et al., and Lipner v. Visa U.S.A., Inc., et al., were brought
in United States District Court for the Eastern District of Pennsylvania in
2001. Five other actions, Cooper v. Visa U.S.A., Inc., et al., Ramsey v. Visa
U.S.A., Inc., et al., La Place v. Visa U.S.A., Inc., et al., Salvagio v. Visa
U.S.A., Inc., et al. and Javier, et al. v. Visa U.S.A., Inc. et al., were
brought in the United States District Court for the Northern District of
California in 2001. Five class actions, Wood v. Visa U.S.A., Inc., et al., Oshry
v. Visa U.S.A., Inc., et al., Inducon Park Assocs. Inc. v. Visa U.S.A., Inc., et
al., Matthews v. Visa U.S.A., Inc., et al. and Silberman et al. v. Visa U.S.A.,
Inc. were recently brought in the United States District Court for the Southern
District of New York. The plaintiffs in the Javier action have made a motion
before the judicial panel on multidistrict litigation to transfer the Javier and
Ross cases to a single district court and to consolidate those pending federal
actions. As against MasterCard, the plaintiffs seek damages for an alleged
conspiracy to fix and maintain prices in violation of the Sherman Antitrust Act.
The complaints allege that MasterCard's and Visa's system of dual governance
inhibits competition between the associations and provides each association with
the ability and incentive to collude and fix the asserted currency conversion
"fee" in violation of antitrust laws. The Silberman action also alleges
violations of the Truth-in-Lending Act against MasterCard. MasterCard denies
these allegations.
MasterCard believes that it is not currently possible to estimate the
impact, if any, that the ultimate resolution of these matters will have on its
results of operations, financial position or cash flows.
5. SEGMENT REPORTING
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," MasterCard has one reportable segment,
"Payment Services." All of the Company's activities are interrelated, and each
activity is dependent upon and supportive of the other. Accordingly, all
significant operating decisions are based upon analysis of MasterCard as one
operating segment. The CEO has been identified as the chief operating
decision-maker.
There is no single customer that accounted for more than 10 percent of the
Company's revenue. Revenue generated in the United States contributed
approximately 66% of the Company's total revenue for the six months ended June
30, 2001 and June 30, 2000. The Company estimates that no other individual
country contributed a significant portion to the Company's revenue for the six
months ended June 30, 2001 or June 30, 2000.
MasterCard does not maintain or measure long-lived assets by geographic
location.
6. RISK MANAGEMENT
MasterCard held collateral for legal settlement risk of $504,781 and
$528,472 and had unlimited guarantees estimated at $705,227 and $597,039 at June
30, 2001 and December 31, 2000, respectively. MasterCard monitors its credit
risk portfolio on a regular basis to assess potential concentration risks and to
evaluate the adequacy of collateral on hand. MasterCard's settlement exposure at
June 30, 2001 and December 31, 2000, after consideration of collateral and
guarantees, amounted to $7,431,217 and $7,921,109,
F-31
MASTERCARD INTERNATIONAL INCORPORATED
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
respectively. MasterCard settlement exposure had concentrations of 65% and 55%
in North America and 19% and 32% in Europe at June 30, 2001 and December 31,
2000, respectively. The Company also reviews the credit worthiness of financial
institutions to consider the appropriateness of establishing reserves for non-
payment.
A significant portion of the Company's credit risk is concentrated in one
MasterCard travelers cheque issuer. See Note 3 for a description of exposure of
outstanding travelers cheques.
Generally, the Company does not obtain collateral related to forward,
option and swap contracts because of the high credit ratings of the
counter-parties involved. The amount of accounting loss the Company would incur
if the counter-parties failed to perform according to the terms of the contracts
is not considered material.
7. MONDEX
On June 29, 2001 the Company purchased all the outstanding minority shares
of Mondex International, Ltd. ("MXI") that it did not previously own. As a
result of assuming full ownership of MXI, MasterCard now directly controls all
of MXI's operations and management. Accordingly, MasterCard is no longer
responsible for MXI assessments. This transaction did not have a material impact
on the financial statements of MasterCard International.
F-32
EUROPAY INTERNATIONAL S.A.
CONSOLIDATED FINANCIAL STATEMENTS
F-33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Europay International S.A.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of income and cash flows present fairly, in all material
respects, the financial position of Europay International S.A. and its
subsidiaries at December 31, 2000, and the results of their operations and their
cash flows for the year then ended in conformity with accounting principles
generally accepted in the Belgium, expressed in euros. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
Accounting principles generally accepted in Belgium vary in certain
significant respects from accounting principles generally accepted in the United
States. The application of the latter would have affected the determination of
consolidated net income for the year ended December 31, 2000 and the
determination of consolidated shareholders' equity and consolidated financial
position at December 31, 2000 to the extent summarized in Note 22 to the
consolidated financial statements.
PricewaterhouseCoopers Reviseurs d'Entreprises,
represented by
Yves Vandenplas
May 22, 2001
Except for Note 21 as to which the date is July 31, 2001
F-34
EUROPAY INTERNATIONAL S.A.
CONSOLIDATED BALANCE SHEETS
(IN E THOUSANDS)
The accompanying notes are an integral part of these consolidated financial
statements.
F-35
EUROPAY INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF INCOME
(IN E THOUSANDS)
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
EUROPAY INTERNATIONAL S.A.
SUPPLEMENTAL DISCLOSURE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN E THOUSANDS)
The accompanying notes are an integral part of these consolidated financial
statements.
F-37
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN E THOUSANDS)
1. ORGANIZATION
Europay International S.A., incorporated in Belgium, manages and licenses
banks and banking organizations in Europe for payment systems trademarks such as
eurocheque, Eurocard-MasterCard, Maestro, Cirrus and Clip. Services provided
also include processing services such as authorization, clearing and settlement
of transactions carried out under the above mentioned trademarks. Europay also
engages in a variety of marketing activities designed to maintain and enhance
the value of the brands, and plays a leading role in the development of new
technologies aimed at facilitating and expanding electronic and mobile commerce.
2. LIST OF CONSOLIDATED ENTERPRISES AND ENTERPRISES INCLUDED USING THE EQUITY
METHOD
The financial statements include the accounts of Europay and also the
accounts of the subsidiaries listed below.
F-38
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
3. CHANGES IN FINANCIAL STATEMENT PRESENTATION
The Consolidated Financial Statements for the years ended December 31, 1999
and 1998 have been amended in order to reflect the following changes and
improvements in presentation:
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies used in the preparation of these
financial statements are set out below.
CONSOLIDATION
Europay follows accounting principles and reporting requirements generally
accepted in Belgium ("Belgian GAAP"). Assets and liabilities are recorded under
the accrual method of accounting and valued at historical cost less any amounts
provided for possible reduction in value.
The consolidated financial statements include the accounts of Europay and
its majority-owned subsidiaries. All significant intercompany transactions are
eliminated in consolidation. Investments in entities for which the equity method
of accounting is appropriate are reported as financial assets on the balance
sheet. Europay's share of net earnings of these entities is included in the
consolidated statements of income. Investments in entities for which the equity
method is not appropriate are accounted for using historical cost. All
investments are evaluated for impairment on an ongoing basis.
REVENUES
Revenues are recognized when services are performed. The main operating
revenues arise from the following fees.
Operations fees -- consists of authorization, clearing and settlement fees
charged to issuers/acquirers based on transaction volumes either through
settlement or through invoices. This also includes fees for other member
services that are collected based on monthly invoices.
Assessment fees -- consists of assessment fees charged to issuers and
acquirers for costs associated with the overall management of the payments
system, and currency conversion fees charged to issuers, which are charged daily
and quarterly based on transaction volumes. These fees are recognized as revenue
when
F-39
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
collected through direct debit or upon invoicing of customers. Assessment fees
also include card fees charged to issuers that are recognized as revenue upon
invoicing of customers.
FOREIGN CURRENCY TRANSLATION
The euro is the functional currency for the majority of Europay's
businesses except its Eurocard U.S.A. operations, where the local currency is
the functional currency. Transactions arising from EMU countries in foreign
currencies are translated at their EMU fixed rate. Bank movements generated by
Europay's centralized processing system, known as European Common Clearing &
Settlement System (ECCSS), are translated at the transaction date. All other
transactions arising in foreign currencies are translated to and recorded in
euros at the rate prevailing at the end of the month that precedes the month the
transaction takes place, which is not significantly different from the rate at
the respective transaction date. Current assets and liabilities expressed in
foreign currencies are translated at the spot rate on the balance sheet date.
Profits and losses arising from the translation of foreign currencies are
reflected in the statements of income. For businesses where the local currency
is the functional currency, translation to euros is performed for balance sheet
accounts using current exchange rates in effect at the balance sheet date and
for revenue and expense accounts using an average exchange rate for the period.
Resulting translation adjustments are reported as cumulative translation
adjustments in the consolidated balance sheets.
DEFERRED TAXES
Deferred tax liabilities on consolidation entries are recorded when it is
probable that a tax charge will effectively be incurred in the foreseeable
future.
INTANGIBLE ASSETS
Intangible assets are recorded at historical cost and amortized over their
estimated useful lives using the straight-line method between three and five
years.
PROPERTY, PLANT AND EQUIPMENT
Land and buildings, plant and equipment, and office furniture and equipment
are recorded at historical cost, including ancillary expenses. Depreciation is
provided on buildings, plant and equipment and office furniture and equipment,
at the following rates calculated to amortize the cost of the assets over their
estimated useful lives, using the straight-line method.
Property, plant and equipment are depreciated for a full year in the year
of acquisition.
PENSIONS
Europay has a defined benefit pension plan providing retirement and death
benefits to employees, which is funded by a group insurance contract. Premiums
charged by the insurance company are expensed as
F-40
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
retirement benefits as incurred, on the assumption that the amount of the
premium constitutes an appropriate measure of the economic cost of pension
obligations for the period.
RESEARCH & DEVELOPMENT
It is Europay's policy to expense the costs of research and development,
such as chip card research and development, in the year in which they are
incurred.
5. INTANGIBLE ASSETS
Europay capitalized work completed on the EMV (Europay, MasterCard, Visa)
integrated circuit card, terminal and card application specifications for
payment systems and related documents as intellectual property for estimated
costs of E269 and E860 in 2000 and 1998, respectively, and in doing so
recognized income for the same amounts, which is included in the 2000 and 1998
Consolidated Statements of Income under capitalization of intangible asset. The
EMV intangible assets have been contributed in their entirety as part of a
capital contribution to a joint venture as described in Note 7 below.
Starting in 1999 and continuing in 2000 Europay put in place systems and
procedures in order to assess the criteria in respect of capitalization of
internally developed software, which resulted in the effective capitalization of
costs incurred as of January 1, 2000. Accordingly, eligible direct internal and
external costs related to the application development and testing stages are
capitalized and, upon completion of the project, are amortized using the
straight-line method over a three year estimated useful life.
Capitalized software amounting to E1,192 and related amortization expense
of E9 should have been recognized in the consolidated accounts for the year
ended December 31, 1999. Under Belgian GAAP it is not permitted to restate
opening retained earnings or to account for this non-capitalization in the
following year.
Europay capitalized internally developed software amounting to E7,553 in
the year ended December 31, 2000. Amortization expense related to this
capitalized software amounted to E602 in 2000.
F-41
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
6. FIXED ASSETS
In July 1999 Europay sold a building, which it formerly occupied, for a
sales price of E3,718. Europay realized a loss of E124 on the sale. In 1998,
based on an independent valuation made of the building in July 1998 Europay
recorded an impairment of E3,063 to reflect a permanent diminution in value.
In 1998 Europay began a process of expanding and renovating its Waterloo
premises in order to accommodate current and future organizational and
operational requirements. Assets under construction in relation to this effort
amounting to E482 and E3,136 are included in the Consolidated Balance Sheets at
December 31, 2000 and 1999, respectively. During 2000 assets under construction
amounting to E2,655 were put into use and as such transferred to buildings.
Europay rents network computer equipment required for network operations
under an operating lease agreement. The value of the computer equipment rented
under this lease agreement totaled E24,313 and E20,878 at December 31, 2000 and
1999, respectively. Rent expense related to this lease amounted to E4,717,
E5,231 and E5,868 in 2000, 1999 and 1998, respectively.
During 1999 and 1998 Europay rented personal computer equipment required
for its activities under operating lease agreements. Rent expense related to
these lease agreements amounted to E1,717 and E2,064 in 1999 and 1998,
respectively. In December 1999 Europay bought out the operating lease
agreements. Under the terms of the transaction Europay acquired personal
computer equipment at a cost of E632 and incurred a cancellation fee of E2,169,
which was expensed.
Europay provides cars to certain levels of management under 4 year
operating lease agreements. Total expense related to these lease agreements,
including insurance, fuel and maintenance, amounted to E2,634, E2,185 and E2,055
in 2000, 1999 and 1998, respectively.
Europay also rents office buildings and equipment under operating lease
agreements. Total rents related to these lease agreements amounted to E4,774,
E5,614 and E5,038 in 2000, 1999 and 1998, respectively.
F-42
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
Future scheduled operating lease payments are summarized below. Computer
equipment includes lease payments plus related computer hardware and software
maintenance and service contract costs.
In 2000 and 1999 Europay concluded a physical observation of fixed assets
and reconciled the results to its books of account. Adjustments were made in
order to equate the books of account to the physical observation. As a result of
these adjustments Europay recognized net losses of E295 and E394 in 2000 and
1999, respectively, which are included in fixed asset disposals.
7. FINANCIAL ASSETS
F-43
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
In 1999 Europay assigned the rights to intellectual property described in
Note 5 to EMVCo, LLC ("EMVCo"), a Delaware (U.S.) limited liability company.
EMVCo was established as a joint venture under equal ownership by Europay,
MasterCard and Visa to manage, maintain and enhance the EMV Integrated Circuit
Card Specifications for Payment Systems as technology advances and the
implementation of chip card programs become more prevalent. This assignment,
amounting to the full E860 value of the intellectual property and a cash payment
of E92, represents Europay's capital contribution for its one-third interest in
EMVCo. In 2000 Europay's interest in EMVCo was increased by the contribution of
additional intellectual property valued at E269 (see also Note 5). The full
capital contribution is accounted for as an investment in EMVCo on an equity
basis.
Europay also has a 50% interest in a joint venture company, Maestro
International Incorporated. ("Maestro"), of which the remaining 50% interest is
held by MasterCard. At December 31, 1999 the net value of the investment in the
joint venture was nil as the original investment of E184 was fully offset by
loss provisions from previous years.
In 2000 Europay reversed the loss provision of E184 and recognized a
consolidation adjustment of E383 for the equity share of Maestro's undistributed
1999 net earnings. The reversal of the provision resulted from a change in the
joint venture's profitability. Furthermore, the E383 income from the joint
venture was recognized subsequent to 1999 or the period earned, and is reflected
in the following required disclosure of consolidation differences:
The Consolidated Balance Sheets include receivables from Maestro of E345 and
E890 and payables to Maestro of E1,874 and E1,513 at December 31, 2000 and 1999,
respectively. The income statements include amounts of E4,878, E4,128 and E3,978
representing Europay's share of the net costs incurred by Maestro in 2000, 1999
and 1998, respectively.
F-44
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
8. CONSOLIDATED RESERVES
9. OTHER AMOUNTS RECEIVABLE
Other amounts receivable consists of the following.
At December 31, 1999 Europay had recoverable value added tax, or VAT, for
the third and fourth quarters of 1999, whereas at December 31, 2000 only the
recoverable VAT for the fourth quarter of 2000 was receivable.
In 2000 a same day settlement service called "Euro D0" for euro-currency
transactions was implemented. This new service results in settlement receivables
and payables arising from the two-day delay in the settlement of issued and
acquired transactions between euro-currency members that settle on a same-day
basis and non-euro currency members that settle two days later. See Note 14 for
Euro D0 settlement payables.
10. INVESTMENTS AND DEPOSITS
Europay had a short-term deposit at December 31, 1999 of E6,951 ($7,000) at
5.35% that matured on January 4, 2000.
The E1,852 investment at December 31, 2000 consists of foreign currency
option premiums paid to cover future cash flows denominated in U.S. dollars.
Option premium payments are recorded as short-term investments whereas option
premiums received are recorded as deferred income.
At December 31, 2000 Europay made a loss provision for E583 on a written
option for the difference between the strike price of the option and the closing
U.S. dollar exchange rate. This loss provision is included in provisions for
liabilities and charges in the Consolidated Balance Sheet at December 31, 2000
and in net other financial income/(expense) in the Consolidated Statement of
Income for the year then ended.
In January 1999 Europay bought a 12-month forward exchange contract for the
purchase of U.S. dollars, which matured in December 1999. A gain of E5,509
realized on this contract is included in net other financial income/(expense) in
the Consolidated Statement of Income for the year ended December 31, 1999.
F-45
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
The notional and estimated fair values of the outstanding derivative
contracts at December 31, 2000 and 1999 are as follows:
11. CASH AT BANK AND IN HAND AND BANK OVERDRAFTS
Cash at bank and in hand consists of the following:
Cash includes E47,210 of cash on Europay's settlement bank accounts from
Euro D0 (described in Note 9 above) and other new settlement service operations
that commenced in 2000.
Europay requires and holds security deposits from certain members in order
to ensure proper settlement of their transactions. The deposits are in euros or
U.S. dollars and are placed on-call at market interest rates. At December 31,
2000 the applicable interest rates were 4.33% on euro deposits and 5.99% on U.S.
dollar deposits. These amounts are fully offset by corresponding liabilities
included in other amounts payable in the Consolidated Balance Sheets (see Note
14). The 1999 to 2000 increase is primarily due to the addition of new members
in Eastern Europe.
The bank overdrafts consist of the following:
The overdraft on settlement bank accounts is due to Euro D0 (described in
Note 9 above) and other new settlement service operations that commenced in
2000. Overdrafts on corporate bank accounts are subject to an interest rate of
the Euro OverNight Index Average (Eonia) + 0.5% p.a.
F-46
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
12. MINORITY INTEREST
MasterCard has a 15% shareholding in European Payment Systems Services
("EPSS"), Europay's transaction processing subsidiary, for which a minority
interest in Europay is determined as follows:
13. CREDIT LINES
Europay has credit lines available amounting to E35,000 at December 31,
2000 (E24,789 at December 31, 1999) with the following interest rate conditions,
which are based on the Euro Interbank Offered Rate (Eribor):
Europay had no borrowings on these credit lines at December 31, 2000.
14. OTHER AMOUNTS PAYABLE
Other amounts payable consists of the following.
15. LONG TERM LIABILITIES
At December 31, 1999 Europay had long-term loans outstanding from members
amounting to E2,533 which are interest free with no fixed repayment date.
Europay will repay these loans in 2001; consequently, the loans have been
reclassified as current and are included in other amounts payable in the
Consolidated Balance Sheet at December 31, 2000 (see Note 14).
The balance of E244 at December 31, 2000 represents an invoice for a
sponsorship campaign that is payable in 2002.
F-47
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
16. COMMITMENTS
In addition to the future lease payments summarized in Note 6, Europay has
entered into other contractual obligations, which are estimated to be payable in
the following years:
17. AVERAGE NUMBER OF PERSONS EMPLOYED AND PERSONNEL CHARGES
Management personnel consist of the directors of Europay and all other
staff are included in the employees category.
In 2000 Europay provided E1,479 for obligations arising from severance
agreements with employees, of which E127 is included in operating expenses and
E1,353 is included in extraordinary income/(charges) in the Consolidated
Statement of Income for the year ended December 31, 2000. The liability for
these obligations is included as part of the provisions for liabilities and
charges in the Consolidated Balance Sheet at December 31, 2000.
18. TAXATION
The reconciliation of the 2000, 1999 and 1998 income tax charges compared
to the statutory rate of 40.17% is as follows:
F-48
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
Included in the consolidated tax charge for the year ended December 31,
2000 is deferred tax amounting to E2,792 related to the capitalization of
internally developed software, net of related amortization expense for the year.
19. ALLIANCE AGREEMENT WITH MASTERCARD INTERNATIONAL INCORPORATED
On November 14, 1996, Europay entered into an Alliance Agreement with
MasterCard pursuant to which Europay has been granted exclusive licensing rights
for the MasterCard brand in Europe and is responsible for the overall management
of the MasterCard brand within the European region. In accordance with this
agreement:
(a) Europay took over from MasterCard the billing of European members for
inter-regional credit program and service transactions as from January 1, 1998
and for inter-regional debit program and service transactions as from January 1,
1999. The Consolidated Statements of Income include revenues generated from
these transactions amounting to E126,606, E111,925 and E74,186 in 2000, 1999 and
1998, respectively.
(b) Europay is responsible for funding MasterCard's Europe region costs
plus an agreed profit margin. Total MasterCard Europe region charges of
E103,868, E83,172 and E65,099 in 2000, 1999 and 1998, respectively, are included
in services and other goods.
(c) European members were required to migrate to a new Eurocard/MasterCard
acceptance brand over the three-year period from 1997 to 1999, and MasterCard
compensated the European members for their brand migration efforts through a
Country Migration Fund over the same time period. Europay incurred E4,558 and
E7,557 in advertising and marketing costs related to European members' brand
migration activities in 1999 and 1998, respectively. These costs are included in
services and other goods in the Consolidated Statements of Income. Europay
re-billed MasterCard and recorded related revenues for the full amount of these
costs. These revenues, as well as other revenues and income received from
MasterCard are included in the Consolidated Statements of Income as follows:
The Consolidated Balance Sheets include receivables from MasterCard of
E2,401 and E4,284 and payables to MasterCard of E11,955 and E4,194 at December
31, 2000 and 1999, respectively.
F-49
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
20. SUBSEQUENT EVENT, PROPOSED INTEGRATION WITH MASTERCARD INCORPORATED
Europay is considering entering into an integration agreement with
MasterCard Incorporated and MasterCard International that provides for
MasterCard Incorporated to acquire all of Europay's capital stock in exchange
for class A and class B common stock of MasterCard Incorporated (the
"integration").
The integration is conditioned upon the merger of MasterCard International
with a subsidiary of MasterCard Incorporated and the exchange of existing
principal and association memberships in MasterCard International for new class
A membership interests in MasterCard International and shares of class A and
class B common stock of MasterCard Incorporated (the "conversion"), the approval
of Europay's shareholders, and other customary closing conditions. Upon
completion of the conversion and integration, the European principal members of
MasterCard International will own 33 1/3% of the outstanding capital stock of
MasterCard Incorporated and the non-European members will own 66 2/3%.
Following the completion of the conversion and integration, the Alliance
Agreement between Europay and MasterCard described in Note 19 above will be
terminated.
As of May 22, 2001 the conversion and integration have not occurred.
21. SUBSEQUENT EVENT, TAX NOTICE
In April 1999 the Belgian tax authorities initiated an investigation of
Europay's tax returns for 1997 and 1998. In June 2001, Europay received a notice
from the Belgian tax authorities challenging Europay's deduction of certain
card-based incentive program costs totaling E10.4 million in 1997 and E13.4
million in 1998. The aggregate tax liability claimed in the notice approximates
E16.3 million, including possible penalties and interest accrued to December 31,
2000. Based on the methodology and assertions used by the Belgian tax
authorities in determining the possible tax liability for 1997 and 1998, Europay
has estimated the possible impact for 1999 and 2000 to be a further additional
tax liability of up to approximately E9.5 million, including possible penalties.
Interest will accrue on any additional amounts to be paid at a per annum rate of
7% until settlement. Interest on additional amounts will begin to accrue on July
1 of the second fiscal year following the fiscal year in which the deduction to
which the additional amount relates was made.
Europay is required to respond to the notice by August 27, 2001 prior to
any assessment being levied by the tax authorities. Europay believes that it has
reasonable and meritorious arguments in favor of its characterization of these
deductions and intends to respond vigorously to the notice.
In the event that Europay is unsuccessful in appealing the findings of the
Belgian tax authorities in their investigation, under certain circumstances
MasterCard International could, under its bylaws, levy an assessment upon its
European members for the additional tax liability to the extent that it,
together with other losses and liabilities arising out of the representations
and warranties of Europay in the draft integration agreement, exceeds $7 million
in the aggregate.
Europay cannot predict the outcome of this matter or any additional matters
that may be raised by the Belgian tax authorities. Europay believes that it is
not currently possible to estimate the impact, if any, that the ultimate
resolution of these matters will have on its financial position or results of
operations.
22. SUMMARY OF DIFFERENCES BETWEEN BELGIUM AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The accompanying consolidated financial statements have been prepared in
accordance with Belgian GAAP, which differ in certain material respects from
accounting principles generally accepted in the United States of America ("U.S.
GAAP"). These differences involve methods for measuring the amounts shown in the
financial statements, as well as additional disclosures required by U.S. GAAP.
F-50
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
U.S. GAAP RECONCILING ITEMS TO CONSOLIDATED NET INCOME AND TOTAL
SHAREHOLDERS' EQUITY.
The following is a summary of the material adjustments to profit on
ordinary activities after taxation and shareholders' equity that would have been
required in applying the significant differences between Belgian and U.S. GAAP.
RECONCILIATION OF CONSOLIDATED PROFIT AND LOSS ACCOUNTS
(IN E THOUSANDS EXCEPT EARNINGS PER SHARE)
F-51
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
RECONCILIATION OF CONSOLIDATED SHAREHOLDER'S EQUITY
MOVEMENTS IN SHAREHOLDERS' EQUITY IN ACCORDANCE WITH U.S. GAAP
A summary of the principal differences and additional disclosures
applicable to Europay are set out below:
(a) Pensions
Under Belgian GAAP, enterprises are required to make provision for their
obligations relating to retirement or survivors' pensions, early-retirement and
other similar pensions or allowances. However, enterprises are also bound by law
to fund their pension obligations with an independent pension fund or insurance
company. Consequently, the practice in Belgium is to expense as incurred the
premium charged by the insurance company or pension fund, on the assumption that
the amount of the premium constitutes an appropriate measure of the economic
cost of their pension obligations for the period concerned.
F-52
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
Under U.S. GAAP, the annual pension cost comprises the estimated cost of
benefits accruing in the period as determined in accordance with Statement of
Financial Accounting Standards (SFAS) No. 87, which requires readjustment of the
significant actuarial assumptions annually to reflect current market and
economic conditions. Under SFAS No. 87, a pension asset representing the excess
plan assets over benefit obligations is recognized in the balance sheet. The
pension benefit obligation is calculated by using a projected unit credit
method. Actuarial gains or losses within a 10% "corridor" are recognized. In
addition, in cases where the accumulated benefit obligation exceeds the
unamortized prior service cost, Europay has recorded the excess as a separate
component of shareholders' equity.
The net periodic pension cost under U.S. GAAP for Europay's defined benefit
pension plan is as follows:
COMPONENTS OF NET PERIOD BENEFIT COST
Changes in the projected benefit obligation and plan assets during the year
were as follows:
CHANGES IN PROJECTED BENEFIT OBLIGATION
F-53
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
CHANGES IN PLAN ASSETS
The funded status under U.S. GAAP for Europay's defined benefit pension
plan is as follows:
FUNDED STATUS
The weighted-average assumptions used to determine pension cost for
Europay's defined benefit pension plan were as follows:
(b) Deferred Tax
Under Belgian GAAP, deferred tax liabilities on consolidation entries
should be recorded when it is probable that a tax charge will effectively be
incurred in the foreseeable future.
Under U.S. GAAP, deferred tax is provided for on a full liability basis.
Under the full liability method, deferred tax assets or liabilities are
recognized for differences between the financial and tax basis of assets and
liabilities and for tax loss carry forwards at the statutory rate at each
reporting date. A valuation allowance is established when it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
F-54
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
(c) Capitalization of Borrowing Costs
Under Belgian GAAP, an entity may choose between capitalizing or not
capitalizing interest on specific borrowings to finance the construction of
individual qualifying assets. Europay does not capitalize interest cost as part
of the historical cost of its qualifying construction projects.
Under U.S. GAAP, interest recognized on borrowings and other obligations
must be capitalized for assets that are produced under a discrete project and
require a substantial period of time to get ready for their intended use or
sale. The amount of interest eligible for capitalization is determined as either
the actual cost incurred on a specific borrowing or the weighted average of the
rates applicable for all the general borrowings outstanding during the period.
The total amount of interest cost capitalized in each period is limited to the
total amount of interest cost incurred in that period.
The adjustment to net income under U.S. GAAP reflects the decrease in
interest expense for the period as well as the increase in depreciation expense
on the constructed assets. The adjustment to shareholders' equity under U.S.
GAAP reflects the amount of interest capitalized on constructed assets, net of
depreciation.
(d) Depreciation of Fixed Assets
Under Belgian GAAP, Europay depreciates its fixed assets for a full year in
the year of acquisition under the straight-line basis. Further, Europay may
depreciate an asset during the period of its construction or development
regardless of whether the asset is substantially ready for its intended use.
Prior to 1999 Europay depreciated assets during the period of construction
regardless of when the asset was substantially ready for its intended use.
Under U.S. GAAP, fixed assets are depreciated from the date of acquisition
on a straight-line basis. Constructed assets are depreciated on a straight-line
basis when substantially complete. For purposes of the U.S. GAAP reconciliation,
Europay has applied the half-year convention method whereby a half-year of
depreciation is taken in the year of acquisition and in the year of disposal.
Additionally, an asset is depreciated when it is substantially ready for its
intended use.
(e) Internally Developed Software Costs
Under Belgian GAAP, costs relating to internally developed software are
capitalized when it can be demonstrated that:
- The product or process is useful;
- The product or process is clearly defined;
- Costs related to the project are clearly identified,
- The project is technically feasible; and
- Financial resources are available to complete the project.
Under U.S. GAAP, certain costs to develop or obtain internal-use software
should be capitalized when the preliminary project stage is completed,
management implicitly or explicitly authorizes and commits to funding a computer
software project and it is probable that the project will be completed. Costs of
computer software developed or obtained for internal use that can be capitalized
include external direct material and service costs, payroll and payroll-related
costs for employees who devote time to the internal-use computer software
project and interest costs incurred while developing internal-use computer
software. Capitalized costs are amortized under a straight-line basis over the
expected useful life of the software.
F-55
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
(f) Financial Instruments
Under Belgian GAAP, premiums paid and received on option contracts intended
to reduce (hedge) foreign exchange risk on future U.S. dollar payments are
deferred. Option contracts that do not qualify as risk reducing (non-hedge) are
accounted for using the lower of cost or market approach.
Under U.S. GAAP, gains and losses related to derivative instruments that
satisfy the criteria for hedge accounting are recognized in the same period as
gains and losses on the hedged item. Upon termination of the derivative, any
gains and losses are deferred and amortized to profit and loss over the
remaining life of the hedged item. Derivatives that do not qualify for hedge
accounting are recorded on the balance sheet at fair value with gains and losses
immediately included in earnings.
The adjustment to net income under U.S. GAAP reflects the fact that certain
contracts accounted for by Europay as hedges do not meet the criteria for hedge
accounting under U.S. GAAP. In addition, premiums paid for hedge contracts are
carried at cost by Europay, whereas they are amortized over the life of the
derivative contract under U.S. GAAP.
(g) Leases
Under Belgian GAAP, a capital lease is deemed to exist when the sum of the
minimum lease payments is equal to or greater than the lessor's investment in
the leased asset, including related interest and other transaction costs.
Under U.S. GAAP, a capital lease is deemed to exist when any of the
following criteria are met:
- The present value of the minimum lease payments is equal to 90% of the
fair value of the asset at the inception of the lease, or
- The length of the lease period is greater or equal to 75% of the asset's
estimated useful economic life, or
- The transfer of ownership of the asset to the lessee by the end of the
lease term, or
- The existence of a bargain purchase option.
The adjustment to net income under U.S. GAAP reflects a decrease in rental
expense and an increase in depreciation expense related to the capitalized
leased assets. The adjustment to shareholders' equity under U.S. GAAP reflects
the capitalization of the net present value of the minimum lease payments using
the interest rate implicit in the lease.
(h) Capitalization of Intangible Assets
Europay recognized the initial contributions to a joint venture at fair
value of the assets contributed. As such, any contribution of "know how" is
recognized at fair value by both Europay and the joint venture. Further, Europay
recognizes its proportionate share of expenses associated with the amortization
of "know how" recorded by the joint venture. See Note 5 for additional
information.
Under U.S. GAAP, initial contributions to a joint venture should generally
be recorded at cost, i.e., the amount of cash contributed or net book value of
non-cash assets contributed.
(i) Financial Assets
Under Belgian GAAP, Europay recorded a loss in value of an investment
accounted for under the equity method. Losses must be subsequently reversed.
Dividends to be received from an equity investee are accrued as income when
declared. See Note 7 for additional information.
F-56
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
Under U.S. GAAP, a loss in value of an investment, accounted for under the
equity method, which is other than temporary should be recognized. Recognized
losses are not subsequently reversed based on subsequent events or economic
developments. Dividends from an investee accounted for under the equity method
are recognized when declared as a reduction in the carrying amount of the
investment. Europay's share of earnings or losses from equity investees is
recognized as an adjustment to the carrying amount of the investment.
(j) Licensing Fee Revenue Recognition
Under Belgian GAAP, revenue from licensing fees is recognised immediately
upon invoicing of customers.
Under U.S. GAAP, licensing fees are earned as services are delivered and
performed over the term of the arrangement or the expected period of performance
and generally should be deferred and recognised systematically over the periods
that the fees are earned.
The adjustment to net income and stockholders' equity under U.S. GAAP
reflects the deferral and recognition of licensing revenue over the life of the
licensing arrangement for the current year.
The cumulative effect adjustment to net income and shareholders' equity
under U.S. GAAP reflects the cumulative adjustment, net of tax effects, related
to the deferral and proportionate recognition of licensing revenue upon adoption
of SAB 101.
(k) Earnings Per Share
Belgian GAAP does not require the presentation of earnings per share (EPS).
Under U.S. GAAP, basic and diluted earnings per share must be disclosed for
companies that file public reports under the U.S. federal securities laws. Basic
EPS is calculated as profit available to common shareholders, divided by the
weighted average number of shares in issue during the period. To calculate
diluted EPS, earnings are adjusted for the after-tax amount of dividends and
interest recognized in the period in respect of the dilutive potential ordinary
shares and for any other changes in income or expense that would result from the
conversion of the dilutive potential ordinary shares. The conversion is deemed
to have occurred at the beginning of the period or, if later, the date of the
issue of potential ordinary shares.
(l) Comprehensive Income
Belgian GAAP does not require the presentation of comprehensive income.
U.S. GAAP requires disclosure of the components of total comprehensive
income in the period in which they are recognized in the financial statements.
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise arising from transactions and other events and circumstances
from non-owner sources. It includes all changes in shareholders' equity during
the reporting period except those resulting from investments by owners and
distributions to owners.
Revenue Recognition
Under Belgian GAAP, revenue earned and related cost of sales incurred while
acting as an agent may be presented on a gross basis in the statement of income.
Under U.S. GAAP, revenue and related cost of sales should be presented
gross if Europay acts as a principal in the transactions and has the risk and
rewards of ownership. Europay acts as an agent on behalf of MasterCard
International for the billing and collection of inter-regional transactions with
members. Europay
F-57
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
does not bear the risk and rewards of ownership related to these transactions
and therefore revenue and related costs should be reported net under U.S. GAAP.
The impact would be a reduction in revenue of E126,606 and E111,925, net of a
reduction in MasterCard costs included in services and other goods of E103,868
and E83,172 for the years ended December 31, 2000 and 1999, respectively.
Extraordinary Items
Items classified as extraordinary under Belgian GAAP do not meet the
definition of "extraordinary" under U.S. GAAP and, accordingly, are classified
as operating expenses under U.S. GAAP.
Cash Flow Information
Under Belgian GAAP, a presentation of cash flows is considered voluntary.
The statement of cash flows presented in the financial statements has been
prepared in accordance with IAS 7. This presentation is acceptable under Belgian
GAAP.
Under U.S. GAAP a statement of cash flows is required to be present in
accordance with SFAS No. 95. Interest paid and received and dividends received
are shown as operating activity cash flows, while dividends paid are shown as
financing cash flows.
A summary of Europay's operating, investing and financing activities,
classified in accordance with U.S. GAAP are as follows:
Recently Issued Accounting Standards
United States
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities." Europay
has reviewed the effect of the implementation of SFAS 133, as amended by SFAS
138 and related implementation guidance. This statement requires Europay to
recognize all derivatives in the consolidated balance sheet measuring these
derivatives at fair value. The recognition of the change in the fair value of a
derivative depends on a number of factors, including the intended use of the
derivative and the extent to which it is effective as part of a hedge
transaction. SFAS 133 is effective for Europay for the fiscal year commencing
January 1, 2001. Europay intends to continue to pursue hedge accounting under
SFAS 133.
Europay estimates that it will record a net-of-tax cumulative-effect-type
adjustment of E548 (loss) in earnings to recognize at fair value all derivative
instruments that will be designated as cash flow hedging instruments upon
adoption of SFAS 133.
F-58
PART II:
ITEM 20: INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145(a) of the General Corporation Law of the State of Delaware
("Delaware Corporation Law") provides, in general, that a corporation shall have
the power to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, other than an action
by or in the right of the corporation, because the person is or was a director,
officer, employee or an agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprises. That
indemnity may be against expenses, including attorneys' fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred by the person in
connection with such action, suit or proceeding, if the person acted in good
faith and in a manner the person reasonably believed to be in or not opposed to
the best interests of the corporation and if, with respect to any criminal
action or proceeding, the person did not have reasonable cause to believe the
person's conduct was unlawful.
Section 145(b) of the Delaware General Corporation Law provides, in
general, that a corporation shall have the power to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor because the person is or was a director, officer, employee
or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprises, against any expenses
(including attorneys' fees) actually and reasonably incurred by the person in
connection with the defense or settlement of such action or suit if the person
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
that person is fairly and reasonably entitled to be indemnified for these
expenses which the Court of Chancery or such other court shall deem proper.
Section 145(g) of the Delaware General Corporation Law provides, in
general, that a corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprises, against any liability asserted
against the person in any such capacity, or arising out of the person's status
as such, whether or not the corporation would have the power to indemnify the
person against that liability under the provisions of the law.
Article XII of the registrant's bylaws requires indemnification to the
fullest extent permitted under Delaware law of any person who is or was a
director, officer, employee or agent of the registrant who is or was involved or
threatened to be made so involved in any proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person is or
was serving as a director, officer, employee or agent of the registrant or was
serving at the request of the registrant as a director, officer, employee or
agent of any other enterprise. The registrant has also obtained officer's and
directors' liability insurance which insures against liabilities that officers
and directors of the registrant in these capacities, may incur.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duties as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
company or its stockholders, (ii) for acts or omissions not in good faith or
which include intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law (certain illegal
distributions), or (iv) for any transaction from which
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the director derives an improper personal benefit. Article Tenth of the
registrant's certificate of incorporation includes such a provision.
The foregoing statements are subject to the detailed provisions of Sections
145 and 102(b)(7) of the Delaware Corporation Law and Article XII of the bylaws
and Article Tenth of the certificate of incorporation of the registrant.
ITEM 21: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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+ The registrant has applied for confidential treatment of portions of this
exhibit. Accordingly, portions have been omitted and filed separately with the
Securities and Exchange Commission.
* To be filed by amendment.
ITEM 22: UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission that indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against these liabilities (other than the
payment by the registrant of expenses incurred, or paid by a director, officer
or controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
that indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of that issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of the form, within one business day of receipt of the
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement on Form S-4 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Purchase,
State of New York, on August 14, 2001.
MASTERCARD INCORPORATED
By: /s/ ROBERT W. SELANDER
------------------------------------
ROBERT W. SELANDER
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned, being an
officer or director, or both, of MasterCard Incorporated (the "Registrant"), in
his capacity as set forth below, hereby constitutes and appoints, Robert W.
Selander, Denise K. Fletcher, Noah J. Hanft and Spencer Schwartz, and each of
them, his true and lawful attorney and agent, to do any and all acts and all
things and to execute any and all instruments which said attorney and agent may
deem necessary or desirable to enable the Registrant to comply with the
Securities Act of 1933, as amended (the "Act"), and any rules, regulations and
requirements of the Securities and Exchange Commission thereunder, in connection
with the registration under the Act of the class A and class B common stock of
the Registrant (the "Securities"), including, without limitation, the power and
authority to sign the name of each of the undersigned in the capacities
indicated below on the Registration Statement on Form S-4 to be filed with the
Securities and Exchange Commission with respect to such Securities, to any and
all amendments or supplements to such Registration Statement, whether such
amendments or supplements are filed before or after the effective date of such
Registration Statement, to any related Registration Statement filed pursuant to
Rule 462 under the Act, and to any and all instruments or documents filed as
part of or in connection with such Registration Statement or any and all
amendments thereto, whether such amendments are filed before or after the
effective date of such Registration Statement; and each of the undersigned
hereby ratifies and confirms all that such attorney and agent shall do or cause
to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED ON AUGUST 14, 2001 BY OR ON BEHALF
OF THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED WITH THE REGISTRANT.
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EXHIBIT INDEX
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+ The registrant has applied for confidential treatment of portions of this
exhibit. Accordingly, portions have been omitted and filed separately with the
Securities and Exchange Commission.
* To be filed by amendment.
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